BranchOut Food Inc S-1/A, filed May 12, 2023
BranchOut Food Inc. (BOF)
As filed with the Securities and Exchange Commission on May 11, 2023
File No. 333-271422
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
BranchOut Food Inc.
(Exact Name of Registrant as Specified in its Charter)
| Nevada | 2000 | 87-3980472 | ||
(State or other jurisdiction of incorporation or organization) |
(Primary Standard Industrial Classification Code Number) |
(I.R.S. Employer Identification No.) |
205 SE Davis Ave., Suite C
Bend, Oregon 97702
(844) 263-6637
(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)
Eric Healy
Chief Executive Officer
205 SE Davis Ave., Suite C
Bend, Oregon 97702 (844) 263-6637
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent for Service)
With copies to:
Rowland Day, Esq. 465 Echo Bay Trail Bigfork, Montana 59911 (949) 350-6500
Dane Johansen, Esq. Parr Brown Gee & Loveless, P.C. 101 South 200 East, Suite 700 Salt Lake City, Utah 84111 (801) 532-7840 |
David Danovitch, Esq. Michael DeDonato, Esq. Charles E. Chambers, Jr. Esq. Sullivan & Worcester LLP 1633 Broadway New York, New York 10019 (212) 660-3000 |
Approximate date of commencement of proposed sale to public: As soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, check the following box. ☒
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering. ☐
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering. ☐
Indicate by check mark whether the registrant is a large-accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large-accelerated filer,” “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large-accelerated filer | ☐ | Accelerated filer | ☐ |
| Non-accelerated filer | ☒ | Smaller reporting company | ☒ |
| Emerging growth company | ☒ |
If an emerging growth company, check indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards pursuant to Section 7(a)(2)(B) of the Securities Act. ☐
The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.
EXPLANATORY NOTE
Prior to November 19, 2021, BranchOut Food Inc., the registrant whose name appears on the cover of this registration statement, was an Oregon limited liability company under the name of AvoLov LLC. AvoLov LLC filed Articles of Conversion on November 19, 2021, with the Nevada Secretary of State to convert to a Nevada corporation (the “Corporate Conversion”). As a result of the Corporate Conversion, each membership interest in AvoLov LLC was converted into 5,113 shares of common stock of BranchOut Food Inc. The Corporate Conversion was approved by the managers of, and members holding a majority of the interests in, AvoLov LLC.
The financial statements and summary historical financial data included in this registration statement for the periods prior to November 19, 2021, are those of AvoLov LLC and do not give effect to the Corporate Conversion. The financial statements and summary historical financial data included in this registration statement for periods subsequent to the Corporate Conversion give effect to the Corporate Conversion. All per share amounts and related prices reflected in the accompanying prospectus give effect to the Corporate Conversion.
In addition, this registration statement contains two forms of prospectuses. One form of prospectus, which we refer to as the initial public offering prospectus, is to be used in connection with an initial public offering of 1,250,000 shares of common stock (plus an over-allotment option for an additional 187,500 shares of common stock). The other form of prospectus, which we refer to as the resale prospectus, is to be used in connection with the potential resale by certain selling stockholders (the “Selling Stockholders”) of an aggregate of 1,934,506 shares of our common stock (i) to be issued upon conversion of convertible notes and (ii) underlying warrants previously issued by us in private placement offerings to certain Selling Stockholders. The initial public offering prospectus and the resale prospectus will be identical in all respects except for the alternate pages for the resale prospectus included herein which are labeled “Alternate Page for Resale Prospectus.”
The information in this preliminary prospectus is not complete and may be changed. The shares of common stock may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell the shares of common stock and it is not soliciting an offer to buy the shares of common stock in any state or jurisdiction where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED MAY 11, 2023
PRELIMINARY PROSPECTUS
1,250,000 Shares of Common Stock
This is an initial public offering of BranchOut Food Inc., a Nevada corporation on a firm commitment basis. This offering consists of 1,250,000 shares of our common stock, par value $0.001 per share. The assumed initial public offering price is $7.00 per share, the midpoint of the estimated range between $6.00 and $8.00. The actual initial public offering price of the shares of common stock offered hereby will be determined between the underwriters and us at the time of pricing, considering our historical performance and capital structure, prevailing market conditions, and overall assessment of our business. Therefore, the assumed initial public offering price per share of common stock used throughout this prospectus may not be indicative of the actual initial public offering price for the shares of common stock (see “Underwriting — Offering Price Determination” for additional information).
We have granted Alexander Capital L.P. (the “Representative”), the representative of the underwriters of this offering, a 45-day option to purchase up to an additional 187,500 shares of common stock to cover over-allotments, if any.
Prior to this offering, there has been no public market for our common stock. We have applied to list our common stock on the Nasdaq Capital Market (“Nasdaq”) under the symbol “BOF.” If our application is not approved or if we otherwise determine that we will not be able to secure the listing of our common stock on Nasdaq, we will not consummate this offering. There can be no assurance that we will be successful in listing our common stock on Nasdaq.
We intend to use the proceeds from this offering for repayment of indebtedness, working capital and general corporate purposes, including operating expenses and capital expenditures. See “Use of Proceeds.”
We are an “emerging growth company” as that term is used in the Jumpstart Our Business Startups Act of 2012, as amended (the “JOBS Act”) and we have elected to comply with certain reduced public company reporting requirements.
Investing in our shares of common stock is highly speculative and involves a high degree of risk. You should carefully consider the risks and uncertainties described under the heading “Risk Factors” beginning on page 8 of this prospectus before making a decision to purchase our shares of common stock.
Neither the Securities and Exchange Commission (“SEC”) nor any state securities commission has approved or disapproved of THE SHARES OF COMMON STOCK or PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. Any representation to the contrary is a criminal offense.
| Per Share | Total(1) | |||||||
| Initial public offering price(1) | $ | $ | ||||||
| Underwriting discounts and commissions(2) | $ | $ | ||||||
| Non-accountable expense allowance(3) | $ | $ | ||||||
| Proceeds, before expenses, to us(4) | $ | $ | ||||||
| (1) | Assumes no exercise of the over-allotment option we have granted to the underwriters, as described below. | |
| (2) | Represents an underwriting discount equal to 9% of the gross offering proceeds. For a description of the other compensation to be received by the underwriters, please see “Underwriting” beginning on page 81. | |
| (3) | Represents a non-accountable expense allowance equal to 1% of the gross proceeds of this offering, payable to the Representative. | |
| (4) | We estimate the total expenses of this offering will be approximately $702,478. This does not include the issuance to the Representative of warrants exercisable for up to 86,250 shares of common stock, equal to 6% of the number of shares of common stock sold in this offering, at a per share exercise price equal to 120% of the initial public offering price of the shares of common stock offered hereby, including shares sold to cover over-allotments, if any, or the reimbursement of certain expenses of the underwriters. See “Underwriting” beginning on page 81 of this prospectus for additional information regarding compensation to be paid by the Company to the underwriters in connection with this offering. |
We have granted the Representative an option to purchase from us, at the initial public offering price, up to additional shares of common stock, less the underwriting discounts and commissions, within 45 days from the date of this prospectus to cover over-allotments, if any. If the Representative exercises the option in full, the total underwriting discounts and commissions payable will be $1,006,250, and the total proceeds to us, before expenses, will be $10,062,500.
For a description of the other compensation to be received by the underwriters, please see “Underwriting” beginning on page 81.
The underwriters expect to deliver the shares of common stock to purchasers in the offering on or about , 2023.
The date of this prospectus is .
Sole Book-Running Manager
ALEXANDER CAPITAL L.P.
TABLE OF CONTENTS
| i |
Throughout this prospectus, unless otherwise designated or the context suggests otherwise,
| ● | all references to the “Company,” the “registrant,” “BranchOut,” “we,” “our,” or “us” collectively refer to BranchOut Food Inc., a Nevada corporation, and its subsidiaries; | |
| ● | all references to the “offering” refer to the initial public offering (the “IPO”) contemplated by this prospectus; | |
| ● | “year” or “fiscal year” mean the Company’s fiscal year ending December 31; and | |
| ● | all dollar or $ references when used in this prospectus refer to United States dollars. |
The registration statement of which this prospectus forms a part that we have filed with the U.S. Securities and Exchange Commission (the “SEC”) includes exhibits that provide more detail of the matters discussed in this prospectus. You should read this prospectus and the related exhibits filed with the SEC, together with the additional information described under the heading “Where You Can Find More Information,” before making your investment decision.
You should rely only on the information provided in this prospectus or in any prospectus supplement or any free writing prospectuses or amendments thereto, or to which we have referred you, before making your investment decision. Neither we nor the underwriters have authorized anyone to provide you with information different from, or in addition to, that contained in this prospectus or any related free writing prospectus. If anyone provides you with different or inconsistent information, you should not rely on it. This prospectus, any prospectus supplement, or any free writing prospectuses or amendments thereto do not constitute an offer to sell, or a solicitation of an offer to purchase, the shares of common stock offered by this prospectus, any prospectus supplement or any free writing prospectuses or amendments thereto in any jurisdiction to or from any person to whom or from whom it is unlawful to make such offer or solicitation of an offer in such jurisdiction. You should not assume that the information contained in this prospectus, any prospectus supplement or any free writing prospectuses or amendments thereto, as well as information we have previously filed with the SEC, is accurate as of any date other than the date on the front cover of the applicable document.
To the extent there is a conflict between the information contained in this prospectus and any prospectus supplement, you should rely on the information in such prospectus supplement, provided that if any statement in one of these documents is inconsistent with a statement in another document having a later date — for example, a document incorporated by reference in this prospectus or any prospectus supplement — the statement in the document having the later date modifies or supersedes the earlier statement.
Neither the delivery of this prospectus nor any distribution of any of the shares of common stock pursuant to this prospectus shall, under any circumstances, create any implication that there has been no change in the information set forth or incorporated by reference into this prospectus or in our affairs since the date of this prospectus. Our business, financial condition, results of operations and prospects may have changed since such date.
Neither we nor the underwriters are offering to sell or seeking offers to purchase such shares of common stock offered hereby in any jurisdiction where the offer or sale is not permitted. Neither we, nor the underwriters, have done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. Persons outside the United States who come into possession of this prospectus must inform themselves about, and observe any restrictions relating to, the offering of such shares of common stock as to distribution of the prospectus outside of the United States.
For investors outside the United States: neither we nor any of the underwriters have done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than the United States. You are required to inform yourselves about and to observe any restrictions relating to this offering and the distribution of this prospectus.
Neither our Company, any of its officers, directors, agents or representatives, nor the underwriters, make any representation to you about the legality of an investment in our Company’s shares of common stock. You should not interpret the contents of this prospectus to be legal, business, investment or tax advice. You should consult with your own advisors for that type of advice and consult with them about the legal, tax, business, financial and other issues that you should consider before investing in our Company’s shares of common stock.
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TRADEMARKS AND TRADE NAMES
This prospectus includes trademarks that are protected under applicable intellectual property laws and are the Company’s property. This prospectus also contains trademarks, service marks, trade names and/or copyrights of other companies, which are the property of their owners. Solely for convenience, trademarks and trade names referred to in this prospectus may appear without the ® or ™ symbols, but such references are not intended to indicate, in any way, that the Company will not assert, to the fullest extent under applicable law, its rights or the right of the applicable licensor to these trademarks and trade names.
This prospectus includes estimates regarding market and industry data that we prepared based on our management’s knowledge and experience in the markets in which we operate, together with information obtained from various sources, including publicly available information, industry reports and publications, surveys, our customers, distributors, suppliers, trade and business organizations and other contacts in the markets in which we operate. Management estimates are derived from publicly available information released by independent industry analysts and third-party sources, as well as data from our internal research, and are based on assumptions made by us upon reviewing such data and our knowledge of such industry and markets which we believe to be reasonable.
Our estimates presented elsewhere in this prospectus of our addressable market are based on multiple assumptions and our analysis of multiple sources, including publicly available information, academic articles, data from governmental agencies and reports by industry organization as well as on our internal estimates.
In presenting this information, we have made certain assumptions that we believe to be reasonable based on such data and other similar sources and on our knowledge of, and our experience to date in, the markets for the products we distribute. Any such market data, information or forecast is subject to change and may prove to be inaccurate because of the method by which we obtain it or because it cannot always be verified with complete certainty given the limits on the availability and reliability of raw data, the voluntary nature of the data gathering process and other limitations inherent in any statistical survey of market shares, including those discussed in the “Risk Factors” and “Cautionary Statement Regarding Forward-Looking Statements” sections. In addition, customer preferences are subject to change.
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains “forward-looking statements.” Forward-looking statements reflect the current view about future events. All statements, other than statements of historical facts, regarding our strategy, future operations, future financial position, future revenues, projected costs, prospects, plans, objectives of management or other financial items are forward-looking statements. The words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “will,” “would” and similar expressions, or the negative of these terms or similar expressions, are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words.
Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict. Our actual results may differ materially from those contemplated by the forward-looking statements. They are neither statements of historical fact nor guarantees of assurance of future performance. We caution you therefore against relying on any of these forward-looking statements. Important factors that could cause actual results to differ materially from those in the forward-looking statements include, without limitation:
| ● | the factors referenced in this prospectus, including those set forth under “Risk Factors” in this prospectus; | |
| ● | our ability to consummate this offering and realize the anticipated benefits of this offering; | |
| ● | the likelihood that we will consummate this offering; | |
| ● | risks associated with our ability to consummate this offering; | |
| ● | the risk that the anticipated benefits from this offering may not be realized or may take longer to realize than expected, including as a result of the failure to complete this offering; | |
| ● | unexpected costs or unexpected liabilities that may arise from this offering, whether or not completed; | |
| ● | the fact that we have a limited operating history; | |
| ● | the expected growth of our business and our Company; | |
| ● | estimates of our total addressable market and our expectations about market trends; | |
| ● | whether we are able to achieve commercial success and market acceptance for our products; | |
| ● | our expectations regarding competitive companies and technologies and our industry generally; | |
| ● | the impact on our business, financial condition and results of operation from COVID-19, or any pandemic, epidemic or outbreak of an infectious disease in the United States or worldwide; | |
| ● | our ability to manage and grow our business by expanding our commercial organization and increasing our sales to existing and new customers in current and new geographies; | |
| ● | our ability to manufacture sufficient quantities of our products with sufficient quality; | |
| ● | our ability to accurately forecast customer demand for our products and manage our inventory; | |
| ● | our ability to establish and maintain intellectual property protection for our products or avoid future claims of infringement; | |
| ● | U.S. or foreign regulatory actions affecting us or the food and beverage industry generally; | |
| ● | the timing or likelihood of regulatory filings and approvals; | |
| ● | our ability to hire and retain key personnel; | |
| ● | our ability to obtain additional financing in this or future offerings; | |
| ● | the volatility of the trading price of our common stock; | |
| ● | our expectations regarding the use of proceeds from this offering; | |
| ● | our compliance with extensive Nasdaq requirements and government laws, rules and regulations both in the United States and internationally; and | |
| ● | our expectations regarding the time during which we will be an emerging growth company under the Jumpstart our Business Startups Act of 2012 (the “JOBS Act”). |
The preceding list is not intended to be an exhaustive list of all of our forward-looking statements. We have based these forward-looking statements on our current expectations, assumptions, estimates and projections about future events and financial trends that we believe may affect our business, financial condition, and results of operations. While we believe these expectations, assumptions, estimates, and projections are reasonable, such forward-looking statements are only predictions and involve known and unknown risks and uncertainties, many of which are beyond our control. These and other important factors, including those discussed in this prospectus under the headings “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Description of Business,” may cause our actual results, performance, or achievements to differ materially from any future results, performance or achievements expressed or implied by these forward-looking statements. Furthermore, the potential impact of COVID-19 on our business operations and financial results and on the world economy as a whole may heighten the risks and uncertainties that affect our forward-looking statements described above. Moreover, we operate in a very competitive and rapidly evolving environment. New risk factors and uncertainties may emerge from time to time, and it is not possible for management to predict all risk factors and uncertainties. Given these risks and uncertainties, you are cautioned not rely on such forward-looking statements as predictors of future events. The forward-looking statements included elsewhere in this prospectus are not guarantees of future performance and our actual results of operations, financial condition and liquidity, and the development of the industry in which we operate, may differ materially from the forward-looking statements included elsewhere in this prospectus. In addition, even if our results of operations, financial condition and liquidity, and events in the industry in which we operate, are consistent with the forward-looking statements included elsewhere in this prospectus, they may not be predictive of results or developments in future periods.
Any forward-looking statement that we make in this prospectus speaks only as of the date of such statement. Except as required by law, we do not undertake any obligation to update or revise, or to publicly announce any update or revision to, any of the forward-looking statements, whether as a result of new information, changed circumstances, future events or otherwise, after the date of this prospectus.
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This summary highlights selected information that is presented in greater detail elsewhere in this prospectus. This summary does not contain all the information you should consider before investing in our common stock. You should read this entire prospectus carefully, including the sections titled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our financial statements and the related notes included elsewhere in this prospectus, before making an investment decision.
Our Company
BranchOut is an emerging natural food brand with a licensed technology platform that enables the manufacturing and marketing of plant-based dehydrated foods. BranchOut has licensed rights from an independent third party to a new dehydration technology designed for drying and processing highly sensitive fruits and vegetables such as avocados, bananas and others. Using the licensed technology platform, we believe BranchOut’s line of branded food products speak to current consumer trends. In our experience, conventional dehydration methods, such as freeze-drying and air drying, tend to degrade most fruit and vegetables through oxidation, browning/color degradation, nutritional content reduction and/or flavor loss. As a result, certain highly sensitive fruit, such as avocados and bananas, have not previously been successfully offered as a dehydrated base for consumer products. Other dried fruit- and vegetable-based products are on the market but are of low quality. We believe that BranchOut’s licensed technology platform and process is the only way to produce quality avocado- and banana-based snack and powdered products. Additionally, we believe our licensed technology platform produces superior products when using other fruits and vegetables as the base when compared to conventional drying and dehydration technologies. With more than 17 patents registered or pending in 14 countries, BranchOut has been granted the exclusive rights to use the licensed technology platform as applied to avocados, in addition to BranchOut’s own patent pending process, and nonexclusive rights to use the licensed technology platform for other products.
Our Products
Over time, BranchOut plans to grow revenues strategically by penetrating the multi-billion dollar grocery market opportunity presented by our current product lines, as well as expanding our platform to include additional products that meet our strict plant-based ingredient criteria to diversify our revenue base and increase BranchOut’s total addressable market (“TAM”) opportunity. BranchOut’s current products are primarily:
| ● | BranchOut Snacks: dehydrated fruit- and vegetable-based snacks, including Avocado Chips, Chewy Banana Bites, Pineapple Chips, Brussels Sprout Crisps and Bell Pepper Crisps. | |
| ● | BranchOut Powders: Avocado Powder, Banana Powder and Blueberry Powder. | |
| ● | BranchOut Industrial Ingredients: Bulk Avocado Powder, dried avocado pieces and other fruit powders/pieces. |
BranchOut is currently developing additional products, including chocolate covered fruit items and many private label products for large retailers.
Our Market Opportunity in the Evolving Food and Beverage Industry
BranchOut participates in what the U.S. Census Bureau estimated to be a $695 billion grocery market as of 2019, which is the second largest retail market after the automobile industry. BranchOut is specifically focused on the fastest growing sub-segment of the grocery market: Natural, Organic and Functional Food and Beverages. According to the Nutrition Business Journal, in 2018, Natural, Organic and Functional Food and Beverages sales in the U.S. were approximately $152 billion and grew 6.6% from the prior year, which was faster than the 4.0% growth in the overall food and beverage industry according to the U.S. Census Bureau. Further, according to the Nutrition Business Journal, during the same period, third-party and direct e-commerce sales represented two of the four fastest growing channels for Natural, Organic and Functional Food and Beverages sales in the United States, which we believe indicates significant market potential for the roll out of our omnichannel strategy once production capacity allows.
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We believe that consumer preferences within the evolving food and beverage industry are shifting away from processed and sugar-laden food and beverage products, as well as those containing significant amounts of highly processed and artificial ingredients. We believe that there is also increasing recognition of the environmental impact of animal-based products. This has led to significant growth in plant-based foods and beverages. According to the Plant-Based Foods Association, U.S. retail sales of plant-based foods increased 11% from 2018 to 2019, reaching a market value of $4.5 billion, compared to increases of 4% and 7% in the general grocery and natural foods categories, respectively. Among plant-based food categories, plant-based snacks are a rapidly emerging category but, in our opinion, lack product offerings similar to the BranchOut Snacks line. A report published by Persistence Market Research opines that the global plant-based snacks market is poised to witness lucrative growth by clocking a notable Compound Annual Growth Rate (“CAGR”) of 8.7% by the end of 2028. North America contributes massively to the growing size of the plant-based snacks market, on account of the rapid adoption of the flexitarian, vegetarian, and vegan diet. The North American plant-based snacks market is projected to produce a healthy CAGR of over 7% and exceed a market value of over US$23.2 billion through 2028.
BranchOut’s long-term goal is to build a scale-level and widely recognized brand and private label solutions that focuses on natural ingredients, nutritional density and functionality in the plant-based snack and nutritional powder space. We believe an authentic and trusted brand is the strongest barrier to entry and a sustainable source of differentiation in the consumer-packaged goods (“CPG”) industry. We also believe a strong brand is a valuable platform that can be leveraged to expand beyond our current markets to achieve relevance across multiple grocery aisles, online and a wide array of other relevant points of distribution. While the barriers to entry for launching a food product in the CPG industry have fallen in recent years as a result of unlimited shelf space on the internet and targeted online marketing, we believe that the barriers to building an internationally recognized and trusted brand relevant to today’s consumer remain high.
Our Growth Strategy
Consumers are increasingly incorporating natural alternatives into their diets but there are limited options. BranchOut is seeking to build a high level of brand recognition, as well as develop a trust and understanding with consumers that, regardless of category, any product labeled BranchOut will taste great and maintain a high-quality ingredient set. In addition, BranchOut aims to leverage our capabilities by offering major retailers private label products. These two approaches make up the heart of our platform strategy. Our primary growth strategies are as follows:
Open-Ended and Long Duration Growth Opportunity in the Enormous Grocery Market
At $695 billion, the U.S. grocery market is one of the largest retail end-markets in the world. BranchOut’s strategy is to maximize penetration of this opportunity through a variety of avenues, including growing brand trust and recognition, significantly expanding our grocery distribution footprint to multiples of our current level of customer retail locations, driving shelf velocity through an acceleration of online and offline advertising and introducing new products to expand our store footprint.
Exposure to Plant-Based, Functional and Natural Foods Portions of the Grocery Market
Within the grocery category, there is an ongoing secular shift from highly processed legacy brands that demonstrate little nutritional benefit to natural, nutrient-dense, functional and plant-based alternatives. We expect the shift in consumer tastes driving the growth of natural and plant-based alternatives will continue throughout the foreseeable future as consumers become better educated on nutrition and focus on the health and wellness of themselves, their families and the environment. There is also clear evidence that an increasing number of natural and plant-based products in stores are moving beyond the natural and specialty segments and into conventional grocery stores. The continuation of these trends should benefit BranchOut as it seeks to penetrate the very large overall grocery market.
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Continued Expansion of Distribution Footprint
Based on our estimate of what wholesale penetration for a leading CPG industry brand should be at maturity, we believe BranchOut’s wholesale distribution footprint should eventually be multiples of its current size. Currently, our products are marketed and sold through a diverse set of physical retail channels, including grocery chains, club stores, specialty and natural food outlets, and on our website at www.branchoutfood.com and Amazon.com. Maximizing potential distribution will be a key growth driver for BranchOut and our goal is to expand distribution so that our products are available wherever our customers choose to shop, whether it be a retail store, food service environment or directly online. While expanding distribution, we plan to simultaneously increase our brand awareness through an extensive program of online and offline marketing initiatives to accelerate the sell-through velocity of our products once they reach the shelves of our wholesale partners.
Maximize Market Penetration of Existing Product Lines
We believe that BranchOut’s existing snacks and nutritional powders represent a multi-billion-dollar TAM; however, we have not commissioned a formal market study to property quantify this expectation. We believe simply penetrating these core markets with our differentiated product lines will provide BranchOut with a large and long-duration growth opportunity. In the near-term, BranchOut plans to focus on growing its share within these categories. We plan to drive growth of both our snacks and nutritional powders through distribution expansion and increased marketing and advertising to drive brand recognition and shelf velocity. We plan to also attempt to leverage our new and existing wholesale relationships to gain additional shelf space for our full suite of existing products.
Expected Increases in Gross Margins, Fixed-Cost Leverage and a Capital Efficient Sales and Marketing Strategy Should Allow Earnings to Grow Faster than Sales, Providing a Path to Profitability
While generating topline growth is of primary importance to BranchOut, we are also highly focused on growing earnings faster than net sales and achieving profitability. We believe that the move from small batch system dehydration machines currently in operation to the larger continuous throughput machines, will significantly improve our operating margins. Our new large-scale continuous throughput dehydration machine was commissioned in September 2022 and we completed the first production run in the first quarter of 2023. We also expect operating margins to be improved by our shifting finished packaging from South America to Texas (which allows us to ship from our contract manufacturers in South America to the U.S. in bulk, reducing costs). We commenced this transition in early 2023. BranchOut remains committed to a business model focused on not just top line growth, but on steady progress toward profitability.
New Product Development
BranchOut’s current product lines are growing to address multi-billion dollar market opportunities with differentiated products. We intend to grow by launching new products over time, including planned launches in 2023. In the first and second quarters of 2020, we launched three flavors of Avocado Chips, three flavors of our Chewy Banana Bites and our Pineapple Chips. In the first quarter of 2022, we launched Banana Powder and Blueberry Powder to complement our Avocado Powder which was already on the market. In 2023, we launched a line of vegetable-based snacks including Brussels Sprout Crisps, and Bell Pepper Crisps. We are also developing Broccoli Bites, Asparagus Sticks, Mango Chips and Mandarin Crisps and others. In addition, we are developing several new items at the request of a national retailer which are planned to be sold under their brand.
These new products have been, and we expect that our future products will be, developed primarily through internal research and development. Using our unique licensed technology and South American supply chain, we believe that BranchOut is in a position to create a wide variety of innovative new products. With this in mind, we are focused on creating products that conform to our uncompromising brand ethos of uniqueness, great taste, high-quality ingredients, nutritional density, and functionality. Additional criteria for new product development are expected to include the potential for broad commercial acceptance, size of market opportunity, regulatory compliance issues, manufacturing process, availability and cost of raw materials, shelf-life and expected usage patterns by potential customers.
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Summary Risk Factors
We are subject to several risks, including risks that may prevent us from achieving our business objectives or that may adversely affect our business, financial condition, and results of operations. You should carefully consider the risks discussed in the section titled “Risk Factors”, including the following risks, before investing in our common stock:
Risks Related to Our Operating History, Financial Position and Capital Needs
| ● | We are an early-stage company and have incurred significant losses since our inception. We expect to incur losses for the foreseeable future and may never achieve or maintain profitability. | |
| ● | Our audited financial statements for the years ended December 31, 2022 and 2021 included a statement from our independent registered public accounting firm that there is a substantial doubt about our ability to continue as a going concern, and a continuation of negative financial trends could result in our inability to continue as a going concern. | |
| ● | We have previously identified material weaknesses and significant deficiencies in our internal control over financial reporting for the years ended December 31, 2022 and 2021. If we experience additional material weaknesses in the future, we may not be able to accurately or timely report our financial condition or results of operations and investors may lose confidence in our financial reports and the market price of our common stock could be adversely affected. |
Risks Related to Our Business
| ● | We are dependent on our management team, and the loss of any key member of this team may prevent us from implementing our business plan in a timely manner, or at all. | |
| ● | Our business is reliant on the license we have been granted to utilize certain dry processing technology we use to manufacture our products in the agreed upon exclusive region. | |
| ● | We rely on a small number of suppliers to provide our raw materials, and our supply chain may be interrupted and prevent us from obtaining the necessary materials we need to operate. | |
| ● | Competition in the food retail industry is intense and presents an ongoing threat to the success of our business. | |
| ● | Our future results of operations may be adversely affected by volatile commodity costs. | |
| ● | We are subject to the risks associated with sourcing and manufacturing products from, and conducting business operations outside of the United States, which could adversely affect our business. | |
| ● | Our results may be negatively affected by changes in foreign currency exchange rates. |
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| ● | Adverse weather conditions, natural disasters, crop disease, pests and other natural conditions can impose significant costs and losses on our business. | |
| ● | Our production equipment may be damaged, adversely affecting our ability to meet consumer and wholesale demand. | |
| ● | We rely on retailers and distributors for a substantial portion of our sales, and our failure to maintain and further develop our sales channels could harm our business. | |
| ● | Failure to maintain sufficient production capacity with our contract manufacturers on terms that are beneficial to us may result in our inability to meet customer demand and/or may increase our operating costs and capital expenditures. | |
| ● | Economic downturns could limit consumer demand for our products and negatively affect our sales and profitability. |
Regulatory Risks
| ● | Our products and operations are subject to government regulation and oversight both in the United States and abroad, and our failure to comply with applicable requirements could adversely affect our business and results of operations. | |
| ● | Litigation and regulatory enforcement concerning marketing and labeling of food products could adversely affect our business and reputation. | |
| ● | We may face scrutiny from evolving state regulations concerning health, safety, our supply chain and marketing. |
Risks Related to this Offering
| ● | There is no existing market for our common stock, and we do not know if one will develop to provide you with adequate liquidity. | |
| ● | Our stock price may fluctuate significantly, and you may be unable to resell your shares at or above the offering price. | |
| ● | The market prices and trading volume of our shares of common stock may experience rapid and substantial price volatility, which could cause purchasers of our common stock to incur substantial losses. |
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| ● | Sales of substantial amounts of our securities in the public markets, or the perception that such sales might occur, could reduce the price of our securities and may dilute your voting power and your ownership interest in us. | |
| ● | We are an “emerging growth company” and elect to comply with certain reduced reporting requirements applicable to emerging growth companies, which could make our securities less attractive to investors. | |
| ● | Our management has broad discretion as to the use of the net proceeds from this offering. | |
| ● | We may not be able to satisfy listing requirements of Nasdaq or obtain or maintain a listing of our common stock on Nasdaq. |
Risks Related to Our Capital Structure
| ● | Our Articles of Incorporation provide that the Nevada Eighth Judicial District Court of Clark County, Nevada shall be the exclusive forum for certain litigation that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us, our directors, officers or employees. Notwithstanding these provisions of our Articles of Incorporation, Section 27 of the Exchange Act creates exclusive federal jurisdiction over all suits brought to enforce any duty or liability created by the Exchange Act or the rules and regulations thereunder, and Section 22 of the Securities Act creates concurrent jurisdiction for federal and state courts over all suits brought to enforce any duty or liability created by the Securities Act or the rules and regulations thereunder, and notwithstanding the provisions of our Articles of Incorporation, compliance with the federal securities laws and the rules and regulations thereunder may not be waived by our investors. Accordingly, the exclusive forum provision of our Articles of Incorporation would not apply to suits brought to enforce any liability or duty created by the Securities Act, the Exchange Act the rules and regulations thereunder or any other claim for which the federal courts have exclusive or concurrent jurisdiction, which may cause us to incur additional costs associated with resolving such actions in other jurisdictions. |
Our business also faces a number of other challenges and risks discussed throughout this prospectus. You should read the entire prospectus carefully, including “Risk Factors”, “Cautionary Statement Regarding Forward-Looking Statements”, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, and our financial statements and related notes included elsewhere in this prospectus, before deciding to invest in our common stock.
Implications of Being an Emerging Growth Company
We qualify as an “emerging growth company” as defined in the JOBS Act. As an emerging growth company, we have elected to take advantage of specified reduced disclosure and other requirements that are otherwise applicable generally to public companies. These provisions include:
| ● | the requirement that we provide only two years of audited financial statements in addition to any required unaudited interim financial statements with correspondingly reduced “Management’s Discussion and Analysis of Financial Condition and Results of Operations” disclosure; | |
| ● | reduced disclosure about our executive compensation arrangements; | |
| ● | an exemption from the requirement that we hold a non-binding advisory vote on executive compensation or golden parachute arrangements; and | |
| ● | an exemption from the auditor attestation requirement in the assessment of our internal control over financial reporting. |
We may take advantage of these exemptions for up to five years or such earlier time that we are no longer an emerging growth company. We would cease to be an emerging growth company on the date that is the earliest of (i) the last day of the fiscal year in which we have total annual gross revenues of $1.235 billion or more; (ii) the last day of our fiscal year following the fifth anniversary of the date of the completion of this offering; (iii) the date on which we have issued more than $1 billion in nonconvertible debt during the previous three years; or (iv) the date on which we are deemed to be a large accelerated filer under the rules of the SEC. We may choose to take advantage of some but not all of these exemptions. We have taken advantage of reduced reporting requirements in this prospectus. Accordingly, the information contained herein may be different from the information you receive from other public companies in which you hold securities.
Nasdaq Listing Application and Proposed Symbol
We have filed an application to have our common stock and our shares underlying warrants listed on the Nasdaq under the symbol “BOF”. No assurance can be given that our application will be approved. If our application is not approved or we otherwise determine that we will not be able to secure the listing of our common stock on the Nasdaq, we will not complete the offering.
Recent Developments
We entered into a private labeling contract with one of the world’s largest retailers in late 2022 to supply the retailer with two products for placement in half of their domestic stores. In April 2023, the same retailer agreed to commence carrying an additional four of our products in certain of their stores.
In January 2023, we commenced the onboarding process for certain of our products with one of the nation’s largest food product redistributors.
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| Shares to be offered by us: | 1,250,000 shares of common stock (or 1,437,500 shares if the underwriters exercise in full their over-allotment option to purchase shares of our common stock at the initial public offering price). | |
| Initial public offering price: | We estimate that the price per share will be between $6.00 and $8.00. The initial public offering price may be at, above or below such assumed initial public offering price and will be determined at pricing based upon, among other factors, the closing bid price of the common stock on the effective date of this registration statement See “Underwriter – Determination of Initial Public Offering Price” for additional information. | |
| Common stock that may be offered by the Selling Stockholders: | Up to 1,934,506 shares of common stock. | |
| Common stock outstanding before this offering:(1) | 2,767,734 shares of common stock. | |
| Common stock outstanding after this offering:(1) | 4,017,734 shares of common stock (or 4,205,234 shares of common stock if the underwriters exercise in full their over-allotment option to purchase 187,500 additional shares of common stock at the initial public offering price). | |
| Over-allotment option of common stock offered by us: | The Company has granted the underwriters an over-allotment option, which is exercisable for up to 45 days after the date of this prospectus, and which permits the underwriters to purchase a maximum of 187,500 additional shares of common stock (15% of the shares sold in this offering) to cover over-allotments, if any. | |
| Use of proceeds: | We estimate that the net proceeds from this offering will be approximately $7,375,000, or approximately $8,556,250 if the underwriters exercise their over-allotment option in full, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us, assuming no exercise of the Representative’s Warrants, based upon an estimated initial public offering price of $7.00 per share, the midpoint of the price range of $6.00 to $8.00 set forth on the cover page of this prospectus. We intend to use net proceeds from this offering for repayment of approximately $2,500,000 of indebtedness, working capital and general corporate purposes, including operating expenses and capital expenditures. See “Use of Proceeds” for a more complete description of the intended use of proceeds from this offering. | |
| Representative’s Warrants: | We have agreed to issue the Representative warrants (the “Representative’s Warrants”) to purchase up to 86,250 shares of common stock (equal to 6% of the total number of shares of common stock sold in this offering, including any common stock sold pursuant to the over-allotment option). The Representative’s Warrants are not redeemable, and will be exercisable during the period beginning on the date that is six months from the date of commencement of sales of common stock in connection with this initial public offering and ending on the fifth anniversary date of such date at an exercise price of 120% of the initial public offering price. The registration statement of which this prospectus forms a part also registers the Representative’s Warrants and the common stock underlying the Representative’s Warrants. See “Underwriting — Representative’s Warrants” in this prospectus for more information regarding the Representative’s Warrants. | |
| Lock-Up Agreements: | Our executive officers and directors and certain of our shareholders, including holders of more than 5% of the outstanding shares of our common stock, have agreed with the underwriters not to sell, transfer or dispose of any common stock or similar securities for 360 days following the effective date of the registration statement for this offering without the prior written consent of the Representative. For additional information regarding our arrangement with the underwriters, please see “Underwriting.” | |
| Dividend policy: | We have never declared any cash dividends on our shares of common stock. We do not anticipate paying any cash dividends on our shares of common stock for the foreseeable future. See “Dividend Policy,” “Risk Factors – Risks Related to the Offering” in this prospectus for more information regarding our dividend policy. | |
| Proposed Nasdaq Ticker Symbols: | We have applied to have our common stock offered in the offering listed on the Nasdaq Capital Market under the symbol “BOF”. The listing of our common stock on the Nasdaq is a condition to consummating the offering. | |
| Risk factors: | You should carefully read and consider the information set forth under “Risk Factors” beginning on page 8, together with all of the other information set forth in this prospectus, before deciding to invest in the shares of our common stock. |
| (1) | The number of shares of common stock outstanding before this offering, as set forth in the table above, is based on 2,767,734 shares of our common stock outstanding immediately before this offering and after giving effect to (x) the conversion of principal and interest under convertible notes which automatically convert into 3,917,335 shares of our common stock upon the effectiveness of the registration statement in relation to this offering (the “Convertible Note Conversion”) and (y) a 2.5 for 1.0 reverse stock split of our common stock (the “Reverse Stock Split”) which will be effected before the initial closing of the offering and promptly after the registration statement in relation to this offering is declared effective and the convertible notes are converted into shares of our common stock and excludes: (i) outstanding options to purchase approximately 92,700 shares of our common stock which were issued to various individuals; (ii) outstanding warrants to purchase 365,141 shares of our common stock issued to various individuals, consisting of (x) warrants to purchase 189,167 shares with an exercise price of $6.50 per share, (y) warrants to purchase 154,246 shares with an exercise price of $7.10 per share and (z) warrants to purchase 21,728 shares with an exercise price of $7.50 per share; (iv) 187,500 shares of our common stock underlying the underwriters’ over-allotment option; and (v) warrants to purchase up to 86,250 shares of our common stock issuable to the Representative in connection with this offering at a price of 120% of the initial public offering price. |
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An investment in our securities involves a high degree of risk. Before making an investment decision you should carefully consider the risks described below and the risks and uncertainties described in this prospectus and the other information set forth or incorporated by reference in this prospectus. Additional risks and uncertainties that we are unaware of or that we believe are not material at this time could also materially adversely affect our business, financial condition or results of operations. In any case, the value of our common stock could decline, and you could lose all or part of your investment. You should also refer to our financial statements and the notes to those statements, which are incorporated by reference in this prospectus. See also the information contained under the heading “Cautionary Statement Regarding Forward Looking Statements” above.
Risks Related to Our Operating History, Financial Position and Capital Needs
We are an early-stage company and have incurred significant losses since our inception. We expect to incur losses for the foreseeable future and may never achieve or maintain profitability.
We are an early-stage company. We were formed and commenced operations in November 2017. We face all the risks faced by newer companies, including significant competition from existing and emerging competitors, many of which are established and have better access to capital. In addition, as a new business, we may encounter unforeseen expenses, difficulties, complications, delays, and other known and unknown factors. We will need to transition from an early-stage company to a company capable of supporting larger scale commercial activities. If we are not successful in such a transition, our business, results, and financial condition will be harmed.
We have not been profitable to date, and we expect operating losses for the near future. During the years ended December 31, 2022 and 2021, we achieved net sales of approximately $752,178 and $715,553, respectively, and incurred net losses of approximately $4,643,352 and $660,198, respectively. There can be no assurance that we will not continue to incur net losses in the future. We may not succeed in expanding our customer base and product offerings and even if we do, may never generate revenue that is significant enough to achieve profitability. Even if we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis. Furthermore, we may not be able to control overhead expenses even where our operations successfully expand. Our failure to become and remain profitable would depress our value and could impair our ability to raise capital, expand our business, diversify our product offerings, or even continue our operations.
Our audited financial statements for the years ended December 31, 2022 and 2021 included a statement from our independent registered public accounting firm that there is substantial doubt about our ability to continue as a going concern, and a continuation of negative financial trends could result in our inability to continue as a going concern.
There is substantial doubt about our ability to continue as a going concern over the next twelve months and our independent registered public accounting firm has included a “going concern” explanatory paragraph in their report in our financial statements as of and for the years ended December 31, 2022 and 2021. The report is for the years ended December 31, 2022 and 2021 and does not take into account any proceeds we will receive in the proposed offering; however, if our operating results fail to improve, our financial condition will deteriorate which could render us unable to continue as a going concern.
We may need to raise additional capital to fund our existing commercial operations and develop and commercialize new products and expand our operations.
Based on our current business plan, we believe the net proceeds from this offering, together with our current cash and cash equivalents and cash receipts from sales will enable us to conduct our planned operations for at least the next twelve months. If our available cash balances, net proceeds from this offering and anticipated cash flow from operations are insufficient to satisfy our liquidity requirements because of lower demand for our products or due to other risks described herein, we may seek to sell common stock or other securities, enter into an additional credit facility or seek another form of third-party funding, including debt financing.
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We may consider raising additional capital in the future to expand our business, to pursue strategic investments, to take advantage of financing opportunities or for other reasons, including to:
| ● | increase our sales and marketing efforts and address competitive developments; | |
| ● | provide for supply and inventory costs; | |
| ● | fund development and marketing efforts of any future products or additional features to then-current products; | |
| ● | acquire, license or invest in new technologies; and | |
| ● | acquire or invest in complementary businesses or assets. |
Our present and future funding requirements will depend on many factors, including:
| ● | our ability to achieve revenue growth and improve gross margins; | |
| ● | the cost of expanding our operations and offerings, including our sales and marketing efforts; | |
| ● | the effect of competing market developments; and | |
| ● | costs related to international expansion. |
The various ways we could raise additional capital carry potential risks. If we raise funds by issuing equity securities, dilution to our stockholders could result. Any equity securities issued also could provide for rights, preferences, or privileges senior to those of holders of shares of our common stock. If we raise funds by issuing debt securities, those debt securities would have rights, preferences, and privileges senior to those of holders of shares of our common stock. The terms of any debt securities issued or borrowings made pursuant to a credit agreement could impose significant restrictions on our operations. If we raise additional funds through collaborations and licensing arrangements, we might be required to relinquish significant rights or grant licenses on terms that are not favorable to us.
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 are a nascient company which commenced operations in 2017. Our net sales were approximately $752,178 for the year ended December 31, 2022 and approximately $715,553 for the year ended December 31, 2021. We expect that, in the future, 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; | |
| ● | cost-effectively increase online sales on our website and third-party marketplaces; | |
| ● | effectively introduce new products; | |
| ● | increase awareness of our brand; | |
| ● | manufacture at a scale that satisfies future demand; and | |
| ● | effectively source key raw materials. |
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We may not successfully accomplish any of these objectives. Since our inception in November 2017, 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.
We may be unable to manage our future growth effectively, which could make it difficult to execute our business strategy.
Our growth has placed, and may continue to place, significant demands on our organizational, administrative, and operational infrastructure, including manufacturing operations, quality control, technical support and customer service, sales force management and general and financial administration. As we continue to grow, we will need to make significant investments in multiple divisions of our company, including in sales, marketing, product development, information technology, equipment, facilities, and human resources. We will also need to improve our operational, financial and management controls as well as our reporting systems and procedures.
If we are unable to manage our growth effectively, we may be unable to execute our business plan, which could have a material adverse effect on our business and our results of operations. Managing our planned growth effectively will require us to:
| ● | maintain a low cost of customer acquisition relative to customer lifetime value; | |
| ● | identify products that will be viewed favorably by customers; | |
| ● | expand operations with our contract manufacturers; and | |
| ● | successfully hire, train, and motivate additional employees, including additional personnel for our technology, sales and marketing efforts. |
The expansion of our products and customer base may result in increases in our overhead and selling expenses. Any increase in expenditures in anticipation of future sales that do not materialize would adversely affect our profitability. In addition, if we are unable to effectively manage the growth of our business, the quality of our products may suffer and we may be unable to address competitive challenges, which would adversely affect our overall business, operations, and financial condition.
We have previously identified material weaknesses and significant deficiencies in our internal control over financial reporting for the years ended December 31, 2022 and 2021. If we experience additional material weaknesses in the future, we may not be able to accurately or timely report our financial condition or results of operations and investors may lose confidence in our financial reports and the market price of our common stock could be adversely affected.
We have identified material weaknesses and significant deficiencies in our internal control over financial reporting in connection with our assessment as of and for the years ended December 31, 2022 and 2021. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of a company’s annual or interim financial statements will not be prevented or detected on a timely basis. Specifically, these control deficiencies constitute material weaknesses, either individually or in the aggregate, relating to: (1) the Company has no formal control process related to the identification and approval of related party transactions; (2) the Company lacks a formal and complete set of policies and procedures that cover the Company’s internal controls over financial reporting; (3) the Company did not maintain effective internal controls to assure proper segregation of duties; (4) and lack of resources to evaluate and review appropriate accounting treatment for certain complex areas, such as the treatment of deferred tax assets, unique transactions, and share based compensation.
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We have identified and initiated certain immaterial post-closing adjustments to our financial statements and implemented changes to our internal controls and policies as of December 31, 2022, including establishing an independent board of directors, hiring a Chief Financial Officer, and engaging a certified public accountant consultant with extensive public company and GAAP experience to analyze and improve the Company’s systems and processes.
Remediation of the identified material weaknesses and strengthening our internal control environment will require a substantial effort through 2023 and beyond. While we believe that the steps taken to date and those planned for implementation will improve our internal control over financial reporting, we have not completed all remediation efforts. The planned remediation activities described above highlight our commitment to remediating our identified material weaknesses and will remain largely unchanged through the effective date of the registration statement of which this prospectus forms a part.
As we continue to evaluate and work to improve our internal control over financial reporting, our management may determine that additional or different measures to address control deficiencies or modifications to the remediation plan are necessary. Further, in the future we may determine that we have additional material weaknesses. Our failure to remediate the material weaknesses or failure to identify and address any other material weaknesses or control deficiencies could result in inaccuracies in our financial statements and could also impair our ability to comply with applicable financial reporting requirements and related regulatory filings on a timely basis, which could cause investors to lose confidence in our reported financial information, which may result in volatility in and a decline in the market price of our common stock.
We will rely on our internal control over financial reporting to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with U.S. generally accepted accounting principles (“GAAP”). More broadly, effective internal control over financial reporting is a necessary component of our business to seek to prevent and detect any fraud. Furthermore, as we grow, our business will likely become more complex, and we may require significantly more resources to develop and maintain effective controls. Designing and implementing an effective system of internal control over financial reporting is a continuous effort that requires significant resources, including the expenditure of a significant amount of time by senior members of our management team. Any failure to maintain effective internal control over financial reporting or to timely effect any necessary improvements to such controls could materially and adversely affect us. Additionally, ineffective internal control over financial reporting could also adversely affect our ability to prevent or detect fraud, harm our reputation and cause stockholders to lose confidence in our reported financial information.
We are not currently required to comply with the rules of the SEC implementing Section 404 of the Sarbanes-Oxley Act and are therefore not required to make a formal assessment of the effectiveness of our internal control over financial reporting for that purpose. Although we will be required to disclose changes made in our internal controls and procedures on a quarterly basis, we will not be required to make our first annual assessment of our internal control over financial reporting pursuant to Section 404 until December 31, 2023. Moreover, as an emerging growth company, our independent registered public accounting firm will not be required to formally attest to the effectiveness of our internal control over financial reporting pursuant to Section 404 until the later of December 31, 2023 or the date that we are no longer an emerging growth company. At such time, our independent registered public accounting firm may issue a report that is adverse if it is not satisfied with the level at which our controls are documented, designed or operating.
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Our disclosure controls and procedures may not prevent or detect all errors or acts of fraud.
Upon the completion of this offering, we will become subject to the periodic reporting requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). We must design our disclosure controls and procedures to reasonably assure that information we must disclose in reports we file or submit under the Exchange Act is accumulated and communicated to management, and recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. We believe that any disclosure controls and procedures or internal controls and procedures, no matter how well-conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. For example, our directors or executive officers could inadvertently fail to disclose a new relationship or arrangement causing us to fail to make a required related party transaction disclosure. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by an unauthorized override of the controls. Accordingly, because of the inherent limitations in our control system, misstatements due to error or fraud may occur and not be detected.
Risks Related to Our Business
We are dependent on our management team, and the loss of any key member of this team may prevent us from implementing our business plan in a timely manner, or at all.
Our success depends largely upon the continued services of our executive officers and other key personnel, particularly our Chief Executive Officer Eric Healy, our Chief Financial Officer, Douglas Durst, our Controller, Chris Coulter and our Vice President of Sales, Joshua O’Brien. Our executive officers or key personnel could terminate their employment with us at any time without penalty. In addition, we do not maintain key person life insurance policies on any of our employees. The loss of one or more of these executive officers or key personnel could seriously harm our business and may prevent us from implementing our business plan in a timely manner, or at all.
Our Chief Financial Officer is not a full-time employee.
Douglas Durst, our Chief Financial Officer, is not a full-time employee of the Company and is simultaneously serving as the chief financial officer of another company. 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.
Our business is reliant on the license we have been granted to utilize certain dry processing technology we use to manufacture our products in the agreed upon exclusive region.
Our ability to continue our business of growth and distribution of our products is dependent on the licensing agreement (the “Licensing Agreement”) we have obtained from EnWave Corporation (“EnWave”) to utilize its dehydration technology in the manufacturing of our products. Our license is exclusive to North America, Central America, and South America (excluding our contract manufacturer in Chile) as it specifically relates to our avocado products and the Licensing Agreement grants non-exclusive rights for a variety of additional products. Any failure to comply with the terms of the Licensing Agreement could convert the exclusive portion of the license to a non-exclusive license, thereby permitting potential competitors to offer comparable avocado-based products using EnWave’s dehydration technology in the same geographic areas. Thus, any material failure to comply with the terms of the license or any failure to renew the license after it expires could have a material adverse impact on our financial condition and the operation of our business as it relates to our avocado-based products. Furthermore, we are reliant on EnWave to enforce its intellectual property rights in preventing would be competitors from using the technology exclusively licensed to us and there can be no assurance that EnWave will be successful in enforcing such rights in the relevant areas. Furthermore, future product development efforts may lead to additional products that we desire to commercialize. In this case, we will request expanding the exclusive and/or non-exclusive products defined by the Licensing Agreement, but there can be no assurance that EnWave will grant such requests.
We rely on a small number of suppliers to provide our raw materials, and our supply chain may be interrupted and prevent us from obtaining the necessary materials we need to operate.
We rely on limited number of suppliers and partners to meet our high-quality standards and supply products in a timely and efficient manner. There is, however, no assurance that quality natural and organic products will continue to be available to meet our specific and growing needs. This may be due to, among other reasons, problems with our suppliers’ and vendors’ businesses, finances, labor relations, ability to export materials, product quality issues, costs, production, insurance and reputation, as well as disease pandemics, epidemics or outbreaks such as COVID-19, acts of war, terrorism, natural disasters, fires, earthquakes, flooding or other catastrophic occurrences. If, for any reason, our suppliers or vendors became unable or unwilling to continue to provide services to us, this would likely lead to an interruption in our ability to import our products until we found another source that could provide these services. Failure to find a suitable replacement, even on a temporary basis, would have a material adverse effect on our ability to meet our current production targets, make it difficult to grow and would have an adverse effect on our results of operations.
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In addition, we depend on a limited number of key suppliers and partners located primarily in Chile, Peru, the People’s Republic of China (the “PRC”) and the United States. As of and for the year ended December 31, 2022 and 2021, three key suppliers accounted for 100% of our total raw material and packaging purchases. As of and for the years ended December 31, 2022 and 2021, 100% of our total dried fruit was supplied from Chile (we commenced receiving dried fruit from Peru in January 2023), 100% of our packaging purchases were from the PRC and 100% of our seasoning purchases were from the United States. As a result of this concentration in our supply chain, our business and operations would be negatively affected if any of our key suppliers were to experience significant disruption affecting the price, quality, availability, or timely delivery of their products. Additionally, our top suppliers are in a similar geographic area, which increases the risk of significant supply disruptions from local and regional events. In the event that our supply from our current suppliers is interrupted, our operations may be interrupted resulting in lost revenue, added costs such as, without limitation, shipping costs, and distribution delays that could harm our business and customer relationships until we are able to identify and enter into agreements with one or more alternative suppliers.
Our results of operations may be negatively impacted by public health pandemics, epidemics or outbreaks, including COVID-19.
COVID-19 and the restrictions intended to prevent its spread have had a significant adverse impact on economic and market conditions around the world, including in the United States. These conditions have had, and may continue to have, a material adverse impact on our business. In particular, the continued spread of the coronavirus globally could adversely impact our operations, including among others, our manufacturing and supply chain, sales and marketing and could have an adverse impact on our business and our financial results. Additionally, countries have imposed, and may impose in the future, prolonged quarantines and travel restrictions, which may significantly impact the ability of our employees to get to their places of work to produce products, may make it such that we are unable to obtain sufficient components or raw materials and component parts on a timely basis or at a cost-effective price or may significantly hamper our products from moving through the supply chain.
Our global operations expose us to risks associated with public health crises and epidemics, pandemics and outbreaks, such as the COVID-19 pandemic. We rely on our production facilities, as well as third-party suppliers and manufacturers, in the United States, Peru, Chile, the PRC and other countries significantly impacted by the COVID-19 pandemic. The COVID-19 pandemic resulted in the extended shutdown of certain businesses in many of these countries, which has resulted and may continue to result in disruptions or delays to our supply chain. Any disruption in businesses in any of these countries will likely impact our sales and operating results. The COVID-19 pandemic has had, and COVID-19 may continue to have, an adverse impact on our operations, supply chains and distribution systems and increase our expenses, including as a result of impacts associated with preventive and precautionary measures that we, other businesses and governments are taking. Due to these impacts and measures, we have experienced, and may continue to experience, significant and unpredictable reductions in demand for certain of our products.
The future impact of COVID-19 is highly uncertain and cannot be predicted and there is no assurance that COVID-19 will not have a material adverse impact on our business, financial condition and results of operations. The extent of the impact of COVID-19 will depend on future developments, including actions taken to contain COVID-19, and if these impacts persist or exacerbate over an extended period of time.
The rapid spread of other contagious illnesses such as a novel coronavirus, or fear of such an event, could also have a material adverse effect on the demand for our products and services and therefore have a material adverse effect on our business and results of operations. Such a widespread health crisis could adversely affect the global economy, resulting in an economic downturn that could impact demand for our products.
Competition in the food retail industry is intense and presents an ongoing threat to the success of our business.
The food retail industry is very competitive. In our online and wholesale business, we compete with food retail stores, supermarkets, warehouse clubs and other mass and general retail and online merchandisers, many of which are larger than us and have significantly greater capital resources than we do, selling both competitive products and retailing our own products, and competing against our direct online business. We also compete with a number of Natural, Organic and Functional Food and Beverage producers.
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We face significant competition from these and other retailers and producers. Any changes in their merchandising and operational strategies could negatively affect our sales and profitability. In particular, if Natural, Organic and Functional Food and Beverage competitors seek to gain or retain market share by reducing prices, we would likely be forced to reduce our prices on similar product offerings in order to remain competitive, which may result in a decrease in our market share, net sales and profitability and may require a change in our operating strategies.
We have been able to compete successfully by differentiating ourselves from our competitors by providing an expanding selection of natural, organic, and functional food and beverage products, competitive pricing, convenience and exceptional customer service. If changes in consumer preferences decrease the competitive advantage attributable to these factors, or if we fail to otherwise positively differentiate our product offering or customer experience from our competitors, our business, financial condition, and results of operations could be materially and adversely affected.
Many of our current competitors have, and potential competitors may have, longer operating histories, greater brand recognition, larger fulfillment infrastructures, greater technical capabilities, significantly greater financial, marketing, and other resources and larger customer bases than we do. These factors may allow our competitors to derive greater net sales and profits from their existing customer bases, acquire customers at lower costs or respond more quickly than we can to new or emerging technologies and changes in consumer preferences or habits. These competitors may engage in more extensive research and development efforts, undertake more far-reaching marketing campaigns, and adopt more aggressive pricing policies (including but not limited to predatory pricing policies and the provision of substantial discounts), which may allow them to build larger customer bases or generate net sales from those customer bases more effectively than we are able to execute upon. There can be no assurance that we will be able to successfully compete against these competitors.
We expect competition in the Natural, Organic and Functional Food and Beverage industry generally to continue to increase. We believe that our ability to compete successfully in this market depends upon many factors both within and beyond our control, including:
| ● | the size and composition of our customer base; | |
| ● | the number of products that we feature on our website; | |
| ● | the quality and responsiveness of our customer service; | |
| ● | our selling and marketing efforts; | |
| ● | the quality and price of the products that we offer; | |
| ● | the convenience of the shopping experience that we provide; | |
| ● | our ability to distribute our products and manage our operations; and | |
| ● | our reputation and brand strength. |
Given the rapid changes affecting the global, national, and regional economies generally and the Natural, Organic and Functional Food and Beverage industry, we may not be able to create and maintain a competitive advantage in the marketplace. Our success will depend on our ability to respond to, among other things, changes in consumer preferences, laws and regulations, market conditions, and competitive pressures. Any failure by us to anticipate or respond adequately to such changes could have a material adverse effect on our financial condition, operating results, liquidity, cash flow and our operational performance.
If we fail to compete successfully in this market, our business, financial condition, and results of operations would be materially and adversely affected.
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Our BranchOut products are new, and our industry is rapidly evolving.
Due consideration must be given to our prospects considering the risks, uncertainties and difficulties frequently encountered by companies in their early stage of development, particularly companies in the rapidly evolving Natural, Organic and Functional Food and Beverage industry. To be successful we must, among other things:
| ● | develop, manufacture, and introduce new attractive and successful consumer products in our BranchOut brand; | |
| ● | attract and maintain a large customer base and develop and grow that customer base; | |
| ● | increase awareness of our BranchOut brand and develop effective marketing strategies to ensure consumer loyalty; | |
| ● | establish and maintain strategic relationships with key sales, marketing, manufacturing, and distribution providers; | |
| ● | respond to competitive and technological developments; and | |
| ● | attract, retain, and motivate qualified personnel. |
We cannot guarantee that we will succeed in achieving our goals, and our failure to do so would have a material adverse effect on our business, prospects, financial condition, and operating results.
Some of our BranchOut products are new and are in the early stages of commercialization, and some products that are important to our growth strategy are in various stages of research and development and have not yet been commercialized. Products in development that have not yet been commercialized include Broccoli Bites, Asparagus Sticks, Mango Chips and Mandarin Crisps and others. We are not certain that these, or any other future products, will be developed to commercialization, sell as anticipated, or be desirable to their intended markets. Also, some of our products may have limited uses and benefits, which may limit their appeal to consumers and put us at a competitive disadvantage. Developing new products and placing them into wholesale channels and into conventional and natural grocery environments is an expensive and time-consuming process, and if a product fails to sustain market acceptance, the investment made in the product may be lost.
If our current or future BranchOut products fail in the development stage, or fail to meet our customers’ expectation of quality, or if we do not achieve or sustain market acceptance, we could lose customers or could be subject to claims which could have a material adverse effect on our business, financial condition and operating results.
As is typical in a rapidly evolving industry, the development process and demand and market acceptance for recently introduced products are subject to a high level of uncertainty and risk. Because the market for our products is new, evolving and therefore uncertain, it is difficult to predict with any certainty the size of this market and its growth rate, if any. We cannot guarantee that we will be successful in developing new products, or that a market for our products will develop or that demand for our products will be sustainable. If we fail to develop new products, or the market for new products fails to develop, develops more slowly than expected or becomes saturated with competitors, our business, financial condition and operating results would be materially adversely affected.
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Our future results of operations may be adversely affected by volatile commodity costs.
Many aspects of our business could be directly affected by volatile commodity costs. Agricultural commodities and raw materials, including avocados, bananas, pineapples, blueberries and other fresh produce, plastic film, cardboard, and other packaging materials, are the principal inputs used in our products. These items are subject to price volatility which can be caused by commodity market fluctuations, inflation, crop yields, seasonal cycles, weather conditions (including the potential effects of climate change), temperature extremes and natural disasters (including floods, droughts, water scarcity, frosts, earthquakes and hurricanes), pest and disease problems, changes in currency exchange rates, imbalances between supply and demand, natural disasters and government programs and policies, among other factors. Volatile fuel costs translate into unpredictable costs for the products and services we receive from our third-party providers including, but not limited to, distribution costs for our products and packaging costs. While we may seek to offset the volatility of such costs with a combination of cost savings initiatives, operating efficiencies and price increases to our customers, we may be unable to manage cost volatility. If we are unable to fully offset the volatility of such costs, our financial results could be adversely affected.
We are subject to the risks associated with sourcing and manufacturing products from, and conducting business operations outside of the United States, which could adversely affect our business.
We purchase our products from a variety of suppliers, including international suppliers. Our direct purchases from non-US suppliers represented most of our raw material purchases in 2022 and 2021, and we expect our international purchases may grow with time. We may in the future enter into agreements with distributors in foreign countries to sell our products. All of these activities are subject to the uncertainties associated with international business operations, including:
| ● | difficulties with foreign and geographically dispersed operations; | |
| ● | having to comply with various U.S. and international laws; | |
| ● | changes and uncertainties relating to foreign rules and regulations; | |
| ● | tariffs, export or import restrictions, restrictions on remittances abroad, imposition of duties or taxes that limit our ability to import necessary materials; | |
| ● | limitations on our ability to enter into cost-effective arrangements with distributors, or at all; | |
| ● | fluctuations in foreign currency exchange rates; | |
| ● | imposition of limitations on production, sale, or export in foreign countries, including due to COVID-19 or other epidemics, pandemics, outbreaks and quarantines; | |
| ● | imposition of limitations on or increase of withholding and other taxes on remittances and other payments by foreign processors or joint ventures; | |
| ● | imposition of differing labor laws and standards; | |
| ● | economic, political, environmental, health-related or social instability in foreign countries and regions; | |
| ● | an inability, or reduced ability, to protect our intellectual property; | |
| ● | availability of government subsidies or other incentives that benefit competitors in their local markets that are not available to us; | |
| ● | difficulties in recruiting and retaining personnel, and managing international operations; |
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| ● | difficulties in enforcing contracts and legal decisions; and | |
| ● | less developed infrastructure. |
In particular, there has been significant recent political instability in Peru and Chile, where our contract manufacturers are located. There can be no assurance that political instability in those countries will not materially and adversely affect our contract manufacturers and, in turn, our ability to source our products.
If we expand into other target markets, we cannot assure you that our expansion plans will be realized, or if realized, be successful. We expect each market to have particular regulatory and funding hurdles to overcome, and future developments in these markets, including the uncertainty relating to governmental policies and regulations, could harm our business. If we expend significant time and resources on expansion plans that fail or are delayed, our reputation, business and financial condition may be adversely affected.
In addition, we could be adversely affected by violations of the U.S. Foreign Corrupt Practices Act, as amended, and similar worldwide anti-bribery laws, which generally prohibit companies and their intermediaries from making improper payments to non-U.S. officials or other third parties for the purpose of obtaining or retaining business. While our policies mandate compliance with these anti-bribery laws, our internal control policies and procedures may not protect us from reckless or criminal acts committed by our employees or agents. Violations of these laws, or allegations of such violations, could disrupt our business and result in a material adverse effect on our results of operations, cash flows and financial condition.
Our results may be negatively affected by changes in foreign currency exchange rates.
Currently, substantially all of our international purchase and sales contracts are denominated in U.S. dollars. As a result, a decrease in the value of the U.S. dollar relative to foreign currencies could increase our costs in dollars for the food products and ingredients that we import from other countries. In addition, if and when we expand into international markets, an increase in the value of the U.S. dollar relative to foreign currencies could require us to reduce our selling price or risk making our products less competitive in international markets.
A larger portion of our revenues may be denominated in other foreign currencies if we expand into international markets. Conducting business in currencies other than U.S. dollars could subject us to fluctuations in currency exchange rates that could negatively affect our revenues, cost of revenues and operating margins and result in foreign currency translation gains and losses.
We may be unable to adequately protect our brand and our other intellectual property rights.
We regard our brand, customer lists, trademarks, domain names, trade secrets and similar intellectual property as critical to our success. We may rely on U.S. and international trademark, copyright and patent law, trade secret protection, agreements and other methods with our employees and others to protect our proprietary rights. We might not be able to obtain broad protection in the United States for all our intellectual property. The protection of our intellectual property rights may require the expenditure of significant financial, managerial and operational resources. Moreover, the steps we take to protect our intellectual property may not adequately protect our rights or prevent third parties from infringing or misappropriating our proprietary rights, and we may be unable to broadly enforce all our trademarks. Any of our trademarks or other intellectual property rights or future patents (if any) may be challenged by others or invalidated through administrative process or litigation. Any of our future patent and trademark applications may never be granted. To date, we have applied for patent protection with the United States Patent and Trademark Office with respect to certain of the manufacturing processes that we use (in addition to our licensed technology). Even if we are granted one or more patents with respect to our manufacturing process, there is no guarantee that others will not independently develop or otherwise acquire equivalent or superior technology or intellectual property rights. Furthermore, our confidentiality agreements may not effectively prevent disclosure of our proprietary information, technologies and processes and may not provide an adequate remedy in the event of unauthorized disclosure of such information.
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We might be required to spend significant resources to monitor and protect our intellectual property rights. For example, we may initiate claims or litigation against others for infringement, misappropriation or violation of our intellectual property rights or other proprietary rights or to establish the validity of such rights. However, we may be unable to discover or determine the extent of any infringement, misappropriation or other violation of our intellectual property rights and other proprietary rights. Despite our efforts, we may be unable to prevent third parties from infringing upon, misappropriating or otherwise violating our intellectual property rights and other proprietary rights. Any litigation, whether or not it is resolved in our favor, could result in significant expense to us and divert the efforts of our technical and management personnel, which may materially and adversely affect our business, financial condition, and results of operations.
In addition, our licensed technology platform may use open-source software. The use of such open-source software may subject us to certain conditions, including the obligation to offer, distribute, or disclose our licensed technology platform for no or reduced cost, make the proprietary source code subject to open-source software licenses available to the public, license our software and systems that use open-source software for the purpose of making derivative works, or allow reverse assembly, disassembly, or reverse engineering. We monitor our use of open-source software to avoid subjecting our technology platform to conditions we do not intend. However, if our licensed technology platform becomes subject to such unintended conditions, it could have an adverse effect on our business, financial condition, and results of operations.
We may not be able to enforce our intellectual property rights throughout the world.
The laws of some foreign countries do not protect intellectual property rights to the same extent as the laws of the United States. Many companies have encountered significant problems in protecting and defending intellectual property rights in certain foreign jurisdictions. This could make it difficult for us to stop the infringement or the misappropriation of our intellectual property rights. The loss of the BranchOut brand or logo or other registered or common law trade names or a diminution in the perceived quality of products or services associated with the Company would harm our business. Our efforts to protect our intellectual property rights in such countries may be inadequate. In addition, changes in the law and legal decisions by courts in the United States and foreign countries may affect our ability to obtain adequate protection for our technology and the enforcement of intellectual property.
Third parties may assert that our employees or consultants have wrongfully used or disclosed confidential information or misappropriated trade secrets.
Although we try to ensure that our employees and consultants do not use the proprietary information or know-how of others in their work for us, we may be subject to claims that we or our employees, consultants or independent contractors have inadvertently or otherwise used or disclosed intellectual property, including trade secrets or other proprietary information, of a former employer or other third parties. Litigation may be necessary to defend these claims. If we fail in defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel. Even if we are successful in defending against such claims, litigation could result in substantial costs to the Company and be a distraction to management and other employees.
A food safety or quality issue that results in a product disruption such as a recall, health issue, or death of a consumer could harm our business.
The sale of products for human use and consumption involves the risk of injury or illness to consumers. Such injuries may result from inadvertent mislabeling, tampering by unauthorized third parties or product contamination or spoilage. Under certain circumstances, we may be required to recall or withdraw products, suspend production of our products, or cease operations, which may lead to a material adverse effect on our business. In addition, customers may stop placing or cancel orders for such products as a result of such events.
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Even if a situation does not necessitate a recall or market withdrawal, product liability claims might be asserted against us. While we are subject to governmental inspection and regulations and believe our facilities and those of our co-packers and suppliers comply in all material respects with all applicable laws and regulations, if the consumption of any of our products causes, or is alleged to have caused, a health-related illness or death to a consumer, we may become subject to claims or lawsuits relating to such matters. Even if a product liability claim is unsuccessful or is not fully pursued, the negative publicity surrounding any assertion that our products caused illness or physical harm could cause consumers to lose confidence in the safety and quality of our products. Moreover, claims or liabilities of this type might not be covered by our insurance or by any rights of indemnity or contribution that we may have against others. Although we maintain product liability and product recall insurance in an amount that we believe to be consistent with market practice, we cannot be sure that we will not incur claims or liabilities for which we are not insured or that exceed the amount of our insurance coverage. A product liability judgment against us or a product recall could have a material adverse effect on our business, financial condition, results of operations or liquidity.
We may be subject to significant liability that is not covered by insurance.
Although we believe that the extent of our insurance coverage is consistent with industry practice, any claim under our insurance policies may be subject to certain exceptions, may not be honored fully, in a timely manner, or at all, and we may not have purchased sufficient insurance to cover all losses incurred. If we were to incur substantial liabilities or if our business operations were interrupted for a substantial period, we could incur costs and suffer losses. Inventory, equipment, and business interruption losses may not be covered by our insurance policies. Additionally, insurance coverage may not be available to us at commercially acceptable premiums in the future, or at all.
We rely on independent certification for a number of our products.
We rely on independent third-party certification, such as certifications of our products as “Organic”, “KETO”, “Gluten Free”, “Vegan” or “Non-GMO” (non-genetically modified organisms), to differentiate our products from others. We must comply with the requirements of independent organizations or certification authorities in order to label our products as certified. The loss of any independent certifications could adversely affect our market position as a natural products company, which could harm our business.
Our future results of operations may be adversely affected by the availability of certifiable ingredients.
Our ability to ensure a continuing supply of certifiable ingredients at competitive prices depends on many factors beyond our control, such as the number and size of farms that grow organic crops, climate conditions, changes in national and world economic conditions, currency fluctuations and forecasting adequate need of seasonal ingredients.
The ingredients that we use in the production of our products (including, among others, avocados, bananas, pineapples and blueberries) are vulnerable to adverse weather conditions and natural disasters, such as floods, droughts, water scarcity, temperature extremes, frosts, earthquakes and pestilences. Natural disasters and adverse weather conditions (including the potential effects of climate change) can lower crop yields and reduce crop size and crop quality, which in turn could reduce our supplies of certifiable ingredients or increase the prices of such ingredients. If our supplies of certifiable ingredients are reduced, we may not be able to find enough supplemental supply sources on favorable terms, if at all, which could impact our ability to supply product to our customers and adversely affect our business, financial condition and results of operations.
We also compete with other manufacturers in the procurement of certifiable product ingredients, which may be less plentiful in the open market than conventional product ingredients. This competition may increase in the future if consumer demand for certifiable products increases. This could cause our expenses to increase or could limit the amount of product that we can manufacture and sell.
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Adverse weather conditions, natural disasters, crop disease, pests and other natural conditions can impose significant costs and losses on our business.
Agricultural products are vulnerable to adverse weather conditions, including severe rains, drought and temperature extremes, floods and windstorms, which are quite common but difficult to predict. Agricultural products also are vulnerable to crop disease and to pests, which may vary in severity and effect, depending on the stage of production at the time of infection or infestation, the type of treatment applied and climatic conditions. Unfavorable growing conditions caused by these factors can reduce both crop size and crop quality and, in extreme cases, entire harvests may be lost. Additionally, adverse weather or natural disasters, including earthquakes, winter storms, droughts, volcanic events or fires, could impact the manufacturing and business facilities of our suppliers in South America, which could result in significant costs and meaningfully reduce our capacity to fulfill orders and maintain normal business operations. These factors may result in lower sales volume and increased costs due increased costs of products. Incremental costs, including transportation, may also be incurred if we need to find alternate short-term supplies of products from alternative areas. These factors can increase costs, decrease revenues and lead to additional charges to earnings, which may have a material adverse effect on our business, results of operations and financial condition.
Climate change may negatively affect our business and operations.
There is concern that carbon dioxide and other greenhouse gases in the atmosphere may have an adverse impact on global temperatures, weather patterns and the frequency and severity of extreme weather and natural disasters. In the event that such climate change has a negative effect on agricultural productivity, we may be subject to decreased availability or less favorable pricing for certain commodities that are necessary for our products, such as avocados, bananas, pineapples, blueberries and other fresh produce, plastic film, cardboard and other packaging materials. As a result of climate change, we may also be subjected to decreased availability of water, deteriorated quality of water or less favorable pricing for water, which could adversely impact our manufacturing and distribution operations, as well as the agricultural businesses of our suppliers, which rely on the availability and quality of water.
Our production equipment may be damaged, adversely affecting our ability to meet consumer and wholesale demand.
A significant proportion of our products are produced at our contract manufacturers’ manufacturing facilities in South America. A significant disruption at those facilities or to any of our key production equipment, even on a short-term basis, could impair our ability to timely produce and ship products, which could have a material adverse effect on our business, financial position and results of operations. In the past, we have had manufacturing delays due to damaged and malfunctioning equipment, shipping delays, U.S. port congestion and delays, and cannot fully insure against the effects of such delays on our business. The manufacturing operations of our suppliers are vulnerable to interruption and damage from natural and other types of disasters, including earthquake, fire, floods, volcanic events, draughts, environmental accidents, winter storms, power loss, disease outbreaks, epidemics or pandemics such as the COVID-19 pandemic, communications failures and similar events. If any disaster were to occur at one of our facilities, our ability to operate our business would be seriously impaired.
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If the reputation of our brand erodes significantly, it could have a material impact on our results of operations.
Our financial success is directly dependent on the consumer perception of our brand. The success of our brand may suffer if our marketing plans or product initiatives do not have the desired impact on our brand’s image or its ability to attract consumers. Further, our results could be negatively affected if our brand suffers substantial damage to its reputation due to real or perceived quality issues or other actions by the Company or any of its executives.
We rely on retailers and distributors for a substantial portion of our sales, and our failure to maintain and further develop our sales channels could harm our business.
We sell a substantial portion of our products through retailers such as Costco Wholesale Corporation (“Costco” and Walmart Inc. (“Walmart”) and Sam’s Club Stores, a subsidiary of Walmart (“Sam’s Club”), distributors such as United Natural Foods, Inc. and KeHE Distributors, LLC (“KeHE Distributors”) and online through Amazon.com, and we depend on these third parties to sell our products to consumers. The largest retailer of our products for the year ended December 31, 2022 was Costco, accounting for approximately 59% of our net sales for the year. The top two retailers of our products for the year ended December 31, 2021, were Costco and Sam’s Club, accounting for 65% and 26% of our net sales, respectively. No other retailer or distributor represented more than 25% of our total net sales in 2022 or 2021.
The loss of, or business disruption at, one or more of these retailers or distributors or a negative change in our relationship with Costco or Sam’s Club, or a disruption to any one of our sales channels could have a material adverse effect on our business. If we do not maintain our relationship with existing retailers and distributors or develop relationships with new retailers and distributors, the growth of our business may be adversely affected, and our business may be harmed.
If we are required to obtain additional or alternative distribution agreements or arrangements in the future, we cannot be certain that we will be able to do so on satisfactory terms or in a timely manner. Our inability to enter into satisfactory distribution agreements may inhibit our ability to implement our business plan or to establish markets necessary to expand the distribution of our products successfully.
We do not have long-term purchase agreements with our customers.
Many of our customers buy from us under purchase orders, and we generally do not have long-term agreements with or commitments from these customers for the purchase of products. We cannot provide assurance that our customers, including customers that participate in our subscription programs, will maintain, or increase their sales volumes or orders for our products or that we will be able to maintain or add to our existing customer base. As a result, our past sales experience is not indicative of future sales or anticipated sales trends. Further, decreases in our customers’ sales volumes or orders for products supplied by us may have a material adverse effect on our business, financial condition, or results of operations and may occur without warning thus making future planning and forecasting difficult.
We may not be able to successfully implement our growth strategy for our brand on a timely basis or at all.
We believe that our future success depends, in part, on our ability to implement our growth strategy of leveraging our existing brand and products to drive increased sales. Our ability to implement this strategy depends, among other things, on our ability to:
| ● | enter distribution and other strategic arrangements with third-party retailers and other potential distributors of our products; | |
| ● | successfully compete in the product categories in which we choose to operate; |
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| ● | introduce new and appealing products and successfully innovate on our existing products; | |
| ● | develop and maintain consumer interest in our brand; and | |
| ● | increase our brand recognition and loyalty. |
We may not be able to implement this growth strategy successfully. Our planned marketing expenditures may not result in increased total sales or generate sufficient levels of consumer interest or brand awareness, and our high rates of sales and income growth may not be sustainable over time. Our sales and results of operations will be negatively affected if we fail to implement our growth strategy or if we invest resources in a growth strategy that ultimately proves unsuccessful.
Failure to maintain sufficient production capacity with our contract manufacturers on terms that are beneficial for us may result in our inability to meet customer demand and/or may increase our operating costs and capital expenditures.
We intend to rely on external production capacity of our contract manufacturers and partner with co-packers that use both their own production equipment as well as our production equipment. We have plans to expand our partner production facilities though additional investments in capital expenditures, A failure by any of our contract manufacturers or our co-packers to comply with food safety, environmental, or other laws and regulations, or to produce products of the quality and taste-profile we expect, may also disrupt our supply of products. In addition, we may experience increased distribution and warehousing costs due to capacity constraints resulting from our growth. If we need to enter additional co-packing, warehousing, or distribution agreements in the future, we can provide no assurance that we would be able to find acceptable third-party providers or enter into agreements on satisfactory terms or at all. In addition, we may need to expand our internal capacity, which could increase our operating costs and could require significant capital expenditures. If we cannot maintain sufficient production, warehousing, and distribution capacity, either internally or through third party agreements, we may be unable to meet customer demand and/or our manufacturing, distribution and warehousing costs may increase, which could negatively affect our business.
If we or our contract manufacturers face labor shortages or increased labor costs, our results of operations and our growth could be adversely affected.
Labor, particularly the costs of labor associated with our contract manufacturers, is a significant component of the cost of operating our business. Our ability and particularly the ability of our contract manufacturers to meet labor needs while controlling labor costs are subject to external factors, such as employment levels, prevailing wage rates, minimum wage legislation, changing demographics, health and other insurance costs and governmental labor and employment requirements. In the event of increasing wage rates, if we or any of our contract manufacturers fail to increase our wages competitively, the quality of our workforce and products could decline, while increasing our wages could cause our earnings to decrease. If we face labor shortages or increased labor costs because of increased competition for employees from our competitors and other industries, higher employee-turnover rates, or increases in the federal- or state-mandated minimum wage, change in exempt and non-exempt status, or other employee benefits costs (including costs associated with health insurance coverage or workers’ compensation insurance), our operating expenses could increase and our business, financial condition and results of operations could be materially and adversely affected.
Our financial success depends on our ability to successfully predict changes in consumer preferences and develop successful new products and marketing strategies in response.
Consumer preferences evolve over time and the success of our products depends on our ability to identify the tastes and dietary habits of consumers and to offer products that appeal to their preferences and address their concerns. We must also adapt our marketing strategies to these fluid consumer preferences as they develop. Recent trends in consumer preferences that may impact us include:
| ● | dietary trends and increased attention to nutritional values, such as sugar, fat, protein, fiber, or calorie content; |
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| ● | concerns about obesity and the health effects of specific ingredients and nutrients, such as sugar and other sweeteners, ingredients derived from GMOs, gluten, dairy, soybeans, nuts, oils, vitamins, fiber and minerals; and | |
| ● | increasing awareness of the environmental and social effects of product production, including agricultural production by food manufacturers and their suppliers. |
The development and introduction of new products could require substantial research and development and other expenditures, including capital investment and marketing and warehouse slotting investments. In addition, the success of our innovation and product development efforts depends upon our ability to anticipate changes in consumer preferences, the technical capability of our research and development staff in developing, formulating, and testing new products, and our ability to introduce the resulting products in a timely manner. If our products fail to meet consumer preferences, or we fail to introduce new and improved products on a timely basis, then the return on that investment will be less than anticipated and our strategy to grow sales and profits through product innovations and extensions will be less successful.
Consumer preferences for natural and organic food products are difficult to predict and may change.
Our business is primarily focused on sales of non-GMO, organic and natural products, and our success depends, in part, on our ability to offer products that anticipate the tastes and dietary habits of consumers and appeal to their preferences on a timely and affordable basis. Consumer eating habits may impact our business because of changes in attitudes regarding diet and health or new information regarding the health effects of consuming products we distribute. If consumer eating habits change significantly, we may be required to modify or discontinue sales of certain items in our product portfolio, and we may experience higher costs associated with implementing those changes. We cannot ensure that we will be able to effectively respond to changes in consumer health perceptions or to adapt our product offerings to trends in eating habits.
A significant shift in consumer demand away from our products, could reduce our sales and harm our business. Consumer trends change based on a number of possible factors, including nutritional values, a change in consumer preferences or general economic conditions. Additionally, there is a growing focus among some consumers to buy local food products in an attempt to reduce the carbon footprint associated with transporting food products from longer distances, which could result in a decrease in the demand for food products and ingredients that we import from other countries or transport from remote processing locations or growing regions. Further, failures by us or our competitors to deliver quality products could erode consumer trust in the organic certification of foods. A significant shift in consumer demand away from our products would reduce our market share, harming our business.
Technology failures or security breaches could disrupt our operations and negatively impact our business.
In the normal course of business, we rely on information technology systems to process, transmit, and store electronic information. For example, our production and distribution facilities and inventory management utilize information technology to increase efficiencies and limit costs. Information technology systems are also integral to the reporting of our results of operations. Furthermore, a significant portion of the communications between, and storage of personal data of, our personnel, customers, and suppliers depend on information technology, including social media platforms.
Our information technology systems may be vulnerable to a variety of interruptions, as a result of updating our enterprise platform or due to events beyond our control, including, but not limited to, natural disasters, terrorist attacks, telecommunications failures, computer viruses, hackers, and other security issues. These events could compromise our confidential information, impede, or interrupt our business operations, and may result in other negative consequences, including remediation costs, loss of revenue, litigation and reputational damage. Furthermore, if a breach or other breakdown results in disclosure of confidential or personal information, we may suffer reputational, competitive and/or business harm.
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While we have implemented administrative and technical controls and taken other preventive actions to reduce the risk of cyber incidents and protect our information technology, they may be insufficient to prevent physical and electronic break-ins, cyber-attacks, or other security breaches to our computer systems, which could have a material adverse effect on our business, financial condition or results of operations.
Economic downturns could limit consumer demand for our products and negatively affect our sales and profitability.
The premium organic and natural food industry is sensitive to national and regional economic conditions and the demand for the products that we distribute may be adversely affected from time to time by economic downturns that impact consumer spending, including discretionary spending. Future economic conditions such as employment levels, business conditions, housing starts, interest rates, inflation rates, energy and fuel costs and tax rates could reduce consumer spending or change consumer purchasing habits. Among these changes could be a reduction in the number of natural and organic products that consumers purchase where there are non-organic alternatives, given that many premium natural and organic products, and particularly premium natural and organic foods, often have higher retail prices than do their non-organic counterparts.
Regulatory Risks
Our products and operations are subject to government regulation and oversight both in the United States and abroad, and our failure to comply with applicable requirements could adversely affect our business and results of operations.
We are affected by a wide range of governmental laws and regulations. Examples of regulatory agencies influencing our operations include the United States Department of Agriculture (the “USDA”), the Food and Drug Administration (the “FDA”), the Federal Trade Commission (the “FTC”), and the Environmental Protection Agency (the “EPA”), among others. These agencies regulate, among other things, with respect to our products and operations:
| ● | design, development, and manufacturing; | |
| ● | testing, labeling, content, and language of instructions for use and storage; | |
| ● | product safety; | |
| ● | marketing, sales, and distribution; | |
| ● | record keeping procedures; | |
| ● | advertising and promotion; | |
| ● | recalls and corrective actions; and | |
| ● | product import and export. |
These laws and regulations affect various aspects of our business. For example, certain food ingredient products manufactured by us are regulated under the United States Federal Food, Drug, and Cosmetic Act (“FDCA”), as administered by the FDA. Under the FDCA, pre-marketing approval by the FDA is required for the sale of a food ingredient which is a food additive unless the substance is generally recognized as safe, under the conditions of its intended use by qualified experts in food safety. We believe that most food ingredients in our products are generally recognized as safe. However, this status cannot be determined until actual formulations and uses are finalized. As a result, we may be adversely affected if the FDA determines that our food ingredient products do not meet the criteria for generally recognized as safe.
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The regulations to which we are subject are complex and have tended to become more stringent over time. Regulatory changes could result in restrictions on our ability to carry on or expand our operations, higher than anticipated costs or lower than anticipated sales. The failure to comply with applicable regulations could jeopardize our ability to sell our products and result in enforcement actions and third-party lawsuits such as:
| ● | warning letters; | |
| ● | fines; | |
| ● | injunctions; | |
| ● | civil penalties and civil lawsuits; | |
| ● | termination of distribution; | |
| ● | recalls or seizures of products; | |
| ● | termination of distribution; | |
| ● | delays in the introduction of products into the market; and | |
| ● | total or partial suspension of production. |
Any of these sanctions could result in higher than anticipated costs or lower than anticipated sales and harm our reputation, business, financial condition, and results of operations. We may also be required to take corrective actions, such as installing additional equipment or taking other actions, each of which could require us to make substantial capital expenditures. In addition, we could be required to indemnify our employees in connection with any expenses or liabilities that they may incur individually in connection with regulatory action against them. As a result, our future business prospects could deteriorate due to regulatory constraints, and our profitability could be impaired by our obligation to provide such indemnification to our employees.
Our reputation could suffer from real or perceived issues involving the labeling or marketing of our products.
Products that we sell carry claims as to their origin, ingredients, or health benefits, including, by way of example, the use of the term “natural”, “functional”, or “healthy”, or similar synonyms or implied statements relating to such benefits. Although the FDA and the USDA each has issued statements regarding the appropriate use of the word “natural,” there is no single, U.S. government regulated definition of the term “natural” for use in the food industry, which is true for many other adjectives common in our industry. The resulting uncertainty has led to consumer confusion, distrust, and legal challenges. Plaintiffs have commenced legal actions against several food companies that market “natural” products, asserting false, misleading, and deceptive advertising and labeling claims, including claims related to genetically modified ingredients. In limited circumstances, the FDA has taken regulatory action against products labeled “natural” but that nonetheless contain synthetic ingredients or components. Should we become subject to similar claims, consumers may avoid purchasing products from us or seek alternatives, even if the basis for the claim is unfounded. Adverse publicity about these matters may discourage consumers from buying our products. The cost of defending against any such claims could be significant. Any loss of confidence on the part of consumers in the truthfulness of our labeling or ingredient claims would be difficult and costly to overcome and may significantly reduce our brand value. Any of these events could adversely affect our reputation and brand and decrease our sales, which would have a material adverse effect on our business, financial condition, and results of operations.
Similarly, certain USDA regulations set forth the minimum standards producers must meet in order to have their products labeled as “certified organic.” While we believe our products and our supply chain are in compliance with these regulations, changes to food regulations may increase our costs to remain in compliance. We could lose certifications if a facility becomes contaminated, if we do not use raw materials that are certified, or if key ingredients used in our products are no longer allowed to be used in food certifications. The loss of our certifications could materially and adversely affect our business, financial condition, or results of operations.
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In addition, the USDA has proposed a rule requiring disclosure of the use of genetic engineering in manufacturing a product or an ingredient used in a product. The rule has not been finalized, and we are unable to predict with certainty what the final requirements will be. If the USDA issues bioengineering disclosure regulations inconsistent with our practices, the resulting changes in labeling could adversely affect customer acceptance of our product and materially and adversely affect our business.
Litigation and regulatory enforcement concerning marketing and labeling of food products could adversely affect our business and reputation.
The marketing and labeling of any food product in recent years has brought increased risk that consumers will bring class action lawsuits and that the FTC and/or state attorneys general will bring legal action concerning the truth and accuracy of the marketing and labeling of the product. Examples of causes of action that may be asserted in a consumer class action lawsuit include fraud, unfair trade practices and breach of state consumer protection statutes. The FTC and/or state attorneys general may bring legal action that seeks removal of a product from the marketplace and impose fines and penalties. Even when unmerited, class claims, action by the FTC or state attorneys general enforcement actions can be expensive to defend and adversely affect our reputation with existing and potential customers and consumers and our corporate and brand image, which could have a material and adverse effect on our business, financial condition or results of operations.
We may be subject to specific FTC endorsement and/or testimonial regulations that would interfere with our advertising, marketing and labeling strategies.
The FTC revised its Guides Concerning the Use of Endorsements and Testimonials in Advertising (the “Guides”), which became effective on December 1, 2009. Although the Guides are not binding, they explain how the FTC interprets Section 5 of the Federal Trade Commission Act’s prohibition on unfair or deceptive acts or practices. Consequently, the FTC could bring a Section 5 enforcement action based on practices that are inconsistent with the Guides. Under the revised Guides, advertisements that feature a consumer and convey his or her atypical experience with a product or service are required to clearly disclose the results that consumers can generally expect. In contrast to the 1980 version of the Guides, which allowed advertisers to describe atypical results in a testimonial as long as they included a disclaimer such as “results not typical,” the revised Guides no longer contain such a safe harbor. The revised Guides also add new examples to illustrate the long-standing principle that “material connections” between advertisers and endorsers (such as payments or free products), connections that consumers might not expect, must be disclosed. While we do request that public persons who we provide samples of product disclose their relationship with us prior to sharing on social media or other endorsement, we cannot ensure all recipients comply with this request. We have continually adapted our marketing efforts to be compliant with the revised Guides. However, it is possible that our use, and that of our employees, of testimonials in the advertising and promotion of our products will be significantly impacted and therefore might negatively affect our sales.
We may face scrutiny from evolving state regulations concerning health, safety, our supply chain and marketing.
In addition to the federal regulatory issues listed above, there are a growing number of state regulations that might impair our ability to operate and avoid interruption. For example, California currently enforces legislation commonly referred to as “Proposition 65” that requires that “clear and reasonable” warnings be given to consumers who are exposed to chemicals known to the State of California to cause cancer or reproductive toxicity. Although we seek to comply with the requirements of Proposition 65, as well as to educate our customers regarding the substance of Proposition 65 and the relative metals contents in various natural foods, there can be no assurance that we will not be adversely affected by litigation or other actions relating to Proposition 65 or future legislation that is similar or related thereto. Increased compliance costs associated with operating in California and other states could adversely affect our business, financial condition and results of operations.
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Risks Related to this Offering
There is no existing market for our common stock, and we do not know if one will develop to provide you with adequate liquidity.
Prior to this offering, there has not been a public market for our securities. An active market for our securities may not develop following the completion of this offering, or if it does develop, may not be maintained. If an active trading market does not develop, or if the volume of trading in that market is limited, you may have difficulty selling any of our securities that you purchase. The initial public offering price for the securities will be determined by negotiations between us and the Representative of the underwriters and may not be indicative of prices that will prevail in the open market following this offering. Consequently, you may be unable to sell securities at prices equal to or greater than the price you paid in this offering.
Even if this offering is successful, we may need additional funding in order to grow our business.
To date, we have financed our operations through private placements of our equity and debt securities and borrowings under our revolving lines of credit. We have devoted substantially all our financial resources and efforts to developing our products, workforce, and manufacturing capabilities. Our long-term growth and success are dependent upon our ability ultimately to generate cash from operating activities. There is no assurance that we will be able to generate sufficient cash from operations or access the capital we need to grow our business. Our inability to obtain additional capital could have a material adverse effect on our ability to fully implement our business plan as described herein and grow our business, to a greater extent than we can with our existing financial resources.
Our stock price may fluctuate significantly, and you may be unable to resell your shares at or above the offering price.
The trading price of our securities may be volatile and subject to wide price fluctuations in response to various factors, including:
| ● | market conditions in the broader stock market; | |
| ● | actual or anticipated fluctuations in our quarterly financial statements and results of operations, or those of other companies in our industry; | |
| ● | actual or anticipated strategic, technological, or regulatory threats, whether or not warranted by actual events; | |
| ● | whether any securities analysts cover our stock; | |
| ● | issuance of new or changed securities analysts’ reports or recommendations, if any; | |
| ● | investor perceptions of our Company, the lithium battery and accessory industry; | |
| ● | the volume of trading in our stock; | |
| ● | changes in accounting standards, policies, guidance, interpretations, or principles; | |
| ● | sales, or anticipated sales, of large blocks of our stock; | |
| ● | additions or departures of key management personnel, creative, or other talent; | |
| ● | regulatory or political developments, including changes in laws or regulations that are applicable to our business; | |
| ● | litigation and governmental investigations; | |
| ● | sales or distributions of our common stock by significant shareholders, the entity through which our controlling shareholder holds its investment, or other insiders; | |
| ● | natural disasters and other calamities; and | |
| ● | macroeconomic conditions. |
Furthermore, the stock market has experienced extreme volatility that in some cases has been unrelated or disproportionate to the operating performance of particular companies. These and other factors may cause the market price and demand for our securities to fluctuate substantially, which may limit or prevent investors from readily selling their securities and it may otherwise negatively affect the liquidity of our securities. In addition, in the past, when the market price of a stock has been volatile, holders of that stock have sometimes instituted securities class action litigation against the company that issued the stock. If any of our stockholders were to bring a lawsuit against us, we could incur substantial costs defending the lawsuit. Such a lawsuit could also divert the time and attention of our management from our business.
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The market prices and trading volume of our shares of common stock may experience rapid and substantial price volatility, which could cause purchasers of our common stock to incur substantial losses.
Recently, the market prices and trading volume of shares of common stock of other small publicly traded companies with a limited number of shares available to purchasers, have experienced rapid and substantial price volatility unrelated to the financial performance of those companies. Similarly, subsequent to this offering, shares of our common stock may experience similar rapid and substantial price volatility unrelated to our financial performance, which could cause purchasers of our common stock in this offering to incur substantial losses, which may be unpredictable and not bear any relationship to our business and financial performance. Extreme fluctuations in the market price of our common stock may occur in response to strong and atypical retail investor interest, including on social media and online forums, the direct access by retail investors to broadly available trading platforms, the amount and status of short interest in our common stock and our other securities, access to margin debt, trading in options and other derivatives on our shares of common stock and any related hedging and other trading factors:
If there is extreme market volatility and trading patterns in our common stock, it may create several risks for investors in this offering, including the following:
| ● | the market price of our common stock may experience rapid and substantial increases or decreases unrelated to our operating performance or prospects, or macro or industry fundamentals; | |
| ● | if our future market capitalization reflects trading dynamics unrelated to our financial performance or prospects, purchasers of our common stock could incur substantial losses as prices decline once the level of market volatility has abated; and | |
| ● | if the future market price of our common stock declines, purchasers of shares of common stock in this offering may be unable to resell such shares at or above the price at which they acquired them. We cannot assure such purchasers that the market of our common stock will not fluctuate or decline significantly in the future, in which case investors in this offering could incur substantial losses. |
Further, we may incur rapid and substantial increases or decreases in our common stock price in the foreseeable future that may not coincide in timing with the disclosure of news or developments by or affecting us. Accordingly, the market price of our common stock may fluctuate dramatically, and may decline rapidly, regardless of any developments in our business. Overall, there are various factors, many of which are beyond our control, that could negatively affect the market price of our common stock or result in fluctuations in the price or trading volume of our common stock, including:
| ● | actual or anticipated variations in our annual or quarterly results of operations, including our earnings estimates and whether we meet market expectations with regard to our earnings; | |
| ● | our current inability to pay dividends or other distributions; | |
| ● | publication of research reports by analysts or others about us or the industry in which we operate, which may be unfavorable, inaccurate, inconsistent or not disseminated on a regular basis; | |
| ● | changes in market valuations of similar companies; | |
| ● | market reaction to any additional equity, debt or other securities that we may issue in the future, and which may or may not dilute the holdings of our existing stockholders; |
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| ● | additions or departures of key personnel; | |
| ● | actions by institutional or significant stockholders; | |
| ● | short interest in our common stock or our other securities and the market response to such short interest; | |
| ● | the dramatic increase in the number of individual holders of our common stock and their participation in social media platforms targeted at speculative investing; | |
| ● | speculation in the press or investment community about our company or industries in which we operate; | |
| ● | strategic actions by us or our competitors, such as acquisitions or other investments; | |
| ● | legislative, administrative, regulatory or other actions affecting our business, our industry, including positions taken by the FDA; | |
| ● | investigations, proceedings, or litigation that involve or affect us; | |
| ● | the occurrence of any of the other risk factors included in this registration statement of which this prospectus forms a part; and | |
| ● | general market and economic conditions. |
We do not anticipate paying dividends on our common stock in the foreseeable future, you may not receive any return on investment unless you sell your common stock for a price greater than that which you paid for it.
We do not anticipate paying any dividends in the foreseeable future on our common stock. We intend to retain all future earnings for the operation and expansion of our business and the repayment of outstanding debt. Our credit documents contain, and any future indebtedness likely will contain, restrictive covenants that impose significant operating and financial restrictions on us, including restrictions on our ability to pay dividends and make other restricted payments. As a result, capital appreciation, if any, of our common stock may be your major, if not exclusive, source of gain for the foreseeable future. While we may change this policy at some point in the future, we cannot assure you that we will make such a change.
If securities or industry analysts do not publish research or reports about our business, if they adversely change their recommendations regarding our stock, or if our results of operations do not meet their expectations, our stock price and trading volume could decline.
The trading market for our securities may be influenced by the research and reports that securities or industry analysts publish about us or our business (or the absence of such research or reports). There is no guarantee that such industry analysts will commence coverage of us or even if such analysts do commence coverage, if one or more of these analysts cease coverage of our Company or fail to publish reports on us regularly, we could lose visibility in the financial markets, which in turn could cause our stock prices or trading volume to decline. Moreover, if one or more of the analysts who cover us downgrade recommendations regarding our stock, or if our results of operations do not meet their expectations, our stock prices could decline and such decline could be material.
You may be diluted by the future issuance of additional common stock in connection with our 2022 Equity Incentive Plan, acquisitions or otherwise.
As of the date of this prospectus, we have 200,000,000 shares of common stock authorized of which 196,998,091 were unissued (which will be ratably reduced in accordance with the 2.5 for 1.0 Reverse Stock Split to be effected prior to the initial closing of this offering). Our articles of incorporation authorizes us to issue these shares of common stock and options, rights, warrants and appreciation rights relating to common stock for the consideration and on the terms and conditions established by our board of directors in its sole discretion, whether in connection with acquisitions or otherwise. Our 2022 Equity Incentive Plan (the “2022 Equity Incentive Plan”) authorizes issuance of an initial maximum of 1,500,000 shares of common stock (which will be ratably reduced in accordance with the 2.5 for 1.0 Reverse Stock Split to be effected prior to the initial closing of this offering), subject to annual increases on the first day of each fiscal year of no more than 5.0% of the total outstanding shares of common stock as of the last day of each fiscal year through 2032. Any common stock that we issue, including stock issued under our 2022 Equity Incentive Plan or other equity incentive plans that we may adopt in the future, as well as under outstanding options would dilute the percentage ownership held by the investors who purchase common stock in this offering.
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Sales of substantial amounts of our securities in the public markets, or the perception that such sales might occur, could reduce the price of our securities and may dilute your voting power and your ownership interest in us.
If our existing stockholders sell substantial amounts of our securities in the public market following this offering, the market price of our securities could decrease significantly. The perception in the public market that our existing stockholders might sell securities could also depress our market price. After giving effect to the conversion of outstanding convertible notes which convert upon the effectiveness of the registration statement of which this prospectus forms a part and the Reverse Stock Split and prior to the initial closing of this offering, we will have approximately 2,767,734 shares of common stock outstanding immediately prior to this offering (after giving effect to the Convertible Note Conversion and the Reverse Stock Split). We, our directors, executive officers and significant stockholders are subject to the lock-up agreements described in “Underwriting” and also to the Rule 144 (as defined below) holding period requirements described in “Shares Eligible for Future Sale”. Following the expiration of the lock-up period, our principal stockholders will have the right, subject to certain conditions, to require us to register the sale of their shares of our common stock under the Securities Act of 1933, as amended (the “Securities Act”). After this offering (assuming no exercise of the underwriters’ over-allotment option) and the expiration of the lock-up period, additional shares will be eligible for sale in the public market. The market price of shares of our common stock may drop significantly when the restrictions on resale by our existing stockholders lapse or when we are required to register the sale of our stockholders’ remaining shares of our common stock. A decline in the price of shares of our securities might impede our ability to raise capital through the issuance of additional shares of our common stock or other equity securities.
Our costs could increase significantly as a result of operating as a public company, and our management will be required to devote substantial time to complying with public company regulations.
As a public company, and particularly after we cease to be an “emerging growth company,” as defined in the JOBS Act, we could incur significant legal, accounting and other expenses not incurred in previous years. In addition, the Sarbanes-Oxley Act of 2002, as amended (“Sarbanes-Oxley”), as well as rules promulgated by the SEC and Nasdaq, require us to adopt certain corporate governance practices applicable to U.S. public companies. These rules and regulations may increase our legal and financial compliance costs.
Sarbanes-Oxley, as well as rules and regulations subsequently implemented by the SEC and Nasdaq, have imposed increased disclosure and enhanced corporate governance practices for public companies. Our efforts to comply with evolving laws, regulations and standards are likely to result in increased expenses and a diversion of management’s time and attention from revenue-generating activities to compliance activities. We may not be successful in continuing to implement these requirements and implementing them could adversely affect our business, results of operations and financial condition. In addition, if we fail to implement the requirements with respect to our internal accounting and audit functions, our ability to report our financial results on a timely and accurate basis could be impaired.
Our management team has limited experience managing a public company.
Most members of our management team have limited experience managing a publicly traded company, interacting with public company investors, and complying with the increasingly complex laws pertaining to public companies. Our management team may not successfully or efficiently manage our transition to being a public company that is subject to significant reporting obligations and regulatory oversight, and the continuous scrutiny of investors and analysts. These new obligations and constituents will require significant attention from our senior management and could divert their attention away from the day-to-day management of our business, which could harm our business, operating results and financial condition.
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We are an “emerging growth company” and have elected to comply with certain reduced reporting requirements applicable to emerging growth companies, which could make our securities less attractive to investors.
As an “emerging growth company,” we plan to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of Sarbanes-Oxley, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. We cannot predict if investors will find our securities less attractive because we chose to rely on these exemptions. If some investors find our securities less attractive as a result, there may be a less active trading market for our securities and the prices of our securities may be more volatile.
Section 107 of the JOBS Act also provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. We choose to avail ourselves of this extended transition period and defer adoption of certain changes in accounting standards.
As described in Section 101 of the JOBS Act, the “emerging growth company” classification can be retained for up to five years following this offering or until the earlier occurrence of the following:
| 1. | the last day of the fiscal year (a) following the fifth anniversary of the completion of this offering, (b) in which we have total annual gross revenue of at least $1.235 billion, or (c) in which we deemed to be a large, accelerated filer, which means the market value of our common stock that is held by non-affiliates exceeded $700 million as of the prior June 30th; or |
| 2. | the date on which we have issued more than $1.0 billion in non-convertible debt securities during the prior three-year period. |
If some investors find our securities less attractive as a result of any choices to reduce future disclosure, there may be a less active market for our securities and our stock price may be more volatile.
We will incur increased costs as a result of operating as a smaller reporting public company, and our management will be required to devote substantial time to new compliance initiatives.
As a smaller reporting public company, and particularly after we are no longer an emerging growth company, we will incur significant legal, accounting, and other expenses that we did not incur as a private company. In addition, Sarbanes-Oxley and rules subsequently implemented by the SEC and Nasdaq have imposed various requirements on public companies, including establishment and maintenance of effective disclosure and financial controls and corporate governance practices. Our management and other personnel will need to devote a substantial amount of time to these compliance initiatives. Moreover, these rules and regulations will increase our legal and financial compliance costs and will make some activities more time consuming and costly. For example, we expect that these rules and regulations may make it more difficult and more expensive for us to obtain director and officer liability insurance.
Pursuant to Section 404 of Sarbanes-Oxley (“Section 404”), we will be required to furnish a report by our management on our internal control over financial reporting, including an attestation report on internal control over financial reporting issued by our independent registered public accounting firm. However, while we remain an emerging growth company, we will not be required to include an attestation report on internal control over financial reporting issued by our independent registered public accounting firm. To achieve compliance with Section 404 within the prescribed period, we will be engaged in a process to document and evaluate our internal control over financial reporting, which is both costly and challenging. In this regard, we will need to continue to dedicate internal resources, potentially engage outside consultants and adopt a detailed work plan to assess and document the adequacy of internal control over financial reporting, continue steps to improve control processes as appropriate, validate through testing that controls are functioning as documented and implement a continuous reporting and improvement process for internal control over financial reporting. Despite our efforts, there is a risk that neither we nor our independent registered public accounting firm will be able to conclude within the prescribed timeframe that our internal control over financial reporting is effective as required by Section 404. This could result in an adverse reaction in the financial markets due to a loss of confidence in the reliability of our financial statements.
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If you purchase shares of common stock in this offering, you will suffer immediate and substantial dilution.
If you purchase shares of common stock in this offering, you will incur immediate and substantial dilution in the book value of your securities, because the price that you pay will be substantially greater than the net tangible book value per share of the common shares and warrants to acquire common shares that you acquire. The adjusted net tangible book value per share, calculated as of December 31, 2022 and after giving effect to the offering at an estimated initial public offering price of $7.00, which is the midpoint of the price range set forth on the cover page of this prospectus, is $2.05, resulting in dilution of your shares of $4.95 per common share.
You will experience additional dilution upon the exercise of options and warrants to purchase our common stock, including those options currently outstanding and possibly those granted in the future, and the issuance of restricted stock or other equity awards under our stock incentive plans. To the extent we raise additional capital by issuing equity securities, our stockholders may experience substantial additional dilution. See “Dilution.”
Failure to maintain effective internal control over financial reporting in accordance with Section 404 of Sarbanes-Oxley could have a material adverse effect on our business and stock price.
We are required to comply with certain SEC rules that implement Sections 302 and 404 of Sarbanes-Oxley, which require management to certify financial and other information in our quarterly and annual reports and provide an annual management report on the effectiveness of our internal control over financial reporting. Though we are required to disclose changes made in our internal control procedures on a quarterly basis, we take advantage of certain exceptions from reporting requirements that are available to “emerging growth companies” under the JOBS Act, each independent registered public accounting firm that performs an audit for us has not been required to attest to and report on our annual assessment of our internal controls over financial reporting pursuant to Section 404 until the later of the year following our first annual report required to be filed with the SEC or the date we are no longer an “emerging growth company” as defined in the JOBS Act. While we expect to be ready to comply with Section 404 of Sarbanes-Oxley by the applicable deadline, we cannot assure you that this will be the case. Furthermore, we may identify material weaknesses that we may be unable to remediate in time to meet the applicable deadline imposed upon us for compliance with the requirements of Section 404 of Sarbanes-Oxley. In addition, if we fail to achieve and maintain the adequacy of our internal controls, as such standards are modified, supplemented, or amended from time to time, we may be unable to conclude that we have effective internal controls over financial reporting in accordance with Section 404 of Sarbanes-Oxley. If we are unable to implement the requirements of Section 404 of Sarbanes-Oxley in a timely manner or with adequate compliance, our independent registered public accounting firm may issue an adverse opinion due to ineffective internal controls over financial reporting and we may be subject to sanctions or investigation by regulatory authorities, such as the SEC. As a result, there could be a negative reaction in the financial markets due to a loss of confidence in the reliability of our financial statements. In addition, we may be required to incur costs in improving our internal control system and the hiring of additional personnel. Any such action could have a material adverse effect on our business, prospects, results of operations, and financial condition.
Our management has broad discretion as to the use of the net proceeds from this offering.
Our management will have broad discretion in the application of the net proceeds of this offering. Accordingly, you will have to rely upon the judgment of our management with respect to the use of these proceeds. Our management may spend a portion or all of the net proceeds from this offering in ways that holders of the shares may not desire or that may not yield a significant return or any return at all. Our management not applying these funds effectively could harm our business. Pending their use, we may also invest the net proceeds from this offering in a manner that does not produce income or that loses value. Please see “Use of Proceeds” for more information.
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We may not be able to satisfy listing requirements of Nasdaq or obtain or maintain a listing of our common stock on Nasdaq.
If our common stock is listed on Nasdaq, we must meet certain financial and liquidity criteria to maintain such listing. If we violate Nasdaq listing requirements, our common stock may be delisted. If we fail to meet any of Nasdaq’s continued listing standards, our common stock may be delisted. In addition, our board of directors may determine that the cost of maintaining our listing on a national securities exchange outweighs the benefits of such listing. A delisting of our common stock from Nasdaq may materially impair our stockholders’ ability to buy and sell our common stock and could have an adverse effect on the market price of, and the efficiency of the trading market for, our common stock. The delisting of our common stock could significantly impair our ability to raise capital and the value of your investment.
If our shares of common stock become subject to the penny stock rules, it would become more difficult to trade our shares.
The SEC has adopted rules that regulate broker-dealer practices in connection with transactions in penny stocks. Penny stocks are generally equity securities with a price of less than $5.00, other than securities registered on certain national securities exchanges or authorized for quotation on certain automated quotation systems, provided that current price and volume information with respect to transactions in such securities is provided by the exchange or system. If we do not retain a listing on Nasdaq or another national securities exchange and if the price of our common stock is less than $5.00, our common stock could be deemed a penny stock. The penny stock rules require a broker-dealer, before a transaction in a penny stock not otherwise exempt from those rules, to deliver a standardized risk disclosure document containing specified information. In addition, the penny stock rules require that before effecting any transaction in a penny stock not otherwise exempt from those rules, a broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive (i) the purchaser’s written acknowledgment of the receipt of a risk disclosure statement; (ii) a written agreement to transactions involving penny stocks; and (iii) a signed and dated copy of a written suitability statement. These disclosure requirements may have the effect of reducing the trading activity in the secondary market for our common stock, and therefore stockholders may have difficulty selling their shares.
Risks Related to Our Capital Structure
Our indebtedness could adversely affect our ability to raise additional capital to fund operations, limit our ability to react to changes in the economy or our industry and prevent us from meeting our financial obligations and our creditors have broad remedies in the event of default.
As of December 31, 2022 and 2021, we had total liabilities of $8,404,033 and $4,815,489, respectively. Certain portions of this indebtedness are secured in part by a security interest in substantially all of our assets, and our security agreements includes broad remedies in favor of the lenders, including the right to foreclose on pledged assets in connection with an event of default.
If we cannot generate sufficient cash flow from operations to service our debt, we may need to further refinance our debt, dispose of assets, or issue equity to obtain necessary funds. We do not know whether we will be able to do any of this on a timely basis or on terms satisfactory to us, or at all. Our substantial indebtedness could have important consequences, including:
| ● | our ability to obtain additional debt or equity financing for working capital, capital expenditures, debt service requirements, acquisitions, and general corporate or other purposes may be limited; | |
| ● | a portion of our cash flows from operations will be dedicated to the payment of principal and interest on the indebtedness and will not be available for other purposes, including operations, capital expenditures and future business opportunities; and | |
| ● | we may be vulnerable in a downturn in general economic conditions or in business or may be unable to carry on capital spending that is important to our growth. |
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The terms of our security agreements and other debt documents restrict our current and future operations, which could adversely affect our ability to respond to changes in our business and to manage our operations.
Our security agreements and other debt documents contain restrictive covenants with respect to creating liens and future debt documents may impose significant operating and financial restrictions on us, including restrictions on our ability to, among other things:
| ● | incur additional debt; | |
| ● | pay dividends and make other restricted payments; or | |
| ● | sell our collateral, other than inventory in the ordinary course of business. |
Our Articles of Incorporation provide that the Nevada Eighth Judicial District Court of Clark County, Nevada shall be the exclusive forum for certain litigation that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or employees.
Our Articles of Incorporation provide that, subject to limited exceptions, the Nevada Eighth Judicial District Court of Clark County, Nevada shall be, to the fullest extent permitted by law, the sole and exclusive forum for (i) any derivative action or proceeding brought in the name or right of the Corporation or on its behalf, (ii) any action asserting a claim for breach of a fiduciary duty owed by any of our directors, officers, employees or agents to us or our stockholders, (iii) any action asserting a claim arising pursuant to any provision of Nevada Revised Statutes (“NRS”) Chapters 78 or 92A, our Articles of incorporation or our bylaws, (iv) any action to interpret, apply, enforce or determine the validity of our Articles of Incorporation or bylaws, or (v) any action asserting a claim governed by the internal affairs doctrine.
Notwithstanding these provisions of our Articles of Incorporation, Section 27 of the Exchange Act creates exclusive federal jurisdiction over all suits brought to enforce any duty or liability created by the Exchange Act or the rules and regulations thereunder, and Section 22 of the Securities Act creates concurrent jurisdiction for federal and state courts over all suits brought to enforce any duty or liability created by the Securities Act or the rules and regulations thereunder, and notwithstanding the provisions of our Articles of Incorporation, compliance with the federal securities laws and the rules and regulations thereunder may not be waived by our investors. Accordingly, the exclusive forum provision of our Articles of Incorporation would not apply to suits brought to enforce any liability or duty created by the Securities Act, the Exchange Act the rules and regulations thereunder or any other claim for which the federal courts have exclusive or concurrent jurisdiction, which may cause us to incur additional costs associated with resolving such actions in other jurisdictions.
These choice of forum provisions may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for certain disputes with us or our directors, officers, employees or agents, which may discourage such lawsuits against us and our directors, officers, employees and agents. Stockholders who do bring a claim in the Nevada Eighth Judicial District Court of Clark County, Nevada could face additional litigation costs in pursuing any such claim, particularly if they do not reside in or near the State of Nevada. The Nevada Eighth Judicial District Court of Clark County Nevada may also reach different judgments or results than would other courts, including courts where a stockholder considering an action may be located or would otherwise choose to bring the action, and such judgments or results may be more favorable to us than to our stockholders. Alternatively, if a court were to find the choice of forum provision contained in our Articles of Incorporation to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could adversely affect our business and financial condition.
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We estimate that we will receive net proceeds of approximately $7,375,000 (or approximately $8,556,250 if the underwriters’ over-allotment option is exercised in full) from the sale of the shares offered by us in this offering, based on an assumed initial public offering price of $7.00 per share (the midpoint of the range set forth on the cover page of this prospectus), and after deducting the estimated underwriting discounts and commissions, non-accountable expense allowance and estimated offering expenses payable by us and assuming no exercise of any Representative’s Warrants.
Each $1.00 increase or decrease in the assumed initial public offering price of $7.00 per share (the midpoint of the range set forth on the cover page of this prospectus), would increase or decrease the net proceeds to us from this offering by $1,125,000, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.
We intend to use the net proceeds from this offering for repayment of approximately $2,500,000 of indebtedness, working capital and general corporate purposes, including operating expenses and capital expenditures. Accordingly, we will have broad discretion in using these proceeds. Pending the use of proceeds from this offering as described above, we may invest the net proceeds that we receive in this offering in short-term, investment grade, interest-bearing instruments. You will not have an opportunity to evaluate the economic, financial or other information on which we base our decisions regarding the use of these proceeds.
The use of the proceeds represents our management’s estimates based upon current business and economic conditions. We reserve the right to use the net proceeds we receive in the offering in any manner we consider to be appropriate. Although the Company does not contemplate changes in the proposed use of proceeds, to the extent we find that adjustment is required for other uses by reason of existing business conditions, the use of proceeds may be adjusted. The actual use of the proceeds of this offering could differ materially from those outlined above as a result of several factors including those set forth under “Risk Factors” and elsewhere in this prospectus.
Pending the use of the net proceeds of this offering, we intend to invest the net proceeds in short-term investment-grade, interest-bearing securities.
We estimate that the net proceeds from this offering, together with our current cash and cash equivalents and cash receipts from sales, will be sufficient for us to fund our operating expenses and capital expenditure requirements through at least the next 12 months.
We will not receive any proceeds from the sale of the Stockholder Shares by the Selling Stockholders that occur pursuant to the registration statement of which this prospectus forms a part.
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We have never declared or paid any cash dividends on our common stock. We currently intend to retain future earnings, if any, to finance the operation and expansion of our business and do not anticipate paying any cash dividends in the foreseeable future. Any future determination related to our dividend policy will be made at the discretion of our board of directors after considering our financial condition, results of operations, current and anticipated capital requirements, business prospects and other factors our board of directors deems relevant, and subject to the restrictions contained in any future financing instruments.
In addition, our ability to pay cash dividends is currently restricted by the terms of the agreements governing our term debt and revolving debt credit facilities.
Our ability to pay cash dividends on our common stock in the future may also be limited by the terms of any preferred securities we may issue or agreements governing any additional indebtedness we may incur.
The following table sets forth our cash and capitalization, as of December 31, 2022 on:
| ● | an actual basis; | |
| ● | On a pro forma basis to give effect to (i) the sale of a total of $467,500 of additional convertible notes during the first quarter of 2023, (ii) the conversion of $6,008,793 of principal and accrued interest of outstanding convertible notes into an aggregate of 3,917,335 shares (on a pre-Reverse Stock Split Basis) of common stock under the Convertible Note Conversion, and (iii) the Reverse Stock Split; and | |
| ● | an as-adjusted basis, giving effect to (i) the issuance and sale of 1,250,000 shares in this offering, at the assumed initial public offering price of $7.00 per share, the midpoint of the range set forth on the cover of this prospectus, and after deducting estimated underwriting discounts and commissions, non-accountable expense allowance and estimated offering expenses payable by us and assuming no exercise of any Representative’s Warrants, and (ii) repayment of $2,500,000 in indebtedness and also giving effect to the Convertible Note Conversion and the Reverse Stock Split. |
The following table should be read in conjunction with “Use of Proceeds,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and related notes included in this prospectus.
| As of December 31, 2022(1) | ||||||||||||
| Actual
(audited) | Pro Forma to Reflect the Convertible Note Conversion and Reverse Stock Split | As Adjusted(2) | ||||||||||
| Cash | $ | 312,697 | $ | 780,197 | $ | |||||||
| Total indebtedness(3) | $ | 7,435,232 | $ | 2,376,041 | $ | |||||||
| Stockholders’ equity: | ||||||||||||
| Preferred stock, $0.001 par value per share; 8,000,000 shares authorized; no shares issued or outstanding, actual; and no shares issued or outstanding, as adjusted | - | - | ||||||||||
| Common stock; $0.001 par value per share; 80,000,000(2) shares authorized(4); | 3,002 | 2,768 | ||||||||||
| Additional paid-in capital | 3,742,101 | 9,751,128 | ||||||||||
| Accumulated (deficit) | (8,884,831 | ) | (8,884,831 | ) | ||||||||
| Total stockholders’ deficit | (5,139,728 | ) | 869,065 | |||||||||
| Total capitalization | $ | 2,295,504 | $ | 3,245,106 | $ | |||||||
| (1) | Save as otherwise indicated all numbers in this table have been adjusted to reflect the Reverse Stock Split | |
| (2) | Assumes no exercise of the over-allotment option or the Representative’s Warrants. | |
| (3) | Total indebtedness consists of convertible notes payable, related parties, convertible notes payable, the current portion of notes payable, the amount outstanding under our revolving line of credit and long-term notes payables, which consisted of $34,500 outstanding under the EIDL Loan as of December 31, 2022. | |
| (4) | 3,001,909 shares were actually issued and outstanding as of December 31, 2022 (not adjusted for the Reverse Stock Split); Immediately after the Convertible Note Conversion and the Reverse Stock Split, there will be 2,767,734 shares issued and outstanding; immediately after the completion of the offering (and factoring in the Convertible Note Conversion and the Reverse Stock Split), there will be 4,017,734 shares of common stock issued and outstanding (assuming no exercise of the over-allotment option or the Representative’s Warrants). |
A $1.00 increase (decrease) in the assumed initial public offering price of $7.00 per share, the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease) each of additional paid-in capital, total stockholders’ (deficit) equity and total capitalization on an as adjusted basis by approximately $1,125,000, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us and assuming no exercise of the Representative’s Warrants.
The number of shares of common stock outstanding before this offering, as set forth in the table above, is based on 2,767,734 shares of our common stock outstanding immediately before the effectiveness of the registration statement in relation to this offering and gives effect to (x) the Convertible Note Conversion and (y) the Reverse Stock Split and excludes: (i) outstanding options to purchase approximately 92,700 shares of our common stock which were issued to various individuals; (ii) outstanding warrants to purchase 365,141 shares of our common stock issued to various individuals, consisting of (x) warrants to purchase 189,167 shares with an exercise price of $6.50 per share, (y) warrants to purchase 154,246 shares with an exercise price of $7.10 per share and (z) warrants to purchase 21,728 shares with an exercise price of $7.50 per share; (iv) 187,500 shares of our common stock underlying the underwriters’ over-allotment option; and (v) warrants to purchase up to 86,250 shares of our common stock issuable to the Representative in connection with this offering at a price of 120% of the initial public offering price.
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If you invest in our common stock in this offering, your ownership interest will be diluted immediately to the extent of the difference between the initial public offering price per share of our common stock and the as adjusted net tangible book value per share of our common stock immediately after this offering. We calculate net tangible book value per share by dividing our net tangible book value, which is total tangible assets less our total liabilities, by the number of our outstanding shares of common stock as of December 31, 2022.
Our net tangible book value (deficit) as of December 31, 2022 was $(5,139,728), or $(1.71) per share of our common stock. Our net tangible book value (deficit) is the amount of our total tangible assets less our total liabilities and convertible preferred stock, which is not included within our stockholders’ (deficit) equity. We do not currently have any shares of, or securities convertible into, preferred stock outstanding. Historical net tangible book value per share represents net tangible book value (deficit) divided by the number of shares of our common stock issued as of December 31, 2022. This data is solely based on the historical amounts as shown in our balance sheet as of December 31, 2022.
After giving further effect to our sale of shares in this offering at an assumed initial public offering price of $7.00 per share, the midpoint of the price range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us for net proceeds of $7,375,000, and the conversion of convertible notes payable in aggregate outstanding amount of $5,419,692, consisting of $5,059,191 of principal and $360,501 of accrued interest, our as adjusted net tangible book value as of December 31, 2022 would have been approximately $8,244,065, or approximately $2.05 per share. This represents an immediate increase in as adjusted net tangible book value per share of $3.76 to our existing stockholders and an immediate dilution in as adjusted net tangible book value per share of approximately $4.95 to new investors purchasing common stock in this offering. Dilution per share to new investors purchasing securities in this offering is determined by subtracting as adjusted net tangible book value per share after this offering from the assumed initial public offering price per share paid by new investors.
The following table illustrates this dilution on a per share basis as of December 31, 2022 after giving effect to the Convertible Note Conversion and the Reverse Stock Split:
| Assumed initial public offering price per share of common stock | $ | 7.00 | ||
| Net tangible book value (deficit) per share December 31, 2022 | (1.71 | ) | ||
| Increase in unaudited as adjusted net tangible book value per share attributable to new investors purchasing shares in this offering | 3.76 | |||
| Unaudited as adjusted net tangible book value per share after this offering | 2.05 | |||
| Dilution per share to new investors purchasing shares in this offering | $ | 4.95 |
| Shares Purchased | Total Consideration | Average Price | ||||||||||||||||||
| Number | Percent | Amount | Percent | Per Share | ||||||||||||||||
| (in thousands) | ||||||||||||||||||||
| Existing stockholders | 2,767,734 | 69 | % | $ | 5,771,140 | 40 | % | $ | 2.09 | |||||||||||
| New investors | 1,250,000 | 31 | % | 8,750,000 | 60 | % | 7.00 | |||||||||||||
| Total | 4,017,734 | 100 | % | $ | 14,521,140 | 100 | % | $ | 3.61 | |||||||||||
The number of shares of common stock outstanding before this offering, as set forth in the table above, is based on 2,767,734 shares of our common stock outstanding immediately before this offering and after giving effect to (x) the Convertible Note Conversion and (y) the Reverse Stock Split and excludes: (i) outstanding options to purchase approximately 92,700 shares of our common stock which were issued to various individuals; (ii) outstanding warrants to purchase 365,141 shares of our common stock issued to various individuals, consisting of (x) warrants to purchase 189,167 shares with an exercise price of $6.50 per share, (y) warrants to purchase 154,246 shares with an exercise price of $7.10 per share, and (z) warrants to purchase 21,728 shares with an exercise price of $7.50 per share; (iv) 187,500 shares of our common stock underlying the underwriters’ over-allotment option; and (v) warrants to purchase up to 86,250 shares of our common stock issuable to the Representative in connection with this offering at a price of 120% of the initial public offering price.
To the extent that options are issued and exercised, or shares are issued under our 2022 Equity Incentive Award Plan as described elsewhere in this prospectus, you will experience further dilution. In addition, we may choose to raise additional capital due to market conditions or strategic considerations even if we believe we have sufficient funds for our current or future operating plans. To the extent that additional capital is raised through the sale of equity or convertible debt securities, the issuance of these securities may result in further dilution to our stockholders.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion of our historical performance, financial condition and future prospects in conjunction with the financial statements and related notes included elsewhere in this prospectus. The information provided below supplements, but does not form part of, our historical financial statements. This discussion includes forward-looking statements that are based on the views and beliefs of our management, as well as assumptions and estimates made by our management. Actual results could differ materially from such forward-looking statements as a result of various risk factors, including those that may not be in the control of management. For further information on items that could impact our future operating performance or financial condition, see the sections entitled “Risk Factors” and “Cautionary Statement Regarding Forward-Looking Statements” elsewhere in this prospectus. We assume no obligation to update any of these forward-looking statements, except as required by law.
Overview
We were incorporated as Avochips Inc., an Oregon corporation, on February 21, 2017. On November 2, 2017, AvoChips Inc. converted into Avochips, LLC, an Oregon limited liability company and on November 19, 2021, Avochips, LLC redomiciled in Nevada, subsequent to a conversion from a limited liability company to a C-corporation, named BranchOut Food Inc., a Nevada corporation.
We are engaged in the development, marketing, sale, and distribution of plant-based, dehydrated fruit and vegetable snacks and powders. One of the Company’s contract manufacturers is in the Republic of Chile. The Company entered into a second contract manufacturing partnership in 2022 with a company based in the Republic of Peru. This facility in Peru houses BranchOut’s continuous throughput dehydration machine, substantially increasing production capacity. Our new large-scale continuous through-put dehydration machine was commissioned in September 2022 and we completed the first production run in the first quarter of 2023. Both facilities produce dehydrated fruit and vegetable products for BranchOut using a new proprietary dehydration technology. The Company’s customers are primarily located throughout the United States.
Business Summary
BranchOut is an emerging natural food brand with a licensed technology platform that enables the manufacturing and marketing of plant-based dehydrated foods. BranchOut has licensed rights from an independent third party to a new dehydration technology designed for drying and processing highly sensitive fruits and vegetables such as avocados, bananas and others. Using the licensed technology platform, we believe BranchOut’s line of branded food products speak to current consumer trends. In our experience, conventional dehydration methods, such as freeze-drying and air drying, tend to degrade most fruit and vegetables through oxidation, browning/color degradation, nutritional content reduction and/or flavor loss. As a result, certain highly sensitive fruit, such as avocados and bananas, have not previously been successfully offered as a dehydrated base for consumer products. Other dried fruit- and vegetable-based products are on the market but are of low quality. We believe that BranchOut’s licensed technology platform and process is the only way to produce quality avocado- and banana-based snack and powdered products. Additionally, we believe our licensed technology platform produces superior products when using other fruits and vegetables as the base when compared to conventional drying and dehydration technologies. With more than 17 patents registered or pending in 14 countries, BranchOut has been granted the exclusive rights to use the licensed technology platform as applied to avocados, in addition to BranchOut’s own patent pending process, and nonexclusive rights to use the licensed technology platform for other products.
Our Products
Over time, BranchOut plans to grow revenues strategically by penetrating the multi-billion dollar grocery market opportunity presented by our current product lines, as well as expanding our platform to include additional products that meet our strict plant-based ingredient criteria to diversify our revenue base and increase BranchOut’s TAM opportunity. BranchOut’s current products are primarily:
| ● | BranchOut Snacks: dehydrated fruit- and vegetable-based snacks, including Avocado Chips, Chewy Banana Bites, Pineapple Chips, Brussel Sprout Crisps and Bell Pepper Crisps. | |
| ● | BranchOut Powders: Avocado Powder, Banana Powder and Blueberry Powder. | |
| ● | BranchOut Industrial Ingredients: Bulk Avocado Powder, dried avocado pieces and other fruit powders/pieces. |
BranchOut is currently developing additional products, including chocolate covered fruit items and many private label products for large retailers.
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Factors Affecting Our Results of Operations
We believe our performance and continued success depend on several factors that present significant opportunities. These factors include:
Investments in Product Development and Innovation
We expect to continue to focus on long-term revenue growth through investments in our business. In research and development and new product development, our team is continually working on new products and iterations of our existing products. Further, we anticipate we will continue to invest significantly in our current product line in order to improve customer satisfaction, quality, and unit economics. We are committed to continuously expanding our portfolio and bringing next-generation products to market.
Continued Commercial Expansion in the United States and International Markets
In sales and marketing, we are also dedicating meaningful resources to expand our commercial team in the United States and in international markets. Our top commercial priorities in the United States include sales and marketing expansion to gain additional retail distribution and online sales.
Ability to Grow Our Customer Base in both Online and Traditional Wholesale Distribution Channels
We are currently growing our customer base through both paid and organic online channels, as well as by expanding our presence in a variety of physical retail distribution channels. Online customer acquisitions typically occur at our direct website Branchoutfood.com and Amazon.com. Our online customer acquisition program includes paid and unpaid social media, search, display and traditional media. Our products are also sold through a growing number of physical retail channels. Wholesale customers include grocery chains, club stores, among others. Customer acquisition in physical retail channels depends on, among other things, paid promotions through retailers, display and traditional media.
Ability to Acquire and Retain Customers at a Reasonable Cost
We believe an ability to consistently acquire and retain customers at a reasonable cost relative to projected life-time value will be a key factor affecting future performance. To accomplish this goal, we intend to balance advertising spend between online and offline channels, as well as balancing more targeted and measurable “direct response” marketing spend with advertising focused on increasing our long-term brand recognition, where success attribution is less directly measurable on a near-term basis.
Ability to Drive Repeat Usage of Our Products
We accrue substantial economic value from repeat users of our products who consistently re-order our products. The pace of our growth rate will be affected by the repeat usage dynamics of existing and newly acquired customers.
Ability to Expand Our Product Line
Our goal is to substantially expand our product line over time to increase our growth opportunity and reduce product-specific risks through diversification into multiple products each designed around daily use. Our pace of growth will be partially affected by the cadence and magnitude of new product launches over time.
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Ability to Expand Gross Margins
Our overall profitability will be impacted by our ability to expand gross margins through effective sourcing of raw materials, controlling labor and shipping costs, as well as spreading other production-related costs over greater manufacturing volumes.
Ability to Expand Operating Margins
Our ability to expand operating margins will be impacted by our ability to cover fixed general and administrative costs and variable sales and marketing costs with higher revenues and gross profit dollars.
Ability to Manage Our Global Supply Chain and Expand Production In-line with Demand
Our ability to grow and meet future demand will be affected by our ability to properly plan for and source inventory from a variety of suppliers.
Ability to Optimize Key Components of Working Capital
Our ability to reduce cash burn in the near-term and eventually generate positive cash flow will be partially impacted by our ability to effectively manage all the key working capital components that could influence our cash conversion cycle.
Seasonality
Because we are so early in our lifecycle of growth, it is difficult to discern the exact magnitude of seasonality affecting our business. Any evidence of seasonality is not discernable from our growth.
Components of Our Results of Operations
Net Revenue
We currently derive our revenue from the sale of our finished snack and powder products. We also record as revenue any amounts billed to customers for shipping costs and record as cost of goods sold the actual shipping costs. We have elected to exclude from the measurement of the transaction price all taxes, such as sales, use, value-added, assessed by government authorities and collected from a customer. Therefore, revenue is recognized net of such taxes. Revenues are offset by customer deductions that are non-promotional or undecipherable. This includes slotting fees which are funds paid for shelve placement within the schematic at retail facilities. We expect our net revenue to increase in the foreseeable future as we increase deduction management efforts, expand our sales territories, add new customers and increase the utilization of our products by our existing customers, though net revenue may fluctuate from quarter to quarter due to a variety of factors, including availability of reimbursement, the size and success of our sales force, the number of customers who are aware of and purchase our products.
Cost of Goods Sold
Cost of goods sold consists primarily of finished products purchased from third-party suppliers, shipping costs, excess and obsolete inventory adjustments and royalties. Our products are manufactured to our specifications primarily by third-party suppliers in the Chile, Peru, the PRC and the United States. Cost of goods sold is recognized at the time revenue is recognized in accordance with customer agreements. Prior to selling the products, the cost of our products is recorded as inventories, net in our balance sheets. Cost of goods sold is expected to increase due primarily to increased sales volume.
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Gross Profit
We calculate gross profit as net revenue less cost of goods sold, and gross margin as gross profit divided by net revenue. We expect our gross profit to increase in the foreseeable future as our net revenue grows, though our gross profit and gross margin have been and will continue to be affected by a variety of factors, primarily average selling prices, third-party manufacturing costs, change in mix of customers, excess and obsolete inventory adjustments, royalties and seasonality of our business. We expect our gross margin to fluctuate from period to period, however, based upon the factors described above and seasonality.
General and Administrative
General and administrative expenses consist primarily of commissions paid to U.S. sales representatives, salaries, bonuses, and benefits related to selling, marketing, and general and administrative functions, and stock-based compensation. In addition, selling, general, and administrative expenses consist of the costs associated with marketing initiatives, trade show and related travel, other travel expenses, insurance costs, facility expenses and other general corporate expenses.
We expect general and administrative expenses to continue to increase in the foreseeable future as we continue to grow our business, though it may fluctuate from quarter to quarter. We also expect our administrative expenses, including stock-based compensation expense, to increase as we increase our headcount and expand our facilities and business processes to support our operations as a public company. Our selling, general and administrative expenses may fluctuate from period to period due to the seasonality of our business and as we continue to add direct sales territory managers in new territories.
Salary and Wages
Salary and wages consist of salaries and wages for full-time, as well as contract, employees of the Company.
Professional Fees
Professional fees consist of expenses incurred for accounting, legal, finance, consulting, audit, and transfer agent services. It also consists of stock-based compensation paid for advisory, fundraising, and financial services. We anticipate increased expenses related to audit, legal, regulatory, and tax-related services associated with being a public company, compliance with exchange listing and SEC requirements, director and officer insurance premiums and investor relations costs. We also expect to see an increase in our stock-based compensation expense with the establishment of a new equity plan associated with this offering and related grant either in the form of restricted stock units or options.
Total Other Expense
Other expense consists primarily of interest expense from amortization of debt discounts, and other income from interest earned on notes receivable. It also includes any gains and loss attributable to the changes in fair market value from the derivative liabilities associated with the issuance of convertible notes.
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Results of Operations for the Years Ended December 31, 2022 and 2021
The following table summarizes our results of operations for the periods presented below:
| For the Years Ended | ||||||||
| December 31, | ||||||||
| 2022 | 2021 | |||||||
| Net revenue | $ | 752,178 | $ | 715,553 | ||||
| Cost of goods sold | 922,728 | 786,469 | ||||||
| Gross profit (loss) | (170,550 | ) | (70,916 | ) | ||||
| Operating expenses: | ||||||||
| General and administrative | 929,726 | 391,866 | ||||||
| Salaries and wages | 628,637 | 243,450 | ||||||
| Professional fees | 583,920 | 205,498 | ||||||
| Depreciation expense | 93,253 | 323 | ||||||
| Total operating expenses | 2,235,536 | 841,137 | ||||||
| Operating loss | (2,406,086 | ) | (912,053 | ) | ||||
| Other income (expense): | ||||||||
| Interest income | 13,627 | 15,017 | ||||||
| Interest expense | (2,250,893 | ) | (697,729 | ) | ||||
| Gain on early extinguishment of debts | - | 548,643 | ||||||
| Change in fair value of derivative liabilities | - | 385,924 | ||||||
| Total other income (expense) | (2,237,266 | ) | 251,855 | |||||
| Net loss | $ | (4,643,352 | ) | $ | (660,198 | ) | ||
Net Revenue
Our net revenue for the year ended December 31, 2022 was $752,178, compared to $715,553 for the year ended December 31, 2021, an increase of $36,625, or 5%. The increase in revenue was due to increased brand recognition and new retail partners.
Cost of Goods Sold and Gross Profit (Loss)
Our cost of goods sold for the year ended December 31, 2022 was $922,728, compared to $786,469 for the year ended December 31, 2021, an increase of $136,259, or 17%. Cost of goods sold increased as revenues increased, while we expanded our customer base to new retail partners. Our gross loss increased by $99,634, or 141%, for the year ended December 31, 2022, as compared with the year ended December 31, 2021, which resulted in negative margins of 23% and 9% for the years ended December 31, 2022 and 2021, respectively. Our gross margins are significantly affected by slotting fees and discounts associated with commencing operations and introducing our products into new big box retail outlets, which significantly reduced our net revenues. In addition, our manufacturing partner in Chile uses small batch machines making manufacturing inefficient. Our new partner in Peru uses our large-scale continuous throughput machine, which should significantly improve efficiency and reduce our cost of goods sold in 2023 and beyond. Cost of goods sold for 2022 was greater than our net revenues primarily due to increased slotting fees and increased freight cost due to port congestion.
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General and Administrative Expense
Our general and administrative expense for the year ended December 31, 2022 was $929,726, compared to $391,866 for the year ended December 31, 2021, an increase of $537,860, or 137%. The largest components of our general and administrative expenses are advertising and marketing, travel, and storage, shipping and handling expense.
| Years Ended December 31, | ||||||||||||||||
| 2022 | 2021 | Difference | % change | |||||||||||||
| Advertising/marketing | $ | 322,830 | $ | 218,773 | $ | 104,057 | 48 | % | ||||||||
| Travel | $ | 98,232 | $ | 13,195 | $ | 85,038 | 645 | % | ||||||||
| Storage, shipping and handling | $ | 73,531 | $ | 145,919 | $ | (72,388 | ) | (50 | )% | |||||||
Advertising and marketing expenses increased significantly in the year ended December 31, 2022 as the in-store marketing fees typically associated with a new retail partner increased. We have increased our advertising and marketing budget as resources permitted and intend to further increase the budget upon completion of our initial public offering. Travel costs increased primarily due to increased travel associated with establishing our new contract manufacturer in Peru and expansion of our retail partners that required greater travel during the year ended December 31, 2022, compared to the year ended December 31, 2021. Our storage, shipping and handling expenses decreased due to improved management and efficiencies over these costs, including, but not limited to, shifting finished packaging from South America to Texas (which allows us to ship from our contract manufacturers in South America to the U.S. in bulk, reducing costs).
Salaries and Wages
Salaries and wages for the year ended December 31, 2022 was $628,637, compared to $243,450 for the year ended December 31, 2021, an increase of $385,187, or 158%. Salaries and wages increased in the year ended December 31, 2022, due to work force growth as we expanded our operations and general increases in wages.
Professional Fees
Professional fees for the year ended December 31, 2022 was $583,920, compared to $205,498 for the year ended December 31, 2021, an increase of $378,422, or 184%. Professional fees increased during the year ended December 31, 2022, due to increased costs in connection with preparations for this offering and IPO related activities.
Depreciation Expense
Depreciation expense for the year ended December 31, 2022 was $93,253, compared to $323 for the year ended December 31, 2021, an increase of $92,930, or 28,771%. The increase was primarily due to depreciation associated with our EnWave 60kW Vacuum Microwave Dehydration and Chiller Machines which was installed at our contract manufacturer in Peru in 2022.
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Other Income (Expense)
Total other income (expense) consisted of interest income, interest expense, gains (losses) on early extinguishments of debts and changes in the fair value of derivative liabilities for the years ended December 31, 2022 and 2021.
Interest income for the year ended December 31, 2022 was $13,627, compared to $15,017 for the year ended December 31, 2021, a decrease of $1,390 or 9%. The decrease was due to maintaining lower cash reserves in 2022 compared to 2021.
Interest expense for the year ended December 31, 2022 was $2,250,893, compared to $697,729 for the year ended December 31, 2021, an increase of $1,553,164, or 223%. The increase was primarily due to increased debt financing as we purchased equipment and began preparations for this offering, in addition to non-cash charges due to the amortization of debt discounts, including the value of warrants issued as debt discounts on notes payable. Interest expense included amortization of debt discounts of $1,286,021 and $332,747 for the years ended December 31, 2022 and 2021, respectively.
We recognized a loss on early extinguishments of debts due to amendments to our debt financings of $0 for the year ended December 31, 2022, compared to a gain of $548,643 for the year ended December 31, 2021, a net decrease of $548,643, or 100%.
We recognized gains on the change in fair value of derivative liabilities and on early extinguishment of debts of $385,924 and $548,643, respectively, for the year ended December 31, 2021. There were no gains or losses related to the derivative valuations on the convertible notes in 2022, as the convertible notes were modified at the beginning of the year to be convertible at a fixed conversion rate of $1.65 per share, which removed the derivative liability.
Net Loss
Net loss for the year ended December 31, 2022 was $4,643,352, compared to $660,198 for the year ended December 31, 2021, an increase of $3,983,154, or 603%. Our net loss increased in the year ended December 31, 2022, primarily due to increased cost of goods sold, operating costs, and costs incurred in connection with preparations for this offering and increased interest expense on debt financing as we expanded operations and readied the Company for this offering.
Liquidity and Capital Resources
We have incurred net losses since our inception and we anticipate net losses and negative operating cash flows for the near future and we may not be profitable or realize growth in the value of our assets. To date, our primary sources of capital have been cash generated from the sales of our product and common stock, and debt financing agreements. As of December 31, 2022, we had cash of $312,697, total liabilities of $8,404,033, and an accumulated deficit of $8,884,831. As of December 31, 2021, we had cash of $620,332, total liabilities of $4,815,489, and an accumulated deficit of $4,241,479.
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We believe that our existing cash, funds from this offering, and expected revenues will be sufficient to meet our capital requirements and fund our operations for the next 12 months. However, we may decide to raise additional financing, in addition to the net proceeds from this offering, to support further growth of our operations.
Long-Term Obligations
Convertible Notes Payable
On June 6, 2022, the Company completed the sale of a (i) convertible promissory note in the principal amount of $200,000 (“Fluffco Convertible Note”) to Fluffco, LLC (“Fluffco”), and (ii) a five-year warrant to purchase 8,485 shares of the Company’s common stock at an exercise price of $6.50 per share, for an aggregate purchase price of $186,000, pursuant to a Securities Purchase Agreement between the Company and Fluffco (the “Purchase Agreement”). The unsecured convertible note bears interest at 8% per annum and carries a default rate of 18%, which is mandatorily convertible upon the date on which a registration statement for the Company’s underwritten public offering of its common stock with total proceeds to the Company of not less than $10,000,000 is effective, at a fixed conversion price of $1.65 per common share. The Fluffco Convertible Note was originally set to mature on November 30, 2022, but was later amended to extend the maturity date to June 30, 2023 and to lower the public offering proceeds threshold to $5,000,000. All interest shall be deemed to have stopped accruing as of a date selected by the Company that is up to 10 days prior to the effective date of the registration statement filed in connection with the IPO.
On May 26, 2022, the Company completed the sale of a (i) convertible promissory note in the principal amount of $1,250,000 (“Foss Convertible Note”) to Don Foss (“Foss”), and (ii) a five-year warrant to purchase 45,833 shares of the Company’s common stock at an exercise price of $6.50 per share, for an aggregate purchase price of $1,162,500, pursuant to a Securities Purchase Agreement between the Company and Foss (the “Purchase Agreement”). The unsecured convertible note bears interest at 8% per annum and carries a default rate of 18%, which is mandatorily convertible upon the date on which a registration statement for the Company’s underwritten public offering of its common stock with total proceeds to the Company of not less than $10,000,000 is effective, at a fixed conversion price of $1.65 per common share. The Foss Convertible Note was originally set to mature on November 30, 2022, but was later amended to extend the maturity date to June 30, 2023 and to lower the public offering proceeds threshold to $5,000,000. All interest shall be deemed to have stopped accruing as of a date selected by the Company that is up to 10 days prior to the effective date of the registration statement filed in connection with the IPO.
On various origination dates between February 15, 2022 and February 25, 2022, the Company sold two (2) individual convertible promissory notes (“First Convertible Eagle Vision Notes”) with a face value of $350,000 each, under substantially the same terms. The unsecured convertible notes bear interest at 5% per annum and carry a default rate of 18%, which are mandatorily convertible upon the date on which a registration statement for the Company’s underwritten public offering of its common stock with total proceeds to the Company of not less than $10,000,000 is effective, at a fixed conversion price of $1.65 per common share. The First Convertible Eagle Vision Notes were originally set to mature on November 30, 2022 but were later amended to extend the maturity to June 30, 2023 and to lower the public offering proceeds threshold to $5,000,000. All interest shall be deemed to have stopped accruing as of a date selected by the Company that is up to 10 days prior to the effective date of the registration statement filed in connection with the IPO.
On various origination dates between March 1, 2018 and December 31, 2021, the Company sold a total of fifty-two (52) individual convertible promissory notes (“Convertible Notes”) with substantially the same terms, for total proceeds of $2,143,591. The unsecured Convertible Notes bearing interest at 5% per annum, which originally carried an automatic conversion upon (i) a Qualified Financing, consisting of the closing of the sale of shares of its stock of at least $1,000,000, at a conversion rate of the lesser of (i) the product of (x) eight-tenths (0.8) and (y) the price per share paid by the purchasers of the preferred stock sold in the Qualified Financing and (ii) the price per share obtained by dividing $7,000,000 (the “Valuation Cap”) by the Company’s fully-diluted capitalization immediately prior to the Qualified Financing (excluding any shares issued upon conversion of convertible debt), were amended on December 17, 2021 to be automatically converted upon the date on which a registration statement for the Company’s underwritten public offering of its common stock with total proceeds to the Company of not less than $5,000,000, as amended, is effective at fixed conversion prices of either $0.82 or $1.65 per common share (six (6) of the Convertible Notes, totaling $355,000 in aggregate principal amount, were amended to convert at $0.82 per common share, and forty-six (46) of the Convertible Notes, totaling $1,788,591 in aggregate principal amount, were amended to convert at $1.65 per common share), and all interest shall be deemed to have stopped accruing as of a date selected by the Company that is up to 10 days prior to the effective date of the registration statement filed in connection with the IPO. On February 14, 2022, one of the Convertible Notes was repaid, consisting of $20,000 of principal and $3,586 of interest. The Convertible Notes were originally set to mature after eighteen months but were later amended to extend the maturity to June 30, 2023 and to lower the public offering proceeds threshold to $5,000,000.
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On May 28, 2020, the Company sold a convertible promissory note (“Controller Note”) to the Company’s Controller, Chris Coulter, in the face amount of $50,000 and on December 31, 2021, the Company sold a convertible promissory note (“CFO Note”) to the Company’s Chief Financial Officer, Douglas Durst, in the face amount of $90,000, each on the same terms and conditions as the Convertible Notes. On December 17, 2021, the maturity dates of all then existing Convertible Notes and the Controller Note were extended to June 30, 2023 so that the maturity dates for all Convertible Notes, the Controller Note and the CFO Note is June 30, 2023.
Notes Payable
On May 7, 2021, we accepted subscriptions for $1,000,000 and issued senior secured promissory notes and stock purchase warrants to six accredited investors. Each promissory note, (each, a “Subordinated Note”) accrues interest at an annual rate of 15%, of which 10% is to be paid monthly, and the remaining 5% to remain unpaid, compounded annually, and is due and payable on the maturity date. Upon default, the aggregate interest rate would increase to 18% per annum. Each Subordinated Note was due and payable on the earlier of: (i) November 30, 2022 (the Subordinated Notes were later amended to extend this date to June 30, 2023), (b) the closing of a “Qualified Subsequent Financing”, and (c) the closing of an initial public offering, as amended. In the event a note is pre-paid, we were required to pay a minimum one-year of interest. The term “Qualified Subsequent Financing” means the next sale, or series of related sales, of any security in which we received $2,000,000 or more from any parties that do not currently own, directly or indirectly, any of our common stock. We received gross proceeds of $1,000,000 in connection with the offering, and net proceeds of $890,000, after payment of $110,000 in diligence fees to Eagle Vision Ventures, Inc. (“Eagle Vision”), which is being amortized as a debt discount over the life of the notes. The Subordinated Notes are a general secured obligation of the Company, subordinated to the Senior Secured Notes mentioned below.
In addition to the Subordinated Notes, each investor received a warrant to purchase shares of our common stock at $2.84 per share, expiring ten years from the issuance date, as subsequently amended on March 7, 2022. The total number of shares available for purchase under the warrants are 385,607 shares, including 38,456 warrants issued as offering costs on the loan, which are also being amortized as a debt discount over the life of the notes. We are required to register the shares issuable upon exercise of the warrants with the SEC in this filing. Prior to the exercise of a warrant, we are required to provide the investor monthly financial statements unaudited statements of income, cash flows, and stockholder equity for each such monthly period.
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On May 7, 2021, we entered into a secured loan agreement (“Loan Agreement”) with EnWave Corporation, a Canadian corporation, for $375,000 pursuant to an equipment purchase agreement, whereby the Company purchased from EnWave a 60kW REV vacuum microwave dehydration machine (“EnWave Equipment”). The Loan Agreement bears interest at 12% per annum, calls for monthly payments of principal and interest in the amount of $14,531, and a lump-sum principal payment in the amount of $190,000 within twelve (12) months following the date the EnWave Equipment was shipped to the Company, and matures on November 6, 2023. The Loan Agreement is collateralized with a security interest in the EnWave Equipment, all of the Company’s receivables and inventory, as well as a cash pledge in the amount of $125,000 that was replaced with funds in trust of $235,750 to cover EnWave’s responsibility for additional value added Taxes (VAT).
On May 7, 2021, we entered into a license agreement (“License Agreement”) with EnWave, pursuant to which we license to use the EnWave technology, a collection of patents and intellectual property used to manufacture and operate vacuum microwave dehydration machines (the “EnWave Equipment”), to the Company. The License Agreement entitles EnWave to a fixed royalty percentage on all revenue from the sale of products produced using EnWave Equipment, net of trade or volume discounts, refunds paid, settled claims for damaged goods, applicable excise, sales and withholding taxes imposed at the time of the sale, and provides us with certain exclusivity rights. In order to maintain the exclusivity of the avocado products, we agreed to annual royalty minimums as follows:
| Year | Exclusivity Retention Royalty | |||
| 2021 | $ | - | ||
| 2022 | - | |||
| 2023 | 206,763 | |||
| 2024 | 225,000 | |||
| 2025 and each subsequent year of the term | 300,000 | |||
| 2026 | 300,000 | |||
| 2027 | 300,000 | |||
| Total* | $ | 1,331,763 | ||
The unrecognized commitment thereafter is $300,000 in perpetuity, as long as the Company elects to maintain exclusivity.
In addition to the initial EnWave Equipment we purchased, the Company agreed to the purchase of additional equipment over time. The additional equipment purchase schedule requires the Company to purchase a “Second EnWave Machine” on or before, June 30, 2023, and pay a non-refundable down payment of 40% of the purchase price, or pay up to four non-refundable deposits for the Second EnWave Machine in the amount of fifty thousand dollars ($50,000) each on September 30, 2023, December 31, 2023, March 31, 2024 and June 30, 2024 (the “Interim Deposits”), and pay the remainder of a 40% down payment of the purchase price on or before June 30, 2024. We are required to execute an Equipment Purchase Agreement for a 120kW, or greater rated power, EnWave Equipment (the “Third EnWave Machine”) on or before December 31, 2025, and satisfy the payment obligations required with respect to the Third EnWave Machine by the License Agreement. We are also required to enter into an Equipment Purchase Agreement for a 120kW, or greater, rated power EnWave Equipment (the “Fourth EnWave Machine”) on, or before, December 31, 2026, and to satisfy the payment obligations required with respect to the Fourth EnWave Machine by the License Agreement. The License Agreement is effective as long as EnWave possesses its EnWave technology.
On December 8, 2020, we accepted subscriptions for $1,250,000 and issued senior secured promissory notes and stock purchase warrants to three accredited investors. Each promissory note (each, a “Senior Secured Note”) accrues interest at an annual rate of 15%, of which 10% is to be paid monthly, and the remaining 5% to remain unpaid, compounded annually, and is due and payable on the maturity date. Upon default, the aggregate interest rate would increase to 18% per annum. Each Senior Secured Note is due and payable on the earlier of: (i) November 30, 2022 (the Senior Secured Notes were later amended to extend this date to June 30, 2023), (b) the closing of a “Qualified Subsequent Financing”, and (c) the closing of an initial public offering, as amended. In the event a note is pre-paid, we are required to pay a minimum one-year of interest. The term “Qualified Subsequent Financing” means the next sale, or series of related sales, of any security in which we received $2,000,000 or more from any parties that do not currently own, directly or indirectly, any of our common stock. We received gross proceeds of $1,250,000 in connection with the offering, and net proceeds of $1,115,000, after payment of $135,000 in diligence fees to Eagle Vision, which is being amortized as a debt discount over the life of the notes. The Senior Secured Notes are a general secured obligation of the Company, senior in all respects to the liens, terms, covenants, and conditions of all existing debt of the Company, except for our loans from the SBA. We executed a Security Agreement concurrently with the issuance of the Senior Secured Notes and filed UCC financing statements with the Oregon Secretary of State.
In addition to the Senior Secured Notes, each investor received a warrant to purchase shares of our common stock at $2.60 per share, expiring ten years from the issuance date, as subsequently amended on March 7, 2022. The total number of shares available for purchase under the warrants are 189,167 shares, including 47,811 warrants issued as offering costs on the loan, which are also being amortized as a debt discount over the life of the Senior Secured Notes. We are required to register the shares issuable upon exercise of the warrants with the SEC in this filing. Prior to the exercise of a warrant, we are required to provide the investor monthly financial statements unaudited statements of income, cash flows, and stockholder equity for each such monthly period.
On May 17, 2020, the Company entered into a loan authorization and loan agreement with the United States Small Business Administration (the “SBA”), as lender, pursuant to the SBA’s Economic Injury Disaster Loan (“EIDL”) assistance program in light of the impact of the COVID-19 pandemic on the Company’s business (the “EIDL Loan Agreement”) encompassing a $34,500 Promissory Note issued to the SBA (the “EIDL Note” and, together with the EIDL Loan Agreement, the “EIDL Loan”), bearing interest at 3.75% per annum. In connection with entering into the EIDL Loan, the Company also executed a security agreement, dated May 17, 2020, between the SBA and the Company (the “EIDL Security Agreement”) pursuant to which the EIDL Loan is secured by a security interest on all of the Company’s assets. Under the EIDL Note, the Company was required to pay principal and interest payments of $169 every month beginning May 17, 2021; however, the SBA extended the repayment date to November 17, 2022, at which time the deferred interest payments will be repaid until settled, followed by principal and interest payments. All remaining principal and accrued interest is due and payable on May 17, 2050. The EIDL Note may be repaid at any time without penalty. As of December 31, 2022, we had $37,544 outstanding in principal and interest under the EIDL Loan.
On January 13, 2020, the Company issued a promissory note to Cedar Holdings LLC (“Cedar Holdings”) in the amount of $81,147, in exchange for settlement of an outstanding $66,059 equipment lease. Cedar Holdings paid off the Company’s existing equipment lease and assumed the Company’s liability, which consisted of a principal balance due of $50,214, resulting in a loss on early extinguishment of debts of $30,933 for the year ended December 31, 2020. The unsecured promissory note carried interest at 8% per annum, called for monthly installment payments of $1,645 commencing February 5, 2020, and was to mature on February 5, 2025. On March 5, 2021, HHC Holdings, LLC (“HHC”), settled $66,059 of the loan by assuming a debt obligation of the Company owed to Cedar Holdings of $66,059. HHC is a limited liability company in which the Company’s Chief Executive Officer, Eric Healy, and the Company’s Controller, Chris Coulter, collectively own 54% of the membership interests,
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Common Stock Sales
On January 10, 2022, the Company sold a total of 3,031 shares of common stock to our Controller, Chris Coulter, at $1.65 per share for total proceeds of $5,000.
On January 7, 2022, the Company sold a total of 3,030 shares of common stock to an accredited investor at $1.65 per share for total proceeds of $5,000.
Funding Requirements
We use our cash to fund our operations, which primarily include the costs of purchasing our raw materials and tolling services, as well as our operating expenses, including research and development and selling, general and administrative expenses. We expect our operating expenses to increase for the foreseeable future as we continue to invest in expanding our research and development initiatives and as we continue to expand our sales and marketing infrastructure and programs to both drive and support anticipated sales growth. In addition, we expect our general and administrative expenses to increase for the foreseeable future as we hire personnel and expand our infrastructure to both drive and support the anticipated growth in our organization. We also expect to incur additional expenses as a result of operating as a public company and also expect to increase the size of our administrative function to support the growth of our business. The timing and amount of our operating expenditures will depend on many factors, including:
| ● | the research and development activities we intend to undertake in order to improve our existing products and development new products and solutions; | |
| ● | the costs of our ongoing commercialization activities in the United States and elsewhere, including expanding territories, increasing sales and marketing personnel, actual and anticipated product sales, marketing, manufacturing and distribution; | |
| ● | whether or not we pursue acquisitions or investments in businesses, products or technologies that are complementary to our current business; | |
| ● | the degree and rate of market acceptance of our products; | |
| ● | the costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights; | |
| ● | our need to implement additional infrastructure and internal systems; | |
| ● | the emergence of competing products or other adverse market developments; | |
| ● | any product liability or other lawsuits; | |
| ● | the expenses needed to attract and retain skilled personnel; | |
| ● | changes or fluctuations in our inventory; | |
| ● | our implementation of various computerized information systems; | |
| ● | the costs associated with being a public company; and | |
| ● | the impact of COVID-19 on our operations and business. |
We have based this estimate on assumptions that may prove to be incorrect, and we could utilize our available capital resources sooner than we expect. We may seek to raise any necessary additional capital through public or private equity offerings or debt financings, credit or loan facilities or a combination of one or more of these or other funding sources. Additional funds may not be available to us on acceptable terms or at all. If we fail to obtain necessary capital when needed on acceptable terms, or at all, we could be forced to delay, limit, reduce or terminate our product development programs, commercialization efforts or other operations. If we raise additional funds by issuing equity securities, our stockholders will suffer dilution and the terms of any financing may adversely affect the rights of our stockholders. In addition, as a condition to providing additional funds to us, future investors may demand, and may be granted, rights superior to those of existing stockholders. If we raise additional capital through collaborations agreements, licensing arrangements or marketing and distribution arrangements, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product or grant licenses that may not be favorable to us. Debt financing, if available, is likely to involve restrictive covenants limiting our flexibility in conducting future business activities, and, in the event of insolvency, debt holders would be repaid before holders of our equity securities received any distribution of our corporate assets.
Cash Flow
The following table sets forth the primary sources and uses of cash for the period presented below:
| December 31, | December 31, | |||||||
| 2022 | 2021 | |||||||
| Net cash used in operating activities | $ | (2,467,681 | ) | $ | (1,082,897 | ) | ||
| Net cash used in investing activities | $ | (22,436 | ) | $ | (1,066,953 | ) | ||
| Net cash provided by financing activities | $ | 2,182,482 | $ | 1,890,206 | ||||
| Net change in cash | $ | (307,635 | ) | $ | (259,644 | ) | ||
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Net Cash Used in Operating Activities
Net cash used in operating activities was $2,467,681 for the year ended December 31, 2022, compared to $1,082,897 for the year ended December 31, 2021, an increase of $1,384,784, or 128%. The increased funds used in operating activities was primarily due to our net loss, as we increased operations in the year ended December 31, 2022 and began supplying our products to big box retail customers.
Net Cash Used in Investing Activities
Net cash used in investing activities was $22,436 for the year ended December 31, 2022, compared to $1,066,953 for the year ended December 31, 2021, a decrease of $1,044,517, or 98%. The decrease in funds used in investing activities was due primarily to the decrease in purchase of fixed assets in 2022, a $500,000 loan advanced to our manufacturer in 2021 that was not incurred in 2022 and a decrease in repayments received on notes receivable in the year ended December 31, 2022.
Net Cash Provided by Financing Activities
Net cash provided by financing activities was $2,182,482 for the year ended December 31, 2022, compared to $1,890,206 for the year ended December 31, 2021, an increase of $292,276, or 15%. The increase in funds provided by financing activities was primarily due to increased net proceeds of $1,409,000 received from convertible debt financing, as partially offset by net payments on our revolving lines of credit of $221,123, increased net payments on our notes payable of $682,052, increased payments of deferred offering costs of $159,100 and a reduction of proceeds from the sale of common stock in the amount of $54,449 during the year ended December 31, 2022, compared to 2021.
Off-Balance Sheet Arrangements
We did not have any off-balance sheet arrangements, such as structured finance, special purpose entities, or variable interest entities during the years ended December 31, 2022 and 2021.
Critical Accounting Estimates
Management’s discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and assumptions for the reported amounts of assets, liabilities, revenue, expenses and related disclosures. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions and any such differences may be material.
While our significant accounting policies are more fully described in Note 1 of our financial statements included in this prospectus, we believe the following discussion addresses our most critical accounting policies and estimates, which are those that are most important to our financial condition and results of operations and require our most difficult, subjective and complex judgments.
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Revenue Recognition
The Company recognizes revenue in accordance with the Financial Accounting Standards Board (FASB) Accounting Standards Codification ASC Topic 606 — Revenue from Contracts with Customers. Under ASC 606, the Company recognizes revenue from the sale of its plant-based snack products in accordance with a five-step model in which the Company evaluates the transfer of promised goods or services and recognizes revenue when customers obtain control of promised goods or services in an amount that reflects the consideration which the Company expects to be entitled to receive in exchange for those goods or services. To determine revenue recognition for the arrangements that the Company determines are within the scope of ASC 606, the Company performs the following five steps: (1) identify the contract(s) with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract and (5) recognize revenue when (or as) the entity satisfies a performance obligation. The Company has elected, as a practical expedient, to account for the shipping and handling as fulfillment costs, rather than as a separate performance obligation, and the related costs are recorded as selling expenses in general and administrative expenses in the statement of operations. Revenue is reported net of applicable provisions for discounts, returns and allowances. Methodologies for determining these provisions are dependent on customer pricing and promotional practices. The Company records reductions to revenue for estimated product returns and pricing adjustments in the same period that the related revenue is recorded. These estimates are based on industry-based historical data, historical sales returns, if any, analysis of credit memo data, and other factors known at the time.
The Company’s sales are predominantly generated from the sale of finished products to retailers, and to a lesser extent, direct to consumers through third party website platforms. These sales contain a single performance obligation and revenue is recognized at a single point in time when ownership, risks and rewards transfer. Typically, this occurs when the goods are received by the retailer or customer, or when title of goods is exchanged. Revenues are recognized in an amount that reflects the net consideration the Company expects to receive in exchange for the goods.
The Company promotes its products with advertising, consumer incentives and trade promotions. These programs include discounts, slotting fees, coupons, rebates, in-store display incentives and volume-based incentives. Customer trade promotion and consumer incentive activities are recorded as a reduction to the transaction price based on amounts estimated as being due to customers and consumers at the end of a period. The Company derives these estimates based principally on historical utilization and redemption rates. The Company does not receive a distinct service in relation to the advertising, consumer incentives and trade promotions.
Payment terms in the Company’s invoices are based on the billing schedule established in contracts and purchase orders with customers.
Inventory
The Company’s products consist of pre-packaged and bulk dried fruit and vegetable-based snacks, powders and ingredients purchased from contract manufacturers in Chile and/or Peru. The Company’s contract manufacturer in Peru uses equipment purchased by BranchOut in its manufacturing process. Raw materials consist of packaging materials. Appropriate consideration is given to obsolescence, excessive levels, deterioration, and other factors in evaluating net realizable value. As of the date of this prospectus, no reserve for obsolete inventories has been recognized. Inventory, consisting of raw materials and finished goods, are stated at the lower of cost or net realizable value using the average cost valuation method, and consist of the following:
| December 31, | December 31, | |||||||
| 2022 | 2021 | |||||||
| Raw materials | $ | 10,824 | $ | 5,603 | ||||
| Finished goods | 96,135 | 198,366 | ||||||
| $ | 159,761 | $ | 203,969 | |||||
Stock-Based Compensation
All stock-based awards to employees and non-employee contractors, including any grants of stock and stock options, are measured at fair value at the grant date and recognized over the relevant vesting period in accordance with the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 718. Stock based awards to non-employees are recognized as a selling, general and administrative expense over the period of performance. Such awards are measured at fair value at the date of grant. In addition, for awards that vest immediately, the awards are measured at fair value and recognized in full at the grant date.
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We estimate the fair value of each stock-based award containing service and/or performance conditions on the grant date using the Black-Scholes option valuation model which incorporates assumptions as to stock price volatility, the expected life of the options, risk-free interest rate and dividend yield. There is no active external or internal market for our common stocks. The assumptions used in our Black-Scholes option valuation model represent management’s best estimates at the time of measurement. These estimates are complex and involve several variables, uncertainties, and assumptions and the application of management’s judgment. If any assumptions change, our stock-based compensation expense could be materially different in the future. Thus, it was not possible to estimate the expected volatility of our stock price in estimating fair value of options granted. Accordingly, as a substitute for such volatility, we used the historical volatility of the common stock of other companies in the same industry over a period commensurate with the expected term of the options awarded. We use the simplified method of calculation for estimating expected term. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant. We do not anticipate that dividends will be distributed in the near future. Forfeitures are recorded as they occur, and when they occur compensation expense previously recognized is reversed in the period of the forfeiture. Option awards are generally granted with an exercise price equal to the fair value of our common stock at the date of grant.
Because there was no public market for our common stock, the fair value of the common stock underlying the stock options has historically been determined at the time of grant of the stock option by considering a number of objective and subjective factors, including sales of common stocks, third-party valuations performed, important developments in our operations, actual operating results and financial performance, the conditions in the medical device industry and the economy in general, and the stock price performance, volatility of comparable public companies, and an assumption for a discount for lack of marketability, among other factors.
Income Taxes
We account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, we determine deferred tax assets and liabilities on the basis of the differences between the financial statement and tax bases of assets and liabilities by using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.
We regularly review our deferred tax assets for recoverability and establish a valuation allowance if it is more likely than not that some portion, or all, of a deferred tax asset will not be realized. The determination as to whether a deferred tax asset will be realized is made on a jurisdictional basis and is based on both positive and negative evidence. This evidence includes historic taxable income, projected future taxable income, the expected timing of the reversal of existing temporary differences and the implementation of tax planning strategies.
We record uncertain tax positions in accordance with Accounting Standards Codification (ASC) Topic 740 on the basis of a two-step process in which (1) we determine whether it is more likely-than-not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, we recognize the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority.
We evaluate the tax positions that have been taken or are expected to be taken on our income tax returns to determine if an accrual is necessary for uncertain tax positions. We will recognize interest and penalties as a component of income tax expense if incurred.
Recently Issued Accounting Pronouncements
See Note 3 to our audited financial statements included elsewhere in this prospectus for new accounting pronouncements not yet adopted as of the date of this prospectus.
Emerging Growth Company
As an emerging growth company under the JOBS Act, we are eligible to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies. We have elected to avail ourselves of this exemption from new or revised accounting standards and, therefore, while we are an emerging growth company, we will not be subject to new or revised accounting standards at the same time that they become applicable to other public companies that are not emerging growth companies. As a result, our financial statements and interim financial statements may not be comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates.
We will remain an emerging growth company until the earliest of (i) the last day of our first fiscal year in which we have total annual gross revenues of $1.235 billion or more, (ii) the last day of the first fiscal year in which we become a “large accelerated filer” as defined in Rule 12b-2 under the Exchange Act, with at least $700 million of equity securities held by non-affiliates as of the end of the last business day of the second quarter of that fiscal year, (iii) the date on which we have issued, in any three-year period, more than $1.0 billion in non-convertible debt securities, or (iv) the last day of our fiscal year after the fifth anniversary of the date of the completion of this offering.
EnWave Contract
Pursuant to the terms of the Licensing Agreement with EnWave, we cannot undertake any transaction that would result in a change of control of us without the prior written consent of EnWave.
Going Concern
Our audited financial statements for the year ended December 31, 2022 included a statement from our independent registered public accounting firm that there is a substantial doubt about our ability to continue as a going concern, and a continuation of negative financial trends could result in our inability to continue as a going concern.
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This summary highlights selected information that is presented in greater detail elsewhere in this prospectus. This summary does not contain all the information you should consider before investing in our common stock. You should read this entire prospectus carefully, including the sections titled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our financial statements and the related notes included elsewhere in this prospectus, before making an investment decision. Unless the context otherwise requires, the terms “BranchOut,” “the Company,” “we,” “us,” and “our” in this prospectus refer to BranchOut Food, Inc.
Company Overview
We were incorporated as Avochips Inc., an Oregon corporation, on February 21, 2017. On November 2, 2017, AvoChips Inc. converted into Avochips, LLC, an Oregon limited liability company and on November 19, 2021, Avochips, LLC redomiciled in Nevada, subsequent to a conversion from a limited liability company to a C-corporation, named BranchOut Food Inc., a Nevada corporation.
We are engaged in the development, marketing, sale, and distribution of plant-based, dehydrated fruit and vegetable snacks and powders. One of the Company’s contract manufacturers is in the Republic of Chile. The Company entered into a second contract manufacturing partnership in 2022 with a company based in the Republic of Peru. This facility in Peru houses BranchOut’s continuous throughput dehydration machine, substantially increasing production capacity. Our new large-scale continuous throughput dehydration machine was commissioned in September of 2022 and we completed the first production run in the first quarter of 2023. Both facilities produce dehydrated fruit and vegetable products for BranchOut using a new proprietary dehydration technology. The Company’s customers are primarily located throughout the United States.
Business Summary
BranchOut is an emerging natural food brand with a licensed technology platform that enables the manufacturing and marketing of plant-based dehydrated foods. BranchOut licensed the rights to a new dehydration technology designed for drying and processing highly sensitive fruits and vegetables such as avocados, bananas and others. Using the licensed technology platform, we believe BranchOut creates a line of branded food products that speak to current consumer trends. In our experience, conventional dehydration methods, such as freeze-drying and air drying, tend to degrade most fruit and vegetables through oxidation, browning/color degradation, nutritional content reduction and/or flavor loss. As a result, certain highly sensitive fruit, such as avocados and bananas, have not been successfully offered as a dehydrated base for consumer products. Other dried fruit- and vegetable-based products are on the market, but are of low quality. We believe that BranchOut’s licensed technology platform and process is the only way to produce quality avocado and banana-based snacks and powdered products. Additionally, we believe our licensed technology platform produces superior products when using other fruits and vegetables as the base when compared to conventional drying and dehydration technologies. With more than 17 patents registered or pending in 14 countries, BranchOut has been granted the exclusive rights to use the licensed technology platform as applied to avocados, in addition to our own patent pending process, and nonexclusive rights to use the licensed technology platform for other products.
Our Products
Over time, BranchOut plans to grow revenues strategically by penetrating the multi-billion dollar grocery market opportunity presented by our current product lines, as well as expanding our platform to include additional products that meet our strict plant-based ingredient criteria to diversify our revenue base and increase BranchOut’s TAM opportunity both with BranchOut branded items as well as retailer brands, or “private label”. BranchOut’s current products are primarily:
| ● | BranchOut Snacks: dehydrated fruit- and vegetable-based snacks, including Avocado Chips, Chewy Banana Bites, Brussels Sprouts Crisps, Bell Pepper Crisps and Pineapple Chips. |
| ● | BranchOut Powders: Avocado Powder, Banana Powder and Blueberry Powder. |
| ● | BranchOut Industrial Ingredients: Bulk Avocado Powder, dried avocado pieces and other fruit powders/pieces. |
BranchOut is currently developing additional products, including chocolate covered fruit items and many private label products for large retailers.
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BranchOut Snacks
Our Avocado Chips are real avocado slices, dehydrated using our licensed technology and process to create crispy, crunchy avocado slices while maintaining their vibrant green color, rich creamy avocado flavor, and superfood nutritional content. We offer these in three flavors, “Sea Salt with a Hint of Lime”, “Chili Lime” and “Sriracha” seasoned topically on the avocado slices.
In addition to the avocado snack line, BranchOut offers a “Chewy Banana Bite”. Each “Banana Bite” is an actual banana slice, providing a unique marshmallow-like, chewy texture. Previous market offerings in the banana snack space include fried plantain chips and dark brown air-dried banana snacks. We believe that our “Chewy Banana Bite” product is superior due to its fresh-looking, natural yellow color, single ingredient base and fresh banana flavor. We offer the banana bites in three flavors, “Original”, “Chocolate Dipped” and “Cinnamon Churro”. According to widely accepted market data, fresh bananas have historically shown to be the most consumed fruit in America and the highest selling item in grocery stores; however, we do not believe that any banana snack has been offered prior to our “Chewy Banana Bite” product that is of similar quality.
We believe that BranchOut has a unique opportunity to establish a market and provide substantial value to retailers and distributors.
BranchOut has developed a third snack product to this line through its “Pineapple Chip” product, which is made up of 100% dried pineapple slices. Utilizing the same technology as the Avocado Chips and Chewy Banana Bite products, the Pineapple Chips are made from real pineapple slices and offer a fresh pineapple flavor.
In 2023, BranchOut added two vegetable-based snacks, Brussels Sprout Crisps and Bell Pepper Crisps to the BranchOut branded product line.
BranchOut Powders
In addition to snack products, BranchOut has developed mixable powder products that can be utilized in many different functions. The current powder offerings include, Avocado Powder, Banana Powder and Blueberry Powder, and each are 100% plant-based. We believe that our Avocado Powder is the first and only quality avocado powder on the market. This product offers a true solution to consumers. Fresh avocados are one of the shortest shelf-life items consumers can buy and tend to be expensive. Rather than waiting for fresh avocados to ripen and worrying about spoilage, consumers can simply use our avocado powder. All of our powders have a 12-month shelf life and maintain the natural color, flavor, and nutritional content. Currently, consumers are mainly using our powders as additions to homemade smoothies because of their convenience, high flavor and nutritional values. Secondarily, consumers are using our powders for a wide variety of applications, including as ingredients in baked goods, recipes, cocktails, skin care applications and others.
BranchOut Industrial Ingredients
While BranchOut is primarily focused on our snack items, many industrial ingredients opportunities have presented themselves as we have begun marketing the brand. Specifically, the Avocado Powder and dried avocado pieces have caught the attention of many other food product manufacturers, pet food makers and ingredient distributors. Many companies are reaching out to us looking for a supply. These opportunities include offering bulk avocado powder to ingredient suppliers, inclusion in other food products, pet foods, skin care applications, and many others. To date, BranchOut has sold bulk Avocado Powder to several food product manufacturers. While we are limiting our supply to these customers now to preserve our limited production capacity for our branded items, we believe that other significant opportunities will be available as we grow our business.
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Products in Development
BranchOut is continuously innovating and developing new products. We are currently working on several new items at the request of a major national retailer for their private label brand. BranchOut may choose to launch several of our products in development under the BranchOut brand, as well, if consumer trials prove successful.
In 2019, BranchOut launched its Avocado Powder in Walmart Inc. and Sprouts Farmers Markets, Inc. stores and other retailers followed by the launch of its full snack line in March 2020. The snack line has seen rapid market adoption despite the launch timing coinciding with the onset of the COVID pandemic. We are currently selling the products in our snack line at a large number of retailers, including rotations in three Costco Wholesale Corporation regions, Sam’s Club Stores, Giant Eagle, Hy-Vee, Fresh Thyme, Stop & Shop and Lunds & Byerlys. In addition, the line won the Most Innovative New Business award at our first live trade show, the Sweets & Snacks Expo, held in June of 2021, held in Indianapolis, Indiana.
Since 2019, we have been in discussions with the U.S. Army about the possibility of including certain of our products in their Meals Ready-to-Eat for their personnel. The U.S. Army has asked us to develop snack concepts for sensory and shelf-life testing, which is currently in progress. Separately, since the third quarter of 2022, we have been developing a line of salad toppers with one of the largest salad dressing producers in the U.S.
As a result of growing consumer demand for BranchOut products and the continued expansion of our omnichannel distribution strategy, our net sales grew from $715,553 for the year ended December 31, 2021, to $752,178 for the year ended December 31, 2022.
Our Market Opportunity in the Evolving Food and Beverage Industry
BranchOut participates in what the U.S. Census Bureau estimates to be a $695 billion grocery market as of 2019, which is the second largest retail market after the automobile industry. BranchOut is specifically focused on the fastest growing sub-segment of the grocery market: Natural, Organic and Functional Food and Beverages. According to the Nutrition Business Journal, in 2018, Natural, Organic and Functional Food and Beverages sales in the U.S. were approximately $152 billion and grew 6.6% from the prior year, which was faster than the 4.0% growth in the overall food and beverage industry according to the U.S. Census Bureau. Further, according to the Nutrition Business Journal, during the same period, third-party and direct e-commerce sales represented two of the four fastest growing channels for Natural, Organic and Functional Food and Beverages sales in the United States.
We believe that consumer preferences within the evolving food and beverage industry are shifting away from processed and sugar-laden food and beverage products, as well as those containing significant amounts of highly processed and artificial ingredients. We believe that there is also increasing recognition of the environmental impact of animal-based products. This has led to significant growth in plant-based foods and beverages. According to the Plant-Based Foods Association, U.S. retail sales of plant-based foods increased 11% from 2018 to 2019, reaching a market value of $4.5 billion, compared to increases of 4% and 7% in the general grocery and natural foods categories, respectively. Among plant-based food categories, plant-based snacks are a rapidly emerging category but, in our opinion, lack product offerings similar to the BranchOut Snacks line. A report published by Persistence Market Research opines that the global plant-based snacks market is poised to witness lucrative growth by clocking a notable CAGR of 8.7% by the end of 2028. North America contributes massively to the growing size of the plant-based snacks market, on account of the rapid adoption of the flexitarian, vegetarian, and vegan diet. The North American plant-based snacks market is projected to produce a healthy CAGR of over 7% and exceed a market value of over US$23.2 billion through 2028.
BranchOut’s long-term goal is to build a scale-level and widely recognized brand and private label solutions that focuses on natural ingredients, nutritional density and functionality in the plant-based snack and nutritional powder space. We believe an authentic and trusted brand is the strongest barrier to entry and a sustainable source of differentiation in the CPG industry. We also believe a strong brand is a valuable platform that can be leveraged to expand beyond our current markets to achieve relevance across multiple grocery aisles, online and a wide array of other relevant points of distribution. While the barriers to entry for launching a food product in the CPG industry have fallen in recent years as a result of unlimited shelf space on the internet and targeted online marketing, we believe that the barriers to building an internationally recognized and trusted brand relevant to today’s consumer remain high.
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Our Competitive Strengths
We believe the following strengths differentiate BranchOut and create long-term, sustainable competitive advantages.
A Patented Technology based Platform used to serve the Rapidly Expanding Plant-Based Natural Foods Industry
Over the near and intermediate term, BranchOut is highly focused on maximizing revenue growth by penetrating the multi-billion dollar market opportunity that we believe is presented by our current product lines. One of the core pillars of BranchOut’s strategy is the use of its licensed and patented, high-tech dehydration method, which is based on a radiant energy vacuum dehydration method that is characterized by a rapid, low temperature drying method that maintains the product’s color, flavor, and nutrients during the drying process. We believe the combination of a vacuum chamber and industrial microwave system creates several synergetic advantages. The vacuum chamber component is used to eliminate the exposure to oxygen during the process as well as dramatically reduce the boiling point of water. With the boiling point of water lowered in the vacuum atmosphere, the system then produces microwave energy to boil the water out of the product at reduced temperatures without freezing or excessively heating the food. The system rapidly and precisely dries with flexible moisture content unattainable by freeze-dry or air drying. Conventional dried fruit products are processed using hot air, freezing, or oil fryers. In our opinion, these methods destroy flavor, color, leave the fruit void of nutrients and can add unnatural ingredients such as industrial oils and preservatives. The technology we use (and consider to be advanced) has approximately more than 17 patents registered or pending in 14 countries and has been exclusively licensed to BranchOut for use on avocados in North, Central and South America (excluding our contract manufacturer in Chile), or the primary global avocado growing regions, and non-exclusively for other products. With this exclusive Licensing Agreement and BranchOut’s own patent pending process, we believe we are well positioned to successfully manufacture quality avocado-based products in our areas of operation, in addition to the ability to produce quality products with other fruits or vegetables as the base.
An Authentic and Trusted Brand Name and Innovative Product Offering
We believe that an authentic and trusted brand is one of the strongest long-term barriers to entry and sources of sustained differentiation in the consumer products industry. Since inception, BranchOut has invested heavily in building a trusted brand that consumers will be able to identify as authentic, plant-based, nutrient dense and functional. We encourage our customers to “branch out” and try something unique. Our goal is to make BranchOut the choice for customers searching for unique, nutrient dense, functional foods. Our target market extends well beyond plant-based consumers into the mass market due to our recognition that BranchOut products must not only be natural, functional, and nutrient-dense, they must also taste great and be affordable to provide access to all consumers. At our core, BranchOut is dedicated to innovation and uniqueness. Our licensed manufacturing technology enables the offering of innovative and unique products to consumers. We plan to expand this one-of-a-kind product offering approach in the future with additional products currently under development by BranchOut.
Balanced and Highly Differentiated Omnichannel Distribution Strategy
Our highly differentiated omnichannel distribution strategy has three key components: wholesale, online, and industrial. In aggregate, this omnichannel strategy provides us with a diverse set of customers and wholesale partners, leading to a larger TAM opportunity than is normally available to products available primarily in grocery stores, along with an opportunity to develop a direct relationship with our customers at our website, www.branchoutfood.com. We believe that, along with a trusted brand name, extensive proprietary distribution is a critical long-term and sustainable barrier to entry in the food industry. While we are starting with sales in traditional brick and mortar natural and conventional grocery stores and convenience stores, we expect to move into online as well as the industrial ingredients opportunities. To date, we have been capacity constrained as wholesale/retail customers orders have outpaced our production capacity; however, with our new large-scale dehydration machine that was commissioned in September 2022 and completed the first production run in the first quarter of 2023, we have launched our e-commerce channel. Once we have ample capacity and can fulfill all wholesale/retail and e-commerce customers, we will begin looking at industrial opportunities.
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Our wholesale business is intended to address the $695 billion grocery industry, specifically the $152 billion Natural, Organic and Functional Food and Beverages sub-segment, which has been increasing its proportion of the grocery industry, as well as many non-grocery retail channels. For the years ended December 31, 2022 and 2021, wholesale made up approximately 95% and 96% of our net sales, respectively, and approximately 98% and 98% of our gross sales prior to chargebacks, respectively. BranchOut products are sold through a diverse set of retail channels, including conventional, natural and specialty grocery, club, and convenience stores. We currently estimate our products are in over 1,000 retail locations across the United States and we believe the long-term potential store base exceeds 20,000 retail locations in the United States. The diversity of our retail channel represents a strong competitive advantage for BranchOut and provides us with a larger TAM than would be considered normal for a food brand that is singularly focused on the grocery market. We have invested in a national sales team, as well as an internal salesforce and customer service team.
Our online business is planned to comprise two prongs, direct sales through our website and sales through Amazon.com. Both platforms are already set up but with the items set as out of stock until we have additional production capacity.
Vertically Integrated Business Model
Since inception, BranchOut has focused on building a vertically integrated business model utilizing our licensed technology platform. Since this equipment is so new, BranchOut did not have the luxury of partnering with existing co-packers like many other food companies. Instead, we have invested heavily in capital expenditures to build out our hybrid co-pack model. Our hybrid co-pack model involves BranchOut buying the dehydration equipment and placing it in our manufacturing partner’s facility to operate and produce our products under an exclusive contract. We currently have one manufacturing partner based in Chile and have a new partnership with a company in Peru. We are transitioning our manufacturing equipment from small batch dehydration machines to larger continuous throughput dehydration machines. Our new large-scale continuous throughput dehydration machine was commissioned in September of 2022 and we completed the first production run in the first quarter of 2023. We invest in the equipment, but we do not have the burden and overhead of managing manufacturing facilities. Since we own the equipment and have exclusive contracts with our manufacturing partners, we have complete control and priority over the production capacity, better lead times, better margins and better control in general. We believe one of BranchOut’s greatest assets is this South America based, vertically integrated next-generation dehydration capacity.
Future manufacturing expansion is being explored with the first EnWave Machine (a large-scale dehydration machine) having come online in 2022 and having commenced production in early 2023 and additional machines, including the second EnWave Machine, planned to come online in 2024 and beyond.
Targeting Top-Tier Food Industry Gross Margins
Our vertically integrated model is expected to enable gross margins to move toward levels above food industry averages, as production and sales volumes increase. In particular, we expect this to be facilitated by our move to the larger scale, continuous throughput machines. Our new large-scale continuous throughput dehydration machine was commissioned in September of 2022 and we completed the first production run in the first quarter of 2023.
Global freight costs skyrocketed during the COVID-19 pandemic and BranchOut has seen significant cost increases as we ship our fully packaged products from Chile, and now also Peru, to the United States. To reduce its shipping costs, BranchOut commenced moving to a bulk shipping model in the first quarter of 2023. This model allows us to condense a full container of packaged product down to about three pallets of bulk product, dramatically reducing our freight cost. We are working on a partnership with manufacturing companies in the United States to receive the bulk dehydrated items and then manage the seasoning and packaging to finalize the product. While we have seen some freight related margin compression during 2022 and 2021, as most companies in our space have, we believe our new bulk shipping model will help us combat such freight-related margin compression should it continue in the future.
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Our Growth Strategy
Consumers are increasingly incorporating natural alternatives into their diets; however, there are limited national natural food brands with the name recognition of legacy brands in traditional center-of-the-store grocery aisles. BranchOut is seeking to build a high level of brand recognition, as well as develop a trust and understanding with consumers that, regardless of category, any product labeled BranchOut will taste great and maintain a high-quality ingredient set. That is the heart of our platform strategy. Our primary growth strategies are as follows:
Open-Ended and Long Duration Growth Opportunity in the Enormous Grocery Market
At $695 billion, the U.S. grocery market is one of the largest retail end-markets in the world. BranchOut’s strategy is to maximize penetration of this opportunity through a variety of avenues, including growing brand trust and recognition, significantly expanding our grocery distribution footprint to multiples of our current level of retail locations, driving shelf velocity through an acceleration of online and offline advertising and introducing new products to expand our store footprint.
Exposure to Plant-Based, Functional and Natural Foods Portions of the Grocery Market
Within the grocery category, there is an ongoing secular shift from highly processed legacy brands that demonstrate little nutritional benefit to natural, nutrient-dense, functional and plant-based alternatives. We expect the shift in consumer tastes driving the growth of natural and plant-based alternatives will continue throughout the foreseeable future as consumers become better educated on nutrition and focus on the health and wellness of themselves, their families and the environment. There is also clear evidence that an increasing number of natural and plant-based products in stores are moving beyond the natural and specialty segments and into conventional grocery stores. The continuation of these trends should benefit BranchOut as it seeks to penetrate the very large overall grocery market.
Continued Expansion of Distribution Footprint
Based on our estimate of what wholesale penetration for a leading CPG industry brand should be at maturity, we believe BranchOut’s wholesale distribution footprint should eventually be multiples of its current size. Currently, our products are marketed and sold through a diverse set of physical retail channels, including grocery chains, club stores, specialty and natural food outlets, and on our website at www.branchoutfood.com and Amazon.com. Maximizing potential distribution will be a key growth driver for BranchOut and our goal is to expand distribution so that our products are available wherever our customers choose to shop, whether it be a retail store, food service environment or directly online. While expanding distribution, we plan to simultaneously increase our brand awareness through an extensive program of online and offline marketing initiatives to accelerate the sell-through velocity of our products once they reach the shelves of our wholesale partners.
Maximize Market Penetration of Existing Product Lines
We believe that BranchOut’s existing snacks and nutritional powders represent a multi-billion-dollar TAM; however, we have not commissioned a formal market study to properly quantify this expectation. We believe simply penetrating these core markets with our differentiated product lines will provide BranchOut with a large and long-duration growth opportunity. In the near-term, BranchOut will focus on growing its share within these categories. We plan to drive growth of both our snacks and nutritional powders through distribution expansion and increased marketing and advertising to drive brand recognition and shelf velocity. We plan to also attempt to leverage our new and existing wholesale relationships to gain additional shelf space for our full suite of existing products.
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Expected Increases in Gross Margins, Fixed-Cost Leverage and a Capital Efficient Sales and Marketing Strategy Should Allow Earnings to Grow Faster than Sales, Providing a Path to Profitability
While generating topline growth is of primary importance to BranchOut, we are also highly focused on growing earnings faster than net sales and achieving profitability . We believe that the move from small batch system dehydration machines currently in operation to the larger continuous throughput machines, will significantly improve our operating margins. Our new large-scale continuous throughput dehydration machine was commissioned in September 2022 and we completed the first production run in the first quarter of 2023. We also expect operating margins to be improved by our shifting finished packaging from South America to Texas (which allows us to ship from our contract manufacturers in South America to the U.S. in bulk, reducing costs). We commenced this transition in early 2023. BranchOut remains committed to a business model focused on not just top line growth, but on steady progress toward profitability.
New Product Development
BranchOut’s current product lines are growing to address multi-billion dollar market opportunities with differentiated products. We intend to grow by launching new products over time, including planned launches in 2023. In the first and second quarters of 2020, we launched three flavors of Avocado Chips, three flavors of our Chewy Banana Bites and our Pineapple Chips. In the first quarter of 2022, we launched Banana Powder and Blueberry Powder to complement our Avocado Powder which was already on the market. In 2023, we launched a line of vegetable-based snacks including Brussels Sprout Crisps, and Bell Pepper Crisps. We are also developing Broccoli Bites, Asparagus Sticks, Mango Chips and Mandarin Crisps and others. In addition, we are developing several new items at the request of a national retailer which are planned to be sold under their brand.
These new products have been, and we expect that our future products will be, developed primarily through internal research and development. Using our unique licensed technology and South American supply chain, we believe that BranchOut is in a position to create a wide variety of innovative new products. With this in mind, we are focused on creating products that conform to our uncompromising brand ethos of uniqueness, great taste, high-quality ingredients, nutritional density, and functionality. Additional criteria for new product development are expected to include the potential for broad commercial acceptance, size of market opportunity, regulatory compliance issues, manufacturing process, availability and cost of raw materials, shelf-life and expected usage patterns by potential customers.
Government and Non-Government Regulation
Our operations involve food products and are subject to the oversight of, among others, the FDA and state, local and foreign counterparts, and the USDA. The FDA, pursuant to the FDCA, as amended by the Food Safety Modernization Act (“FSMA”), enforces statutory standards regarding the growing, harvesting, manufacturing, processing, packaging, holding, distributing, importing, exporting, labeling and safety of food products, establishes requirements for or limitations on ingredients or substances in foods and establishes standards of identity for certain foods. Similar functions are performed by state, local and foreign governmental entities with respect to food products produced or distributed in their respective jurisdictions. FSMA, which is a major reform of U.S. food safety laws, aims to ensure the U.S. food supply is safe by focusing on preventing contamination. We have been working to comply with the new requirements of FSMA as the FDA has begun implementing and enforcing these provisions, and we will aim to ensure continued compliance as new regulations are promulgated and additional requirements go into effect. The USDA regulates imports and exports of agricultural and food products into and from the United States. The USDA also oversees the National Organic Program, which provides the national standards for labeling products as USDA organic, and regulates the introduction of certain genetically engineered organisms.
For more information on the risks associated with our compliance with government and non-government regulations, see “Risk Factors – Regulatory Risks”.
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Corporate Information
Our principal executive office is located at 205 SE Davis Ave, Suite C Bend Oregon 97702. Our main phone number is (844) 263-6637. Our website is www.branchoutfood.com. Our fiscal year ends on December 31. We have included our website address in this prospectus as an inactive textual reference only. Information contained on, or that can be accessed through, our website is not part of this prospectus. You should not rely on any information contained or included on our website in making your decision whether to purchase our common stock.
Facilities
Our corporate headquarters address is at 205 SE Davis Avenue, Suite C, Bend, Oregon. We do not maintain offices at the address and do not own or lease office or other space. Each of our employees works remotely and we pay for meeting and office space on an as needed basis with no long-term commitment.
Employees and Human Capital Resources
As of December 31, 2022, we had four full-time employees. None of our employees are covered by collective bargaining agreements and we have never experienced an organized work stoppage, strike or labor dispute.
Our human capital resources objectives include, as applicable, identifying, recruiting, retaining, incentivizing and integrating our existing and additional employees. The principal purposes of our equity incentive plans are to attract, retain and motivate selected employees, consultants and directors through the granting of stock-based compensation awards and cash-based performance bonus awards.
Legal Proceedings
From time to time, we may be involved in various disputes and litigation matters that arise in the ordinary course of business. We are not currently engaged in any material legal proceedings.
Major Contracts
We have entered into an exclusive Licensing Agreement with EnWave, whereby EnWave has granted to us the following rights and licenses:
| ● | The exclusive right and license to use the EnWave technology to manufacture our avocado products in North America, Central America, and South America (excluding our contract manufacturer in Chile), provided we meet certain purchasing conditions. To the extent we do not meet such conditions, EnWave may convert the exclusive rights and license granted to us to non-exclusive rights and licenses. This would allow for another company to compete with us using the same technology we use for our avocado products in North America, Central America and South America. | |
| ● | The nonexclusive right and license to use the EnWave technology to manufacture non-exclusive products in Mexico | |
| ● | The nonexclusive right and license to market our products that are made using the EnWave technology worldwide. |
The Licensing Agreement permits EnWave to grant additional exclusive or nonexclusive licenses to third parties (i) in North America, Central America, and South America for the third party’s use in manufacturing any products other than the specified avocado products and for any products if the license is converted to a non-exclusive license, or (ii) in Mexico for any purpose including use in manufacturing non-exclusive products, or (iii) outside of North America, Central America, and South America for any purpose.
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As a condition for the exclusive rights and licenses, we are obligated to purchase additional EnWave Equipment over the next three years. EnWave will maintain a security interest in such EnWave Equipment until such has been paid off in full. Even after the EnWave equipment is paid for in full, we have agreed to pledge and grant to EnWave a lien on and a continuing security in the EnWave Equipment as collateral security for all amounts due to EnWave under the Licensing Agreement, including Earned Royalties (defined below). We are not permitted to sell, transfer, assign, mortgage, make available for use or encumber the EnWave equipment to or for the benefit of a third party without the prior written consent of EnWave. We are also not permitted to move the EnWave Equipment outside the agreed upon manufacturing location without the written consent of EnWave.
For the rights and licenses granted to us under the Licensing Agreement, we are obligated to pay to EnWave a royalty on the revenue generated from products made on the EnWave Equipment. In addition to this royalty, we are obligated to pay a royalty on the consideration we receive from third parties from drying or processing products on behalf of third parties. All royalties paid must be paid in U.S. dollars without any reduction or deduction of any nature or kind, and such royalties will not be reduced by product recalls. In addition, to maintain the exclusive rights granted under the Licensing Agreement, we must pay to EnWave certain annual royalties, which annual royalties will be reduced by the amount of any Earned Royalties paid to EnWave during such year. There have been no royalty payments to date, and any future minimum royalty payments or equipment purchases under this License Agreement are an unrecognized commitment as they relate to retaining exclusivity of the avocado products going forward and the Company can elect not to pay. We are required to pay $206,763 in 2023, $225,000 in 2024, and $300,000 per year in 2025 and in each successive year thereafter if we elect to retain exclusivity. All royalties paid to EnWave are recognized as royalty expenses as the products are sold.
Under the Licensing Agreement, we have agreed to assign and transfer to EnWave all rights, title, and interest we may have in any improvements we make to the EnWave technology, and to waive all moral rights to all copyrights subsisting in any improvements we make to the EnWave technology. In addition, EnWave may, in its sole discretion, apply for patents for all improvements we make to the EnWave equipment or technology.
We have agreed, under the Licensing Agreement, that EnWave shall not be liable whatsoever to us or any other person for any injury, loss, or damage sustain by or asserted against arising out of or in connection with the manufacture, use, offer for sale, sale, or import of a product, the EnWave technology, or the practice or use of any patents covering the EnWave technology. EnWave shall remain liable for such losses or damage that is definitively concluded by a court of competent jurisdiction to have been solely the result of gross negligence or willful misconduct in the design and manufacture of the EnWave equipment. We have agreed that EnWave shall not be liable for any losses or damages that arise from the use of or any errors or omission in any know-how, technical information, techniques, product developments support, training, or practices disclosed or provided by EnWave, or any advertising or other promotional activities concerning any of the foregoing.
To the fullest extent permitted by law, EnWave shall not be liable to us or any third party for any injury to or loss of goodwill, reputation, business, production, revenues, profits, anticipated profits, contracts or opportunities or for any consequential, incidental, indirect, exemplary, special, punitive, or enhanced damages whether arising out of breach of contract, tort, strict liability or other.
Under the Licensing Agreement, EnWave has agreed to reasonably bring, prosecute, or defend actions or suits against third parties for infringement of the patents.
We have agreed to indemnify and hold harmless EnWave against all claims arising from our negligence or misuse of the EnWave technology or products. We have agreed to cap EnWave’s potential liability under the Licensing agreement at the amount of Earned Royalties paid to EnWave in the previous calendar year.
We cannot undertake any transaction that would result in a change of control without the prior written consent of EnWave.
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Directors and Executive Officers
The following table sets forth certain information, as of December 31, 2022, with respect to the persons who have agreed to serve as our directors and executive officers effective upon the effective date of the registration statement of which this prospectus forms a part.
| Name | Age | Position | ||
| Executive Officers | ||||
| Eric Healy | 39 | Chief Executive Officer, Chairman of the Board | ||
| Douglas Durst | 63 | Chief Financial Officer | ||
| John Dalfonsi | 57 | Independent Director Nominee | ||
| David Israel | 61 | Independent Director Nominee | ||
| Greg Somerville | 55 | Independent Director Nominee |
The following are biographical summaries of the experience of our directors and executive officers:
Eric Healy—Chief Executive Officer and Chairman of the Board. Eric has been our Chief Executive Officer since inception in November 2017. Mr. Healy brings over 13 years of experience as a mechanical engineer, product development engineer, and a food entrepreneur. Prior to founding BranchOut, Mr. Healy was the owner/partner of the No-Bake Cookie Company, running all aspects of the company. Mr. Healy served as a Senior Mechanical Engineer at Stratos Product Development, Synapse Product Development (both consumer product development engineering firms) as well as a Mechanical Engineer at the Boeing Company. Eric earned a Bachelor of Science in Mechanical Engineering from Oregon State University.
Douglas Durst—Chief Financial Officer. Douglas Durst, our Chief Financial Officer, is a licensed Certified Public Accountant, MBA, and certified Strategic Planner, who brings over 15 years’ experience as Chief Financial Officer of small, mid-stage and public companies. Mr. Durst has experience as a Chief Financial Officer globally, having supported operations in North America, Asia, Africa, and Europe with experience across several relevant market verticals including manufacturing, distribution, logistics, and retail. Mr. Durst has been the CFO of TMS Solutions, Inc. a transcranial magnetic stimulation services company, since 2022. Mr. Durst served as the CFO of SPT Logistics, a shipping and logistics company, from 2020 to 2021, contract CFO and Director of VR Studios, Inc., a virtual reality commercial solutions company, from 2019 to 2020, and contract CFO of Truss Insurance Brokers, from 2017 to 2018. Prior roles include Director of Business Performance at Microsoft Corporation (USSMS&P) and a partner at Moss Adams LLP. Mr. Durst earned his Bachelor of Arts degree in Accounting and Finance at the University of Washington and his Master of Business Administration from Nova Southeastern University.
John Dalfonsi—Independent Director. John is a nominee to our board of directors, audit committee, compensation committee, and nominating and corporate government committee, whose formal election will occur concurrent with the effectiveness of this registration statement. Since 1995, Mr. Dalfonsi has closed public and private equity and debt financings, merger and acquisitions, advisory and fairness opinion transactions and Nasdaq and NYSE/AMEX IPOs. He has worked with companies in the healthcare, industrial, consumer, technology, cleantech and resource sectors, bringing a wealth of experience to the Company. During this period, Mr. Dalfonsi has spent the bulk of his career at ROTH Capital Partners, LLC and Paulson Investment Company, LLC. Mr. Dalfonsi has been the Managing Member at Eagle Vision Fund G/P., LLC since April 2022, was previously a Senior Managing Director at Paulson Investment Company, LLC from January 2021 through April 2022, and a Managing Director at Roth Capital Partners from February 2002 to December 2020. Mr. Dalfonsi earned his Bachelor of Science degree in Industrial Engineering from Northwestern University and his Master of Business Administration from the University of Chicago Booth School of Business.
David Israel—Independent Director. David Israel is a nominee to our board of directors, audit committee, compensation committee, and nominating and corporate government committee, whose formal election will occur concurrent with the effectiveness of this registration statement. Mr. Israel, one of our co-founders boasts a successful history of food entrepreneurship. As the Chief Executive Officer of Good Planet Foods since February of 2018, David brings extensive experience in natural food product development and management. Additionally, as the Chief Executive Officer of BFY Food Group since February of 2017, David brings an immediate network of distributors and buyers that will continue to scale BranchOut as growth accelerates. David developed and created Pop Gourmet as its founder in 2011, until September of 2018.
Greg Somerville—Independent Director. Greg Somerville is a nominee to our board of directors, audit committee, compensation committee, and nominating and corporate government committee, whose formal election will occur concurrent with the effectiveness of this registration statement. Mr. Somerville is an accomplished 30-year Sales and Marketing veteran of the U.S. Food Industry. Greg is currently North America Controller & Chief Executive Officer at Savencia Fromage and Dairy, which is the world’s leading specialty cheese company and has held the position since August of 2021. In North America, Savencia has top share positions in cream cheese, domestically-produced and imported specialty cheeses, hummus, and plant-based dips and snacks. Prior to joining Savencia, Mr. Somerville spent 20 years at Land O’Lakes, Inc., starting in July of 2001 and leaving in July of 2021, where he held a variety of leadership positions in sales, customer marketing, category & consumer insights and sustainability. Mr. Somerville is a trusted industry expert as he previously held board positions at the National Frozen & Refrigerated Foods Association and the International Dairy Deli Bakery Association. Mr. Somerville’s proven track record managing branded food products across the retail, food service and B2B ingredients segments will be invaluable toward supporting BranchOut’s future growth. Greg has a BS in Business from the University of Wisconsin and an MBA from Quinlan School of Business.
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Board Composition
Upon the completion of the offering, the composition of the committees of our board of directors will be as follows:
| Director | Executive Officer | Independent | Audit Committee | Compensation Committee | Nominating and Corporate Governance Committee | |||||||
| John Dalfonsi | No | Yes | Chair | Yes | Yes | |||||||
| David Israel | No | Yes | Yes | Chair | Yes | |||||||
| Greg Somerville | No | Yes | Yes | Yes | Chair |
Director Independence
Applicable Nasdaq rules require a majority of a listed company’s board of directors to be comprised of independent directors within one year of listing. In addition, Nasdaq rules require that, subject to specified exceptions, each member of a listed company’s audit, compensation and nominating and corporate governance committees be independent under the Exchange Act. Audit Committee members must also satisfy the independence criteria set forth in Rule 10A-3 under the Exchange Act and compensation committee members must also satisfy the independence criteria set forth in Rule 10C-1 under the Exchange Act. Under applicable Nasdaq rules, a director will only qualify as an “independent director” if, in the opinion of the listed company’s board of directors, that person does not have a relationship that would interfere with the exercise of independent judgment in carrying out the responsibilities of a director.
The Nasdaq listing rules provide that a director cannot be considered independent if:
| ● | the director is, or at any time during the past three (3) years was, an employee of the company; |
| ● | the director or a family member of the director accepted any compensation from the company in excess of $120,000 during any period of twelve (12) consecutive months within the three (3) years preceding the independence determination (subject to certain exemptions, including, among other things, compensation for board or board committee service); |
| ● | the director or a family member of the director is a partner in, controlling shareholder of, or an executive officer of an entity to which the company made, or from which the company received, payments in the current or any of the past three fiscal years that exceed 5% of the recipient’s gross revenue for that year or $200,000, whichever is greater (subject to certain exemptions); |
| ● | the director or a family member of the director is employed as an executive officer of an entity where, at any time during the past three (3) years, any of the executive officers of the Company served on the compensation committee of such other entity; or |
| ● | the director or a family member of the director is a current partner of the Company’s outside auditor, or at any time during the past three (3) years was a partner or employee of the Company’s outside auditor, and who worked on the Company’s audit. |
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In order to be considered independent for purposes of Rule 10A-3 under the Exchange Act, a member of an audit committee of a listed company may not, other than in his or her capacity as a member of the audit committee, the board of directors or any other board committee, accept, directly or indirectly, any consulting, advisory or other compensatory fee from the listed company or any of its subsidiaries or otherwise be an affiliated person of the listed company or any of its subsidiaries. In order to be considered independent for purposes of Rule 10C-1, the board must consider, for each member of a compensation committee of a listed company, all factors specifically relevant to determining whether a director has a relationship to such company which is material to that director’s ability to be independent from management in connection with the duties of a compensation committee member, including, but not limited to: (1) the source of compensation of the director, including any consulting advisory or other compensatory fee paid by such company to the director; and (2) whether the director is affiliated with the company or any of its subsidiaries or affiliates.
In September 2022, our board of directors undertook a review of the composition of our board of directors and its committees and the independence of each director and proposed director. Based upon information requested from and provided by each director and director nominee concerning his or her background, employment and affiliations, including family relationships, our board of directors has determined that each of our directors and director nominees, with the exception of Mr. Healy and Mr. Douglas, is an “independent director” as defined under applicable Nasdaq rules, including, in the case of all the members of our Audit Committee, the independence criteria set forth in Rule 10A-3 under the Exchange Act, and in the case of all the members of our compensation committee, the independence criteria set forth in Rule 10C-1 under the Exchange Act. In making such determination, our board of directors considered the relationships that each such non-employee director has with our Company and all other facts and circumstances that our board of directors deemed relevant in determining his or her independence, including the beneficial ownership of our capital stock by each non-employee director.
Family Relationships
There are no family relationships among any of our directors, proposed directors or executive officers.
Board Committees
Our board of directors has established an Audit Committee, Compensation Committee and Nominating and Corporate Governance Committee. Our board of directors may establish other committees to facilitate the management of our business. The composition and functions of each committee are described below. Members serve on these committees until their resignation or until otherwise determined by our board of directors. Effective immediately prior to the effectiveness of the registration statement of which this prospectus forms a part, each committee will adopt a written charter that satisfies the applicable rules and regulations of the SEC and Nasdaq, which will be available on our website at www.branchoutfood.com.
Audit Committee
Our Audit Committee is responsible for, among other things:
| ● | overseeing the integrity of our financial statements and the other financial information we provide to our stockholders and other interested parties; | |
| ● | monitoring the periodic reviews of the adequacy of the auditing, accounting, and financial reporting processes and systems of internal control that are conducted by our independent registered public accounting firm and management; | |
| ● | being responsible for the selection, retention, compensation, and termination of our independent registered public accounting firm; | |
| ● | overseeing the independence and performance of our independent registered public accounting firm; | |
| ● | overseeing compliance with applicable legal and regulatory requirements as they relate to our financial statements and disclosure of financial information to our stockholders and other interested parties; | |
| ● | facilitating communication among our independent registered public accounting firm, management, and the board of directors; | |
| ● | preparing the Audit Committee report required by SEC rules and regulations to be included in our annual proxy statement; and | |
| ● | performing such other duties and responsibilities as are enumerated in and consistent with the Audit Committee charter. |
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Our Audit Committee will operate under a written charter to be effective prior to the consummation of this offering, which satisfies the requirements of applicable SEC rules and Nasdaq listing standards, which will be available on our principal corporate website located at www.branchoutfood.com concurrently with the consummation of this offering.
The board of directors has affirmatively determined that each member who serves on the Audit Committee meets the additional independence criteria applicable to Audit Committee members under SEC rules and Nasdaq listing rules. The board of directors has affirmatively determined that each member of the Audit Committee is financially literate, and that Mr. Dalfonsi meets the qualifications of an audit committee financial expert within the meaning of Item 407(d) of Regulation S-K under the Securities Act. The Audit Committee consists of Mr. Dalfonsi, Mr. Israel and Mr. Somerville. Mr. Dalfonsi serves as chair of the Audit Committee.
Compensation Committee
The Compensation Committee is responsible for, among other things:
| ● | assisting the board of directors in developing and reviewing compensation programs applicable to our executive officers and directors; | |
| ● | overseeing our Company’s overall compensation philosophy, strategy, and objectives; | |
| ● | approving the total compensation opportunity, as well as each component of compensation, paid to our executive officers and directors; | |
| ● | administering our equity-based and cash-based compensation plans applicable to our directors, officers, and employees; | |
| ● | preparing the report of the compensation committee required by SEC rules to be included in our annual proxy statement; and | |
| ● | performing such other duties and responsibilities as an enumerated and consistent with the Compensation Committee charter. |
Our Compensation Committee will operate under a written charter to be effective prior to the consummation of this offering, which satisfies the requirements of applicable Nasdaq listing standards, which will be available on our principal corporate website located at www.branchoutfood.com concurrently with the consummation of this offering.
The Board has affirmatively determined that each member of the Compensation Committee meets the independence criteria applicable to Compensation Committee members under SEC rules and Nasdaq listing rules. The Company believes that the composition of the Compensation Committee meets the requirements for independence under, and the functioning of such Compensation Committee complies with, any applicable requirements of the rules and regulations of Nasdaq listing rules and the SEC. The Compensation Committee consists of Mr. Dalfonsi, Mr. Israel and Mr. Somerville. Mr. Israel serves as chair of the Compensation Committee.
Nominating and Corporate Governance Committee
The Nominating and Corporate Governance Committee is responsible for, among other things:
| ● | assisting the board of directors in identifying candidates qualified to serve as directors, consistent with selection criteria approved by the board of directors and the nominating and corporate governance committee; | |
| ● | recommending to the board of directors the appointment of director nominees that meet the selection criteria; | |
| ● | recommending to the board of directors the appointment of directors to serve on each committee of the board of directors; | |
| ● | developing and recommending to the board of directors such corporate governance policies and procedures as the nominating and corporate governance committee determines is appropriate from time to time; | |
| ● | overseeing the performance and evaluation of the board of directors, and of each committee of the board of directors; and | |
| ● | performing such other duties and responsibilities as are consistent with the Nominating and Corporate Governance Committee charter. |
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Our Nominating and Corporate Governance Committee will operate under a written charter to be effective prior to the consummation of this offering, which satisfies the requirements of applicable Nasdaq listing standards, which will be available on our principal corporate website located at www.branchoutfood.com concurrently with the consummation of this offering.
The Board has determined that each member of the Nominating and Corporate Governance Committee is independent within the meaning of the independent director guidelines of Nasdaq listing rules. The Nominating and Corporate Governance Committee consists of Mr. Dalfonsi, Mr. Israel and Mr. Somerville. Mr. Somerville serves as chair of the Nominating and Corporate Governance Committee.
Code of Business Conduct and Ethics
Prior to the consummation of this offering, our board of directors will adopt a written Code of Business Conduct and Ethics that will apply to our directors, officers, and employees, including our Chief Executive Officer, Chief Financial Officer, and Chief Operational Officer or persons performing similar functions, in accordance with U.S. federal securities laws and the corporate governance rules of Nasdaq. The Code of Business Conduct and Ethics will be available on the investor relations portion of our website at www.branchoutfood.com concurrently upon the consummation of this offering. Any substantive amendments or waivers of the Code of Conduct or any similar code(s) subsequently adopted for senior financial officers may be made only by our Board and will be promptly disclosed as required by applicable U.S. federal securities laws and the corporate governance rules of Nasdaq.
Corporate Governance Guidelines
Prior to the consummation of this offering, our board of directors will adopt corporate governance guidelines in accordance with the corporate governance rules of Nasdaq, which will be available on our principal corporate website located at www.branchoutfood.com concurrently with the consummation of this offering.
Compensation Committee Interlocks and Insider Participation
No member of our Compensation Committee is currently, or has been at any time, one of our executive officers or employees. None of our executive officers currently serves, or has served in the past, as a member of the board of directors or compensation committee, or other committee serving an equivalent function, of any entity that has one or more executive officers serving as a member of our board of directors or on our Compensation Committee.
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Executive Compensation Summary
This section describes our compensation program for our named executive officers (“NEOs”) for the years ended December 31, 2022 and 2021. Our NEOs are:
| ● | Eric Healy - Chairman and Chief Executive Officer | |
| ● | Douglas Durst - Chief Financial Officer |
The following table provides details with respect to the total compensation of our NEOs during the fiscal years ended December 31, 2022 and 2021. Our NEOs are (a) each person who served as our Chief Executive Officer during 2022, (b) the next two most highly compensated executive officers serving as of December 31, 2022 whose total compensation exceeded $100,000 and (c) any person who could have been included under (b) except for the fact that such persons were not an executive officer on December 31, 2022.
Summary Compensation Table
| Name and Principal Position | Year | Salary ($) | Total ($) | |||||||
| Eric Healy(1) | 2022 | 147,832 | 147,832 | |||||||
| (Chairman & Chief Executive Officer) | 2021 | 50,000 | 50,000 | |||||||
| Douglas Durst(2) | 2022 | 170,140 | 170,140 | |||||||
| (Chief Financial Officer) | 2021 | 20,025 | 20,025 | |||||||
| (1) | Eric Healy, our Chairman and Chief Executive Officer, was issued an U.S. Internal Revenue Service (“IRS”) Form 1099 for his compensation for the year ended December 31, 2021, given his status as beneficial owner of the Company and the Company’s pass-through limited liability company status through the date of the Corporate Conversion, Mr. Healy’s compensation was treated as a distribution rather than employment income. | |
| (2) | Douglas Durst, our Chief Financial Officer, joined the Company in November 2021 and was awarded $40,140 and $20,025 of compensation, payable to Chase Innovations, Inc., an entity of which Mr. Durst is the sole owner, from us during the years ended December 31, 2022 and 2021, respectively. The Company paid $20,025 of the awards in 2022, and still owed Mr. Durst $40,140 as of December 31, 2022. |
Employment Agreements and Incentive Compensation
We have entered into an employment agreement with our Chief Executive Officer, dated December 6, 2022. Pursuant to such agreement, Mr. Healy has agreed to serve as Chief Executive Officer and Chairman of our board of directors in consideration for an annualized salary of $250,000, payable in regular installments in accordance with the usual payment practices of the Company. The employment agreement contemplates an annual bonus, as determined by the board of directors and possible additional bonuses for services and results achieved by Mr. Healy. Furthermore, the employment agreement requires the Company to pay a bonus to Mr. Healy of $100,000 upon the completion of this offering.
Pursuant to Mr. Healy’s employment agreement, in the event he is involuntarily terminated by the Company other than for “Cause” or if he resigns for “Good Reason,” he is entitled to receive, subject to certain conditions, (x) an amount equal to the remaining unpaid amounts under the employment term (three years from the date of the agreement), plus an additional 12 months of his then current base salary, each payable on the date of termination; (y) an amount equal to the target bonus for the year of termination of employment, payable within five days following the date of termination; and (z) continued medical and dental coverage. “Cause” and “Good Reason” are each defined in the employment agreement.
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Finally, Mr. Healy agreed to certain non-solicitation, non-disparagement and non-competition provisions for a period of 24 months following termination and to certain confidentiality obligations. Additional terms and conditions are set forth in the employment agreement.
We have entered into an employment agreement with our Chief Financial Officer dated November 22, 2021. Pursuant to such agreement, Mr. Durst has agreed to serve as Chief Financial Officer in consideration for an annualized salary of $156,000, payable in regular installments in accordance with the usual payment practices of the Company. The employment agreement contemplates quarterly bonuses after completion of this offering and equal to 20% of Mr. Durst’s base salary and based upon the attainment of no more than three mutually agreed upon quarterly management objectives and, where such objectives are not mutually agreed, Mr. Durst will be paid 80% of the target quarterly performance bonus. Furthermore, the employment agreement granted Mr. Durst options to purchase 144,000 shares of the Company’s common stock at an exercise price equal to $1.65 per share, exercisable over a ten-year period, with the options vesting monthly over an eighteen (18) month period, with the initial vesting commencing on January 1, 2022.
Pursuant to Mr. Durst’s employment agreement, in the event he resigns for “Good Reason,” all unvested stock options earned by Mr. Durst that are scheduled to become vested by the end of the full fiscal quarter following the date of termination, will be deemed fully vested and Mr. Durst shall be entitled upon such resignation for “Good Reason”, or upon a change of control of the Company, to a severance payment equal to 12 times his monthly salary. “Good Reason” is defined in the employment agreement.
Finally, Mr. Durst agreed to certain non-solicitation provisions for a period of 12 months following termination. Additional terms and conditions are set forth in the employment agreement. Mr. Durst’s employment agreement contemplates him working for the Company for 20 hours per week; the Company expects to engage Mr. Durst on a full-time basis following the completion of this offering.
2022 Equity Incentive Plan
General
Our board of directors and stockholders adopted the 2022 Equity Incentive Plan as of January 1, 2022, which provides for the grant of incentive stock options and non-qualified stock options to purchase shares of our common stock and other types of awards. The general purpose of the 2022 Equity Incentive Plan is to provide a means whereby eligible employees, officers, non-employee directors and other individual service providers develop a sense of proprietorship and personal involvement in our development and financial success, and to encourage them to devote their best efforts to our business, thereby advancing our interests and the interests of our stockholders. By means of the 2022 Equity Incentive Plan, we seek to retain the services of such eligible persons and to provide incentives for such persons to exert maximum efforts for our success and the success of our subsidiaries.
Description of the 2022 Equity Incentive Plan
The following description of the principal terms of the 2022 Equity Incentive Plan is a summary and is qualified in its entirety by the full text of the 2022 Equity Incentive Plan.
Administration. In general, the 2022 Equity Incentive Plan will be administered by the Compensation Committee of the board of directors. The Compensation Committee will determine the persons to whom options to purchase shares of common stock, stock appreciation rights (or “SARs”), restricted stock units, restricted or unrestricted shares of common stock, performance shares, performance units, incentive bonus awards, other stock-based awards and other cash-based awards may be granted. The Compensation Committee may also establish rules and regulations for the administration of the 2022 Equity Incentive Plan and amendments or modifications of outstanding awards. No options, stock purchase rights or awards may be made under the 2022 Equity Incentive Plan on or after January 7, 2032 (or, the expiration date), but the 2022 Equity Incentive Plan will continue thereafter while previously granted options, SARs or other awards remain outstanding.
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Eligibility. Persons eligible to receive options, SARs or other awards under the 2022 Equity Incentive Plan are those employees, officers, directors, consultants, advisors and other individual service providers of our Company and our subsidiaries who, in the opinion of the Compensation Committee, are in a position to contribute to our success, or any person who is determined by the Compensation Committee to be a prospective employee, officer, director, consultant, advisor or other individual service provider of the Company or any subsidiary. As of the date of this prospectus, we had four full-time employees, of which two are executive officers. As awards under the 2022 Equity Incentive Plan are within the discretion of the Compensation Committee, we cannot determine how many individuals in each of the categories described above will receive awards.
Shares Subject to the 2022 Equity Incentive Plan. The aggregate number of shares of common stock initially available for issuance in connection with options and other awards granted under the 2022 Equity Incentive Plan is 1,500,000 (which will be ratably reduced in accordance with the Reverse Stock Split). The number of shares of common stock available for issuance under the 2022 Equity Incentive Plan automatically increases on the first day of each fiscal year of the Company commencing with fiscal year 2023, and the first day of each fiscal year thereafter until the expiration date, in an amount equal to 5% percent of the total number of shares of our common stock outstanding on the last day of the immediately preceding fiscal year of the Company, unless the board of directors takes action prior thereto to provide that there will not be an increase in the share reserve for such year or that the increase in the share reserve for such year will be of a lesser number of shares of common stock than would otherwise occur.
“Incentive stock options”, or ISOs, that are intended to meet the requirements of Section 422 of the Internal Revenue Code of 1986, as amended (the “Code”) may be granted under the 2022 Equity Incentive Plan with respect to all of the shares of common stock authorized for issuance under the 2022 Equity Incentive Plan.
If any option or SAR granted under the 2022 Equity Incentive Plan terminates without having been exercised in full or if any award is forfeited, the number of shares of common stock as to which such option or award was forfeited will be available for future grants under the 2022 Equity Incentive Plan. Awards settled in cash will not count against the number of shares available for issuance under the 2022 Equity Incentive Plan.
No non-employee director may receive awards in any calendar year having an accounting value in excess of $250,000 (inclusive of any cash awards to the non-employee director for such year that are not made pursuant to the 2022 Equity Incentive Plan); provided that, in the case of a new non-employee director, such amount is increased to $350,000 for the initial year of the non-employee director’s term.
The number of shares authorized for issuance under the 2022 Equity Incentive Plan and the foregoing share limitations are subject to customary adjustments for stock splits, stock dividends or similar transactions.
We intend to file with the SEC a registration statement on Form S-8 covering the shares of our common stock issuable under the 2022 Equity Incentive Plan.
Terms and Conditions of Options. Options granted under the 2022 Equity Incentive Plan may be either ISOs or “non-statutory stock options” that do not meet the requirements of Section 422 of the Code. The Compensation Committee will determine the exercise price of options granted under the 2022 Equity Incentive Plan. The exercise price of stock options may not be less than the fair market value per share of our common stock on the date of grant (or 110% of fair market value in the case of ISOs granted to a ten-percent stockholder).
If on the date of grant the common stock is listed on a stock exchange or is quoted on the automated quotation system of the Nasdaq Stock Market, the fair market value will generally be the closing sale price on the date of grant (or the last trading day before the date of grant if no trades occurred on the date of grant). If no such prices are available, the fair market value will be determined in good faith by the Compensation Committee based on the reasonable application of a reasonable valuation method.
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No option may be exercisable for more than ten years (five years in the case of an ISO granted to a ten-percent stockholder) from the date of grant. Options granted under the 2022 Equity Incentive Plan will be exercisable at such time or times as the Compensation Committee prescribes at the time of grant. No employee may receive ISOs that first become exercisable in any calendar year in an amount exceeding $100,000. The Compensation Committee may, in its discretion, permit a holder of an option to exercise the option before it has otherwise become exercisable, in which case the shares of our common stock issued to the recipient will continue to be subject to the vesting requirements that applied to the option before exercise.
Generally, the option price may be paid in cash, by certified check, or by bank draft. The Compensation Committee may permit other methods of payment, including through delivery of shares of our common stock having a fair market value equal to the purchase price. The Compensation Committee is authorized to establish a cashless exercise program and to permit the exercise price (and/or tax withholding obligations) to be satisfied by reducing from the shares otherwise issuable upon exercise a number of shares having a fair market value equal to the exercise price.
No option may be transferred other than by will or by the laws of descent and distribution, and during a recipient’s lifetime an option may be exercised only by the recipient. However, the Compensation Committee may permit the holder of an option, SAR or other award to transfer the option, right or other award to immediate family members or a family trust for estate planning purposes. The Compensation Committee will determine the extent to which a holder of a stock option may exercise the option following termination of service with us.
Stock Appreciation Rights. The Compensation Committee may grant SARs under the 2022 Equity Incentive Plan. The Compensation Committee will determine the other terms applicable to SARs. The exercise price per share of a SAR will not be less than 100% of the fair market value of a share of our common stock on the date of grant, as determined by the Compensation Committee. The maximum term of any SAR granted under the 2022 Equity Incentive Plan is ten years from the date of grant. Generally, each SAR will entitle a participant upon exercise to an amount equal to:
| ● | the excess of the fair market value on the exercise date of one share of our common stock over the exercise price, multiplied by | |
| ● | the number of shares of common stock covered by the SAR. |
Payment may be made in shares of our common stock, in cash, or partly in common stock and partly in cash, all as determined by the Compensation Committee.
Restricted Stock and Restricted Stock Units. The Compensation Committee may award restricted common stock and/or restricted stock units under the 2022 Equity Incentive Plan. Restricted stock awards consist of shares of stock that are transferred to a participant subject to restrictions that may result in forfeiture if specified conditions are not satisfied. Restricted stock units confer the right to receive shares of our common stock, cash, or a combination of shares and cash, at a future date upon or following the attainment of certain conditions specified by the Compensation Committee. The restrictions and conditions applicable to each award of restricted stock or restricted stock units may include performance-based conditions. Dividends with respect to restricted stock may be paid to the holder of the shares as and when dividends are paid to stockholders or at the time that the restricted stock vests, as determined by the Compensation Committee. Dividend equivalent amounts may be paid with respect to restricted stock units either when cash dividends are paid to stockholders or when the units vest. Unless the Compensation Committee determines otherwise, holders of restricted stock will have the right to vote the shares.
Performance Shares and Performance Units. The Compensation Committee may award performance shares and/or performance units under the 2022 Equity Incentive Plan. Performance shares and performance units are awards, denominated in either shares or U.S. dollars, which are earned during a specified performance period subject to the attainment of performance criteria, as established by the Compensation Committee. The Compensation Committee will determine the restrictions and conditions applicable to each award of performance shares and performance units.
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Incentive Bonuses. The Compensation Committee may grant incentive bonus awards under the 2022 Equity Incentive Plan from time to time. The terms of incentive bonus awards will be set forth in award agreements. Each award agreement will have such terms and conditions as the Compensation Committee determines, including performance goals and amount of payment based on achievement of such goals. Incentive bonus awards are payable in cash and/or shares of our common stock.
Other Stock-Based and Cash-Based Awards. The Compensation Committee may award other types of equity-based or cash-based awards under the 2022 Equity Incentive Plan, including the grant or offer for sale of shares of our common stock that do not have vesting requirements and the right to receive one or more cash payments subject to satisfaction of such conditions as the Compensation Committee may impose.
Effect of Certain Corporate Transactions. The Compensation Committee may, at the time of the grant of an award provide for the effect of a change in control (as defined in the 2022 Equity Incentive Plan) on any award, including (i) accelerating or extending the time periods for exercising, vesting in, or realizing gain from any award, (ii) eliminating or modifying the performance or other conditions of an award, or (iii) providing for the cash settlement of an award for an equivalent cash value, as determined by the Compensation Committee. The Compensation Committee may, in its discretion and without the need for the consent of any recipient of an award, also take one or more of the following actions contingent upon the occurrence of a change in control: (a) cause any or all outstanding options and SARs to become immediately exercisable, in whole or in part; (b) cause any other awards to become non-forfeitable, in whole or in part; (c) cancel any option or SAR in exchange for a substitute option; (d) cancel any award of restricted stock, restricted stock units, performance shares or performance units in exchange for a similar award of the capital stock of any successor corporation; (e) cancel or terminate any award for cash and/or other substitute consideration in exchange for an amount of cash and/or property equal to the amount, if any, that would have been attained upon the exercise of such award or realization of the participant’s rights as of the date of the occurrence of the change in control, but if the change in control consideration with respect to any option or SAR does not exceed its exercise price, the option or SAR may be canceled without payment of any consideration; or (f) make such other modifications, adjustments or amendments to outstanding awards as the Compensation Committee deems necessary or appropriate.
Amendment, Termination. The board of directors may at any time amend the 2022 Equity Incentive Plan for the purpose of satisfying the requirements of the Code, or other applicable law or regulation or for any other legal purpose, provided that, without the consent of our stockholders, the board of directors may not (a) increase the number of shares of common stock available under the 2022 Equity Incentive Plan, (b) change the group of individuals eligible to receive options, SARs and/or other awards, or (c) extend the term of the 2022 Equity Incentive Plan.
Tax Withholding
As and when appropriate, we shall have the right to require each optionee purchasing shares of common stock and each grantee receiving an award of shares of common stock under the 2022 Equity Incentive Plan to pay any federal, state, or local taxes required by law to be withheld.
Option Exercises and Stock Vested in 2022
During the year ended December 31, 2022, options to purchase a total of 96,000 shares of common stock, having an exercise price of $1.65 per share, exercisable over a 10-year term, vested, as awarded to Douglas Durst, our Chief Financial Officer, on January 1, 2022. The remaining 48,000 unvested options will vest monthly over the first six months of 2023. No options were exercised, and none of our other NEOs, directors or senior management employees held stock options as of December 31, 2022. The options will be ratably adjusted down by a factor of 2.5 and the exercise prices will be adjusted upward by a factor of 2.5 in connection with the Reverse Stock Split.
Compensation of Non-Executive Directors
As the appointment of each of our non-executive directors is conditional upon completion of the offering, they have not received any compensation from us as of the date of this prospectus.
Director Compensation Arrangements
Executive or employee members of the board of directors are not compensated for their services as directors, other than being reimbursed for out-of-pocket expenses incurred in connection with rendering such services.
The independent members of the board of directors will each be compensated for their services as directors through a grant of 12,000 stock option grants and annual payments of $30,000 each. Such grants shall generally vest ratably in equal installments on each of the first anniversaries of the date of grant, and which will be pro-rated for any partial year of service. An additional $42,000 fee will also be paid to the chair of the Audit Committee. Director compensation will be determined by our Compensation Committee on an annual basis.
Compensation in Connection with this Offering
None of our executive officers, directors or employees has any arrangement or understanding with us concerning any type of compensation based solely on the consummation of this offering other than our Chief Executive Officer who is to receive a bonus of $100,000 upon consummation of this offering pursuant to the terms of his employment agreement with us.
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CERTAIN RELATIONSHIPS AND RELATED PERSON TRANSACTIONS
A “related person transaction” is a transaction, arrangement or relationship (or any series of similar transactions, arrangements or relationships) or a proposed transaction in which (i) we were, are or will be a participant, (ii) the amount involved exceeds $120,000 and (iii) any related person had, has or will have a direct or indirect material interest.
A “related person” means any person who is, or at any time since January 1, 2020 was:
| ● | a trustee, a nominee for trustee or an executive officer of the Company; |
| ● | known to us to be the beneficial owner of more than 5% of the outstanding shares of common shares when a transaction in which such person had a direct or indirect material interest occurred or existed; |
| ● | an immediate family member of any of the persons referenced in the preceding two bullets, which means any child, stepchild, parent, stepparent, spouse, sibling, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law or sister-in-law of any of the persons referenced in the preceding two bullets, and any person (other than a tenant or employee) sharing the household of any of the persons referenced in the preceding two bullets; or |
| ● | a firm, corporation or other entity in which any of the foregoing persons is a partner or principal or in a similar position or in which such person has a 10% or greater beneficial ownership interest. |
Policies and Procedures for Related Person Transactions
The Company, in connection with this offering, plans to adopt a formal policy in regard to related persons, effective upon the consummation of this offering. The policy will require all future related person transactions to be approved in advance by our Audit Committee. Any request for such a transaction will be presented to our Audit Committee for review, consideration, and approval. In approving or rejecting any such proposal, our Audit Committee will consider the relevant facts and circumstances available and deemed relevant to the Audit Committee, including, but not limited to, the extent of the related party’s interest in the transaction, and whether the transaction is on terms no less favorable to us than terms we could have generally obtained from an unaffiliated third party under the same or similar circumstances.
Certain historical related person transactions described in this prospectus were reviewed and approved or ratified in accordance with our then existing policies, Code of Business Conduct and Ethics, articles of incorporation and bylaws, and Oregon or Nevada law, as applicable.
Related Person Transactions
Convertible Notes Payable
On May 28, 2020, the Company sold the Controller Note to the Company’s Controller, Chris Coulter, in the face amount of $50,000. The Controller Note originally automatically converted upon (i) a Qualified Financing, consisting of the closing of the sale of shares of its stock of at least $1,000,000, at a conversion rate of the lesser of: (i) the product of (x) eight-tenths (0.8) and (y) the price per share paid by the purchasers of the preferred stock sold in the Qualified Financing and (ii) the price per share obtained by dividing the “Valuation Cap” by the Company’s fully-diluted capitalization immediately prior to the Qualified Financing (excluding any shares issued upon conversion of convertible debt).
On December 17, 2021, the Controller Note was amended to be automatically convertible upon the date on which a registration statement for the Company’s underwritten public offering of its common stock with total proceeds to the Company of not less than $10,000,000 becomes effective at a fixed conversion price of $1.65 per common share. The Controller Note was later amended to lower the public offering proceeds threshold to $5,000,000. Pursuant to the amended Controller note, all interest will cease accruing as of a date selected by the board of directors of the Company that is up to 10 days prior to the effective date of the registration statement filed in connection with the underwritten public offering of common stock.
On December 31, 2021, the Company sold the CFO Note to the Company’s Chief Financial Officer, Douglas Durst in the face amount of $90,000 on the same terms and conditions as the amended Controller Note.
Common Stock Sales
On December 31, 2021, the Company sold 6,060 shares of common stock in connection with a private placement offering to the Company’s Chief Financial Officer, Douglas Durst, at $1.65 per share, for total proceeds of $9,999, pursuant to an exemption from the registration requirements of the Securities Act provided by Regulation D promulgated thereunder.
Transactions with Eagle Vision
In December 2020 and May 2021, AvoLov LLC, the predecessor to the Company, issued two warrants to Eagle Vision, which is indirectly owned by John Dalfonsi, a director of the Company, to purchase Class A Units of AvoLov, LLC. Upon the LLC conversion of the Company, the warrants were amended to purchase up to 38,457 shares of common stock at an exercise price of $2.60 per share and up to 19,228 shares of common stock at an exercise price of $2.84 per share. The warrants will be amended in connection with the Reverse Stock Split to decrease the number of shares into which they are exercisable by a factor of 2.5 and to increase the exercise price by a factor of 2.5.
On April 12, 2022, EagleVision and the Company entered into a consulting agreement engagement letter (the “Eagle Vision Consulting Agreement”) pursuant to which EagleVision provides capital formation and initial public offering consulting services to the Company. Pursuant to the Eagle Vision Consulting Agreement, the Company pays EagleVision $6,000 per month starting on April 12, 2022 until the end of the month in which the initial public offering of the Company is completed. In addition, the Company issued (i) warrants to purchase up to 45,833 shares of common stock at an exercise price of $3.00 in May 2022 and (ii) warrants to purchase up to 8,485 shares of common stock at an exercise price of $3.00 per share in June 2022 for Eagle Vision’s services.
LLC Member Units of AvoLov LLC Issued for Services
During the year ended December 31, 2021, the Company awarded, or vested, approximately an aggregate thirty-one (31) LLC member units of AvoLov LLC to its members for services provided. The aggregate fair value of the LLC member units was $132,169 based on a valuation price per unit of approximately $4,209 per unit on the date of grant.
During the year ended December 31, 2020, the Company awarded, or vested, approximately an aggregate ten (10) LLC member units of AvoLov LLC to its members for services provided. The aggregate fair value of the LLC member units was $44,089 based on a valuation price per unit of approximately $4,209 per unit on the date of grant.
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Manufacturing Distribution Agreement
On February 4, 2021, the Company entered into a Manufacturing and Distributorship Agreement (“MDA”) with Natural Nutrition SpA, a Chilean company (“Nanuva”), in which the Company loaned $500,000 to Nanuva (“Advance Payment”) to help finance the capital investment needed for Nanuva to purchase two industrial fruit drying machines to be used in servicing the Company’s manufacturing needs. Pursuant to the MDA, the Company will recover the Advance Payment no later than May 31, 2027, and the loan bears interest at 3% per annum. The loan shall be repaid pursuant to a two-dollar ($2/kg) deduction in the price of any product exported by Nanuva to the Company with certain mandatory minimum annual payments. Repayments commenced on the earlier of a) the first invoice issued by Nanuva after installation of the drying equipment, or b) June 30, 2021. As of December 31, 2022, a total of $116,594 had been repaid as a reduction of inventory costs, consisting of $102,278 of principal and $14,316 of interest. In addition, the Company received a cash payment of $15,000, consisting of $13,093 of principal and $1,907 of interest, on March 24, 2021. As of December 31, 2022, a total of $392,625 was due from Nanuva, consisting of $384,628 of principal and $7,996 of unpaid interest. The MDA expires on May 31, 2027, with automatic annual renewals thereafter, unless it is terminated in accordance with the provisions within the agreement. The loan is collateralized by a second lien in the equipment. Pursuant to the MDA, the Company has been appointed as the distributor with exclusivity granted to the Company for the following territories:
| Product | Exclusivity Territories | Minimum Volume (Kg/month)(“MOQ”) | ||||
| Avocado Powder | Worldwide (except Chile) | 1,000 | ||||
| Banana Chips | Worldwide (except Chile) | 1,000 | ||||
| Avocado Snacks | North America (Canada and USA) | 1,000 | ||||
| Avocado Chips | Worldwide | 1,000 | ||||
| Other Powders | No Exclusivity | -0- | ||||
Contributed Capital from the Gain on Sale of Equipment
On December 31, 2020, the Company sold equipment to HHC, in exchange for a $100,000 promissory note. HHC is a limited liability company in which the Company’s Chief Executive Officer, Eric Healy, and the Company’s Controller, Chris Coulter, collectively own 54% of the membership interests. The promissory note carried a 5% interest rate, matured on January 1, 2022, and called for monthly payments of principal and interest in the amount of $417, commencing on January 1, 2021. On March 5, 2021, HHC settled $66,059 of the loan by assuming a debt obligation of the Company owed to Cedar Holdings, LLC of $66,059. No gain or loss was recognized on the exchange. On May 3, 2021, the $33,941 balance of the note receivable was paid by HHC and the promissory note was cancelled.
Accrued Compensation
As of December 31, 2022 and 2021, the Company owed Chase Innovations, Inc., a company owned by the Company’s Chief Financial Officer, Douglas Durst, $40,140 and $20,025, respectively, for services rendered during the years ended December 2022 and 2021, respectively.
Indemnity Agreements
The Company plans to enter into indemnification agreements with each of our directors and executive officers, the form of which is attached as an exhibit to the registration statement of which this prospectus forms a part. The indemnification agreements and our amended and restated articles of incorporation and amended and restated bylaws will require us to indemnify our directors and officers to the fullest extent permitted by Nevada law.
To that extent, as indemnification for liabilities arising under the Securities Act, may be permitted to directors, officers or persons controlling the registrant pursuant to the foregoing provisions, the registrant has been informed that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of the date of this prospectus regarding the beneficial ownership of our common stock by:
| ● | each of our stockholders who is known by us to beneficially own 5% or more of our common stock; | |
| ● | each of our executive officers; | |
| ● | each of our directors and proposed directors; and | |
| ● | all of our directors and current executive officers as a group. |
Beneficial ownership is determined based on the rules and regulations of the Commission as defined in Rule 13d-3 of the Exchange Act. A person has beneficial ownership of shares if such individual has the power to vote and/or dispose of shares. This power may be sole or shared and direct or indirect. In computing the number of shares beneficially owned by a person and the percentage ownership of that person, shares of common stock that are subject to RSUs, options or warrants held by that person and exercisable as of, or within 60 days of, the date of this prospectus are counted as outstanding. These shares, however, are not counted as outstanding for the purposes of computing the percentage ownership of any other person(s). Except as may be indicated in the footnotes to this table and pursuant to applicable community property laws, each person named in the table has sole voting and dispositive power with respect to the shares of common stock set forth opposite that person’s name. The inclusion of shares in the table does not, however, constitute an admission that the named stockholder is a direct or indirect beneficial owner of those shares. Unless otherwise indicated, (i) each person or entity named in the table has sole voting power and investment power (or shares that power with that person’s spouse) with respect to all shares of capital stock listed as owned by that person or entity, and (ii) the address of each person or entity named in the table is c/o BranchOut Food Inc., 205 SE Davis Avenue, Suite C, Bend, Oregon 97702.
The percentage of shares beneficially owned is computed on the basis of 2,767,734 shares of our common stock which will be outstanding immediately prior to this offering and after giving effect to (x) the Convertible Note Conversion and (y) the Reverse Stock Split and excluding: (i) outstanding options to purchase approximately 92,700 shares of our common stock which were issued to various individuals; (ii) outstanding warrants to purchase 365,141 shares of our common stock issued to various individuals, consisting of (x) warrants to purchase 189,167 shares with an exercise price of $6.50 per share, (y) warrants to purchase 154,246 shares with an exercise price of $7.10 per share, and (z) warrants to purchase 21,728 shares with an exercise price of $7.50 per share; (iv) 187,500 shares of our common stock underlying the underwriters’ over-allotment option; and (v) warrants to purchase up to 86,250 shares of our common stock issuable to the Representative in connection with this offering at a price of 120% of the initial public offering price.
| Shares of Common Stock Beneficially Owned Prior to this | Percentage of Shares of Common Stock Beneficially Owned | |||||||||||
| Name and Address of Beneficial Owner | Offering | Before Offering | After Offering | |||||||||
| Named Executive Officers and Directors: | ||||||||||||
| Eric Healy | 818,083 | 29.6 | % | 20.4 | % | |||||||
| Douglas Durst(1) | 86,522 | 3.1 | % | 2.1 | % | |||||||
| John Dalfonsi(2) | 44,803 | 1.6 | % | 1.1 | % | |||||||
| David Israel(3) | 265,472 | 9.6 | % | 6.6 | % | |||||||
| Greg Somerville | * | * | * | |||||||||
| All Executive Officers and Directors as a Group (5 Individuals) | 1,214,880 | 43.8 | % | 30.2 | % | |||||||
| 5% or Greater Stockholders: | ||||||||||||
| Eric Healy | 818,083 | 29.6 | % | 20.4 | % | |||||||
| David Israel | 265,472 | 9.6 | % | 6.6 | % | |||||||
| The Donald A. Foss Irrevocable Living Trust dated August 14, 2022(4) | 533,688 | 19.2 | % | 13.2 | % | |||||||
| Fluffco, LLC(5) | 210,120 | 7.4 | % | 5.1 | % | |||||||
*Indicates beneficial ownership of less than 1%.
| (1) | Includes 54,400 shares which may be purchased pursuant to stock options exercisable within 60 days of the date of this prospectus. |
| (2) | Includes 44,803 shares which may be purchased pursuant to stock warrants exercisable within 60 days of the date of this prospectus and held in the name of EagleVision, which is an entity 100% owned by the spouse of Mr. Dalfonsi. The spouse of Mr. Dalfonsi has the sole voting and dispositive power over these shares. |
| (3) | Includes 16,265 shares held in the name of BFY Food Group, LLC, which is an entity in which David Israel is the beneficial owner. Mr. Israel has the sole voting and dispositive power over these shares. |
| (4) | Includes shares underlying warrants to purchase 103,938 shares at $7.50 per share held by the trust and reflects 325,812 shares issuable upon conversion of convertible notes held by the trust pursuant to the Convertible Notes Conversion and as adjusted to reflect the Reverse Stock Split. |
| (5) | Includes shares underlying warrants to purchase 67,975 shares at $6.50 per share held in the name of Fluffco, LLC, which is an entity in which Irving Levin is the beneficial owner. Mr. Levine has the sole voting and dispositive power over these shares and 142,145 shares issuable upon conversion of convertible notes held by Fluffco, LLC pursuant to the Convertible Note Conversion and as adjusted to reflect the Reverse Stock Split. |
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The following descriptions are summaries of the material terms of our articles of incorporation and bylaws. The descriptions of the common stock and preferred stock give effect to changes to our capital structure that will occur immediately prior to the completion of this offering. When we refer to our articles of incorporation and bylaws in this prospectus, unless the context provides otherwise, we are referring to our articles of incorporation and bylaws effective upon the effective date of the registration statement of which this prospectus forms a part. Copies of our articles of incorporation and bylaws are filed as exhibits to the registration statement of which this prospectus is a part.
General
As of the date of this prospectus, the total number of shares of all classes of capital stock that our Company is authorized to issue is 220,000,000 shares, consisting of (i) 200,000,000 shares of common stock, par value $0.001 per share, and (ii) 20,000,000 shares of preferred stock, par value $0.001 per share. Promptly after the registration statement of which this prospectus forms a part becomes effective, the authorized capital stock will be adjusted by the Reverse Stock Split. Immediately following the Reverse Stock Split, our Company will be authorized to issue 100,000,000 shares, consisting of (i) 80,000,000 shares of common stock, par value $0.001 per share, and (ii) 8,000,000 shares of preferred stock, par value $0.001 per share.
As of the date of this prospectus, the Company had, outstanding 2,767,734 shares of common stock held by approximately 14 stockholders of record, and had no shares of preferred stock outstanding. Upon the effectiveness of the registration statement of which this prospectus forms a part, in connection with this offering, the Company will effect the Convertible Note Conversion. Promptly after the effectiveness of the registration statement in connection with this offering and before the initial closing of this offering, the Company will effect the Reverse Stock Split. Immediately after the Reverse Stock Split and giving effect to the Convertible Note Conversion, the Company will have outstanding 2,767,734 shares of common stock, excluding (i) outstanding options to purchase approximately 92,700 shares of our common stock which were issued to various individuals; (ii) outstanding warrants to purchase 365,141 shares of our common stock issued to various individuals, consisting of (x) warrants to purchase 189,167 shares with an exercise price of $6.50 per share, (y) warrants to purchase 154,246 shares with an exercise price of $7.10 per share, and (z) warrants to purchase 21,728 shares with an exercise price of $7.50 per share; (iv) 187,500 shares of our common stock underlying the underwriters’ over-allotment option; and (v) warrants to purchase up to 86,250 shares of our common stock issuable to the Representative in connection with this offering at a price of 120% of the initial public offering price.
Common Stock
The holders of our common stock are entitled to one vote for each share held on all matters submitted to a vote of the stockholders. The holders of our common stock do not have any cumulative voting rights. Holders of our common stock are entitled to receive ratably any dividends declared by the board of directors out of funds legally available for that purpose, subject to any preferential dividend rights of any outstanding preferred stock. Our common stock has no preemptive rights, conversion rights or other subscription rights or redemption or sinking fund provisions. We currently do not have any shares of, or securities convertible into, preferred stock outstanding.
In the event of our liquidation, dissolution or winding up, holders of our common stock will be entitled to share ratably in all assets remaining after payment of all debts and other liabilities and any liquidation preference of any outstanding preferred stock.
Preferred Stock
While we are authorized to issue up to 20,000,000 shares of preferred stock, par value $0.001 per share, our Articles of Incorporation do not assign any rights to our preferred stock and we have not issued any shares of preferred stock. Following the completion of the Reverse Stock Split, the number of authorized preferred shares will be 8,000,000, par value $0.001 per share.
Warrants
As of May 10, 2023, we had outstanding warrants to purchase up to 365,141 shares (as adjusted to reflect the Reverse Stock Split) of common stock at a weighted average exercise price of approximately $2.79 per share. The warrants had a weighted average remaining exercise period as of December 31, 2022 of approximately 7.9 years.
Options
As of May 10, 2023, we had outstanding options to purchase 97,600 shares (as adjusted to reflect the Reverse Stock Split) of common stock granted to various individuals, which had an exercise price of $4.13 The options had a weighted average remaining exercise period as of December 31, 2022 of approximately 9 years.
Convertible Notes
As of May 10, 2023, the Company had outstanding convertible notes the principal and accrued interest of which will automatically convert into approximately 3,917,335 shares of common stock upon the effectiveness of the registration statement in relation to this offering, subject to adjustment after the Reverse Stock Split.
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Anti-Takeover Effects of Provisions of Our Charter Documents
Certain provisions of Nevada law and our bylaws may have the effect of delaying, deferring or preventing another party from acquiring control of the Company. These provisions may discourage and prevent coercive takeover practices and inadequate takeover bids.
Nevada Law
Nevada law contains a provision governing “acquisition of controlling interest.” This law provides generally that any person or entity that acquires 20% or more of the outstanding voting shares of a publicly-held Nevada corporation in the secondary public or private market may be denied voting rights with respect to the acquired shares, unless a majority of the disinterested stockholders of the corporation elects to restore such voting rights in whole or in part. The control share acquisition act provides that a person or entity acquires “control shares” whenever it acquires shares that, but for the operation of the control share acquisition act, would bring its voting power within any of the following three ranges: 20 to 33-1/3%; 33-1/3 to 50%; or more than 50%.
A “control share acquisition” is generally defined as the direct or indirect acquisition of either ownership or voting power associated with issued and outstanding control shares. The stockholders or board of directors of a corporation may elect to exempt the stock of the corporation from the provisions of the control share acquisition act through adoption of a provision to that effect in the articles of incorporation or bylaws of the corporation. Our articles of incorporation and bylaws do not exempt our common stock from the control share acquisition act.
The control share acquisition act is applicable only to shares of “Issuing Corporations” as defined by the Nevada law. An Issuing Corporation is a Nevada corporation which (i) has 200 or more stockholders, with at least 100 of such stockholders being both stockholders of record and residents of Nevada, and (ii) does business in Nevada directly or through an affiliated corporation.
At this time, we do not believe we have 100 stockholders of record resident of Nevada and we do not conduct business in Nevada directly. Therefore, the provisions of the control share acquisition act are believed not to apply to acquisitions of our shares and will not until such time as these requirements have been met. At such time as they may apply, the provisions of the control share acquisition act may discourage companies or persons interested in acquiring a significant interest in or control of us, regardless of whether such acquisition may be in the interest of our stockholders.
The Nevada “Combination with Interested Stockholders Statute” may also have an effect of delaying or making it more difficult to effect a change in control of us. This statute prevents an “interested stockholder” and a resident domestic Nevada corporation from entering into a “combination,” unless certain conditions are met. The statute defines “combination” to include any merger or consolidation with an “interested stockholder,” or any sale, lease, exchange, mortgage, pledge, transfer or other disposition, in one transaction or a series of transactions with an “interested stockholder” having (i) an aggregate market value equal to 5% or more of the aggregate market value of the assets of the corporation, (ii) an aggregate market value equal to 5% or more of the aggregate market value of all outstanding shares of the corporation, or (iii) representing 10% or more of the earning power or net income of the corporation.
An “interested stockholder” means the beneficial owner of 10% or more of the voting shares of a resident domestic corporation, or an affiliate or associate thereof. A corporation affected by the statute may not engage in a “combination” within three years after the interested stockholder acquires its shares unless the combination or purchase is approved by the board of directors before the interested stockholder acquired such shares. If approval is not obtained, then after the expiration of the three-year period, the business combination may be consummated with the approval of the board of directors or a majority of the voting power held by disinterested stockholders, or if the consideration to be paid by the interested stockholder is at least equal to the highest of (i) the highest price per share paid by the interested stockholder within the three years immediately preceding the date of the announcement of the combination or in the transaction in which he became an interested stockholder, whichever is higher, (ii) the market value per common share on the date of announcement of the combination or the date the interested stockholder acquired the shares, whichever is higher, or (iii) if higher for the holders of preferred stock, the highest liquidation value of the preferred stock.
Articles of Incorporation and Bylaws
Our articles of incorporation are silent as to cumulative voting rights in the election of our directors. Nevada law requires the existence of cumulative voting rights to be provided for by a corporation’s articles of incorporation. In the event that a few stockholders end up owning a significant portion of our issued and outstanding common stock, the lack of cumulative voting would make it more difficult for other stockholders to replace our board of directors or for a third party to obtain control of us by replacing our board of directors. Our articles of incorporation and bylaws do not contain any explicit provisions that would have an effect of delaying, deferring or preventing a change in control of us.
Registration Rights
During the years ended December 31, 2020 and 2021, the Company issued senior secured promissory notes in aggregate principal amount of $2,250,000. The notes included detachable warrants to purchase 858,520 shares of common stock at exercise prices of between $2.60 and $2.84 per share. The warrants are exercisable for a period of 10 years from date of grant. The related subscription agreement included an obligation by the Company to register the shares underlying these warrants upon the Company’s initial public offering. We expect to register the shares underlying these warrants by filing a separate registration statement with the SEC substantially concurrently with this offering. Of the shares underlying these warrants, approximately 216,716 shares are subject to lock-up for a period of 360 days after the closing of the offering.
Transfer Agent and Registrar
The transfer agent and registrar for our common shares is Securitize, LLC., formerly Pacific Stock Transfer Company. Securitize’s address and phone number is: 6725 Via Austi Pkwy, Suite 300, Las Vegas, Nevada 89119; telephone number (800) 785-7782. The email address for the transfer agent is: info@securitizemarkets.io. Further information about the transfer agent is available at its website, located at: https://securitize.io/pacific-stock-transfer.
Listing
We have applied to list our common stock on Nasdaq under the symbol “BOF”.
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SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for our common stock. The sale of a substantial amount of our common stock in the public market after this offering could adversely affect the prevailing market price of our common stock. Furthermore, more than % of our common stock outstanding prior to the consummation of this offering will be subject to the contractual and legal restrictions on resale described below. The sale of a substantial amount of common stock in the public market after these restrictions lapse, or the expectation that such a sale may occur, could adversely affect the prevailing market price of our common stock and our ability to raise equity capital in the future.
Upon consummation of the Convertible Note Conversion, the Reverse Split and this offering, we expect to have outstanding an aggregate of 4,017,734 shares of our common stock, assuming no exercise of outstanding options and assuming that the underwriters have not exercised their over-allotment option. All of the shares of common stock sold in this offering will be freely transferable without restriction or further registration under the Securities Act by persons other than “affiliates,” as that term is defined in Rule 144 under the Securities Act. Generally, the balance of our outstanding shares of common stock are “restricted securities” within the meaning of Rule 144 under the Securities Act, and the sale of those shares will be subject to the limitations and restrictions that are described below. Shares of our common stock that are not restricted securities and are purchased by our affiliates will be “control securities” under Rule 144. Restricted securities may be sold in the public market only if registered under the Securities Act or if they qualify for an exemption from registration under Rule 144 or Rule 701 under the Securities Act. These rules are summarized below. Control securities may be sold in the public market subject to the restrictions set forth in Rule 144, other than the holding period requirement.
Upon the expiration of the lock-up agreements described below 360 days after the date of this prospectus, and subject to the provisions of Rule 144 and the potential exercise of any warrants or options with respect thereto, an additional 1,958,688 shares will be available for sale in the public market. The sale of these restricted securities is subject, in the case of shares held by affiliates, to the volume restrictions contained in Rule 144.
Immediately prior to this offering, there were 2,767,734 shares outstanding after giving effect to the Convertible Note Conversion and the Reverse Stock Split, 2,767,734 of which 1,214,880 shares were beneficially owned by officers and directors of the Company. Under the Convertible Note Conversion, which will take place upon the effectiveness of the registration statement in relation to this offering, 3,917,335 shares (on a pre-Reverse Stock Split basis) will be issued pursuant to outstanding convertible notes. Promptly after the Convertible Note Conversion and prior to the closing of this offering, the Company will effect the Reverse Stock Split. The 2,767,734 total shares outstanding excludes: (i) outstanding options to purchase approximately 92,700 shares of our common stock which were issued to various individuals; (ii) outstanding warrants to purchase 365,141 shares of our common stock issued to various individuals, consisting of (x) warrants to purchase 189,167 shares with an exercise price of $6.50 per share, (y) warrants to purchase 154,246 shares with an exercise price of $7.10 per share, and (z) warrants to purchase 21,728 shares with an exercise price of $7.50 per share; (iv) 187,500 shares of our common stock underlying the underwriters’ over-allotment option; and (v) warrants to purchase up to 86,250 shares of our common stock issuable to the Representative in connection with this offering at a price of 120% of the initial public offering price.
Lock-Up Agreements
In connection with this offering, we and our executive officers and directors and certain of our shareholders, including holders of more than 5% of the outstanding shares of our common stock, have agreed with the underwriters not to sell or transfer any common stock or securities convertible into, exchangeable for, exercisable for, or repayable with common stock, for 360 days after the date of this prospectus without first obtaining the written consent of, subject to certain limited exceptions. This lock-up provision applies to common stock and to securities convertible into or exchangeable or exercisable for or repayable with common stock. It also applies to common stock owned now or acquired later by the person executing the agreement or for which the person executing the agreement later acquires the power of disposition. For a further description of these lock-up agreements, see “Underwriting.”
Rule 144
In general, under Rule 144 as in effect on the date of this prospectus, beginning 90 days after the consummation of this offering, a person who is an affiliate, and who has beneficially owned our common stock for at least six months, is entitled to sell in any three-month period a number of shares that does not exceed the greater of:
| ● | 1% of the number of shares of our common stock then outstanding, which will equal approximately 40,216 shares immediately after consummation of this offering, assuming no exercise of the underwriters’ option to purchase additional shares; or | |
| ● | 1% of the average weekly trading volume of our common stock during the four calendar weeks preceding the filing of a notice on Form 144 with respect to that sale provided that, in each case, that we are subject to the Exchange Act for at least 90 days before the sale. |
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Sales by our affiliates under Rule 144 are also subject to manner of sale provisions and notice requirements, as applicable, and to the availability of current public information about us. An “affiliate” is a person that directly, or indirectly through one or more intermediaries, controls or is controlled by, or is under common control with an issuer.
Under Rule 144, a person who is not deemed to have been an affiliate of ours at any time during the 90 days preceding a sale, and who has beneficially owned the shares proposed to be sold for at least six months, would be entitled to sell those shares subject only to availability of current public information about us, and after beneficially owning such shares for at least twelve months, would be entitled to sell an unlimited number of shares without restriction.
To the extent that our affiliates sell their common stock, other than pursuant to Rule 144 or a registration statement, the purchaser’s holding period for the purpose of effecting a sale under Rule 144 commences on the date of transfer from the affiliate.
Resales of restricted shares of our common stock by non-affiliates are not subject to the manner of sale, volume limitation or notice filing provisions of Rule 144, described above.
Rule 701
In general, under Rule 701 as in effect on the date of this prospectus, any of our employees, directors, officers, consultants or advisors who purchased shares from us in reliance on Rule 701 in connection with a compensatory stock or option plan or other written agreement before the effective date of this offering, or who purchased shares from us after that date upon the exercise of options granted before that date, are eligible to resell such shares 90 days after the effective date of this offering in reliance upon Rule 144. If such person is not an affiliate, such sale may be made subject only to the manner of sale provisions of Rule 144. If such a person is an affiliate, such sale may be made under Rule 144 without compliance with the holding period requirement, but subject to the other Rule 144 restrictions described above. However, substantially all Rule 701 shares are subject to the lock-up agreements as described above and will become eligible for sale in compliance with Rule 144 only upon the expiration of the restrictions set forth in those agreements.
The SEC has indicated that Rule 701 will apply to typical options granted by an issuer before it becomes subject to the reporting requirements of the Exchange Act, along with the shares acquired upon exercise of such options, including exercises after an issuer becomes subject to the reporting requirements of the Exchange Act.
Prior to this offering, there has been no public market for our common stock, and a liquid trading market for our common stock may not develop or be sustained after this offering. Future sales of our common stock in the public markets, or the availability of such shares for sale in the public markets, could adversely affect market prices prevailing from time to time. Furthermore, only a limited number of shares of our common stock may be available for sale in the public markets after the closing of this offering due to contractual, legal and other restrictions on resale. These factors could also make it more difficult to raise funds through future offerings of our common stock. All of the shares sold in this offering will be freely tradable without restriction or further registration under the Securities Act, unless such shares are held by any of our “affiliates” as such term is defined in Rule 144 under the Securities Act.
Stock Plans
We intend to file a registration statement or statements on Form S-8 under the Securities Act covering shares of common stock reserved for issuance under our 2022 Equity Incentive Plan including any stock options approved in connection with this offering. These registration statements are expected to be filed as soon as practicable after the closing date of this offering. Shares issued upon the exercise of stock options after the effective date of the applicable Form S-8 registration statement will be eligible for resale in the public market without restriction, subject to Rule 144 limitations applicable to affiliates and the lock-up agreements described above.
Registration Rights
Upon the closing of this offering, the holders of 1,934,506 shares of our common stock or their transferees will be entitled to various rights with respect to the registration of these shares under the Securities Act. Registration of these shares under the Securities Act would result in these shares becoming fully tradable without restriction under the Securities Act immediately upon the effectiveness of the registration, except for shares purchased by affiliates. See “Description of Securities—Registration Rights” for additional information. Shares covered by a registration statement will be eligible for sale in the public market upon the expiration or release from the terms of the lock-up agreement.
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MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS FOR NON-U.S. HOLDERS OF COMMON STOCK
The following is a summary of the material U.S. federal income tax considerations applicable to non-U.S. holders (as defined herein) with respect to their ownership and disposition of shares of our common stock issued pursuant to this offering, but does not purport to be a complete analysis of all the potential tax considerations relating thereto. This summary is based on current provisions of the Code, existing U.S. Treasury Regulations promulgated thereunder, published administrative pronouncements and rulings of the, and judicial decisions, all as in effect as of the date of this prospectus. These authorities are subject to change and to differing interpretation, possibly with retroactive effect. Any change or differing interpretation could alter the tax consequences to non-U.S. holders described in this prospectus. There can be no assurance that a court or the IRS will not challenge one or more of the tax consequences described herein, and we have not obtained, nor do we intend to obtain, a ruling with respect to the U.S. federal income tax consequences to a non-U.S. holder of the purchase, ownership or disposition of our common stock.
In addition, this summary does not address the tax treatment of partnerships (or entities or arrangements that are treated as partnerships for U.S. federal income tax purposes) or persons that hold their common stock through partnerships. If a partnership, including any entity or arrangement treated as a partnership for U.S. federal income tax purposes, holds shares of our common stock, the U.S. federal income tax treatment of a partner in such partnership will generally depend upon the status of the partner and the activities of the partnership. Such partners and partnerships should consult their tax advisors regarding the tax consequences of the purchase, ownership and disposition of our common stock.
All prospective non-U.S. holders of our common stock should consult their tax advisors with respect to the U.S. federal, state, local and non-U.S. tax consequences of the purchase, ownership and disposition of our common stock. In general, a non-U.S. holder means a beneficial owner of our common stock (other than a partnership or an entity or arrangement treated as a partnership for U.S. federal income tax purposes) that is not, for U.S. federal income tax purposes:
| ● | an individual who is a citizen or resident of the United States; | |
| ● | a corporation, or an entity treated as a corporation for U.S. federal income tax purposes, created or organized in the United States or under the laws of the United States or of any state thereof or the District of Columbia; | |
| ● | an estate, the income of which is subject to U.S. federal income tax regardless of its source; or | |
| ● | a trust if (1) a U.S. court can exercise primary supervision over the trust’s administration and one or more U.S. persons have the authority to control all of the trust’s substantial decisions or (2) the trust has a valid election in effect under applicable U.S. Treasury Regulations to be treated as a U.S. person. |
We assume in this discussion that a non-U.S. holder holds shares of our common stock as a capital asset within the meaning of Section 1221 of the Code (generally, property held for investment). This discussion does not address all aspects of U.S. federal income taxation that may be relevant to a particular non-U.S. holder in light of that non-U.S. holder’s individual circumstances, nor does it address any alternative minimum, Medicare contribution, estate or gift tax consequences, or any aspects of U.S. state, local or non-U.S. taxes. This discussion also does not consider any specific facts or circumstances that may apply to a non-U.S. holder and does not address the special tax rules applicable to particular non-U.S. holders, such as holders that own, or are deemed to own, more than 5% of our capital stock (except to the extent specifically set forth below), corporations that accumulate earnings to avoid U.S. federal income tax, tax-exempt organizations, banks, financial institutions, insurance companies, brokers, dealers or traders in securities, commodities or currencies, tax-qualified retirement plans, holders who hold or receive our common stock pursuant to the exercise of employee stock options or otherwise as compensation, holders holding our common stock as part of a hedge, straddle or other risk reduction strategy, conversion transaction or other integrated investment, holders deemed to sell our common stock under the constructive sale provisions of the Code, controlled foreign corporations, passive foreign investment companies and certain former U.S. citizens or long-term residents.
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Distributions on Our Common Stock
Distributions, if any, on our common stock generally will constitute dividends for U.S. federal income tax purposes to the extent paid from our current or accumulated earnings and profits, as determined under U.S. federal income tax principles. If a distribution exceeds our current and accumulated earnings and profits, the excess will be treated as a tax-free return of the non-U.S. holder’s investment, up to such holder’s adjusted tax basis in the common stock. Any remaining excess will be treated as capital gain from the sale or exchange of such common stock, subject to the tax treatment described below in “Gain on Sale, Exchange or Other Disposition of Our Common Stock”. Any such distribution will also be subject to the discussion below under the heading “Foreign Accounts”.
Dividends paid to a non-U.S. holder will generally be subject to withholding of U.S. federal income tax at a 30% rate or such lower rate as may be specified by an applicable income tax treaty between the United States and such holder’s country of residence.
Dividends that are treated as effectively connected with a trade or business conducted by a non-U.S. holder within the United States and, if an applicable income tax treaty so provides, that are attributable to a permanent establishment or a fixed base maintained by the non-U.S. holder within the United States, are generally exempt from the 30% withholding tax if the non-U.S. holder satisfies applicable certification and disclosure requirements. However, such U.S. effectively connected income, net of specified deductions and credits, is taxed at the same graduated U.S. federal income tax rates applicable to U.S. persons (as defined in the Code). Any U.S. effectively connected income received by a non-U.S. holder that is a corporation may also, under certain circumstances, be subject to an additional “branch profits tax” at a 30% rate or such lower rate as may be specified by an applicable income tax treaty between the United States and such holder’s country of residence.
To claim a reduction or exemption from withholding, a non-U.S. holder of our common stock generally will be required to provide (a) a properly executed IRS Form W-8BEN or W-8BEN-E (or successor form) and satisfy applicable certification and other requirements to claim the benefit of an applicable income tax treaty between the United States and such holder’s country of residence, or (b) a properly executed IRS Form W-8ECI stating that dividends are not subject to withholding because they are effectively connected with such non-U.S. holder’s conduct of a trade or business within the United States. Non-U.S. holders are urged to consult their tax advisors regarding their entitlement to benefits under a relevant income tax treaty.
A non-U.S. holder that is eligible for a reduced rate of U.S. withholding tax under an income tax treaty may obtain a refund or credit of any excess amounts withheld by timely filing an appropriate claim for refund with the IRS.
Gain on Sale, Exchange or Other Disposition of Our Common Stock
Subject to the discussion below regarding backup withholding and foreign accounts, in general, a non-U.S. holder will not be subject to any U.S. federal income tax on any gain realized upon such holder’s sale, exchange or other disposition of shares of our common stock unless:
| ● | the gain is effectively connected with a U.S. trade or business of the non-U.S. holder and, if an applicable income tax treaty so provides, is attributable to a permanent establishment or a fixed base maintained in the United States by such non-U.S. holder, in which case the non-U.S. holder generally will be taxed at the graduated U.S. federal income tax rates applicable to U.S. persons (as defined in the Code) and, if the non-U.S. holder is a foreign corporation, the branch profits tax described above in “Distributions on Our Common Stock” also may apply; | |
| ● | the non-U.S. holder is a nonresident alien individual who is present in the United States for 183 days or more in the taxable year of the disposition and certain other conditions are met, in which case the non-U.S. holder will be subject to a 30% tax (or such lower rate as may be specified by an applicable income tax treaty) on the net gain derived from the disposition, which may be offset by U.S. source capital losses of the non-U.S. holder, if any (even though the individual is not considered a resident of the United States); or |
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| ● | our common stock constitutes a U.S. real property interest because we are, or have been, at any time during the five-year period preceding such disposition (or the non-U.S. holder’s holding period, if shorter) a “U.S. real property holding corporation.” Generally, a corporation is a U.S. real property holding corporation only if the fair market value of its U.S. real property interests equals or exceeds 50% of the sum of the fair market value of its worldwide real property interests plus its other assets used or held for use in a trade or business. Although there can be no assurance, we do not believe that we are, or have been, a U.S. real property holding corporation, or that we are likely to become one in the future. Even if we are or become a U.S. real property holding corporation, provided that our common stock is regularly traded, as defined by applicable Treasury Regulations, on an established securities market, our common stock will be treated as a U.S. real property interest only with respect to a non-U.S. holder that holds more than 5% of our outstanding common stock, directly or indirectly, actually or constructively, during the shorter of the 5-year period ending on the date of the disposition or the period that the non-U.S. holder held our common stock. In such case, such non-U.S. holder generally will be taxed on its net gain derived from the disposition at the graduated U.S. federal income tax rates applicable to U.S. persons (as defined in the Code). No assurance can be provided that our common stock is or will in the future be regularly traded on an established securities market for purposes of the rules described above. |
Backup Withholding and Information Reporting
We must report annually to the IRS and to each non-U.S. holder the gross amount of the dividends on our common stock paid to such holder and the tax withheld, if any, with respect to such dividends. Non-U.S. holders will have to comply with specific certification procedures to establish that the holder is not a U.S. person (as defined in the Code) in order to avoid backup withholding at the applicable rate with respect to dividends on our common stock. A non-U.S. holder generally will not be subject to U.S. backup withholding with respect to payments of dividends on our common stock if it certifies its non-U.S. status by providing a valid IRS Form W-8BEN or W-8BEN-E (or successor form) or W-8ECI, or otherwise establishes an exemption; provided we do not have actual knowledge or reason to know such non-U.S. holder is a U.S. person, as defined in the Code. Dividends paid to non-U.S. holders subject to the U.S. withholding tax, as described above in “Distributions on Our Common Stock,” generally will be exempt from U.S. backup withholding.
Information reporting and backup withholding will generally apply to the proceeds of a disposition of our common stock by a non-U.S. holder effected by or through the U.S. office of any broker, U.S. or foreign, unless the holder certifies its status as a non-U.S. holder and satisfies certain other requirements, or otherwise establishes an exemption. Generally, information reporting and backup withholding will not apply to a payment of disposition proceeds to a non-U.S. holder where the transaction is effected outside the United States through a non-U.S. office of a broker. However, for information reporting purposes, dispositions effected through a non-U.S. office of a broker with substantial U.S. ownership or operations generally will be treated in a manner similar to dispositions effected through a U.S. office of a broker. Non-U.S. holders should consult their tax advisors regarding the application of the information reporting and backup withholding rules to them.
Copies of information returns may be made available to the tax authorities of the country in which the non-U.S. holder resides or is incorporated under the provisions of a specific treaty or agreement.
Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules from a payment to a non-U.S. holder may be allowed as a credit against the non-U.S. holder’s U.S. federal income tax liability, if any, and may entitle such holder to a refund, provided that the required information is timely furnished to the IRS.
Foreign Account Tax Compliance
The Foreign Account Tax Compliance Act, which we refer to as FATCA, generally imposes a U.S. federal withholding tax of 30% on dividends and the gross proceeds of a disposition of our common stock paid to a “foreign financial institution” (as specifically defined for this purpose), unless such institution enters into an agreement with the U.S. government to, among other things, withhold on certain payments and to collect and provide to the U.S. tax authorities substantial information regarding U.S. account holders of such institution (which includes certain equity and debt holders of such institution, as well as certain account holders that are foreign entities with U.S. owners) or otherwise qualifies for an exemption from these rules. A U.S. federal withholding tax of 30% also applies to dividends and will apply to the gross proceeds of a disposition of our common stock paid to a non-financial foreign entity (as defined in the Code), unless such entity provides the withholding agent with either a certification that it does not have any substantial direct or indirect U.S. owners or provides information regarding substantial direct and indirect U.S. owners of the entity, or otherwise qualifies for an exemption from these rules. The withholding provisions described above currently apply to dividends paid on our common stock and will generally apply with respect to gross proceeds of a sale or other disposition of our common stock.
If withholding is imposed under FATCA on a payment related to our common stock, a beneficial owner that is not a foreign financial institution and that otherwise would not be subject to withholding (or that otherwise would be entitled to a reduced rate of withholding) generally may obtain a refund from the IRS by filing a U.S. federal income tax return (which may entail significant administrative burden). An intergovernmental agreement between the United States and an applicable foreign country may modify the requirements described in this paragraph.
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EACH PROSPECTIVE INVESTOR SHOULD CONSULT ITS TAX ADVISOR REGARDING THE PARTICULAR U.S. FEDERAL, STATE AND LOCAL AND NON-U.S. TAX CONSEQUENCES OF PURCHASING, OWNING AND DISPOSING OF OUR COMMON STOCK, INCLUDING THE CONSEQUENCES OF ANY PROPOSED CHANGE IN APPLICABLE LAWS.
Alexander Capital L.P is acting as the sole book-running manager of this offering and as Representative of the underwriters of this offering. Under the terms of an underwriting agreement, which is filed as an exhibit to the registration statement, each of the underwriters named below, through the Representative, has severally agreed to purchase from us, and we have agreed to sell to the underwriters, the respective number of shares of common stock shown opposite the underwriter’s name below:
| Underwriters | Number of Shares | |||
| Alexander Capital L.P. | $ | |||
| Total | $ | |||
We intend to enter into an underwriting agreement with the Representative in connection with this initial public offering. Subject to the terms and conditions of the underwriting agreement, the underwriters will buy all of the shares of our common stock if they buy any of them. However, the underwriters are not required to take or pay for the shares of common stock covered by the underwriters’ overallotment option as described below. Our shares are offered subject to a number of conditions, including:
| ● | the representations and warranties made by us to the underwriters are true; | |
| ● | there is no material change in our business or the financial markets; | |
| ● | we deliver customary closing documents to the underwriters; | |
| ● | receipt and acceptance of our shares of common stock by the underwriters; and | |
| ● | the underwriters’ right to reject orders in whole or in part. |
Commissions and Expenses
The following table shows the public offering price, underwriting discount and proceeds, before expenses, to us. The information assumes either no exercise or full exercise by the underwriters of their over-allotment option.
| Per Share | Total with no Over-Allotment | Total with Over-Allotment | ||||||||||
| Public offering price | $ | $ | $ | |||||||||
| Underwriting discount (9%) | ||||||||||||
| Proceeds, before expenses, to us | $ | $ | $ | |||||||||
The underwriters propose to offer the shares of common stock directly to the public at the initial public offering price on the cover of this prospectus and to selected dealers, which may include the underwriters, at such offering price less a selling concession not in excess of $ per share. If all of the shares are not sold at the initial public offering price, the Representative may change the initial public offering price and the other selling terms.
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The expenses of this offering that are payable by us are estimated to be approximately $ (which excludes estimated underwriting discounts and commissions and the non-accountable expense allowance payable to the underwriters). We will be responsible for all of the underwriters expenses related to this offering, including filing fees and communication expenses for the registration of the shares, all filing fees associated with the review of this offering by the Financial Industry Regulatory Authority (“FINRA”), fees and expenses relating to the listing of the shares of common stock on Nasdaq, fees relating to background checks, fees relating to the registration, qualification or exemptions of the shares under securities laws of foreign jurisdictions, cost of making and printing the underwriting documents, cost and expenses of a public relations firm, cost of preparing, printing and delivering stock certificates, fees and expenses of the transfer agent, and fees and expenses of our legal counsel, road show expenses for this offering, and fees and expenses of the underwriters legal counsel (up to a maximum of $150,000). We have agreed to reimburse the underwriters for their accountable expenses, including reasonable attorneys’ fees, not to exceed $200,000. In addition, we have agreed to pay the Representative closing costs, which shall include the reimbursement of the out-of-pocket cost of the escrow agent or clearing agent, as applicable, not exceeding $12,900. We have paid a $25,000 advance to the Representative, which will be credited against the accountable expenses actually incurred by the Representative in connection with this offering and which shall be reimbursed to us to the extent not actually incurred. We have also agreed to pay the Representative a non-accountable expense fee equal to one percent of the gross proceeds from the offering.
Over-Allotment Option
We have granted the underwriters an option exercisable for 45 days after the date of this prospectus, to purchase, from time to time, in whole or in part, up to an aggregate of 187,500 shares of common stock (15% of the shares of common stock sold in this offering) from us in any combination thereof solely for the purpose of covering over-allotments, if any, at the initial public offering price, less underwriting discounts and commissions and the non-accountable expense allowance payable to the underwriters. To the extent that this option is exercised, each underwriter will be obligated, subject to certain conditions, to purchase its pro rata portion of these additional shares based on the underwriter’s percentage underwriting commitment in this offering as indicated in the table at the beginning of this Underwriting section.
Any shares of common stock issued or sold under the over-allotment option will be issued and sold on the same terms and conditions as the other shares that are the subject of this offering.
Lock-Up Agreements
All of our directors, executive officers and certain of our shareholders, including holders of more than 5% of the outstanding shares of our common stock, have agreed that, for a period of 360 days after the date of this prospectus and subject to certain limited exceptions, we and they will not, directly or indirectly, without the prior written consent of the Representative: (i) offer for sale, sell, pledge, or otherwise dispose of (or enter into any transaction or device that is designed to, or could be expected to, result in the disposition by any person at any time in the future of) any shares of common stock (including, without limitation, shares of common stock that may be deemed to be beneficially owned by us or them in accordance with the rules and regulations of the SEC and shares of common stock that may be issued upon exercise of any options or warrants) or securities convertible into or exercisable or exchangeable for common stock; (ii) enter into any swap or other derivatives transaction that transfers to another, in whole or in part, any of the economic benefits or risks of ownership of shares of common stock, whether any such transaction described in clause (i) or (ii) above is to be settled by delivery of common stock or other securities, in cash or otherwise;, (iii) make any demand for or exercise any right or file or cause to be filed a registration statement, including any amendments thereto, with respect to the registration of any shares of common stock or securities convertible into or exercisable or exchangeable for common stock or any of our other securities; (iv) engage in any short selling of common stock; or (v) publicly disclose the intention to do any of the foregoing.
The Representative, in its sole discretion, may release the common stock and other securities subject to the lock-up agreements described above in whole or in part at any time. When determining whether or not to release common stock and other securities from lock-up agreements, the Representative will consider, among other factors, the holder’s reasons for requesting the release, the number of shares of common stock and other securities for which the release is being requested and market conditions at the time.
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We also agreed pursuant to that lock-up agreement that, without the prior written consent of the Representative, we will not, during the restricted period (i) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend, or otherwise transfer or dispose of, directly or indirectly, any shares of our capital stock or any securities convertible into or exercisable or exchangeable for shares of our capital stock (other than the shares sold in this offering and common stock issued pursuant to employee benefit plans, qualified stock option plans or other employee compensation plans existing prior to this offering or pursuant to currently outstanding options, warrants or rights); provided that either (a) such shares shall not vest during the restricted period or (b) the grantee of such shares will execute a lock-up agreement; (ii) file or cause to be filed any registration statement with the SEC relating to the offering of any shares of our capital stock or any securities convertible into or exercisable or exchangeable for shares of our capital stock other than a registration statement on Form S-4 or S-8; or (iii) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of our capital stock, whether any such transaction described in clause (i), (ii) or (iii) above is to be settled by delivery of shares of our capital stock or such other securities, in cash or otherwise.
The restrictions contained in the preceding paragraph do not apply to (i) the securities to be sold in connection with this offering, (ii) the issuance of shares of common stock upon the exercise of a stock option or warrant or the conversion of a security outstanding prior to this offering, (iii) the issuance of any security under any equity compensation plan, (iv) the issuance of shares of common stock in the connection with mergers, acquisitions or joint ventures, (v) the issuance of shares of common stock to consultants in our ordinary course of business and not for capital raising transactions; and (vi) the issuance of shares of common stock or any securities convertible into or exercisable or exchangeable for shares of common stock at a price per share greater than $ per share.
Representative’s Warrants
We have also agreed to issue to the underwriters or their designees at the closing of this offering Representative’s Warrants to purchase an aggregate of shares of common stock (6% of the number of shares sold in the offering, excluding the over-allotment option). We are registering hereby the issuance of Representative’s Warrants and the shares of common stock issuable upon exercise of such warrants. The Representative’s Warrants will be exercisable at any time and from time to time, in whole or in part, during a period commencing six months from the effective date of this offering and expiring five years from the effective date of the offering. The Representative’s Warrants will be exercisable at a price equal to 120% of the public offering price per share of common stock and such warrants shall be exercisable on a cash basis, provided that if a registration statement registering the common stock underlying the Representative’s Warrants is not effective, the Representative’s Warrants may be exercised on a cashless basis. The Representative’s Warrants have been deemed compensation by FINRA and are, therefore, subject to a 180-day lock-up pursuant to Rule 5110(e)(1) of FINRA. The underwriters or their permitted assignees under this Rule 5110(e)(1) shall not sell, transfer, assign, pledge or hypothecate the Representative’s Warrants, nor engage in any hedging, short sale, derivative, put or call transaction that would result in the effective economic disposition of the Representative’s Warrants, for a period of 180 days from the effective date of the offering, except that they may be assigned, in whole or in part, as specifically set forth in the underwriting agreement. The Representative’s Warrants will provide for customary anti-dilution provisions (for stock dividends, splits and recapitalizations and the like) consistent with FINRA Rule 5110, and the number of shares underlying the Representative’s Warrants shall be reduced, or the exercise price increased, if necessary, to comply with FINRA rules or regulations. Further, the Representative’s Warrants will provide for a one-time demand registration right, which will not be greater than five years from the commencement of sales of common stock in connection with this offering in accordance FINRA Rule 5110(g)(8)(C) and piggyback registration rights, which will not be greater than seven years from the commencement of sales of common stock in connection with this offering in compliance with FINRA Rule 5110(g)(8)(D). The Representative’s Warrants and underlying shares are included in this prospectus.
Tail Financing
We granted the Representative the right, for a period of eighteen (18) months after the termination of the Representative’s engagement with us, to receive a cash fee equal to nine percent (9%) of the gross proceeds received by us from the sale of any equity, debt and/or equity derivative instruments to any investor actually introduced by the Representative to the Company in connection with any public or private financing or capital raise, together with Representative’s Warrants to purchase an aggregate of shares of common stock (6% of the number of shares sold in such transaction); provided that, such transaction is by a party actually introduced to us in an offering in which we have direct knowledge of such party’s participation.
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Offering Price Determination
The actual offering price of the Shares we are offering will be negotiated between us and the underwriters based upon, among other things, the trading of our shares of common stock prior to the offering.
| ● | the information set forth in this prospectus and otherwise available to the underwriters; | |
| ● | the prospectus for our Company and the industry in which we operate; | |
| ● | an assessment of our management; | |
| ● | our past and present financial and operating performance; | |
| ● | our prospectus for future earnings; | |
| ● | financial and operating information and market valuations of publicly traded companies engaged in activities similar to ours; | |
| ● | the prevailing conditions of the United States securities markets at the time of this offering; and | |
| ● | other factors deemed relevant. |
Neither we nor the Representative can assure investors that an active trading market will develop for shares of our common stock, or that the shares will trade in the public market at or above the initial public offering price.
Indemnification
We have agreed to indemnify the underwriters against certain liabilities, including liabilities under the Securities Act. If we are unable to provide this indemnification, we have agreed to contribute to payments that the underwriters may be required to make for these liabilities.
Stabilization, Short Positions and Penalty Bids
The underwriters may engage in stabilizing transactions, short sales and purchases to cover positions created by short sales, and penalty bids or purchases for the purpose of pegging, fixing or maintaining the price of the common stock, in accordance with Regulation M under the Exchange Act:
| ● | Stabilizing transactions permit bids to purchase the underlying security so long as the stabilizing bids do not exceed a specified maximum. | |
| ● | A short position involves a sale by the underwriters of shares in excess of the number of shares the underwriters are obligated to purchase in the offering, which creates the syndicate short position. This short position may be either a covered short position or a naked short position. In a covered short position, the number of shares involved in the sales made by the underwriters in excess of the number of shares they are obligated to purchase is not greater than the number of shares that they may purchase by exercising their option to purchase additional shares. In a naked short position, the number of shares involved is greater than the number of shares in their option to purchase additional shares. The underwriters may close out any short position by either exercising their option to purchase additional shares and/or purchasing shares in the open market. In determining the source of shares to close out the short position, the underwriters will consider, among other things, the price of shares available for purchase in the open market as compared to the price at which they may purchase shares through their option to purchase additional shares. A naked short position is more likely to be created if the underwriters are concerned that there could be downward pressure on the price of the shares in the open market after pricing that could adversely affect investors who purchase in the offering. |
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| ● | Syndicate covering transactions involve purchases of the common stock in the open market after the distribution has been completed in order to cover syndicate short positions. | |
| ● | Penalty bids permit the underwriters to reclaim a selling concession from a syndicate member when the common stock originally sold by the syndicate member is purchased in a stabilizing or syndicate covering transaction to cover syndicate short positions. |
These stabilizing transactions, syndicate covering transactions and penalty bids may have the effect of raising or maintaining the market price of our common stock or preventing or retarding a decline in the market price of the common stock. As a result, the price of the common stock may be higher than the price that might otherwise exist in the open market. These transactions may be effected on The Nasdaq Capital Market or otherwise and, if commenced, may be discontinued at any time.
Neither we nor any of the underwriters make any representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the price of the common stock. In addition, neither we nor any of the underwriters make any representation that the underwriters will engage in these stabilizing transactions or that any transaction, once commenced, will not be discontinued without notice.
Electronic Distribution
A prospectus in electronic format may be made available on websites or through other online services maintained by one or more of the underwriters of this offering, or by their affiliates. In those cases, prospective investors may view offering terms online and, depending upon the particular underwriter or selling group member, prospective investors may be allowed to place orders online. The underwriters may agree with us to allocate a specific number of shares for sale to online brokerage account holders. Any such allocation for online distributions will be made by the underwriters on the same basis as other allocations.
Other than the prospectus in electronic format, the information on any underwriter’s website and any information contained in any other website maintained by an underwriter is not part of the prospectus or the registration statement of which this prospectus forms a part, has not been approved and/or endorsed by us or any underwriter in its capacity as underwriter and should not be relied upon by investors.
Listing on Nasdaq
We have filed an application to have our common stock and our shares underlying warrants listed on the Nasdaq under the symbol “BOF”. No assurance can be given that our application will be approved. If our application is not approved or we otherwise determine that we will not be able to secure the listing of our common stock on the Nasdaq, we will not consummate the offering.
Discretionary Sales
The underwriters have informed us that they do not expect to sell more than 5% of the common stock in the aggregate to accounts over which they exercise discretionary authority.
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Other Relationships
Certain of the underwriters and their affiliates may in the future provide various investment banking, commercial banking and other financial services in the ordinary course of business for us and our affiliates for which they may in the future receive customary fees and commissions for these transactions.
Selling Restrictions
Other than in the United States, no action has been taken by us or the underwriters that would permit a public offering of the securities offered by this prospectus in any jurisdiction where action for that purpose is required. The securities offered by this prospectus may not be offered or sold, directly or indirectly, nor may this prospectus or any other offering material or advertisements in connection with the offer and sale of any such securities be distributed or published in any jurisdiction, except under circumstances that will result in compliance with the applicable rules and regulations of that jurisdiction. Persons into whose possession this prospectus comes are advised to inform themselves about and to observe any restrictions relating to the offering and the distribution of this prospectus. This prospectus does not constitute an offer to sell or a solicitation of an offer to buy any securities offered by this prospectus in any jurisdiction in which such an offer or a solicitation is unlawful.
Notice to prospective investors in the European Economic Area and the United Kingdom
In relation to each Member State of the European Economic Area and the United Kingdom (each a “Relevant State”), no shares have been offered or will be offered pursuant to the offering to the public in that Relevant State prior to the publication of a prospectus in relation to the shares which has been approved by the competent authority in that Relevant State or, where appropriate, approved in another Relevant State and notified to the competent authority in that Relevant State, all in accordance with the Prospectus Regulation, except that offers of shares may be made to the public in that Relevant State at any time under the following exemptions under the Prospectus Regulation:
| (a) | to any legal entity which is a qualified investor as defined under the Prospectus Regulation; |
| (b) | to fewer than 150 natural or legal persons (other than qualified investors as defined under the Prospectus Regulation), subject to obtaining the prior consent of the underwriters; or |
| (c) | in any other circumstances falling within Article 1(4) of the Prospectus Regulation; |
provided that no such offer of shares shall require us or any underwriter to publish a prospectus pursuant to Article 3 of the Prospectus Regulation or supplement a prospectus pursuant to Article 23 of the Prospectus Regulation and each person who initially acquires any shares or to whom any offer is made will be deemed to have represented, acknowledged and agreed to and with each of the underwriters and us that it is a “qualified investor” within the meaning of Article 2(e) of the Prospectus Regulation. In the case of any shares being offered to a financial intermediary as that term is used in the Prospectus Regulation, each such financial intermediary will be deemed to have represented, acknowledged and agreed that the shares acquired by it in the offer have not been acquired on a non-discretionary basis on behalf of, nor have they been acquired with a view to their offer or resale to, persons in circumstances which may give rise to an offer of any shares to the public other than their offer or resale in a Relevant State to qualified investors as so defined or in circumstances in which the prior consent of the underwriters have been obtained to each such proposed offer or resale.
For the purposes of this provision, the expression an “offer to the public” in relation to shares in any Relevant State means the communication in any form and by any means of sufficient information on the terms of the offer and any shares to be offered so as to enable an investor to decide to purchase or subscribe for any shares, and the expression “Prospectus Regulation” means Regulation (EU) 2017/1129.
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Notice to prospective investors in the United Kingdom
In addition, in the United Kingdom, this document is being distributed only to, and is directed only at, and any offer subsequently made may only be directed at persons who are “qualified investors” (as defined in the Prospectus Regulation) (i) who have professional experience in matters relating to investments falling within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the “Order”) and/or (ii) who are high net worth companies (or persons to whom it may otherwise be lawfully communicated) falling within Article 49(2)(a) to (d) of the Order (all such persons together being referred to as “relevant persons”) or otherwise in circumstances which have not resulted and will not result in an offer to the public of the shares in the United Kingdom within the meaning of the Financial Services and Markets Act 2000.
Any person in the United Kingdom that is not a relevant person should not act or rely on the information included in this document or use it as basis for taking any action. In the United Kingdom, any investment or investment activity that this document relates to may be made or taken exclusively by relevant persons.
Notice to prospective investors in Switzerland
The shares may not be publicly offered in Switzerland and will not be listed on the SIX Swiss Exchange (the “SIX”) or on any other stock exchange or regulated trading facility in Switzerland. This document does not constitute a prospectus within the meaning of and has been prepared without regard to the disclosure standards for issuance prospectuses under art. 652a or art. 1156 of the Swiss Code of Obligations or the disclosure standards for listing prospectuses under art. 27 ff. of the SIX Listing Rules or the listing rules of any other stock exchange or regulated trading facility in Switzerland. Neither this document nor any other offering or marketing material relating to the shares or the offering may be publicly distributed or otherwise made publicly available in Switzerland.
Neither this document nor any other offering or marketing material relating to the offering, the Company, the shares have been or will be filed with or approved by any Swiss regulatory authority. In particular, this document will not be filed with, and the offer of shares will not be supervised by, the Swiss Financial Market Supervisory Authority FINMA (the “FINMA”), and the offer of shares has not been and will not be authorized under the Swiss Federal Act on Collective Investment Schemes (the “CISA”). The investor protection afforded to acquirers of interests in collective investment schemes under the CISA does not extend to acquirers of shares.
Notice to prospective investors in France
This prospectus (including any amendment, supplement or replacement thereto) is not being distributed in the context of a public offering in France within the meaning of Article L. 411-1 of the French Monetary and Financial Code (Code monétaire et financier). This prospectus has not been and will not be submitted to the French Autorité des marchés financiers (the “AMF”) for approval in France and accordingly may not and will not be distributed to the public in France.
Pursuant to Article 211-3 of the AMF General Regulation, French residents are hereby informed that:
| 1. | the transaction does not require a prospectus to be submitted for approval to the AMF; |
| 2. | persons or entities referred to in Point 2°, Section II of Article L. 411-2 of the Monetary and Financial Code may take part in the transaction solely for their own account, as provided in Articles D. 411-1, D. 734-1, D. 744-1, D. 754-1 and D. 764-1 of the Monetary and Financial Code; and |
| 3. | the financial instruments thus acquired cannot be distributed directly or indirectly to the public otherwise than in accordance with Articles L. 411-1, L. 411-2, L. 412-1 and L. 621-8 to L. 621-8-3 of the Monetary and Financial Code. |
This prospectus is not to be further distributed or reproduced (in whole or in part) in France by the recipients of this prospectus. This prospectus has been distributed on the understanding that such recipients will only participate in the issue or sale of our common stock for their own account and undertake not to transfer, directly or indirectly, our common stock to the public in France, other than in compliance with all applicable laws and regulations and in particular with Articles L. 411-1 and L. 411-2 of the French Monetary and Financial Code.
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Notice to Prospective Investors in Germany
Our common stock may be offered and sold in the Federal Republic of Germany only in compliance with the Prospectus Regulation, the Commission Delegated Regulations (EU) 2019/979 and (EU) 2019/980, each as of March 14, 2019 and the German Securities Prospectus Act (Wertpapierprospektgesetz), as amended, or any other laws applicable in Germany governing the issue, offering and sale of securities. This prospectus has not been approved under the Prospectus Regulation and, accordingly, our common stock may not be offered publicly in the Federal Republic of Germany. Our common stock will only be offered in the Federal Republic of Germany in reliance on an exemption from the requirement to publish an approved securities prospectus under the Prospectus Regulation. Any resale of our common stock in Germany may only be made in accordance with the Prospectus Regulation and other applicable laws.
Notice to Prospective Investors in Hong Kong
The shares have not been offered or sold and will not be offered or sold in Hong Kong, by means of any document, other than (a) to “professional investors” as defined in the Securities and Futures Ordinance (Cap. 571 of the Laws of Hong Kong) (the “SFO”) of Hong Kong and any rules made thereunder; or (b) in other circumstances which do not result in the document being a “prospectus” as defined in the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32) of Hong Kong) (the “CO”) or which do not constitute an offer to the public within the meaning of the CO. No advertisement, invitation or document relating to the shares has been or may be issued or has been or may be in the possession of any person for the purposes of issue, whether in Hong Kong or elsewhere, which is directed at, or the contents of which are likely to be accessed or read by, the public of Hong Kong (except if permitted to do so under the securities laws of Hong Kong) other than with respect to shares which are or are intended to be disposed of only to persons outside Hong Kong or only to “professional investors” as defined in the SFO and any rules made thereunder.
Notice to Prospective Investors in China
This prospectus will not be circulated or distributed in the PRC and the shares will not be offered or sold and will not be offered or sold to any person for re-offering or resale directly or indirectly to any residents of the PRC except pursuant to any applicable laws and regulations of the PRC. Neither this prospectus nor any advertisement or other offering material may be distributed or published in the PRC, except under circumstances that will result in compliance with applicable laws and regulations.
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The validity of the securities being offered by this prospectus will be passed upon for us by Rowland Day, Esq. of Bigfork, Montana and Parr Brown Gee & Loveless, P.C., Salt Lake City, Utah. Sullivan & Worcester, LLP, New York, New York, is acting as counsel to the underwriters.
Interests of named experts and counsel
Rowland Day, Esq. is the trustee of the Rowland W. Day II and Jaimie D. Day Family Trust U/T/D April 13, 1990, which owns (i) two of our convertible notes in principal amounts of $40,100 and $100,000 and with conversion prices of $1.65 per share (which will convert into shares of our common stock upon the Convertible Note Conversion and prior to the Reverse Stock Split) and (ii) 2,400 shares of our common stock (after giving effect to the Reverse Stock Split).
The Company’s financial statements as of and for the years ended December 31, 2022 and 2021, respectively, have been included in this registration statement and have been so included in reliance upon the report of M&K CPAS, PLLC (such report including an explanatory paragraph regarding our ability to continue as a going concern as described in Note 2 to the financial statements), an independent registered public accounting firm, given on the authority of M&K CPAS, PLLC as experts in accounting and auditing.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the SEC, under the Securities Act, a registration statement on Form S-1 relating to the shares offered hereby. This prospectus, which is part of the registration statement, does not contain all of the information set forth in the registration statement and the exhibits and schedules thereto. For further information with respect to our Company and the shares of common stock we are offering by this prospectus, you should refer to the registration statement, including the exhibits and schedules thereto. Statements contained in this prospectus regarding the contents of any contract or other document are only summaries. With respect to any contract or document filed as an exhibit to the registration statement, you should refer to the exhibit for a copy of the contract or document, and each statement in this prospectus regarding that contract or document is qualified by reference to the exhibit. Our SEC filings, including the registration statement of which this prospectus forms a part, are also available to you, free of charge, from the SEC’s website at www.sec.gov.
Upon the effective date of the registration statement of which this prospectus forms a part, we will be subject to the information reporting requirements of the Exchange Act, and we intend to file reports, proxy statements and other information with the SEC. These periodic reports, proxy statements and other information will also be available to you, free of charge, from the SEC’s website at www.sec.gov.
We maintain a website at www.branchoutfood.com. There we make available free of charge, on or through the investor relations section of our website, the reports and other information that we file with the SEC. Information contained on, or that can be accessed through, our website is not incorporated by reference in and is not a part of this prospectus or the registration statement of which it forms a part or any other report or documents we file with or furnish to the SEC, and investors should not rely on any such information in deciding whether to invest.
No dealer, salesperson or other person has been authorized to give any information or to make any representations other than those contained in this prospectus in connection with the offering made by this prospectus, and, if given or made, such information or representations must not be relied upon as having been authorized by us. This prospectus does not constitute an offer to sell or a solicitation of an offer to buy any securities other than those specifically offered hereby or an offer to sell or a solicitation of an offer to buy any of these securities in any jurisdiction to any person to whom it is unlawful to make such offer or solicitation. Except where otherwise indicated, this prospectus speaks as of the date hereof. Neither the delivery of this prospectus nor any sale hereunder shall under any circumstances create any implication that there has been no change in the affairs of the Company since the date hereof.
You should rely only on the information contained in or incorporated by reference or provided in this prospectus. We have not authorized anyone else to provide you with different information. We are not making an offer of these securities in any state where the offer is not permitted. You should not assume the information in this prospectus is accurate as of any date other than the date on the front of this prospectus.
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BRANCHOUT FOOD, INC.
For the Years Ended December 31, 2022 and 2021
| Page | ||
| Audited Financial Statements of Branchout Food, Inc. | ||
| Report of Independent Registered Public Accounting Firm [PCAOB Firm ID: 2738] | F-2 | |
| Balance Sheets as of December 31, 2022 and 2021 | F-3 | |
| Statements of Operations for the years ended December 31, 2022 and 2021 | F-4 | |
| Statement of Stockholders’ Deficit for the years ended December 31, 2022 and 2021 | F-5 | |
| Statements of Cash Flows for the years ended December 31, 2022 and 2021 | F-6 | |
| Notes to the Financial Statements | F-7 |
| F-1 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
BranchOut Food, Inc.
Opinion on the Financial Statements
We have audited the accompanying balance sheets of BranchOut Food, Inc. (the Company) as of December 31, 2022 and 2021, and the related statements of operations, stockholders’ deficit, and cash flows for each of the years in the two-year period ended December 31, 2022, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2022 in conformity with accounting principles generally accepted in the United States of America.
Going Concern
The accompanying financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the company has incurred recurring losses from operations and had a working capital deficit and a stockholders’ deficit as of December 31, 2022 which raises substantial doubt about its ability to continue as a going concern. Management’s plans regarding these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB .
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and the significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates.
Capital Stock and Other Equity Accounts
As discussed in Note 19 and Note 20, the Company issued stock options to purchase common stock to employees and an officer of the Company and the Company issued warrants with notes payable to third parties. Auditing management’s calculation of the fair value of the stock options and the warrants issued can be a significant judgment due to the need of a specialist to evaluate the fair value of the stock options and warrants issued and the auditor has to test the inputs and estimates used.
Auditing management’s calculation of the fair value of the stock options and warrants issued can be a significant judgment given the fact that the Company uses management estimates on various inputs to the calculations.
We evaluated management’s conclusions regarding their fair values and reviewed support for the significant inputs used in the valuation model, as well as assessing the model for reasonableness. In addition, we evaluated the Company’s disclosures in relation to this matter included in Note 19 and Note 20 to the financial statements.
| /s/ M&K CPAS, PLLC | |
| M&K CPAS, PLLC | |
| We have served as the Company’s auditor since 2021 | |
| Houston, TX | |
| April 24, 2023 |
| F-2 |
BALANCE SHEETS
| December 31, | December 31, | |||||||
| 2022 | 2021 | |||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash | $ | 312,697 | $ | 620,332 | ||||
| Accounts receivable | 78,236 | 143,319 | ||||||
| Advances on inventory purchases | 29,500 | 260,735 | ||||||
| Inventory | 159,761 | 203,969 | ||||||
| Deferred offering costs | 543,664 | 192,282 | ||||||
| Other current assets | 497,779 | 59,535 | ||||||
| Total current assets | 1,621,637 | 1,480,172 | ||||||
| Restricted cash | 235,750 | 235,750 | ||||||
| Property and equipment, net | 1,022,290 | 1,070,393 | ||||||
| Note receivable | 384,628 | 407,342 | ||||||
| Total Assets | $ | 3,264,305 | $ | 3,193,657 | ||||
| Liabilities and Stockholders’ Deficit | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 239,939 | $ | 227,045 | ||||
| Accounts payable, related parties | 40,140 | 20,025 | ||||||
| Accrued expenses | 688,722 | 298,337 | ||||||
| Convertible notes payable, related parties | 140,000 | - | ||||||
| Convertible notes payable | 4,919,191 | - | ||||||
| Notes payable, current portion | 2,250,000 | - | ||||||
| Revolving line of credit | 91,541 | 156,332 | ||||||
| Derivative liabilities | - | 630,684 | ||||||
| Total current liabilities | 8,369,533 | 1,332,423 | ||||||
| Convertible notes payable, related parties, net of discounts | - | 120,996 | ||||||
| Convertible notes payable, net of discounts | - | 1,115,083 | ||||||
| Notes payable, net of current portion and discounts | 34,500 | 2,246,987 | ||||||
| Total Liabilities | 8,404,033 | 4,815,489 | ||||||
| Stockholders’ Deficit: | ||||||||
| Common stock, $0.001 par value, 200,000,000 shares authorized; 3,001,909 and 2,981,048 shares issued and outstanding at December 31, 2022 and 2021, respectively | 3,002 | 2,981 | ||||||
| Additional paid-in capital | 3,742,101 | 2,616,666 | ||||||
| Accumulated deficit | (8,884,831 | ) | (4,241,479 | ) | ||||
| Total Stockholders’ Deficit | (5,139,728 | ) | (1,621,832 | ) | ||||
| Total Liabilities and Stockholders’ Deficit | $ | 3,264,305 | $ | 3,193,657 | ||||
The accompanying notes are an integral part of these financial statements.
| F-3 |
STATEMENTS OF OPERATIONS
| For the Years Ended | ||||||||
| December 31, | ||||||||
| 2022 | 2021 | |||||||
| Net revenue | $ | 752,178 | $ | 715,553 | ||||
| Cost of goods sold | 922,728 | 786,469 | ||||||
| Gross profit (loss) | (170,550 | ) | (70,916 | ) | ||||
| Operating expenses: | ||||||||
| General and administrative | 929,726 | 391,866 | ||||||
| Salaries and wages | 628,637 | 243,450 | ||||||
| Professional fees | 583,920 | 205,498 | ||||||
| Depreciation expense | 93,253 | 323 | ||||||
| Total operating expenses | 2,235,536 | 841,137 | ||||||
| Operating loss | (2,406,086 | ) | (912,053 | ) | ||||
| Other income (expense): | ||||||||
| Interest income | 13,627 | 15,017 | ||||||
| Interest expense | (2,250,893 | ) | (697,729 | ) | ||||
| Gain on early extinguishment of debts | - | 548,643 | ||||||
| Change in fair value of derivative liabilities | - | 385,924 | ||||||
| Total other income (expense) | (2,237,266 | ) | 251,855 | |||||
| Net loss | $ | (4,643,352 | ) | $ | (660,198 | ) | ||
| Weighted average common shares outstanding - basic and diluted | 3,000,380 | 2,797,793 | ||||||
| Net loss per common share - basic and diluted | $ | (1.55 | ) | $ | (0.24 | ) | ||
The accompanying notes are an integral part of these financial statements.
| F-4 |
STATEMENT OF STOCKHOLDERS’ DEFICIT
| Common Stock | Additional
Paid-In | Accumulated | Total
Stockholders’ | |||||||||||||||||
| Shares | Amount | Capital | Deficit | Deficit | ||||||||||||||||
| Balance, December 31, 2020 | 2,778,927 | $ | 2,779 | $ | 2,349,897 | $ | (3,581,281 | ) | $ | (1,228,605 | ) | |||||||||
| Fair value of warrants issued as debt discounts | - | - | 66,228 | - | 66,228 | |||||||||||||||
| Issuance of membership units retrospectively exchanged to shares for services | 160,561 | 161 | 132,008 | - | 132,169 | |||||||||||||||
| Common stock sold for cash | 39,060 | 39 | 64,410 | - | 64,449 | |||||||||||||||
| Common stock issued for services | 2,500 | 2 | 4,123 | - | 4,125 | |||||||||||||||
| Net loss | - | - | - | (660,198 | ) | (660,198 | ) | |||||||||||||
| Balance, December 31, 2021 | 2,981,048 | $ | 2,981 | $ | 2,616,666 | $ | (4,241,479 | ) | $ | (1,621,832 | ) | |||||||||
| Modification of derivatives | 630,685 | 630,685 | ||||||||||||||||||
| Fair value of warrants issued as debt discounts | - | - | 14,050 | - | 14,050 | |||||||||||||||
| Modification of warrants | - | - | 377,200 | - | 377,200 | |||||||||||||||
| Common stock sold for cash | 6,061 | 6 | 9,994 | - | 10,000 | |||||||||||||||
| Common stock issued for services | 14,800 | 15 | 24,405 | - | 24,420 | |||||||||||||||
| Amortization of stock options issued for services | - | - | 69,101 | - | 69,101 | |||||||||||||||
| Net loss | - | - | - | (4,643,352 | ) | (4,643,352 | ) | |||||||||||||
| Balance, December 31, 2022 | 3,001,909 | $ | 3,002 | $ | 3,742,101 | $ | (8,884,831 | ) | $ | (5,139,728 | ) | |||||||||
The accompanying notes are an integral part of these financial statements.
| F-5 |
STATEMENTS OF CASH FLOWS
| For the Year Ended | ||||||||
| December 31, | ||||||||
| 2022 | 2021 | |||||||
| Cash flows from operating activities | ||||||||
| Net loss | $ | (4,643,352 | ) | $ | (660,198 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation expense | 93,253 | 323 | ||||||
| Change in fair value of derivative liabilities | - | (385,924 | ) | |||||
| (Gain) loss on early extinguishment of debts | - | (548,643 | ) | |||||
| Amortization of debt discounts | 1,286,021 | 332,747 | ||||||
| Common stock issued for services | 24,420 | 4,125 | ||||||
| Members equity issued for services | - | 132,169 | ||||||
| Options and warrants issued for services | 69,101 | - | ||||||
| Amended warrants | 377,200 | - | ||||||
| Decrease (increase) in assets: | ||||||||
| Accounts receivable | 65,083 | (66,156 | ) | |||||
| Advances on inventory purchases | 231,235 | (190,610 | ) | |||||
| Inventory | 44,208 | (24,583 | ) | |||||
| Other current assets | (438,244 | ) | (58,897 | ) | ||||
| Increase (decrease) in liabilities: | ||||||||
| Accounts payable | 12,894 | 204,968 | ||||||
| Accounts payable, related parties | 20,115 | 20,025 | ||||||
| Accrued expenses | 390,385 | 157,757 | ||||||
| Net cash used in operating activities | (2,467,681 | ) | (1,082,897 | ) | ||||
| Cash flows from investing activities | ||||||||
| Payments on notes receivable | - | (500,000 | ) | |||||
| Payments received on notes receivable | 22,714 | 128,051 | ||||||
| Purchase of property and equipment | (45,150 | ) | (695,004 | ) | ||||
| Net cash used in investing activities | (22,436 | ) | (1,066,953 | ) | ||||
| Cash flows from financing activities | ||||||||
| Proceeds received on convertible notes payable, related parties | - | 90,000 | ||||||
| Proceeds received on convertible notes payable | 2,694,100 | 1,175,100 | ||||||
| Proceeds received on revolving line of credit | 239,241 | 189,648 | ||||||
| Repayments on revolving line of credit | (304,032 | ) | (33,316 | ) | ||||
| Proceeds received on notes payable | - | 890,000 | ||||||
| Repayment of notes payable | (85,445 | ) | (293,393 | ) | ||||
| Repayments on convertible notes payable | (20,000 | ) | - | |||||
| Payment of deferred offering costs | (351,382 | ) | (192,282 | ) | ||||
| Proceeds from sale of common stock | 10,000 | 64,449 | ||||||
| Net cash provided by financing activities | 2,182,482 | 1,890,206 | ||||||
| Net increase (decrease) in cash | (307,635 | ) | (259,644 | ) | ||||
| Cash and restricted cash - beginning of period | 856,082 | 1,115,726 | ||||||
| Cash and restricted cash - ending of period | $ | 548,447 | $ | 856,082 | ||||
| Supplemental disclosures: | ||||||||
| Interest paid | $ | 246,661 | $ | 201,360 | ||||
| Income taxes paid | $ | - | $ | - | ||||
| Non-cash investing and financing transactions: | ||||||||
| Property and equipment purchased with notes payable | $ | - | $ | 375,000 | ||||
| Note receivable settled with cancellation of promissory note | $ | - | $ | 64,607 | ||||
| Value of debt discount on derivative liabilities | $ | - | $ | 1,070,995 | ||||
| Modification of derivative liabilities | $ | 630,685 | $ | - | ||||
| Value of warrants issued as a debt discount | $ | 14,050 | $ | 66,228 | ||||
The accompanying notes are an integral part of these financial statements.
| F-6 |
NOTES TO THE FINANCIAL STATEMENTS
Note 1 – Nature of Business
Nature of Business
BranchOut Food Inc. (formerly AvoLov, LLC, Avochips, LLC and Avochips Inc.) was incorporated as Avochips Inc. in Oregon on February 21, 2017, and redomiciled in Nevada on November 19, 2021, subsequent to a conversion from an LLC, named AvoLov, LLC, to a C-Corporation, named BranchOut Food Inc. On November 3, 2017. BranchOut Food Inc. (“BranchOut,” the “Company,” “we,” “our” or “us”) are engaged in the development, marketing, sale, and distribution of plant-based, dehydrated fruit and vegetable snacks and powders. One of the Company’s contract manufacturers is in Chile. The Company entered into a second contract manufacturing partnership in 2022 with a company based in Peru. This facility houses BranchOut’s continuous through put dehydration machine, substantially increasing production capacity. Both facilities produce dehydrated fruit and vegetable products for BranchOut using a new proprietary dehydration technology. The Company’s customers are primarily located throughout the United States.
Note 2 – Basis of Presentation
Basis of Accounting
The accompanying financial statements have been prepared on the accrual basis of accounting in conformity with accounting principles generally accepted in the United States of America (“GAAP”) and the rules of the U.S. Securities and Exchange Commission (“SEC”). All references to GAAP are in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) and the GAAP hierarchy.
When preparing financial statements in conformity with GAAP, we must make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Unless otherwise noted, all references to shares and shareholders in the accompanying financial statements have been restated retrospectively, to reflect the equity structure of the C corporation as of the beginning of the first period presented.
Going Concern
As shown in the accompanying financial statements, the Company has incurred recurring losses from operations resulting in an accumulated deficit of $5,139,728, and negative working capital of $6,747,896 as of December 31, 2022, and the Company’s cash on hand may not be sufficient to sustain operations. These factors raise substantial doubt about the Company’s ability to continue as a going concern. Management is actively pursuing new customers to increase revenues. In addition, the Company is currently seeking additional sources of capital to fund short term operations. Management believes these factors will contribute toward achieving profitability. The accompanying financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
The financial statements do not include any adjustments that might result from the outcome of any uncertainty as to the Company’s ability to continue as a going concern. These financial statements also do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classifications of liabilities that might be necessary should the Company be unable to continue as a going concern.
Reclassifications
Certain reclassifications have been made to the prior years’ financial statements to conform to current year presentation. These reclassifications had no effect on previously reported results of operations or retained earnings.
COVID-19 Pandemic
During the first quarter ended March 31, 2020, concerns related to the spread of coronavirus (“COVID-19”) began to create global business disruptions as well as disruptions in our operations. COVID-19 was declared a global pandemic by the World Health Organization on March 11, 2020. Governments at the national, state, and local level in the U.S., and globally, have implemented aggressive actions to reduce the spread of the virus, with such actions including lockdown and shelter in place orders, limitations on non-essential gatherings of people, suspension of all non-essential travel, and ordering certain businesses and governmental agencies to cease non-essential operations at physical locations. The spread of COVID-19 has caused significant volatility in the U.S. and international markets.
| F-7 |
BRANCHOUT FOOD INC.
NOTES TO THE FINANCIAL STATEMENTS
We have assessed various accounting estimates and other matters, including those that require consideration of forecasted financial information, in context with the unknown future impacts of COVID-19 using information that is reasonably available to us at this time. While our current assessment of our estimates did not have a material impact on our financial statements as of and for the years ended December 31, 2022 and 2021, as additional information becomes available to us, our future assessment of our estimates, including our expectations at the time regarding the duration, scope and severity of the pandemic, as well as other factors, could materially and adversely impact our financial statement in future reporting periods.
Segment Reporting
ASC 280, Segment Reporting, requires annual and interim reporting for an enterprise’s operating segments and related disclosures about its products, services, geographic areas and major customers. An operating segment is defined as a component of an enterprise that engages in business activities from which it may earn revenues and expenses, and about which separate financial information is regularly evaluated by the chief operating decision maker in deciding how to allocate resources. The Company operates as a single segment and will evaluate additional segment disclosure requirements as it expands its operations.
Note 3 – Summary of Significant Accounting Policies
Fair Value of Financial Instruments
ASC 820, Fair Value Measurements and Disclosures, establishes a fair value hierarchy for instruments measured at fair value that distinguishes between assumptions based on market data (observable inputs) and the Company’s own assumptions (unobservable inputs). Observable inputs are inputs that market participants would use in pricing the asset or liability based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the inputs that market participants would use in pricing the asset or liability and are developed based on the best information available in the circumstances.
ASC 820 identifies fair value as the exchange price, or exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As a basis for considering market participant assumptions in fair value measurements, ASC 820 establishes a three-tier fair value hierarchy that distinguishes between the following:
| - | Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. |
| - | Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. |
| - | Level 3 inputs to valuation methodology are unobservable and significant to the fair measurement. |
Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. To the extent that the valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for instruments categorized in Level 3. A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.
Cash and Cash Equivalents
Cash equivalents include money market accounts which have maturities of three months or less. For the purpose of the statements of cash flows, all highly liquid investments with an original maturity of three months or less are considered to be cash equivalents. Cash equivalents are stated at cost plus accrued interest, which approximates market value. There were no cash equivalents on hand on December 31, 2022 and 2021.
| F-8 |
BRANCHOUT FOOD INC.
NOTES TO THE FINANCIAL STATEMENTS
Cash in Excess of FDIC Insured Limits
The Company maintains its cash in bank deposit accounts which, at times, may exceed federally insured limits. Accounts are guaranteed by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000, under current regulations. The Company had $62,697 and $370,332 in excess of FDIC insured limits on December 31, 2022 and 2021, respectively, and has not experienced any losses in such accounts.
Accounts Receivable
Accounts receivable are carried at their estimated collectible amounts. Trade accounts receivable are periodically evaluated for collectability based on past credit history with customers and their current financial condition. The Company had no allowance for doubtful accounts on December 31, 2022 and 2021.
Inventory
The Company’s products consist of pre-packaged and bulk dried fruit and vegetable-based snacks, powders and ingredients purchased from contract-manufacturers in Chile and/or Peru. The Company’s contract manufacturer in Peru uses equipment purchased by BranchOut in its manufacturing process. Raw materials consist of packaging materials. Appropriate consideration is given to obsolescence, excessive levels, deterioration, and other factors in evaluating net realizable value. No reserve for obsolete inventories has been recognized. Inventory, consisting of raw materials and finished goods are stated at the lower of cost or net realizable value using the average cost valuation method, and consist of the following:
| December 31, | ||||||||
| 2022 | 2021 | |||||||
| Raw materials | $ | 10,824 | $ | 5,603 | ||||
| Finished goods | 148,937 | 198,366 | ||||||
| $ | 159,761 | $ | 203,969 | |||||
The Company had inventory advances on product in the amount of $29,500 and $260,735 as of December 31, 2022 and 2021, respectively. Advances of 70% of estimated finish product costs are made to enable manufacturer’s purchase of raw materials to produce finished products. The remaining 30% is paid upon receipt of finished goods.
Property and Equipment
Property and equipment are stated at the lower of cost or estimated net recoverable amount. The cost of property, plant and equipment is depreciated using the straight-line method based on the lesser of the estimated useful lives of the assets or the lease term based on the following life expectancy:
| Office equipment | 3 years |
| Furniture and fixtures | 5 years |
| Equipment and machinery | 5 years |
Repairs and maintenance expenditures are charged to operations as incurred. Major improvements and replacements, which extend the useful life of an asset, are capitalized, and depreciated over the remaining estimated useful life of the asset. When assets are retired or sold, the cost and related accumulated depreciation are eliminated, and any resulting gain or loss is reflected in operations. Depreciation expense was $93,253 and $323 for the years ended December 31, 2022 and 2021, respectively.
Impairment of Long-Lived Assets
Long-lived assets held and used by the Company are reviewed for possible impairment whenever events or circumstances indicate the carrying amount of an asset may not be recoverable or is impaired. Recoverability is assessed using undiscounted cash flows based upon historical results and current projections of earnings before interest and taxes. Impairment is measured using discounted cash flows of future operating results based upon a rate that corresponds to the cost of capital. Impairments are recognized in operating results to the extent that carrying value exceeds discounted cash flows of future operations.
Our indefinite-lived brand names and trademarks acquired and are assigned an indefinite life as we anticipate that these brand names will contribute cash flows to the Company perpetually. We evaluate the recoverability of intangible assets periodically by considering events or circumstances that may warrant revised estimates of useful lives or that indicate the asset may be impaired. The Company expenses internally developed trademarks.
| F-9 |
BRANCHOUT FOOD INC.
NOTES TO THE FINANCIAL STATEMENTS
Initial Public Offering Costs
Initial public offering (“IPO”) costs consist principally of professional fees, principally of legal and accounting, and other costs such as printing, and registration costs incurred in connection with the planned IPO of the shares of common stock of the Company. As of December 31, 2022, the Company incurred $543,664 of costs directly attributable to its proposed IPO, which been deferred and recorded in other assets in the balance sheet. Such costs are deferred until the closing of the IPO, at which time the deferred costs are offset against the offering proceeds. In the event the IPO is unsuccessful or aborted, the costs will be expensed.
License Agreement
In 2021, the Company entered into a license agreement to license the rights to certain production equipment developed and manufactured by another company through the purchase of that company’s equipment. The license is not discernable from the equipment; therefore, the license costs have been capitalized and depreciated over the useful life of the equipment. The license agreement also entitles the licensor to a royalty on all revenue from the sale of products produced using the equipment. These royalties are recognized as royalty expenses as the products are sold. There have been no royalty payments to date, and any future minimum royalty payments or equipment purchases under this license agreement are an unrecognized commitment as they relate to retaining exclusivity of the avocado products going forward and the Company can elect not to pay as disclosed in Note 17 below.
Derivatives
We evaluate convertible notes payable, stock options, stock warrants and other contracts to determine if those contracts or embedded components of those contracts qualify as derivatives to be separately accounted for under the relevant sections of ASC Topic 815-40, Derivative Instruments and Hedging: Contracts in Entity’s Own Equity.
The result of this accounting treatment could be that the fair value of a financial instrument is classified as a derivative instrument and is marked-to-market at each balance sheet date and recorded as a liability. In the event that the fair value is recorded as a liability, the change in fair value is recorded in the statement of operations as other income or other expense. Upon conversion or exercise of a derivative instrument, the instrument is marked to fair value at the conversion date and then that fair value is reclassified to equity. Financial instruments that are initially classified as equity that become subject to reclassification under ASC Topic 815-40 are reclassified to a liability account at the fair value of the instrument on the reclassification date.
Revenue Recognition
The Company recognizes revenue in accordance with ASC 606, Revenue from Contracts with Customer. Under ASC 606, the Company recognizes revenue from the sale of its plant-based snack products in accordance with a five-step model in which the Company evaluates the transfer of promised goods or services and recognizes revenue when customers obtain control of promised goods or services in an amount that reflects the consideration which the Company expects to be entitled to receive in exchange for those goods or services. To determine revenue recognition for the arrangements that the Company determines are within the scope of ASC 606, the Company performs the following five steps: (1) identify the contract(s) with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract and (5) recognize revenue when (or as) the entity satisfies a performance obligation. The Company has elected, as a practical expedient, to account for the shipping and handling as fulfillment costs, rather than as a separate performance obligation, and the related costs are recorded as selling expenses in general and administrative expenses in the statement of operations. Revenue is reported net of applicable provisions for discounts, returns and allowances. Methodologies for determining these provisions are dependent on customer pricing and promotional practices. The Company records reductions to revenue for estimated product returns and pricing adjustments in the same period that the related revenue is recorded. These estimates are based on industry-based historical data, historical sales returns, if any, analysis of credit memo data, and other factors known at the time.
The Company’s sales are predominantly generated from the sale of finished products to retailers, and to a lesser extent, direct to consumers through third party website platforms. These sales contain a single performance obligation and revenue is recognized at a single point in time when ownership, risks and rewards transfer. Typically, this occurs when the goods are received by the retailer or customer, or when title of goods is exchanged. Revenues are recognized in an amount that reflects the net consideration the Company expects to receive in exchange for the goods.
The Company promotes its products with advertising, consumer incentives and trade promotions. These programs include discounts, slotting fees, coupons, rebates, in-store display incentives and volume-based incentives. Customer trade promotion and consumer incentive activities are recorded as a reduction to the transaction price based on amounts estimated as being due to customers and consumers at the end of a period. The Company derives these estimates based principally on historical utilization and redemption rates. The Company does not receive a distinct service in relation to the advertising, consumer incentives and trade promotions.
| F-10 |
BRANCHOUT FOOD INC.
NOTES TO THE FINANCIAL STATEMENTS
Payment terms in the Company’s invoices are based on the billing schedule established in contracts and purchase orders with customers.
Expenses such as slotting fees, sales discounts, and allowances are accounted for as a direct reduction of revenues as follows:
| December 31, | ||||||||
| 2022 | 2021 | |||||||
| Gross revenue | $ | 888,893 | $ | 1,006,202 | ||||
| Less: slotting, discounts, and allowances | 136,715 | 290,649 | ||||||
| Net revenue | $ | 752,178 | $ | 715,553 | ||||
Cost of Goods Sold
Cost of goods sold represents costs directly related to the purchase, production and manufacturing of the Company’s products. Costs include purchase costs, product development, freight-in, packaging, and print production costs.
Advertising Costs
The Company expenses the cost of advertising and promotions as incurred. Advertising and promotions expense was $199,287 and $75,032 for the years ended December 31, 2022 and 2021, respectively.
Stock-Based Compensation
The Company accounts for equity instruments issued to employees and non-employees in accordance with the provisions of ASC 718 Stock Compensation (“ASC 718”). All transactions in which the consideration provided in exchange for the purchase of goods or services consists of the issuance of equity instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more reliably measurable.
The Company issued stock-based compensation in the amount of $93,521 and $4,125 for the years ended December 31, 2022 and 2021, respectively.
Basic and Diluted Loss Per Share
The basic net loss per common share is computed by dividing the net loss by the weighted average number of common shares outstanding. Diluted net loss per common share is computed by dividing the net loss adjusted on an “as if converted” basis, by the weighted average number of common shares outstanding plus potential dilutive securities. For the years ended December 31, 2022 and 2021, potential dilutive securities had an anti-dilutive effect and were not included in the calculation of diluted net loss per common share.
Income Taxes
The Company recognizes deferred tax assets and liabilities based on differences between the financial reporting and tax basis of assets and liabilities using the enacted tax rates and laws that are expected to be in effect when the differences are expected to be recovered. The Company provides a valuation allowance for deferred tax assets for which it does not consider realization of such assets to be more likely than not.
Uncertain Tax Positions
In accordance with ASC 740, Income Taxes, the Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be capable of withstanding examination by the taxing authorities based on the technical merits of the position. These standards prescribe a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. These standards also provide guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition.
Various taxing authorities periodically audit the Company’s income tax returns. These audits include questions regarding the Company’s tax filing positions, including the timing and amount of deductions and the allocation of income to various tax jurisdictions. In evaluating the exposures connected with these various tax filing positions, including state and local taxes, the Company records allowances for probable exposures. A number of years may elapse before a particular matter, for which an allowance has been established, is audited, and fully resolved. The Company has not yet undergone an examination by any taxing authorities.
| F-11 |
BRANCHOUT FOOD INC.
NOTES TO THE FINANCIAL STATEMENTS
The assessment of the Company’s tax position relies on the judgment of management to estimate the exposures associated with the Company’s various filing positions.
Adoption of New Accounting Standards and Recently Issued Accounting Pronouncements
From time to time, new accounting pronouncements are issued by FASB that are adopted by the Company as of the specified effective date. If not discussed, management believes that the impact of recently issued standards, which are not yet effective, will not have a material impact on the Company’s financial statements upon adoption.
In August 2020, the FASB issued Accounting Standards Update (“ASU”) No. 2020-06, Debt–Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging–Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (ASU 2020-06), which simplifies the accounting for convertible instruments by reducing the number of accounting models available for convertible debt instruments. This guidance also eliminates the treasury stock method to calculate diluted earnings per share for convertible instruments and requires the use of the if converted method. The new guidance is effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2021, with early adoption permitted. The adoption of ASU 2020-06 has not had a material impact on the Company’s financial statements or related disclosures.
In November 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The amendments in ASU 2019-12 are part of an initiative to reduce complexity in accounting standards and simplify the accounting for income taxes by removing certain exceptions from Topic 740 and making minor improvements to the codification. ASU 2019-12 and its related amendments are effective for public entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. The provisions of this update did not have a material impact on the Company’s financial position or results of operations.
There are no other recently issued accounting pronouncements that the Company has yet to adopt that are expected to have a material effect on its financial position, results of operations, or cash flows.
| F-12 |
BRANCHOUT FOOD INC.
NOTES TO THE FINANCIAL STATEMENTS
Note 4 – Related Party Transactions
HHC Holdings Note Receivable- Related Party
On December 31, 2020, the Company sold equipment to HHC Holdings, LLC (“HHC”), in exchange for a $100,000 promissory note. HHC is a limited liability company in which the Company’s Chief Executive Officer, Eric Healy, and the Company’s Controller, Chris Coulter, collectively own 54% of the membership interests. The promissory note carried a 5% interest rate, matured on January 1, 2022, and called for monthly payments of principal and interest in the amount of $417, commencing on January 1, 2021. On March 5, 2021, HHC paid $66,058 of the BranchOut loan by assuming this BranchOut debt to Cedar Holdings, LCC further disclosed in Note 14. No gain or loss was recognized on the exchange. On May 3, 2021, the $33,941 balance of the note receivable was paid by HHC, and the promissory note was cancelled.
Accrued Compensation
As of December 31, 2022 and 2021, the Company owed Chase Innovations, Inc., a company owned by the Company’s CFO, Douglas Durst, $40,140 and $20,025, respectively, for services rendered during the years ended December 2022 and 2021, respectively.
Convertible Notes Payable
On December 31, 2021, the Company sold a convertible promissory note (“CFO Note”) to the Company’s Chief Financial Officer, Douglas Durst, in the face amount of $90,000. The unsecured CFO Note bearing interest at 5% per annum, which originally carried an automatic conversion upon (i) a Qualified Financing, consisting of the closing of the sale of shares of its stock of at least $1,000,000, at a conversion rate of the lesser of (i) the product of (x) eight-tenths (0.8) and (y) the price per share paid by the purchasers of the preferred stock sold in the Qualified Financing and (ii) the price per share obtained by dividing $7,000,000 (the “Valuation Cap”) by the Company’s fully-diluted capitalization immediately prior to the Qualified Financing (excluding any shares issued upon conversion of convertible debt), was amended on December 17, 2021 to be automatically converted upon the date on which a registration statement for the Company’s underwritten public offering of its common stock with total proceeds to the Company of not less than $10,000,000 is effective at a fixed conversion price of $1.65 per common share, and all interest shall be deemed to have stopped accruing as of a date selected by the Company that is up to 10 days prior to the effective date of the registration statement filed in connection with the IPO. The maturity dates have been extended to June 30, 2023 and the public offering proceeds threshold has been amended to $5,000,000.
On May 28, 2020, the Company sold the Controller Note to the Company’s Controller, Chris Coulter, in the face amount of $50,000 (the “Controller Note”) on the same terms and conditions as the CFO Note. The Controller Note originally automatically converted upon (i) a Qualified Financing, consisting of the closing of the sale of shares of its stock of at least $1,000,000, at a conversion rate of the lesser of: (i) the product of (x) eight-tenths (0.8) and (y) the price per share paid by the purchasers of the preferred stock sold in the Qualified Financing and (ii) the price per share obtained by dividing the “Valuation Cap” by the Company’s fully-diluted capitalization immediately prior to the Qualified Financing (excluding any shares issued upon conversion of convertible debt), was amended on December 17, 2021 to be automatically converted upon the date on which a registration statement for the Company’s underwritten public offering of its common stock with total proceeds to the Company of not less than $10,000,000 is effective at a fixed conversion price of $1.65 per common share, and all interest shall be deemed to have stopped accruing as of a date selected by the Company that is up to 10 days prior to the effective date of the registration statement filed in connection with the IPO. The maturity dates have been extended to June 30, 2023 and the public offering proceeds threshold has been amended to $5,000,000.
Common Stock Sales
On January 10, 2022, the Company sold 3,031 shares of common stock to the Company’s Chief Operating Officer at $1.65 per share for proceeds of $5,000.
On December 31, 2021, the Company sold 6,060 shares of common stock, in connection with a capital raise, to the Company’s Chief Financial Officer, Douglas Durst, at $1.65 per share for total proceeds of $9,999.
Limited Liability Company Member Units Issued for Services
During the year ended December 31, 2021, the Company awarded, or vested, approximately an aggregate thirty-one (31) limited liability company (“LLC”) member units to members for services provided. The aggregate fair value of the LLC member units was $132,169 based on a valuation price per unit of approximately $4,209 per unit on the date of grant.
Common Stock Options
On January 1, 2022, the Company awarded options to purchase 144,000 shares of common stock under our 2022 Equity Incentive Plan (the “2022 Plan”) at an exercise price equal to $1.65 per share, exercisable over a ten-year period to the Company’s Chief Financial Officer. The options vest monthly over an eighteen (18) month period, with the initial vesting commencing on January 1, 2022. The estimated value using the Black-Scholes Pricing Model, based on a volatility rate of 29% and a call option value of $0.4612, was $66,419. The options are being expensed over the vesting period, resulting in $44,280 of stock-based compensation expense during the year ended December 31, 2022. As of December 31, 2022, a total of $22,139 of unamortized expenses are expected to be expensed over the vesting period.
Note 5 – Fair Value of Financial Instruments
Under FASB ASC 820-10-5, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). The standard outlines a valuation framework and creates a fair value hierarchy in order to increase the consistency and comparability of fair value measurements and the related disclosures. Under GAAP, certain assets and liabilities must be measured at fair value, and FASB ASC 820-10-50 details the disclosures that are required for items measured at fair value.
The Company has cash, notes receivable, derivative liabilities and debts that must be measured under the fair value standard. The Company’s financial assets and liabilities are measured using inputs from the three levels of the fair value hierarchy. The three levels are as follows:
Level 1 - Inputs are unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.
Level 2 - Inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates, yield curves, etc.), and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs).
| F-13 |
BRANCHOUT FOOD INC.
NOTES TO THE FINANCIAL STATEMENTS
Level 3 - Unobservable inputs that reflect our assumptions about the assumptions that market participants would use in pricing the asset or liability.
The following schedule summarizes the valuation of financial instruments at fair value on a recurring basis in the balances sheet as of December 31, 2022 and 2021:
| Fair Value Measurements at December 31, 2022 | ||||||||||||
| Level 1 | Level 2 | Level 3 | ||||||||||
| Assets | ||||||||||||
| Cash | $ | 312,697 | $ | - | $ | - | ||||||
| Cash, restricted | 235,750 | - | - | |||||||||
| Notes receivable | - | 384,628 | - | |||||||||
| Total assets | 548,447 | 384,628 | - | |||||||||
| Liabilities | ||||||||||||
| Convertible notes payable, related parties | - | - | 140,000 | |||||||||
| Convertible notes payable | - | - | 4,919,191 | |||||||||
| Notes payable | - | 2,250,000 | - | |||||||||
| Revolving line of credit | - | 91,541 | - | |||||||||
| Total liabilities | - | 2,341,541 | 5,059,191 | |||||||||
| $ | 548,447 | $ | (1,956,913 | ) | $ | (5,059,191 | ) | |||||
| Fair Value Measurements at December 31, 2021 | ||||||||||||
| Level 1 | Level 2 | Level 3 | ||||||||||
| Assets | ||||||||||||
| Cash | $ | 620,332 | $ | - | $ | - | ||||||
| Cash, restricted | 235,750 | - | - | |||||||||
| Notes receivable | - | 407,342 | - | |||||||||
| Total assets | 856,082 | 407,342 | - | |||||||||
| Liabilities | ||||||||||||
| Convertible notes payable, related parties, net of discounts of $19,004 | - | - | 120,996 | |||||||||
| Convertible notes payable, net of discounts of $1,028,509 | - | - | 1,115,083 | |||||||||
| Notes payable, net of discounts of $122,958 | - | 2,246,987 | - | |||||||||
| Revolving line of credit | - | 156,332 | - | |||||||||
| Derivative liabilities | - | - | 630,684 | |||||||||
| Total liabilities | - | 2,416,891 | 1,866,763 | |||||||||
| $ | 856,082 | $ | (2,009,549 | ) | $ | (1,866,763 | ) | |||||
There were no transfers of financial assets or liabilities between Level 1 and Level 2 inputs for the years ended December 31, 2022 and 2021.
The fair values of the Company’s derivative liabilities were estimated at the issuance date and are revalued at each subsequent reporting date, using a Monte Carlo Model.
| F-14 |
BRANCHOUT FOOD INC.
NOTES TO THE FINANCIAL STATEMENTS
Note 6 – Major Customers and Accounts Receivable
The Company had certain customers whose revenue individually represented 10% or more of the Company’s total net revenue, or whose accounts receivable balances individually represented 10% or more of the Company’s total accounts receivable, as follows:
For the years ended December 31, 2022 and 2021, two customers accounted for 70% and 90% of net revenue, respectively. The customers were not the same from year to year. For the year ended December 31, 2022, KEHE Distributors and Costco accounted for 11% and 59% of net sales, respectively. For the year ended December 31, 2021, Costco Wholesale Corporation and Sam’s Club Stores accounted for 65% and 25% of net sales, respectively.
On December 31, 2022, KeHE Distributors accounted for 58%, Wal-Mart Stores accounted for 18% and United Natural Foods accounted for 16% of accounts receivable. On December 31, 2021, one customer, Costco, accounted for 83% of accounts receivable.
Note 7 – Other Current Assets
Other current assets consist of the following:
| December 31, | ||||||||
| 2022 | 2021 | |||||||
| Prepaid insurance costs | $ | 959 | $ | 978 | ||||
| Prepaid advertising and trade show fees | 19,485 | 22,702 | ||||||
| Prepaid professional & license fees | 12,617 | 27,400 | ||||||
| Refunds receivable | 1,594 | 1,813 | ||||||
| Interest receivable | 7,996 | 6,642 | ||||||
| Advances to co-manufacturer, NXTDried(1) | 455,128 | - | ||||||
| Total other current assets | $ | 497,779 | $ | 59,535 | ||||
(1)The Company has advanced NXTDried Superfoods SAC (“NXTDried”), a company organized under the laws of Peru, with its principal office in San Isidro, Lima, Peru., a total of $455,128 over various dates between January 28, 2022 and June 30, 2022, for the purchase and construction of the facility and infrastructure necessary to facilitate the manufacturing of the Company’s products. The advance is to be repaid in the form of a $1.00 USD per kilogram discount on all products manufactured for the Company. The advance is not currently backed by a promissory note, and is unsecured.
Note 8 – Restricted Cash
On May 7, 2021, the Company entered into a secured loan agreement with EnWave Corporation (“EnWave”) that was partially collateralized with a cash pledge in the amount of $125,000, which was subsequently replaced by a Guarantee Agreement, dated November 22, 2021, in which the cash pledge was increased to $235,750, recorded as restricted cash, to cover EnWave’s responsibility for additional Valued Added Taxes (“VAT”) to be released on May 30, 2023.
The following table provides a reconciliation of cash and restricted cash reported within the balance sheets that sum to the total of the same such amounts shown in the statements of cash flows:
| December 31, | ||||||||
| 2022 | 2021 | |||||||
| Cash | $ | 312,697 | $ | 620,332 | ||||
| Restricted cash | 235,750 | 235,750 | ||||||
| Total cash and restricted cash shown in the statement of cash flows | $ | 548,447 | $ | 856,082 | ||||
| F-15 |
BRANCHOUT FOOD INC.
NOTES TO THE FINANCIAL STATEMENTS
Note 9 – Property and Equipment
Property and equipment at December 31, 2022 and 2021, consisted of the following:
| December 31, | ||||||||
| 2022 | 2021 | |||||||
| Equipment and machinery | $ | 1,116,769 | $ | 1,071,619 | ||||
| Less: Accumulated depreciation | (94,479 | ) | (1,226 | ) | ||||
| Total property and equipment, net | $ | 1,022,290 | $ | 1,070,393 | ||||
On May 7, 2021, the Company purchased an EnWave 60kw Vacuum Microwave Dehydration Machine in the amount of $1,000,000. The machine was not put in service until August 1, 2022; therefore, no depreciation was recorded for December 31, 2021. The purchase was made with $625,000 cash down and $375,000 financed through EnWave.
Depreciation of property and equipment was $93,253 and $323 for the years ended December 31, 2022 and 2021, respectively.
Note 10 – Notes Receivable
Nanuva Note Receivable
On February 4, 2021, the Company entered into a Manufacturing and Distributorship Agreement (“MDA”) with Natural Nutrition SpA, a Chilean company (“Nanuva”), in which the Company loaned $500,000 to Nanuva (“Advance Payment”) to help finance the capital investment needed for Nanuva to purchase two industrial fruit drying machines to be used in servicing the Company’s manufacturing needs. Pursuant to the MDA, the Company will recover the Advance Payment no later than May 31, 2027, and the loan will bear interest at 3% per annum. The loan shall be repaid pursuant to a two-dollar ($2/kg) deduction in the price of any product exported by Nanuva to the Company with certain mandatory minimum annual payments. Repayments commence on the earlier of a) the first invoice issued by Nanuva after installation of the drying equipment, or b) June 30, 2021. The MDA shall expire on May 31, 2027, with automatic annual renewals thereafter, unless it is terminated in accordance with the provisions within the agreement. A total of $33,100 and $98,494 had been repaid during the years ended December 31, 2022 and 2021, respectively, consisting of $22,714 of principal and $10,386 of interest for the year ended December 31, 2022, and consisting of $92,658 of principal and $5,835 of interest for the year ended December 31, 2021. All payments consisted of reductions in inventory costs, other than a payment of $15,000 in cash on March 24, 2021. As of December 31, 2022, a total of $392,625 was due from Nanuva, consisting of $384,628 of principal and $7,997 of unpaid interest. As of December 31, 2021, a total of $413,983 was due from Nanuva, consisting of $407,342 of principal and $6,641 of unpaid interest. The loan is collateralized by a second lien in the equipment. Pursuant to the MDA, the Company has been appointed as the distributor with exclusivity granted to the Company for the following territories:
| Product | Exclusivity
Territories | Minimum
Volume (Kg/month)(“MOQ”) | ||||
| Avocado Powder | Worldwide (except Chile) | 1,000 | ||||
| Banana Chips | Worldwide (except Chile) | 1,000 | ||||
| Avocado Snacks | North America (Canada and USA) | 1,000 | ||||
| Avocado Chips | Worldwide | 1,000 | ||||
| Other Powders | No Exclusivity | -0- | ||||
| F-16 |
BRANCHOUT FOOD INC.
NOTES TO THE FINANCIAL STATEMENTS
HHC Holdings Note Receivable- Related Party
On December 31, 2020, the Company sold equipment to HHC Holdings, LLC (“HHC”), in exchange for a $100,000 promissory note. HHC is a limited liability company in which the Company’s Chief Executive Officer, Eric Healy, and the Company’s Controller, Chris Coulter, collectively own 54% of the membership interests. The promissory note carried a 5% interest rate, matured on January 1, 2022, and called for monthly payments of principal and interest in the amount of $417, commencing on January 1, 2021. On March 5, 2021, HHC paid $66,058 of the BranchOut loan by assuming this BranchOut debt to Cedar Holdings, LLC further disclosed in Note 14. No gain or loss was recognized on the exchange. On May 3, 2021, the $33,941 balance of the note receivable was paid by HHC, and the promissory note was cancelled.
Note 11 – Accrued Expenses
Accrued expenses consist of the following:
| December 31, | ||||||||
| 2022 | 2021 | |||||||
| Accrued payroll and taxes | $ | 40,089 | $ | 21,719 | ||||
| Accrued interest | 602,246 | 261,236 | ||||||
| Accrued chargebacks | 46,387 | 15,382 | ||||||
| Total accrued expenses | $ | 688,722 | $ | 298,337 | ||||
Note 12 – Revolving Line of Credit
On October 1, 2021, we entered into a Growth Line of Credit Agreement (“LOC”) with Ampla LLC, formerly known as Gourmet Growth (“Gourmet Growth”), which allows us to draw funds from time to time, up to an aggregate principal amount of $400,000, for the purpose of purchasing inventory. The LOC accrues interest at 15% per annum and requires a 2% origination fee on each draw. The LOC was secured by all receivables, and all other tangible and intangible personal property, including, but not limited to cash, inventory, equipment, investments, contract rights and other general intangibles and chattel paper. The LOC requires that we collect payments on our accounts receivable in an account, in which Gourmet Growth is able to collect a percentage of the collections to repay the LOC. The line of credit is revolving and automatically renewed upon use for a 12-month period. Repayment is made from current receivables.
The Company’s balance of the LOC was $91,541 and $156,322 as of December 31, 2022 and 2021, respectively.
The Company recorded interest expense pursuant to the stated interest rates on the LOC in the amount of $19,886 and $3,223 for the years ended December 31, 2022 and 2021, respectively.
| F-17 |
BRANCHOUT FOOD INC.
NOTES TO THE FINANCIAL STATEMENTS
Note 13 – Convertible Notes Payable, Related Parties
Convertible notes payable, related parties consisted of the following at December 31, 2022 and 2021, respectively:
| December 31, | December 31, | |||||||
| 2022 | 2021 | |||||||
| On December 31, 2021, the Company sold a convertible promissory note (“CFO Note”) to the Company’s Chief Financial Officer, Douglas Durst in the face amount of $90,000. The unsecured CFO Note, bears interest at 5% per annum, originally carried an automatic conversion upon (i) a Qualified Financing, consisting of the closing of the sale of shares of its stock of at least $1,000,000, at a conversion rate of the lesser of (i) the product of (x) eight-tenths (0.8) and (y) the price per share paid by the purchasers of the preferred stock sold in the Qualified Financing and (ii) the price per share obtained by dividing $7,000,000 (the “Valuation Cap”) by the Company’s fully-diluted capitalization immediately prior to the Qualified Financing (excluding any shares issued upon conversion of convertible debt), were amended on December 17, 2021 to be automatically converted upon the date on which a registration statement for the Company’s underwritten public offering of its common stock with total proceeds to the Company of not less than $10,000,000 (the “IPO”) is effective, at a fixed conversion price of $1.65 per common share, and all interest shall be deemed to have stopped accruing as of a date selected by the Company that is up to 10 days prior to the effective date of the registration statement filed in connection with the IPO. The maturity date was extended to June 30, 2023 and the public offering proceeds threshold has been amended to $5,000,000. | $ | 90,000 | $ | 90,000 | ||||
| On May 28, 2020, the Company sold a convertible promissory note (“Controller Note”) to the Company’s Controller, Chris Coulter in the face amount of $50,000. The unsecured Controller Note, bears interest at 5% per annum, originally carried an automatic conversion upon (i) a Qualified Financing, consisting of the closing of the sale of shares of its stock of at least $1,000,000, at a conversion rate of the lesser of (i) the product of (x) eight-tenths (0.8) and (y) the price per share paid by the purchasers of the preferred stock sold in the Qualified Financing and (ii) the price per share obtained by dividing $7,000,000 (the “Valuation Cap”) by the Company’s fully-diluted capitalization immediately prior to the Qualified Financing (excluding any shares issued upon conversion of convertible debt), were amended on December 17, 2021 to be automatically converted upon the date on which a registration statement for the Company’s underwritten public offering of its common stock with total proceeds to the Company of not less than $10,000,000 (the “IPO”) is effective, at a fixed conversion price of $1.65 per common share, and all interest shall be deemed to have stopped accruing as of a date selected by the Company that is up to 10 days prior to the effective date of the registration statement filed in connection with the IPO. The maturity date was also extended to June 30, 2023 and the public offering proceeds threshold has been amended to $5,000,000. | 50,000 | 50,000 | ||||||
| Total convertible notes payable, related parties | 140,000 | 140,000 | ||||||
| Less: unamortized debt discounts | - | 19,004 | ||||||
| Convertible notes payable, related parties | $ | 140,000 | $ | 120,996 | ||||
| Less: current maturities | 140,000 | - | ||||||
| Convertible notes payable, related parties, less current maturities | $ | - | $ | 120,996 | ||||
In accordance with ASC 470-20 Debt with Conversion and Other Options, the Company recorded total discounts of $19,054 on the CFO Note and $19,961 on the Controller Note upon the respective origination dates for the embedded derivative features of the convertible debts. The discounts were amortized to interest expense over the term of the debentures using the effective interest method. The Company recorded $19,004 and $13,262 of interest expense pursuant to the amortization of note discounts during the years ended December 31, 2022 and 2021, respectively.
| F-18 |
BRANCHOUT FOOD INC.
NOTES TO THE FINANCIAL STATEMENTS
In accordance with ASC 815-15, the Company determined that the variable conversion feature and shares to be issued on the Convertible Notes, Related Parties represented embedded derivative features, and these are shown as derivative liabilities on the balance sheet. The Company calculated the fair value of the compound embedded derivatives associated with the convertible debentures utilizing a Monte Carlo simulation model.
The Company recorded interest expense pursuant to the stated interest rates on the Convertible Notes, Related Parties in the amount of $6,999 and $2,499 for the years ended December 31, 2022 and 2021, respectively.
Note 14 – Convertible Notes Payable
Convertible notes payable consists of the following at December 31, 2022 and 2021, respectively:
| December 31, | December 31, | |||||||
| 2022 | 2021 | |||||||
| On various origination dates between October 28, 2022 and December 13, 2022, the Company sold a total of sixteen (16) individual convertible promissory notes (“2022 Convertible Notes”) with substantially the same terms. The unsecured Convertible Notes, bearing interest at 8% per annum, mature on the earlier of: a) June 30, 2023, as extended from the original maturity date of March 31 2023, b) the closing of a Qualified Subsequent Financing, c) the closing of a change of control, or d) the Company’s S-1 registration statement being declared effective and the signing of a firm commitment underwriting agreement for a capital raise of at least ten million dollars ($10,000,000). Each note is convertible at a fixed conversion price of $1.65 per common share, and all interest shall be deemed to have stopped accruing as of a date selected by the Company that is up to 10 days prior to the effective date of the registration statement filed in connection with the IPO. Each note is mandatorily convertible upon the Company’s S-1 registration statement being declared effective and the signing of a firm commitment underwriting agreement for a capital raise of at least ten million dollars ($10,000,000). The public offering proceeds threshold has subsequently been amended to $5,000,000. The notes carry a default interest rate of 18% per annum. | $ | 645,600 | $ | - | ||||
| On June 6, 2022, the Company completed the sale of a (i) convertible promissory note in the principal amount of $200,000 (“Fluffco Convertible Note”) to Fluffco, LLC (“Fluffco”), and (ii) a five-year warrant to purchase 8,485 shares of the Company’s common stock at an exercise price of $6.50 per share, for an aggregate purchase price of $186,000, pursuant to a Securities Purchase Agreement between the Company and Fluffco (the “Purchase Agreement”). The unsecured convertible note bears interest at 8% per annum and carries a default rate of 18%, which is mandatorily convertible upon the date on which a registration statement for the Company’s underwritten public offering of its common stock with total proceeds to the Company of not less than $10,000,000 is effective, at a fixed conversion price of $1.65 per common share. The note matured on November 30, 2022, and all interest shall be deemed to have stopped accruing as of a date selected by the Company that is up to 10 days prior to the effective date of the registration statement filed in connection with the IPO. The aggregate estimated value using the Black-Scholes Pricing Model, based on a volatility rate of 35% and a call option value of $0.2679, was $8,485, and is being amortized as a debt discount over the life of the loan. The Company received net proceeds of $186,000 after deductions of debt discounts, consisting of $14,000 of legal fees. The maturity dates were extended to June 30, 2023 and the public offering proceeds threshold has been amended to $5,000,000. | 200,000 | - | ||||||
| On May 26, 2022, the Company completed the sale of a (i) convertible promissory note in the principal amount of $1,250,000 (“Foss Convertible Note”) to Don Foss (“Foss”), and (ii) a five-year warrant to purchase 45,833 shares of the Company’s common stock at an exercise price of $6.50 per share, for an aggregate purchase price of $1,162,500, pursuant to a Securities Purchase Agreement between the Company and Foss (the “Purchase Agreement”). The unsecured convertible note bears interest at 8% per annum and carries a default rate of 18%, which is mandatorily convertible upon the date on which a registration statement for the Company’s underwritten public offering of its common stock with total proceeds to the Company of not less than $10,000,000 is effective, at a fixed conversion price of $1.65 per common share. The note matured on November 30, 2022, and all interest shall be deemed to have stopped accruing as of a date selected by the Company that is up to 10 days prior to the effective date of the registration statement filed in connection with the IPO. The aggregate estimated value using the Black-Scholes Pricing Model, based on a volatility rate of 34% and a call option value of $0.2570, was $45,833, and is being amortized as a debt discount over the life of the loan. The Company received net proceeds of $1,162,500 after deductions of debt discounts, consisting of $87,500 of legal fees. The maturity dates were extended to June 30, 2023 and the public offering proceeds threshold has been amended to $5,000,000. | 1,250,000 | - | ||||||
| On various origination dates between February 15, 2022 and February 25, 2022, the Company sold two (2) individual convertible promissory notes (“First Convertible Eagle Vision Notes”) with a face value of $350,000 each, under substantially the same terms. The unsecured convertible notes bear interest at 5% per annum and carry a default rate of 18%, which are mandatorily convertible upon the date on which a registration statement for the Company’s underwritten public offering of its common stock with total proceeds to the Company of not less than $10,000,000 is effective, at a fixed conversion price of $1.65 per common share. The notes matured on November 30, 2022, and all interest shall be deemed to have stopped accruing as of a date selected by the Company that is up to 10 days prior to the effective date of the registration statement filed in connection with the IPO. The maturity dates were extended to June 30, 2023 and the public offering proceeds threshold has been amended to $5,000,000. | 700,000 | - | ||||||
| On various origination dates between March 1, 2018 and December 31, 2021, the Company sold a total of fifty-two (52) individual convertible promissory notes (“Convertible Notes”) with substantially the same terms, for total proceeds of $2,143,591. The unsecured Convertible Notes bearing interest at 5% per annum, which originally carried an automatic conversion upon (i) a Qualified Financing, consisting of the closing of the sale of shares of its stock of at least $1,000,000, at a conversion rate of the lesser of (i) the product of (x) eight-tenths (0.8) and (y) the price per share paid by the purchasers of the preferred stock sold in the Qualified Financing and (ii) the price per share obtained by dividing $7,000,000 (the “Valuation Cap”) by the Company’s fully-diluted capitalization immediately prior to the Qualified Financing (excluding any shares issued upon conversion of convertible debt), were amended on December 17, 2021 to be automatically converted upon the date on which a registration statement for the Company’s underwritten public offering of its common stock with total proceeds to the Company of not less than $5,000,000, as amended, is effective at fixed conversion prices of either $0.82 or $1.65 per common share (six (6) of the Convertible Notes, totaling $355,000 of principal, were amended to convert at $0.82 per common share, and forty-six (46) of the Convertible Notes, totaling $1,788,591 of principal, were amended to convert at $1.65 per common share), and all interest shall be deemed to have stopped accruing as of a date selected by the Company that is up to 10 days prior to the effective date of the registration statement filed in connection with the IPO. On February 14, 2022, one of the Convertible Notes was repaid, consisting of $20,000 of principal and $3,586 of interest. The Convertible Notes were originally set to mature after eighteen months but were later amended to extend the maturity to June 30, 2023 and the public offering proceeds threshold has been amended to $5,000,000. | 2,123,591 | 2,143,591 | ||||||
| Total convertible notes payable | 4,919,191 | 2,143,591 | ||||||
| Less: unamortized debt discounts | - | 1,028,509 | ||||||
| Convertible notes payable | $ | 4,919,191 | $ | 1,115,083 | ||||
| Less: current maturities | 4,919,191 | - | ||||||
| Convertible notes payable, less current maturities | $ | - | $ | 1,115,083 | ||||
| F-19 |
BRANCHOUT FOOD INC.
NOTES TO THE FINANCIAL STATEMENTS
In accordance with ASC 470, the Company recorded total discounts of $1,604,537 for the embedded derivative features of the convertible debts incurred as of December 31, 2021. The discounts were amortized to interest expense over the term of the debentures using the effective interest method. The Company recorded $1,028,509 and $93,596 of interest expense pursuant to the amortization of note discounts for the years ended December 31, 2022 and 2021, respectively.
In accordance with ASC 815, the Company determined that the variable conversion feature and shares to be issued on the Convertible Notes represented embedded derivative features, and these are shown as derivative liabilities on the balance sheet. The Company calculated the fair value of the compound embedded derivatives associated with the convertible debentures utilizing a Monte Carlo simulation model. In 2021, under ASC 480-10-25, the conversion feature of the convertible notes was accounted for as a liability since the conversion was a discount to the IPO price, which “lacked risk” for the note holder and forced liability accounting. Effective January 1, 2022, the convertible notes with the conversion feature were amended to fixed conversion rates of either $0.82 or $1.65 per share, therefore in 2022, ASC 480-10-25 no longer applies given the fixed conversion rate and the derivative liability was removed.
The Company recorded interest expense pursuant to the stated interest rates on the Convertible Notes in the amount of $211,803 and $57,802 for the years ended December 31, 2022 and 2021, respectively.
Note 15 – Notes Payable
On May 7, 2021, we accepted subscriptions for $1,000,000 and issued senior secured promissory notes and stock purchase warrants to six accredited investors. Each promissory note (titled a “Subordinated Note”) accrues interest at an annual rate of 15%, of which 10% is to be paid monthly, and the remaining 5% to remain unpaid, compound annually, and is due and payable on the maturity date. Upon default, the aggregate interest rate would increase to 18% per annum. Each Subordinated Note is due and payable on the earlier of: (i) November 30, 2022, (b) the closing of a “Qualified Subsequent Financing”, and (c) the closing of an initial public offering, as amended. In the event a note is pre-paid, we are required to pay a minimum one-year of interest. The term “Qualified Subsequent Financing” means the next sale, or series of related sales, of any security in which we received $2,000,000 or more from any parties that do not currently own, directly or indirectly, any of our common stock. The maturity dates were extended to June 30, 2023. We received gross proceeds of $1,000,000 in connection with the offering, and net proceeds of $890,000, after payment of $110,000 in diligence fees to Eagle Vision Ventures, Inc. (“Eagle Vision”), which is being amortized as a debt discount over the life of the notes. The Subordinated Notes are a general secured obligation of the Company, subordinated to the Senior Secured Notes mentioned below.
The documentation with the investors of our May 2021 Bridge Financing contains affirmative covenants that require us to make available to the investors our officers, senior employees, and public accounts to discuss and advise on the affairs of the company and provide to them monthly financial statements and annual budgets. We are also required to file a registration statement with the SEC on or before December 31, 2022, in connection with an initial public offering. The negative covenants in the documentation preclude us from incurring indebtedness senior to the Senior Secured Notes, incur any lien on our real or personal property, and dispose of any property outside the ordinary course of business.
In addition to the Senior Secured Notes, each investor received a warrant to purchase shares of our common stock at $2.84 per share, expiring ten years from the issuance date, as subsequently amended on March 7, 2022. The total number of shares available for purchase under the warrants are 385,607 shares, including 38,456 warrants issued as offering costs in connection with the Subordinated Notes, which are also being amortized as a debt discount over the life of the notes. We are required to register the shares issuable upon exercise of the warrants with the SEC in this filing. Prior to the exercise of a warrant, we are required to provide the investor monthly financial statements unaudited statements of income, cash flows, and stockholder equity for each such monthly period. The principal balance of the notes payable was $1,000,000 and $929,420, net of $70,580 of unamortized debt discounts, as of December 31, 2022 and 2021, respectively.
On May 7, 2021, we entered into a secured loan agreement (“Loan Agreement”) with EnWave, a Canadian corporation, for $375,000 pursuant to an equipment purchase agreement, whereby the Company purchased from EnWave a 60kW REV vacuum microwave dehydration machine (“EnWave Equipment”). The Loan Agreement bears interest at 12% per annum, calls for monthly payments of principal and interest in the amount of $14,531, and a lump-sum principal payment in the amount of $190,000 within twelve (12) months following the date the EnWave Equipment was shipped to the Company, and matures on November 6, 2023. The Loan Agreement is collateralized with a security interest in the EnWave Equipment, all of the Company’s receivables and inventory, as well as a cash pledge in the amount of $125,000 which was replaced with funds in trust of $235,750 to cover EnWave’s responsibility for additional value added Taxes (VAT). The note payable was repaid in full on November 1, 2022. The balance was $85,445 as of December 31, 2021.
| F-20 |
BRANCHOUT FOOD INC.
NOTES TO THE FINANCIAL STATEMENTS
On December 8, 2020, we accepted subscriptions for $1,250,000 and issued senior secured promissory notes and stock purchase warrants to three accredited investors. Each promissory note (titled a “Senior Secured Note”) accrues interest at an annual rate of 15%, of which 10% is to be paid monthly, and the remaining 5% to remain unpaid, compound annually, and is due and payable on the maturity date. Upon default, the aggregate interest rate would increase to 18% per annum. Each Senior Secured Note is due and payable on the earlier of: (i) November 30, 2022, (b) the closing of a “Qualified Subsequent Financing”, and (c) the closing of an initial public offering, as amended. In the event a note is pre-paid, we are required to pay a minimum one-year of interest. The term “Qualified Subsequent Financing” means the next sale, or series of related sales, of any security in which we received $2,000,000 or more from any parties that do not currently own, directly or indirectly, any of our common stock. The maturity dates were extended to June 30, 2023. We received net proceeds of $1,115,000, after payment of $135,000 in diligence fees to Eagle Vision, in connection with the offering.
The Senior Secured Notes are a general secured obligation of the Company, senior in all respects to the liens, terms, covenants, and conditions of all existing debt of the Company, except for our loans from Small Business Administration. We executed a Security Agreement concurrently with the issuance of the Notes and filed UCC financing statements with the Oregon Secretary of State.
The documentation with the investors of our December 2020 Bridge Financing contains affirmative covenants that require us to make available to the investors our officers, senior employees, and public accounts to discuss and advise on the affairs of the company and provide to them monthly financial statements and annual budgets. We are also required to file a registration statement with the SEC on or before December 31, 2022, in connection with an initial public offering. The negative covenants in the documentation preclude us from incurring indebtedness senior to the Senior Secured Notes, incur any lien on our real or personal property, and dispose of any property outside the ordinary course of business.
In addition to the Senior Secured Notes, each investor received a warrant to purchase shares of our common stock at $2.60 per share, expiring ten years from the issuance date, as subsequently amended on March 7, 2022. The total number of shares available for purchase under the warrants are 179,396 shares, including 47,811 warrants issued as offering costs in connection with the Subordinated Notes, which are also being amortized as a debt discount over the life of the notes. We are required to register the shares issuable upon exercise of the warrants with the SEC in this filing. Prior to the exercise of a warrant, we are required to provide the investor monthly financial statements unaudited statements of income, cash flows, and stockholder equity for each such monthly period. The principal balance of the Senior Secured Notes was $1,250,000 and $1,197,622, net of $52,378 of unamortized debt discounts, as of December 31, 2022 and 2021, respectively. The debt discounts were amortized as a debt discount over the life of the notes, resulting in $52,378 and $120,241 of finance costs, including $30,159 and $13,136 of amortized discounts attributable to the warrants, for the years ended December 31, 2022 and 2021, respectively.
On May 17, 2020, the Company entered into a loan authorization and loan agreement with the United States Small Business Administration (the “SBA”), as lender, pursuant to the SBA’s Economic Injury Disaster Loan (“EIDL”) assistance program in light of the impact of the COVID-19 pandemic on the Company’s business (the “EIDL Loan Agreement”) encompassing a $34,500 Promissory Note issued to the SBA (the “EIDL Note”) (together with the EIDL Loan Agreement, the “EIDL Loan”), bearing interest at 3.75% per annum. In connection with entering into the EIDL Loan, the Company also executed a security agreement, dated May 17, 2020, between the SBA and the Company (the “EIDL Security Agreement”) pursuant to which the EIDL Loan is secured by a security interest on all of the Company’s assets. Under the EIDL Note, the Company is required to pay principal and interest payments of $169 every month beginning May 17, 2021; however, the SBA extended the repayment date to November 17, 2022. All remaining principal and accrued interest is due and payable on May 17, 2050. The EIDL Note may be repaid at any time without penalty. The principal balance of the EIDL Loan was $34,500 as of December 31, 2022 and 2021.
| F-21 |
BRANCHOUT FOOD INC.
NOTES TO THE FINANCIAL STATEMENTS
On January 13, 2020, the Company issued a promissory note to Cedar Holdings LLC (“Cedar Holdings”) in the amount of $81,147, in exchange for settlement of an outstanding $66,059 equipment lease. Cedar Holdings paid off the Company’s existing equipment lease and assumed the Company’s liability, which consisted of a principal balance due of $50,214, resulting in a loss on early extinguishment of debts of $30,933 for the year ended December 31, 2020. The unsecured promissory note carried interest at 8% per annum, called for monthly installment payments of $1,645 commencing February 5, 2020, and was to mature on February 5, 2025. On March 5, 2021, the remaining $66,059 principal balance was settled in exchange for the forgiveness of an equivalent note receivable owed from HHC. HHC is a limited liability company in which the Company’s Chief Executive Officer, Eric Healy, and the Company’s Controller, Chris Coulter, collectively own 54% of the membership interests. See Note 10, Notes Receivable, for more information. The note payable was repaid in full as of December 31, 2021.
Notes payable consists of the following as of December 31, 2022 and 2021 are as follows:
| December 31, | ||||||||
| 2022 | 2021 | |||||||
| Total notes payable | $ | 2,284,500 | $ | 2,369,945 | ||||
| Less: unamortized debt discounts | - | 122,958 | ||||||
| Notes payable | $ | 2,284,500 | $ | 2,246,987 | ||||
| Less: current maturities | 2,250,000 | - | ||||||
| Notes payable, less current maturities | $ | 34,500 | $ | 2,246,987 | ||||
The Company recorded total discounts of $176,228 on the Subordinated Notes, consisting of $110,000 of loan origination costs paid to Eagle Vision Ventures, Inc, and an aggregate $66,228 of debt discounts on warrants granted to the eight investors for warrants issued in consideration of the debt financing received on May 7, 2021, including warrants issued as offering costs to two additional parties. The debt discounts were amortized as a debt discount over the life of the notes using the straight-line method, which closely approximated the effective interest method, resulting in $70,581 and $105,647 of finance costs, including $26,525 and $39,703 of amortized discounts attributable to the warrants, for the years ended December 31, 2022 and 2021, respectively. As of December 31, 2022, the debt discounts had been fully amortized.
The Company recognized $846,536 and $526,302 of interest expense on notes payable for the years ended December 31, 2022 and 2021, respectively. Interest expense consisted of $346,378 of stated interest expense and $500,158 of amortized debt discounts, including $39,661 of amortization of the debt discount on the Subordinated Notes due to warrants and $377,200 of expense related to the amendment of those warrants, during the year ended December 31, 2022. Interest expense consisted of $300,413 of stated interest expense and $225,889 of amortized debt discounts, including $69,862 of amortization of the debt discount on the Subordinated Notes due to warrants, during the year ended December 31, 2021.
The Company recognized interest expense as follows for the years ended December 31, 2022, and 2021, respectively:
| December 31, | ||||||||
| 2022 | 2021 | |||||||
| Interest on revolving lines of credit | $ | 19,886 | $ | 3,223 | ||||
| Interest on convertible notes payable, related parties | 6,999 | 2,499 | ||||||
| Interest on convertible notes payable | 211,803 | 57,802 | ||||||
| Interest on notes payable | 346,378 | 300,413 | ||||||
| Amortization of debt discounts, convertible notes payable | 101,500 | - | ||||||
| Amortization of debt discounts, warrants, convertible notes payable | 14,050 | - | ||||||
| Amortization of debt discounts, notes payable | 83,297 | 156,027 | ||||||
| Amortization of debt discounts, warrants, notes payable | 416,861 | 69,862 | ||||||
| Amortization of debt discounts on convertible notes payable, related parties, derivatives | 19,004 | 13,262 | ||||||
| Amortization of debt discounts on convertible notes payable, derivatives | 1,028,509 | 93,596 | ||||||
| Interest on credit cards | 2,606 | 1,045 | ||||||
| Total interest expense | $ | 2,250,893 | $ | 697,729 | ||||
| F-22 |
BRANCHOUT FOOD INC.
NOTES TO THE FINANCIAL STATEMENTS
The aggregate amounts of maturities of notes payable during each of the five years following the balance sheet date and thereafter, including amounts due within one year and classified as current, are as follows:
| Fiscal Year Ending | Note Payable Maturities | |||||||||||
| December 31, | EIDL | EagleVision | Total | |||||||||
| 2023 | $ | - | $ | 2,250,000 | $ | 2,250,000 | ||||||
| 2024 | - | - | - | |||||||||
| 2025 | - | - | - | |||||||||
| 2026 | - | - | - | |||||||||
| 2027 | 83 | - | 83 | |||||||||
| 2028 and thereafter | 34,417 | - | 34,417 | |||||||||
| $ | 34,500 | $ | 2,250,000 | $ | 2,284,500 | |||||||
| Less effects of discounting | - | - | - | |||||||||
| Total notes payable | $ | 34,500 | $ | 2,250,00 | $ | 2,284,500 | ||||||
Note 16 – Derivative Liabilities
The Company originally issued debts that consist of the issuance of convertible notes with variable conversion provisions. The conversion terms of the convertible notes were variable based on certain factors, such as the future IPO and the signing of a firm commitment underwriting agreement for a capital raise in defined amounts. In 2021, under ASC 480-10-25, the conversion feature of the convertible notes was accounted for as a liability since the conversion was a discount to the IPO price, which “lacked risk” for the note holder and forced liability accounting. Effective January 1, 2022, the convertible notes with the conversion feature were amended to fixed conversion rates of either $0.82 or $1.65 per share, therefore in 2022, ASC 480-10-25 no longer applies given the fixed conversion rate.
The fair values of the Company’s derivative liabilities were estimated at the issuance date and are revalued at each subsequent reporting date using a Monte Carlo Model.
The following is a summary of changes in the fair market value of the derivative liabilities during the years ended December 31, 2022 and 2021:
| Derivative | ||||
| Liability | ||||
| Balance, December 31, 2020 | $ | 494,256 | ||
| Increase in derivative value due to issuances of convertible promissory notes | 822,802 | |||
| Change in fair value of derivative liabilities due to the mark to market adjustment | (385,924 | ) | ||
| Modification of convertible notes | (300,450 | ) | ||
| Balance, December 31, 2021 | $ | 630,684 | ||
| Modification of convertible notes | (630,684 | ) | ||
| Balance, December 31, 2022 | $ | - | ||
Key inputs and assumptions used to value the convertible debentures are as follows:
| ● | Stock price based on 409A valuations and common stock transactions would fluctuate with projected volatility. | |
| ● | The variable conversion rate for each note. | |
| ● | The projected volatility curve from an annualized analysis for each valuation date was based on the historical volatility of the comparable companies and the term remaining for each note. | |
| ● | An event of default was valued with zero likelihood. | |
| ● | The holder would maximize their returns and convert all of the notes at maturity. | |
| ● | A reset event and conversion due to an IPO of Change of Control event were based on management’s estimates. |
| F-23 |
BRANCHOUT FOOD INC.
NOTES TO THE FINANCIAL STATEMENTS
Note 17 – Commitments and Contingencies
The Company has contractual obligations under its LOC. Additionally, the Company from time to time may be involved in various inquiries, administrative proceedings and litigation relating to matters arising in the normal course of business. The Company is not aware of any inquiries or administrative proceedings and is not currently a defendant in any material litigation and is not aware of any threatened litigation that could have a material effect on the Company.
On January 19, 2022, the Company entered into a contract manufacturing agreement with NXTDried Superfoods SAC to produce for the Company products for distribution. The Company agreed to pre-pay for inventory via an advance to enable the Manufacturer to invest in necessary processing facilities that will be reimbursed to the Company on an agreed per kg basis over the period from 2022 to 2026.
On May 7, 2021, the Company entered into a license agreement (“License Agreement”) with EnWave, pursuant to which EnWave licensed the EnWave technology, a collection of patents and intellectual property used to manufacture and operate vacuum microwave dehydration machines (the “EnWave Equipment”), to the Company. The License Agreement entitles EnWave to a fixed royalty percentage on all revenue from the sale of products produced using EnWave Equipment, net of trade or volume discounts, refunds paid, settled claims for damaged goods, applicable excise, sales and withholding taxes imposed at the time of the sale, and provides the Company with certain exclusivity rights. In order to maintain the exclusivity of the avocado products, the Company agreed to annual royalty minimums as follows:
| Year | Exclusivity Retention Royalty | |||
| 2021 | $ | - | ||
| 2022 | - | |||
| 2023 | 206,763 | |||
| 2024 | 225,000 | |||
| 2025 and each subsequent year of the term | 300,000 | |||
| 2026 | 300,000 | |||
| 2027 | 300,000 | |||
| Total* | $ | 1,331,763 | ||
The unrecognized commitment thereafter is $300,000 in perpetuity, as long as the Company elects to maintain exclusivity.
In addition to the initial EnWave Equipment we purchased, as disclosed in Note 9, the Company agreed to the purchase of additional equipment over time. The additional equipment purchase schedule requires the Company to purchase a “Second EnWave Machine” on or before, June 30, 2023, and pay a non-refundable down payment of 40% of the purchase price, or pay up-to four non-refundable deposits for the Second EnWave Machine in the amount of fifty thousand dollars ($50,000) each on September 30, 2023, December 31, 2023, March 31, 2024 and June 30, 2024 (the “Interim Deposits”), and pay the remainder of a 40% down payment of the purchase price on or before June 30, 2024. The Company is also required to execute an Equipment Purchase Agreement for a 120kW, or greater rated power, EnWave Equipment (the “Third EnWave Machine”) on or before December 31, 2025, and satisfy the payment obligations required with respect to the Third EnWave Machine by the License Agreement. The Company is also required to enter into an Equipment Purchase Agreement for a 120kW, or greater, rated power EnWave Equipment (the “Fourth EnWave Machine”) on, or before, December 31, 2026, and to satisfy the payment obligations required with respect to the Fourth EnWave Machine by the License Agreement. The License Agreement is effective as long as EnWave possesses its EnWave technology. There have been no royalty payments to date, and any future minimum royalty payments or equipment purchases under this license agreement are an unrecognized commitment, as they relate to retaining exclusivity of the avocado products going forward and the Company can elect not to pay.
Note 18 – Stockholders’ Equity (Deficit)
LLC Conversion
On November 19, 2021, the Company converted from an Oregon limited liability company into a Nevada corporation and changed its name from AvoLov, LLC to BranchOut Food, Inc. Effective November 19, 2021, all of the Company’s outstanding membership units were converted into an aggregate 2,939,488 shares of common stock on 1 to 5,113 conversion ratio, whereby each LLC member received 5,113 shares of common stock for each LLC member unit of AvoLov, LLC held at the time of conversion.
LLC Member Units
Prior to the LLC conversion, the Company had 1,000,000 authorized units with no par value, of which 900,000 units were designated as Class A Units and 100,000 units were designated as Class B Units. Class A Units were the only units that carried voting rights. Each holder of Class A Units was entitled to one vote for each unit held. The two classes were otherwise similar. Upon the LLC Conversion, all the then outstanding LLC member units were converted into shares of common stock on a 1 to 5,113 basis. There were approximately 533 Class A Units and 42 Class B Units outstanding immediately prior to conversion.
Preferred Stock
The Company has authorized 20,000,000 shares of $0.001 par value preferred stock. As of December 31, 2022, none of the preferred stock has been designated or issued.
Common Stock
The Company has authorized 200,000,000 shares of $0.001 par value common stock. As of December 31, 2022, a total of 3,001,909 shares of common stock have been issued. Each holder of common stock is entitled to one vote for each share of common stock held.
Common Stock Issued for Conversion of LLC
On November 19, 2021, the Company issued 2,939,488 shares of common stock in exchange for approximately five hundred seventy-five (575) LLC member units pursuant to the conversion from an LLC to a C-Corporation. No gain or loss was recognized on the exchange.
Common Stock Sales, Related Party for the Year Ended December 31, 2022
On January 10, 2022, the Company sold 3,031 shares of common stock to the Company’s Chief Operating Officer at $1.65 per share for proceeds of $5,000.
Common Stock Sales for the Year Ended December 31, 2022
On January 7, 2022, the Company sold 3,030 shares of common stock to an accredited investor at $1.65 per share for proceeds of $5,000.
Common Stock Issued for Services for the Year Ended December 31, 2022
On April 30, 2022, the Company awarded 2,500 shares of common stock to a consultant for services provided. The fair value of the common stock was $4,125 based on recent sales of common stock to third parties.
On January 17, 2022, the Company awarded 12,300 shares of common stock to a consultant for services provided.
| F-24 |
BRANCHOUT FOOD INC.
NOTES TO THE FINANCIAL STATEMENTS
The fair value of the common stock was $20,295 based on recent sales of common stock to third parties.
Common Stock Issued for Services for the Year Ended December 31, 2021
On November 22, 2021, the Company awarded 2,500 shares of common stock to a consultant for services provided. The fair value of the common stock was $4,125 based on recent sales of common stock to third parties.
Common Stock Sales for the Year Ended December 31, 2021
On December 31, 2021, the Company sold a total of 27,000 shares of common stock to two accredited investors at $1.65 per share for aggregate proceeds of $44,550.
On December 31, 2021, the Company sold 6,060 shares of common stock to the Company’s Chief Financial Officer, Douglas Durst, at $1.65 per share for total proceeds of $9,999.
On December 30, 2021, the Company sold 6,000 shares of common stock to Rowland W. Day II and Jaimie D. Day Family Trust U/T/D April 13, 1990, a trust for which the Company’s securities attorney Rowland W. Day, Esq. is the trustee, at $1.65 per share for total proceeds of $9,900.
LLC Member Units Issued for Services for the Year Ended December 31, 2021
During the year ended December 31, 2021, the Company awarded, or vested, approximately an aggregate thirty-one (31) LLC member units to members for services provided. The aggregate fair value of the LLC member units was $132,169 based on a valuation price per unit of approximately $4,209 per unit on the date of grant.
Note 19 – Common Stock Options
Stock Incentive Plan
Our board of directors and shareholders adopted the 2022 Plan. Our 2022 Plan allows for the grant of a variety of equity vehicles to provide flexibility in implementing equity awards, including nonqualified stock options, incentive stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, performance units, incentive bonus awards, other cash-based awards and other stock-based awards. The number of shares reserved for issuance under the 2020 Equity Plan to an aggregate total of 1,500,000 shares and has been approved by a majority of shareholders of record on January 1, 2022.
Common Stock Options Issued for Services
On September 19, 2022, the Company awarded options to purchase 25,008 shares of common stock under the 2022 Plan at an exercise price equal to $1.65 per share, exercisable over a ten-year period to an employee. One fourth of the options vest one year from the grant date, and the remaining shares vest monthly over a thirty-six (36) month period from the 1-year anniversary of the grant date. The estimated value using the Black-Scholes Pricing Model, based on a volatility rate of 39% and a call option value of $0.6860, was $17,155. The options are being expensed over the vesting period, resulting in $1,201 of stock-based compensation expense during the year ended December 31, 2022. As of December 31, 2022, a total of $15,954 of unamortized expenses are expected to be expensed over the vesting period.
On January 2, 2022, the Company awarded options to purchase 102,000 shares of common stock under the 2022 Plan at an exercise price equal to $1.65 per share, exercisable over a ten-year period to an employee. The options vest monthly over a twenty-four (24) month period, with the initial vesting commencing on January 2, 2022. The estimated value using the Black-Scholes Pricing Model, based on a volatility rate of 29% and a call option value of $0.4631, was $47,239. The options are being expensed over the vesting period, resulting in $23,620 of stock-based compensation expense during the year ended December 31, 2022. As of December 31, 2022, a total of $23,619 of unamortized expenses are expected to be expensed over the vesting period.
On January 1, 2022, the Company awarded options to purchase 144,000 shares of common stock under the 2022 Plan at an exercise price equal to $1.65 per share, exercisable over a ten-year period to the Company’s Chief Financial Officer. The options vest monthly over an eighteen (18) month period, with the initial vesting commencing on January 1, 2022. The estimated value using the Black-Scholes Pricing Model, based on a volatility rate of 29% and a call option value of $0.4612, was $66,419. The options are being expensed over the vesting period, resulting in $44,280 of stock-based compensation expense during the year ended December 31, 2022. As of December 31, 2022, a total of $22,139 of unamortized expenses are expected to be expensed over the vesting period.
| F-25 |
BRANCHOUT FOOD INC.
NOTES TO THE FINANCIAL STATEMENTS
The following is a summary of information about the Stock Options outstanding at December 31, 2022.
| Shares Underlying | ||||||||||||||||||||||
| Shares Underlying Options Outstanding | Options Exercisable | |||||||||||||||||||||
| Weighted | ||||||||||||||||||||||
| Shares | Average | Weighted | Shares | Weighted | ||||||||||||||||||
| Underlying | Remaining | Average | Underlying | Average | ||||||||||||||||||
| Range of | Options | Contractual | Exercise | Options | Exercise | |||||||||||||||||
| Exercise Prices | Outstanding | Life | Price | Exercisable | Price | |||||||||||||||||
| $ | 1.65 | 271,008 | 9.3 years | $ | 1.65 | 142,750 | $ | 1.65 | ||||||||||||||
The following is a summary of activity of outstanding stock options:
| Weighted | ||||||||
| Average | ||||||||
| Number | Exercise | |||||||
| of Shares | Prices | |||||||
| Balance, December 31, 2020 | - | $ | - | |||||
| Options granted | - | - | ||||||
| Balance, December 31, 2021 | - | - | ||||||
| Options granted | 271,008 | 1.65 | ||||||
| Balance, December 31, 2022 | 271,008 | $ | 1.65 | |||||
| Exercisable, December 31, 2022 | 142,750 | $ | 1.65 | |||||
Note 20 – Common Stock Warrants
Warrants to purchase a total of 912,838 shares of common stock at a weighted average exercise price of $2.79 per share, with a weighted average remaining life of 7.9 years, were outstanding as of December 31, 2022.
Amendment to Common Stock Warrants for the Year Ended December 31, 2022
On March 7, 2022, the Company amended outstanding warrants previously issued pursuant to the sale of convertible debt securities. The warrant terms immediately prior to the amendments consisted of the option to purchase an aggregate 16.5% of the Company’s then-outstanding capital stock, calculated on a fully diluted basis as of the time of exercise, at an aggregate exercise price of $2,250,000, which were subsequently amended to purchase an aggregate 858,520 shares of common stock at a weighted average exercise price of $2.71 per share, exercisable over the remaining useful lives on a weighted average basis of 9.12 years. The additional fair value of the warrants, in the amount of $377,200, was expensed as stock-based compensation within professional fees on the statements of operations.
Warrants to Purchase Common Stock Issued as Promissory Note Commitments for the Year Ended December 31, 2022
The Company paid a commitment fee in connection with the issuance of the Fluffco Convertible Note on June 6, 2022, consisting of warrants to purchase 8,485 shares of common stock at an exercise price of $6.50 per share over a five-year term. The estimated value using the Black-Scholes Pricing Model, based on a volatility rate of 35% and a call option value of $0.2679, was $2,273. The warrants were expensed over the vesting period, resulting in $2,273 of stock-based compensation expense during the year ended December 31, 2022. As of December 31, 2022.
The Company paid a commitment fee in connection with the issuance of the Foss Convertible Note on May 26, 2022, consisting of warrants to purchase 45,833 shares of common stock at an exercise price of $6.50 per share over a five-year term. The estimated value using the Black-Scholes Pricing Model, based on a volatility rate of 34% and a call option value of $0.2570, was $11,777. The warrants were expensed over the vesting period, resulting in $11,777 of stock-based compensation expense during the year ended December 31, 2022.
| F-26 |
BRANCHOUT FOOD INC.
NOTES TO THE FINANCIAL STATEMENTS
Warrants Issued as a Discount on Debts for the Year Ended December 31, 2021
On May 7, 2021, the Company received gross proceeds of $1,000,000 from the sale of Subordinated Notes from a total of six accredited investors. In addition to the Subordinated Notes, each investor, along with two other parties subject to loan origination costs, received a warrant to purchase shares of our common stock, expiring ten years from the issuance date. The number of common stock warrants received by a particular investor was equal to the investment amount divided by $1,000,000, or 7.42% of the Company’s then-outstanding capital stock, calculated on a fully diluted basis as of the time of exercise, at an aggregate exercise price of $1,000,000. The aggregate estimated value of the warrants using the Black-Scholes Pricing Model, based on a weighted average volatility rate of 50% and a weighted average call option value of $1,645, was $66,228, and was recognized as a debt discount that is being amortized over the life of the loans. The Company recognized $39,703 interest expense pursuant to the amortization of note discounts during the year ended December 31, 2021. As of December 31, 2021, the unamortized balance of debt discounts on the warrants was $26,525, which will be amortized over the remaining term of the Loan Agreement. We are required to register the shares issuable upon exercise of the warrants with the SEC in the prospectus. Prior to the exercise of a warrant, we are required to provide the investor monthly financial statements unaudited statements of income, cash flows, and stockholder equity for each such monthly period. These warrants were subsequently amended on March 7, 2022, to be exercisable into a fixed 385,607 shares at an exercise price of $2.84 per share, resulting in $162,907 of incremental expense, as part of the $377,200 of stock-based compensation on amended warrants for the year ended December 31, 2022.
The following is a summary of information about our warrants to purchase common stock outstanding at December 31, 2022.
| Shares Underlying | ||||||||||||||||||||
| Shares Underlying Warrants Outstanding | Warrants Exercisable | |||||||||||||||||||
| Weighted | ||||||||||||||||||||
| Shares | Average | Weighted | Shares | Weighted | ||||||||||||||||
| Range of | Underlying | Remaining | Average | Underlying | Average | |||||||||||||||
| Exercise | Warrants | Contractual | Exercise | Warrants | Exercise | |||||||||||||||
| Prices | Outstanding | Life | Price | Exercisable | Price | |||||||||||||||
| $ | 2.60-$3.00 | 912,838 | 7.9 years | $ | 2.73 | 912,838 | $ | 2.73 | ||||||||||||
The fair value of each warrant grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions used for grants under the fixed option plan:
| December 31, | December 31, | |||||||
| 2022 | 2021 | |||||||
| Average risk-free interest rates | 2.68 | % | 1.60 | % | ||||
| Average expected life (in years) | 5.00 | 5.00 | ||||||
| Volatility | 34.5 | % | 50.0 | % | ||||
The weighted average fair value of warrants granted with exercise prices at the current fair value of the underlying stock was approximately $2.73 and $2.84 per warrant for the years ended December 31, 2022 and 2021, respectively.
The following is a summary of activity of outstanding common stock warrants, as retrospectively presented pursuant to the amendment on March 7, 2022:
| Weighted | ||||||||
| Average | ||||||||
| Number | Exercise | |||||||
| of Shares | Prices | |||||||
| Balance, December 31, 2020 | 179,396 | $ | 2.60 | |||||
| Warrants granted | 385,607 | 2.84 | ||||||
| Balance, December 31, 2021 | 858,520 | 2.71 | ||||||
| Warrants granted | 15,383 | 3.00 | ||||||
| Balance, December 31, 2022 | 912,838 | $ | 2.73 | |||||
| Exercisable, December 31, 2022 | 912,838 | $ | 2.73 | |||||
| F-27 |
BRANCHOUT FOOD INC.
NOTES TO THE FINANCIAL STATEMENTS
Note 21 – Gain on Early Extinguishment of Debts
Gain on early extinguishment of debts consisted of the following for the year ended December 31, 2022 and 2021, respectively:
| December 31, | ||||||||
| 2022 | 2021 | |||||||
| Adjustment to debt discounts on derivatives due to modification of debts | $ | - | $ | 248,193 | ||||
| Fair value adjustment on derivatives due to modification of debts | - | 300,450 | ||||||
| $ | - | $ | 548,643 | |||||
Note 22 – Income Taxes
The Company incurred a net operating loss for the period from November 19, 2021 (the effective date of the conversion from a limited liability company to a C-corporation) through December 31, 2022 and, accordingly, no provision for income taxes has been recorded. In addition, no benefit for income taxes has been recorded due to the uncertainty of the realization of any tax assets. At December 31, 2022, the Company had approximately $4,400,000 of federal net operating losses. The net operating loss carry forwards, if not utilized, will begin to expire in 2041.
The provision (benefit) for income taxes for the period from November 19, 2021 (the effective date of the conversion from a limited liability company to a C-corporation) through December 31, 2022 were assuming a 21% effective tax rate. The effective income tax rate for the years ended December 31, 2022 was 21%.
The components of the Company’s deferred tax asset are as follows:
| December 31, | December 31, | |||||||
| 2022 | 2021 | |||||||
| Deferred tax assets: | ||||||||
| Net operating loss carry forwards | $ | 932,400 | $ | 146,760 | ||||
| Net deferred tax assets before valuation allowance | $ | 932,400 | $ | 146,760 | ||||
| Less: Valuation allowance | (932,400 | ) | (146,760 | ) | ||||
| Net deferred tax assets | $ | - | $ | - | ||||
The Company has incurred cumulative losses which make realization of a deferred tax asset difficult to support in accordance with ASC 740. Based on the available objective evidence, including the Company’s history of its loss, management believes it is more likely than not that the net deferred tax assets will not be fully realizable. Accordingly, the Company provided for a full valuation allowance against its net deferred tax assets at December 31, 2022. As a limited liability company, the members assumed any potential tax liability to be considered for the period from January 1, 2021 through November 19, 2021 (the effective date of the conversion from a limited liability company to a C-corporation), and the year ended December 31, 2020.
In accordance with ASC 740, the Company has evaluated its tax positions and determined there are no uncertain tax positions.
Note 23 – Subsequent Events
The Company evaluates events that have occurred after the balance sheet date through the date hereof, which these financial statements were issued. No events occurred of a material nature that would have required adjustments to or disclosure in these financial statements except as follows:
Extension of Maturity Dates on Convertible Notes
On March 31, 2023, the Company and seventeen Convertible Promissory Noteholders amended Convertible Promissory Notes to extend the maturity dates from March 31, 2023 to June 30, 2023, and reduce the conversion terms, consisting of a firm commitment underwriting agreement for a capital raise of at least ten million dollars ($10,000,000) to at least five million dollars ($5,000,000), and a qualified subsequent financing from seven million five hundred thousand dollars ($7,500,000) to two million five hundred thousand dollars ($2,500,000). The conversion terms on the remaining convertible notes, already maturing on June 30, 2023, are expected to be amended as well.
Convertible Note Financings
On various origination dates between January 5, 2023 and March 27, 2023, the Company sold a total of eleven (11) individual convertible promissory notes (“First Quarter of 2023 Convertible Notes”) with substantially the same terms. The unsecured Convertible Notes, bearing interest at 8% per annum, mature on the earlier of: a) June 30, 2022, b) the closing of a Qualified Subsequent Financing, c) the closing of a change of control, or d) the Company’s S-1 registration statement being declared effective and the signing of a firm commitment underwriting agreement for a capital raise of at least ten million dollars ($10,000,000). Each note is convertible at a fixed conversion price of $1.65 per common share, and all interest shall be deemed to have stopped accruing as of a date selected by the Company that is up to 10 days prior to the effective date of the registration statement filed in connection with the IPO. Each note is mandatorily convertible upon the Company’s S-1 registration statement being declared effective and the signing of a firm commitment underwriting agreement for a capital raise of at least ten million dollars ($10,000,000). The public offering proceeds threshold has subsequently been amended to $5,000,000, along with all of the other outstanding convertible notes. The notes carry a default interest rate of 18% per annum. The Company received aggregate proceeds of $467,500 on the sale of the Convertible Notes, including $25,000 received from a related party.
Note Financing
On March 15, 2023, the Company completed the sale of a promissory note in the principal amount of $200,000 (“Hinman Convertible Note”) to The John & Kristen Hinman Trust Dated February 23, 2016 (“Hinman”), pursuant to a Loan Agreement between the Company and Hinman (the “Loan Agreement”). The promissory note bears interest at 18% per annum, based on a 360-day year, and carries a monthly default rate of 1.5% of all outstanding principal, interest, fees and penalties. The note matures on September 14, 2023, and is secured by the Company’s accounts receivable from Walmart.
Common Stock Options Issued for Services
On February 28, 2023, the Company awarded fully vested options to purchase 40,000 shares of common stock under the 2022 Plan at an exercise price equal to $1.65 per share, exercisable over a ten-year period to an employee.
Reverse Stock Split
The Company intends to complete a 1-for-2.5 reverse split of its outstanding common stock after the registration statement is declared effective, and the convertible notes are mandatorily converted, as disclosed throughout the prospectus disclosed within this Form S-1. None of the references in these financial statements, footnotes or management’s discussion and analysis refers to shares and per share amounts retroactively restated to reflect the splits. The effects of future stock splits will retrospectively be applied to these financial statements after the reverse stock split is executed.
| F-28 |
BRANCHOUT FOOD INC.
NOTES TO THE FINANCIAL STATEMENTS
Until , 2023 (25 days after the date of this prospectus), all dealers that effect transactions in our common shares, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers’ obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.
Shares
Shares of Common Stock
PROSPECTUS
Alexander Capital L.P.
, 2023
[Alternate Page for Resale Prospectus]
The information in this preliminary prospectus is not complete and may be changed. The shares of common stock may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell the shares of common stock and it is not soliciting an offer to buy the shares of common stock in any state or jurisdiction where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED MAY 11, 2023
PRELIMINARY PROSPECTUS
PROSPECTUS
This prospectus relates to the offer for resale of up to an aggregate of shares of 1,934,506 common stock of BranchOut Food Inc., a Nevada corporation, by the selling stockholders identified herein (referred to collectively herein as the “Selling Stockholders,” or, individually, as a “Selling Stockholder”). The shares of common stock are all issuable upon exercise of 365,141 common stock purchase warrants that had been issued by us to certain of the Selling Stockholders in connection with previous financings and 1,010,571 shares issuable by us upon conversion of certain outstanding convertible notes issued by us to certain of the Selling Stockholders, each after giving effect to a 2.5 for 1.0 reverse stock split to be effected after the registration statement for the public offering prospectus is declared effective and prior to the initial closing of the public offering (the “Reverse Stock Split”). With respect to the warrants, warrants to purchase 189,167 shares have an exercise price of $6.50 per share; warrants to purchase 154,246 shares have an exercise price of $7.10 per share; and warrants to purchase 21,728 shares have an exercise price of $7.50 per share. The warrants are generally exercisable up to ten years from issuance.
This prospectus also covers any additional shares of common stock that may become issuable upon any anti-dilution adjustment pursuant to the terms of the warrants issued to the Selling Stockholders by reason of stock splits, stock dividends and other events described therein.
After exercise of the warrants or conversion of the convertible notes, as applicable, the Selling Stockholders, or their respective transferees, pledgees, donees or other successors-in-interest, may sell the shares of common stock described in this prospectus through public or private transactions at prevailing market prices, at prices related to prevailing market prices or at privately negotiated prices. The Selling Stockholders may sell any, all or none of the shares of common stock described in this prospectus, and we do not know when or in what amount the Selling Stockholders may sell their shares of common stock hereunder following the effective date of this registration statement. See “Plan of Distribution” for more information about how the selling stockholders may sell the shares of common stock being registered pursuant to this prospectus. Each Selling Stockholder may be considered an “underwriter” within the meaning of Section 2(a)(11) of the Securities Act of 1933, as amended.
We are registering the shares of common stock described in this prospectus on behalf of the Selling Stockholders, to be offered and sold by them from time to time. We are not selling securities under this prospectus and will not receive any of the proceeds from the sale of shares by the selling stockholders. While we will not receive any proceeds from the sale of our common stock by the Selling Stockholders, we may receive up to approximately $2,487,692 in aggregate gross proceeds in the event the warrants are exercised and full cash is paid; however, we cannot predict when and in what amounts or if the warrants will be exercised, and it is possible that the warrants may expire and never be exercised, in which case we would not receive any cash proceeds. We have agreed to bear all of the expenses incurred in connection with the registration of the shares of common stock described in this prospectus. The Selling Stockholders will pay or assume discounts, commissions, fees of underwriters, selling brokers or dealer managers and similar expenses, if any, incurred for the sale of the shares of common stock described in this prospectus.
We have applied to list our common stock on The Nasdaq Capital Market (the “Nasdaq”) under the symbol “BOF.” If our application is not approved or if we otherwise determine that we will not be able to secure the listing of our common stock on the Nasdaq, we will not consummate this offering. There can be no assurance that we will be successful in listing our common stock on the Nasdaq. We expect that no shares will be sold by the Selling Stockholders until our common stock is listed on the Nasdaq and, when sold, will be sold at market prices prevailing at the time of sale or at privately negotiated prices, initially at or around $ , which is the midpoint of the range of the public offering price of our common stock set forth on the cover page of the public offering prospectus.
We are an “emerging growth company” as that term is used in the Jumpstart Our Business Startups Act of 2012, as amended (the “JOBS Act”) and we have elected to comply with certain reduced public company reporting requirements.
Investing in our shares of common stock is highly speculative and involves a high degree of risk. See “Risk Factors” beginning on page 8 of this prospectus before making a decision to purchase our shares of common stock.
Neither the Securities and Exchange Commission (“SEC”) nor any state securities commission has approved or disapproved of THE SHARES OF COMMON STOCK or PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. Any representation to the contrary is a criminal offense.
The date of this prospectus is .
[Alternate Page for Resale Prospectus]
THE OFFERING
| Shares of common stock offered by Selling Stockholders: | Up to 1,934,506 shares of common stock issuable upon exercise of common stock purchase warrants and conversion of convertible notes held by the Selling Stockholders under the Convertible Note Conversion (as defined below). |
| Shares of common stock outstanding after completion of this offering:(1) | 4,017,734 shares of common stock (or 4,205,234 shares of common stock if the underwriters exercise in full their over-allotment option to purchase 187,500 additional shares of common stock at the initial public offering price). |
| Use of Proceeds: | We will not receive any proceeds from the sale of the common stock by the Selling Stockholders. We may receive up to approximately $2,487,692 aggregate gross proceeds in the event the warrants are exercised and full cash is paid. Any proceeds that we receive from the exercise of the warrants will primarily be used for working capital and general corporate purposes, including operating expenses and capital expenditures. Additionally, we may use a portion of the net proceeds from this offering to acquire businesses or products. However, we do not have agreements or commitments for any material acquisitions at this time. See “Use of Proceeds” for a more complete description of the intended use of proceeds from this offering. |
| Proposed Nasdaq Ticker Symbols: | We have applied to have our common stock offered in the offering listed on the Nasdaq Capital Market under the symbol “BOF”. The listing of our common stock on the Nasdaq is a condition to consummating the offering. None of the shares of common stock being registered for resale by the Selling Stockholders in this prospectus may be sold prior to the closing of our initial public offering, and only then in compliance with applicable laws, rules and regulations. |
| Risk factors: | You should carefully read and consider the information set forth under “Risk Factors” on page 8, together with all of the other information set forth in this prospectus, before deciding to invest in the securities offered by this prospectus. |
| (1) | The number of shares of common stock outstanding before this offering, as set forth in the table above, is based on 2,767,734 shares of our common stock outstanding immediately before this offering and after giving effect to (x) the conversion of principal and accrued interest under convertible notes which automatically convert into 3,917,335 shares of our common stock (on a pre-Reverse Stock Split, as defined below, basis) upon the effectiveness of the registration statement in relation to this offering (the “Convertible Note Conversion”) and (y) the Reverse Stock Split and excludes: (i) outstanding options to purchase approximately 92,700 shares of our common stock which were issued to various individuals; (ii) outstanding warrants to purchase 365,141 shares of our common stock issued to various individuals, consisting of (x) warrants to purchase 189,167 shares with an exercise price of $6.50 per share, (y) warrants to purchase 154,246 shares with an exercise price of $7.10 per share and (z) warrants to purchase 21,728 shares with an exercise price of $7.50 per share; (iv) 187,500 shares of our common stock underlying the underwriters’ over-allotment option; and (v) warrants to purchase up to 86,250 shares of our common stock issuable to the Representative in connection with this offering at a price of 120% of the initial public offering price. |
| II-1 |
[Alternate Page for Resale Prospectus]
RISK FACTORS
We will have broad discretion as to any proceeds that we receive from the cash exercise by any holders of the warrants, and we may not use the proceeds effectively.
We will not receive any of the proceeds from the sale of the shares of common stock by the Selling Stockholders pursuant to this prospectus. We may receive up to approximately $2,487,692 in aggregate gross proceeds in the event the warrants are exercised and full cash is paid. Any proceeds that we receive from the exercise of the warrants will primarily be used for working capital and general corporate purposes, including operating expenses and capital expenditures. Additionally, we may use a portion of the net proceeds from this offering to acquire businesses or products. However, we do not have agreements or commitments for any material acquisitions at this time. You will not have the opportunity, as part of your investment decision, to assess whether such proceeds are being used in a manner agreeable to you. You must rely on our judgment regarding the application of such proceeds, which may be used for corporate purposes that do not improve our profitability or increase the price of our shares of common stock. Such proceeds may also be placed in investments that do not produce income or that lose value. The failure to use such funds by us effectively could have a material adverse effect on our business, financial condition, operating results and cash flow.
Neither we nor the Selling Stockholders have authorized any other party to provide you with information concerning us or this offering.
You should carefully evaluate all of the information in this prospectus and the registration statement of which this prospectus forms a part, including the documents incorporated by reference herein. We may receive media coverage regarding our Company, including coverage that is not directly attributable to statements made by our officers, that incorrectly reports on statements made by our officers or employees, or that is misleading as a result of omitting information provided by us, our officers or employees. Neither we nor the Selling Stockholders have authorized any other party to provide you with information concerning us or this offering, and such recipients should not rely on this information.
FINRA sales practice requirements may limit a stockholder’s ability to buy and sell our common stock.
FINRA has adopted rules that require that in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable for that customer. Prior to recommending speculative low-priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial status, tax status, investment objectives and other information. Under interpretations of these rules, FINRA believes that there is a high probability that speculative low-priced securities will not be suitable for certain customers. FINRA requirements will likely make it more difficult for broker-dealers to recommend that their customers buy our common stock, which may have the effect of reducing the level of trading activity in our common stock. As a result, fewer broker-dealers may be willing to make a market in our common stock, reducing a stockholder’s ability to resell shares of our common stock.
| II-2 |
[Alternate Page for Resale Prospectus]
USE OF PROCEEDS
The Selling Stockholders will receive all of the proceeds from the sale of the shares of common stock under this prospectus and we will not receive any of such proceeds. We may receive up to approximately $2,487,692 in aggregate gross proceeds in the event the warrants are exercised and full cash is paid. Any proceeds that we receive from the exercise of the warrants will primarily be used for working capital and general corporate purposes, including operating expenses and capital expenditures. Additionally, we may use a portion of the net proceeds from this offering to acquire businesses or products. However, we do not have agreements or commitments for any material acquisitions at this time. The Selling Stockholders will pay any agent’s commissions and expenses they incur for brokerage, accounting, tax or legal services or any other expenses that they incur in disposing of the shares of common stock. We will bear all other costs, fees and expenses incurred in effecting the registration of the shares of common stock covered by this prospectus and any prospectus supplement. These may include, without limitation, all registration and filing fees, SEC filing fees and expenses of compliance with state securities or “blue sky” laws.
We cannot predict when or if the warrants will be exercised, and it is possible that the warrants may expire and never be exercised. All of the warrants were immediately exercisable upon issuance. In addition, the warrants may be exercised on a cashless basis. As a result, we may never receive meaningful, or any, cash proceeds from the exercise of any of the warrants, and we cannot plan on any specific uses of any proceeds that we may receive beyond the purposes described herein.
See “Plan of Distribution” elsewhere in this prospectus for more information.
| II-3 |
[Alternate Page for Resale Prospectus]
SELLING STOCKHOLDERS
An aggregate of up to 1,934,506 shares of common stock may be offered by certain Selling Stockholders. The following table sets forth certain information with respect to each Selling Stockholder for whom we are registering shares for resale to the public as of the date of this prospectus. No material relationships exist between any of the Selling Stockholders and us nor have any such material relationships existed within the past three years.
| Name and Address of Beneficial Owner | Number of Shares of Common Stock Beneficially Owned Before this Offering and the Conversion of the Convertible Notes | Number of Shares of Common Stock Offered Hereby | Shares of Common Stock Beneficially Owned Following Offering(3) | Percent of Common Stock Beneficially Owned Following Offering (2) | ||||||||||||
| Shares Underlying Warrants(1) | ||||||||||||||||
| Victor Henry David Trione | - | 40,744 | 189,043 | 4.7 | %(3) | |||||||||||
| Pub GST Trust | - | 13,928 | 27,856 | * | ||||||||||||
| Park Family Trust Est. August 29, 2012 | - | 10,394 | 20,788 | * | ||||||||||||
| Poppleton Partners | - | 7,692 | 15,384 | * | ||||||||||||
| Fluffco, LLC | - | 67,975 | 278,095 | 6.8 | %(4) | |||||||||||
| Ernesto Chang | - | 3,534 | 7,068 | * | ||||||||||||
| Eddie Shin | - | 3,534 | 7,068 | * | ||||||||||||
| EagleVision Ventures, Inc. | - | 44,803 | 89,606 | 2.2 | % | |||||||||||
| Donald A. Foss Irrevocable Trust dated August 14, 2022( | - | 103,938 | 533,688 | 12.9 | %(5) | |||||||||||
| Bali Venture Partners, LLC | - | 61,323 | 122,646 | 3.0 | % | |||||||||||
| Cheryl Krane | - | 3,742 | 7,484 | * | ||||||||||||
| Brian Pope | - | 3,534 | 7,068 | * | ||||||||||||
| Shares Issued upon Conversion of Convertible Notes | ||||||||||||||||
| Alessandro Parravicini | - | 6,503 | 6,503 | * | ||||||||||||
| Allen Vaysberg | - | 12,796 | 12,796 | * | ||||||||||||
| Anthony Gattuso | - | 2,852 | 2,852 | * | ||||||||||||
| Barrett Johnston | - | 25,569 | 25,569 | * | ||||||||||||
| Brad Hinman | - | 6,528 | 6,528 | * | ||||||||||||
| Brian Cappy | - | 28,294 | 28,294 | * | ||||||||||||
| Byron Riché Jones | - | 45,753 | 45,753 | 1.1 | % | |||||||||||
| C H Expressway Properties | - | 32,454 | 32,454 | * | ||||||||||||
| Chander Family Revocable Trust | - | 15,141 | 15,141 | * | ||||||||||||
| Chris and Natalie Croswell | - | 6,120 | 6,120 | * | ||||||||||||
| Chris Coulter, Controller | - | 13,911 | 82,188 | 2.0 | % | |||||||||||
| Chris Rosch | - | 26,359 | 26,359 | * | ||||||||||||
| Conner Moore | - | 5,339 | 5,339 | * | ||||||||||||
| Daniel Allen Nadeau | - | 5,197 | 5,197 | * | ||||||||||||
| David Lawrence | - | 25,452 | 25,452 | * | ||||||||||||
| Don Foster | - | 4,698 | 4,698 | * | ||||||||||||
| Donald A. Foss Revocable Living Trust dated January 1981 | - | 325,812 | 533,688 | 12.9 | % | |||||||||||
| Doug Durst, CFO | - | 23,298 | 195,322 | 4.8 | % | |||||||||||
| Fluffco, LLC | - | 142,145 | 278,095 | 6.8 | % | |||||||||||
| Grant Knowles | - | 6,560 | 6,560 | * | ||||||||||||
| Gregory and Vicky Chapin Living Trust 2012 | - | 12,960 | 12,960 | * | ||||||||||||
| Huff Family Trust | - | 30,192 | 30,192 | * | ||||||||||||
| Istvan Elek | - | 26,010 | 26,010 | * | ||||||||||||
| Jacob Bond | - | 25,358 | 25,358 | * | ||||||||||||
| Jebiaus Brown | - | 4,053 | 4,053 | * | ||||||||||||
| Jeff Engleman | - | 67,819 | 94,792 | 2.4 | % | |||||||||||
| Jeffrey Wilson | - | 21,670 | 22,882 | * | ||||||||||||
| Jimmy E Pineda | - | 14,256 | 14,256 | * | ||||||||||||
| Joe Grady (Grady Family Trust) | - | 18,111 | 18,111 | * | ||||||||||||
| John & Kristen Hinman Trust, dated February 23, 2016 (John Hinman) | - | 51,390 | 55,622 | 1.4 | % | |||||||||||
| Jonathan Bond | - | 12,947 | 12,947 | * | ||||||||||||
| Jonathan Poche | - | 28,344 | 28,344 | * | ||||||||||||
| Kelli Moore (fka Kelli Tennant) | - | 5,339 | 5,339 | * | ||||||||||||
| Laszlo Kokeny | - | 7,759 | 7,759 | * | ||||||||||||
| Lindsey Schwartz | - | 34,524 | 46,254 | 1.2 | % | |||||||||||
| Michelle Furtado and Brahma Furtado | - | 8,986 | 8,986 | * | ||||||||||||
| Nick Davies | - | 31,533 | 31,533 | * | ||||||||||||
| Paras Shah | - | 20,252 | 20,252 | * | ||||||||||||
| Patrick Morrison | - | 26,172 | 26,172 | * | ||||||||||||
| Peter Agboh | - | 11,322 | 11,322 | * | ||||||||||||
| Robert Morrison | - | 38,671 | 38,671 | 1.0 | % | |||||||||||
| Ron Olthius | - | 2,513 | 2,513 | * | ||||||||||||
| Ronald G Olthuis | - | 6,503 | 6,503 | * | ||||||||||||
| Rowland W. Day II and Jaimie D. Day Family Trust U/T/D April 13, 1990(4) | 2,400 | 39,938 | 42,338 | 1.1 | % | |||||||||||
| SMEA2Z LLC - Phillip Verges | - | 13,005 | 13,005 | * | ||||||||||||
| Stark Family Trust | - | 67,799 | 67,799 | * | ||||||||||||
| Stephen Osborne | - | 12,158 | 12,158 | * | ||||||||||||
| Taylor Fowles | - | 26,629 | 26,629 | * | ||||||||||||
| Tom & Carol Healy | - | 6,227 | 6,227 | * | ||||||||||||
| Victor David Henry Trione | - | 107,555 | 189,043 | 4.7 | % | |||||||||||
| Welder Family Trust | - | 26,189 | 26,189 | * | ||||||||||||
* Less than 1%
Except as noted in any footnotes below, each person has sole voting power and sole dispositive power as to all of the shares shown as beneficially owned by them. Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities.
| (1) | The number of shares of common stock owned prior to the offering in this column assumes the successful completion of our initial public offering and assumes that each selling stockholder purchases the shares available for purchase pursuant to their warrants. |
| (2) | Based on the 2,76,734 shares of common stock outstanding immediately prior to this offering and giving effect to (x) the Convertible Note Conversion and (y) the Reverse Stock Split and excluding: ((i) outstanding options to purchase approximately 92,700 shares of our common stock which were issued to various individuals; (ii) outstanding warrants to purchase 365,141 shares of our common stock issued to various individuals, consisting of (x) warrants to purchase 189,167 shares with an exercise price of $6.50 per share, (y) warrants to purchase 154,246 shares with an exercise price of $7.10 per share, and (z) warrants to purchase 21,728 shares with an exercise price of $7.50 per share; (iv) 187,500 shares of our common stock underlying the underwriters’ over-allotment option; and (v) warrants to purchase up to 86,250 shares of our common stock issuable to the Representative in connection with this offering at a price of 120% of the initial public offering price. |
| (3) | Assumes conversion of all convertible notes and exercise of all warrants held by the relevant holder. |
| (4) | The trustee of this trust is a legal counsel to the Company. |
| II-4 |
[Alternate Page for Resale Prospectus]
PLAN OF DISTRIBUTION
The Selling Stockholders, and any of their respective pledgees, assignees and successors-in-interest may, from time to time, sell, transfer or otherwise dispose of any or all of their shares of common stock on any stock exchange, market or trading facility on which the shares are traded or in private transactions. These sales may be at fixed prices, at prevailing market prices at the time of sale, at prices related to the prevailing market price, at varying prices determined at the time of sale, or at negotiated prices.
The Selling Stockholders may use any one or more of the following methods when disposing of shares or interests therein:
| ● | ordinary brokerage transactions and transactions in which the broker-dealer solicits purchasers; | |
| ● | block trades in which the broker-dealer will attempt to sell the shares of common stock as agent, but may position and resell a portion of the block as principal to facilitate the transaction; | |
| ● | purchases by a broker-dealer as principal and resale by the broker-dealer for its account; | |
| ● | an exchange distribution in accordance with the rules of the applicable exchange; | |
| ● | privately negotiated transactions; | |
| ● | settlement of short sales; | |
| ● | in transactions through broker-dealers may agree with the Selling Stockholders to sell a specified number of such shares of common stock at a stipulated price per share of common stock; | |
| ● | a combination of any such methods of sale; and | |
| ● | any other method permitted pursuant to applicable law. |
The Selling Stockholders may also sell securities under Rule 144 under the Securities Act, if available, rather than under this prospectus.
Broker-dealers engaged by the Selling Stockholders may arrange for other brokers-dealers to participate in sales. Broker-dealers may receive commissions or discounts from the Selling Stockholders (or, if any broker-dealer acts as agent for the purchaser of securities, from the purchaser) in amounts to be negotiated, except as set forth in a supplement to this prospectus, in the case of an agency transaction not in excess of a customary brokerage commission in compliance with the FINRA Rule 2121 and in the case of a principal transaction a markup or markdown in compliance with FINRA Rule 2121.
In connection with the sale of the shares of common stock covered hereby, the Selling Stockholders may enter into hedging transactions with broker-dealers or other financial institutions, which may in turn engage in short sales of the shares of common stock in the course of hedging the positions they assume. The Selling Stockholders may also sell shares of common stock short and deliver these shares of common stock to close out their short positions, or loan or pledge the shares of common stock to broker-dealers that in turn may sell these shares of common stock. The Selling Stockholders may also enter into option or other transactions with broker-dealers or other financial institutions or create one or more derivative securities which require the delivery to such broker-dealer or other financial institution of shares of common stock offered by this prospectus, which securities such broker-dealer or other financial institution may resell pursuant to this prospectus (as supplemented or amended to reflect such transaction).
The Selling Stockholders and any broker-dealers or agents that are involved in selling the shares of common stock may be deemed to be “underwriters” within the meaning of the Securities Act in connection with such sales. In such event, any commissions received by such broker-dealers or agents and any profit on the resale of the shares of common stock purchased by them may be deemed to be underwriting commissions or discounts under the Securities Act. We are requesting that each Selling Stockholder inform us that it does not have any written or oral agreement or understanding, directly or indirectly, with any person to distribute the shares of common stock. We will pay certain fees and expenses incurred by us incident to the registration of the shares of common stock.
| II-5 |
Because the Selling Stockholders may be deemed to be an “underwriter” within the meaning of the Securities Act, they will be subject to the prospectus delivery requirements of the Securities Act, including Rule 172 thereunder. In addition, any shares of common stock covered by this prospectus which qualify for sale pursuant to Rule 144 under the Securities Act may be sold under Rule 144 rather than under this prospectus. We are requesting that each Selling Stockholder confirm that there is no underwriter or coordinating broker acting in connection with the proposed resale of the shares of common stock by the Selling Stockholder.
We intend to keep this prospectus effective until the earlier of (i) the date on which the shares of common stock may be resold by the Selling Stockholders without registration and without regard to any volume or manner-of-sale limitations by reason of Rule 144, without the requirement for us to be in compliance with the current public information requirement under Rule 144 under the Securities Act or any other rule of similar effect or (ii) all of the shares of common stock have been sold pursuant to this prospectus or Rule 144 under the Securities Act or any other rule of similar effect. The shares of common stock will be sold only through registered or licensed brokers or dealers if required under applicable state securities laws. In addition, in certain states, the shares of common stock covered hereby may not be sold unless they have been registered or qualified for sale in the applicable state or an exemption from the registration or qualification requirement is available and is complied with.
Under applicable rules and regulations under the Exchange Act, any person engaged in the distribution of the resale of the shares of common stock may not simultaneously engage in market making activities with respect to the common stock for the applicable restricted period, as defined in Regulation M, prior to the commencement of the distribution. In addition, the Selling Stockholders will be subject to applicable provisions of the Exchange Act and the rules and regulations thereunder, including Regulation M, which may limit the timing of purchases and sales of the common stock by the Selling Stockholders or any other person. We will make copies of this prospectus available to the Selling Stockholders and are informing the Selling Stockholders of the need to deliver a copy of this prospectus to each purchaser at or prior to the time of the sale (including by compliance with Rule 172 under the Securities Act).
| II-6 |
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the fees and expenses incurred or expected to be incurred by us in connection with the issuance and distribution of the securities being registered hereby (except any underwriting discounts and commissions and expenses incurred by the Selling Stockholders for brokerage, accounting, tax or legal services or any other expenses incurred by the Selling Stockholders in disposing of their shares of common stock). All of the amounts shown are estimated except the SEC registration fee, the Nasdaq application fee, the Nasdaq filing fee and the FINRA filing fee. Estimated fees and expenses can only reflect information that is known at the time of filing this registration statement and are subject to future contingencies, including additional expenses for future offerings.
| Type of Expense | Amount | |||
| SEC Registration Fee | $ | 2,561 | ||
| Nasdaq Application Fee | $ | 5,000 | ||
| Nasdaq Filing Fee | $ | 45,000 | ||
| FINRA Filing Fee | $ | 3,088 | ||
| Transfer Agent Fees | $ | 7,500 | ||
| Printing and Engraving Expenses | $ | 5,995 | ||
| Accounting and Consulting Fees | $ | 85,000 | ||
| Legal Fees and Expenses | $ | 530,000 | ||
| Miscellaneous Costs | $ | 18,334 | ||
| Total | $ | 702,478 | ||
Item 14. Indemnification of Directors and Officers
NRS 78.138(7) provides that, subject to limited statutory exceptions and unless the articles of incorporation or an amendment thereto (in each case filed on or after October 1, 2003) provide for greater individual liability, a director or officer is not individually liable to a corporation or its stockholders or creditors for any damages as a result of any act or failure to act in his or her capacity as a director or officer unless it is proven that: (i) the act or failure to act constituted a breach of his or her fiduciary duties as a director or officer and (ii) the breach of those duties involved intentional misconduct, fraud or a knowing violation of law.
NRS 78.7502(1) provides that a corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation), by reason of the fact that the person is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses, including attorneys’ fees, judgments, fines and amounts paid in settlement actually and reasonably incurred by the person in connection with the action, suit or proceeding if the person (i) is not liable pursuant to NRS 78.138 or (ii) acted in good faith and in a manner which he or she reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe the conduct was unlawful. NRS 78.7502(2) provides that a corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that the person is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against expenses, including amounts paid in settlement and attorneys’ fees actually and reasonably incurred by the person in connection with the defense or settlement of the action or suit if the person (a) is not liable pursuant to NRS 78.138 or (ii) acted in good faith and in a manner which he or she reasonably believed to be in or not opposed to the best interests of the corporation. To the extent that a director, officer, employee or agent of a corporation has been successful on the merits or otherwise in defense of any such action, suit or proceeding, or in defense of any claim, issue or matter therein, the corporation shall indemnify him or her against expenses, including attorneys’ fees, actually and reasonably incurred by him or her in connection with the defense. The termination of any action, suit or proceeding by judgment, order, settlement, conviction or upon a plea of nolo contendere or its equivalent, does not, of itself, create a presumption that the person is liable pursuant to NRS 78.138 or did not act in good faith and in a manner which he or she reasonably believed to be in or not opposed to the best interests of the corporation, or that, with respect to any criminal action or proceeding, he or she had reasonable cause to believe that the conduct was unlawful. Indemnification may not be made for any claim, issue or matter as to which such a person has been adjudged by a court of competent jurisdiction, after exhaustion of all appeals therefrom, to be liable to the corporation or for amounts paid in settlement to the corporation, unless and only to the extent that the court in which the action or suit was brought or other court of competent jurisdiction determines upon application that in view of all the circumstances of the case, the person is fairly and reasonably entitled to indemnity for such expenses as the court deems proper.
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NRS 78.751(1) provides that any discretionary indemnification pursuant to NRS 78.7502 (unless ordered by a court or advanced pursuant to NRS 78.751(2)), may be made by the corporation only as authorized in the specific case upon a determination that indemnification of the director, officer, employee or agent is proper in the circumstances. The determination must be made (i) by the stockholders; (ii) by the board of directors by majority vote of a quorum consisting of directors who were not parties to the action, suit or proceeding; (iii) if a majority vote of a quorum consisting of directors who were not parties to the action, suit or proceeding so orders, by independent legal counsel in a written opinion; or (iv) if a quorum consisting of directors who were not parties to the action, suit or proceeding cannot be obtained, by independent legal counsel in a written opinion. NRS 78.751(2) provides that the corporation’s articles of incorporation or bylaws, or an agreement made by the corporation, may provide that the expenses of officers and directors incurred in defending a civil or criminal action, suit or proceeding must be paid by the corporation as they are incurred and in advance of the final disposition of the action, suit or proceeding, upon receipt of an undertaking by or on behalf of the director or officer to repay the amount if it is ultimately determined by a court of competent jurisdiction that the director or officer is not entitled to be indemnified by the corporation.
Under the NRS, the indemnification pursuant to NRS 78.7502 and advancement of expenses authorized in or ordered by a court pursuant to NRS 78.751:
| ● Does not exclude any other rights to which a person seeking indemnification or advancement of expenses may be entitled under the articles of incorporation or any bylaw, agreement, vote of stockholders or disinterested directors or otherwise, for either an action in the person’s official capacity or an action in another capacity while holding office, except that indemnification, unless ordered by a court pursuant to NRS 78.7502 or for the advancement of expenses made pursuant to NRS 78.751(2), may not be made to or on behalf of any director or officer if a final adjudication establishes that the director’s or officer’s acts or omissions involved intentional misconduct, fraud or a knowing violation of the law and was material to the cause of action; and | |
| ● Continues for a person who has ceased to be a director, officer, employee or agent and inures to the benefit of the heirs, executors and administrators of such a person. |
A right to indemnification or to advancement of expenses arising under a provision of the articles of incorporation or any bylaw is not eliminated or impaired by an amendment to such provision after the occurrence of the act or omission that is the subject of the civil, criminal, administrative or investigative action, suit or proceeding for which indemnification or advancement of expenses is sought, unless the provision in effect at the time of such act or omission explicitly authorizes such elimination or impairment after such action or omission has occurred.
The articles of incorporation of the Company provide that to the fullest extent permitted under the NRS (including, without limitation, to the fullest extent permitted under NRS 78.7502 and 78.751(3)) and other applicable law, the Company shall indemnify directors and officers of the Company in their respective capacities as such and in any and all other capacities in which any of them serves at the request of the Company. The articles of incorporation of the Company further provide that the liability of its directors and officers shall be eliminated or limited to the fullest extent permitted by the NRS, and that if the NRS are amended to further eliminate or limit or authorize corporate action to further eliminate or limit the liability of directors or officers, the liability of directors and officers of the Company shall be eliminated or limited to the fullest extent permitted by the NRS, as so amended from time to time; and in addition to any other rights of indemnification permitted by the laws of the State of Nevada or as may be provided for by the Company in its bylaws or by agreement, the expenses of directors and officers incurred in defending a civil or criminal action, suit or proceeding, involving alleged acts or omissions of such director or officer in his or her capacity as a director or officer of the Company, must be paid, by the Company or through insurance purchased and maintained by the Company or through other financial arrangements made by the Company, as they are incurred and in advance of the final disposition of the action, suit or proceeding, upon receipt of an undertaking by or on behalf of the director or officer to repay the amount if it is ultimately determined by a court of competent jurisdiction that he or she is not entitled to be indemnified by the Company.
| II-8 |
Further, the Company has entered into indemnification agreements with each of its directors and executive officers that may be broader than the specific indemnification provisions contained in the NRS. Such agreements may require the Company, among other things, to advance expenses and otherwise indemnify its executive officers and directors against certain liabilities that may arise by reason of their status or service as executive officers or directors, to the fullest extent permitted by law. The Company intends to enter into indemnification agreements with any new directors and executive officers in the future.
The Company maintains standard policies of insurance under which coverage is provided (a) to its directors and officers against loss rising from claims made by reason of breach of duty or other wrongful act, and (b) to the Company with respect to payments which may be made by the Company to such officers and directors pursuant to the above indemnification provision or otherwise as a matter of law.
The proposed form of Underwriting Agreement filed as Exhibit 1.1 to this Registration Statement provides for indemnification of directors and officers of the Company by the underwriters against certain liabilities.
We expect to enter into customary indemnification agreements with our executive officers and directors that provide them, in general, with customary indemnification in connection with their service to us or on our behalf.
Item 15: Recent Sales of Unregistered Securities
In the past three years, we have issued the following securities that were not registered under the Securities Act of 1933, as amended (the “Securities Act”). The share amounts presented in this Item 15 do not give effect to the Convertible Note Conversion and Reverse Stock Split.
On December 8, 2020, we accepted subscriptions for $1,250,000 and issued senior secured promissory notes and stock purchase warrants to three accredited investors. Each promissory note (titled a “Senior Secured Note”) accrues interest at an annual rate of 15%, of which 10% is to be paid monthly, and the remaining 5% to remain unpaid, compound annually, and is due and payable on the maturity date. Upon default, the aggregate interest rate would increase to 18% per annum. Each Senior Secured Note is due and payable on the earlier of: (i) November 30, 2022, (b) the closing of a “Qualified Subsequent Financing”, and (c) the closing of an initial public offering, as amended. In the event a note is pre-paid, we are required to pay a minimum one-year of interest. The term “Qualified Subsequent Financing” means the next sale, or series of related sales, of any security in which we received $2,000,000 or more from any parties that do not currently own, directly or indirectly, any of our common stock. We received gross proceeds of $1,250,000 in connection with the offering, and net proceeds of $1,115,000, after payment of $135,000 in diligence fees to Eagle Vision, which is being amortized as a debt discount over the life of the notes.
The Senior Secured Notes are a general secured obligation of the Company, senior in all respects to the liens, terms, covenants, and conditions of all existing debt of the Company, except for our loans from Small Business Administration. We executed a Security Agreement concurrently with the issuance of the Notes and filed UCC financing statements with the Oregon Secretary of State.
In addition to the Senior Secured Notes, each investor received a warrant to purchase shares of our common stock at $6.50 per share, expiring ten years from the issuance date, as subsequently amended on March 7, 2022. The total number of shares available for purchase under the warrants are 170,042 shares, including 19,125 warrants issued as offering costs on the loan, which are also being amortized as a debt discount over the life of the notes. We are required to register the shares issuable upon exercise of the warrants with the SEC in this filing. Prior to the exercise of a warrant, we are required to provide the investor monthly financial statements unaudited statements of income, cash flows, and stockholder equity for each such monthly period.
| II-9 |
On May 7, 2021, we accepted subscriptions for $1,000,000 and issued senior secured promissory notes and stock purchase warrants to six accredited investors. Each promissory note (titled a “Subordinated Note”) accrues interest at an annual rate of 15%, of which 10% is to be paid monthly, and the remaining 5% to remain unpaid, compound annually, and is due and payable on the maturity date. Upon default, the aggregate interest rate would increase to 18% per annum. Each Subordinated Note is due and payable on the earlier of: (i) November 30, 2022, (b) the closing of a “Qualified Subsequent Financing”, and (c) the closing of an initial public offering, as amended. In the event a note is pre-paid, we are required to pay a minimum one-year of interest. The term “Qualified Subsequent Financing” means the next sale, or series of related sales, of any security in which we received $2,000,000 or more from any parties that do not currently own, directly or indirectly, any of our common stock. We received gross proceeds of $1,000,000 in connection with the offering, and net proceeds of $890,000, after payment of $110,000 in diligence fees to Eagle Vision Ventures Inc. (“Eagle Vision”), which is being amortized as a debt discount over the life of the notes. The Subordinated Notes are a general secured obligation of the Company, subordinated to the Senior Secured Notes mentioned below.
In addition to the Senior Secured Notes, each investor received a warrant to purchase shares of our common stock at $2.84 per share, expiring ten years from the issuance date, as subsequently amended on March 7, 2022. The total number of shares available for purchase under the warrants are 385,607 shares, including 38,456 warrants issued as offering costs on the loan, which are also being amortized as a debt discount over the life of the notes. We are required to register the shares issuable upon exercise of the warrants with the SEC in this filing. Prior to the exercise of a warrant, we are required to provide the investor monthly financial statements unaudited statements of income, cash flows, and stockholder equity for each such monthly period.
On November 22, 2021, the Company awarded 2,500 shares of common stock to a non-employee services provider for services provided. The fair value of the common stock was $4,125 based on recent sales of common stock to third parties.
On December 31, 2021, the Company sold a total of 27,000 shares of common stock to two accredited investors at $1.65 per share for aggregate proceeds of $44,550.
On December 31, 2021, the Company sold 6,060 shares of common stock to the Company’s Chief Financial Officer, Douglas Durst, at $1.65 per share for total proceeds of $9,999.
On December 30, 2021, the Company sold 6,000 shares of common stock to Rowland W. Day II and Jaimie D. Day Family Trust U/T/D April 13, 1990, a trust for which the Company’s securities attorney, Rowland W. Day, Esq. is the trustee, at $1.65 per share for total proceeds of $9,900.
During the year ended December 31, 2020, the Company awarded, or vested, approximately an aggregate of ten (10) LLC member units to members for services provided. The aggregate fair value of the LLC member units was $44,089 based on a valuation price per unit of approximately $4,209 per unit on the date of grant.
During the year ended December 31, 2021, the Company awarded, or vested, approximately an aggregate thirty-one (31) LLC member units to members for services provided. The aggregate fair value of the LLC member units was $132,169 based on a valuation price per unit of approximately $4,209 per unit on the date of grant.
On January 1, 2022, the Company awarded options to purchase 144,000 shares of common stock under the 2022 Plan at an exercise price equal to $1.65 per share, exercisable over a ten-year period to the Company’s Chief Financial Officer. The options vest monthly over an eighteen (18) month period, with the initial vesting commencing on January 1, 2022.
On January 2, 2022, the Company awarded options to purchase 102,000 shares of common stock under the 2022 Plan at an exercise price equal to $1.65 per share, exercisable over a ten-year period to an employee. The options vest monthly over a twenty-four (24) month period, with the initial vesting commencing on January 2, 2022.
On January 7, 2022, the Company sold 3,030 shares of common stock to an accredited investor at $1.65 per share for proceeds of $5,000.
On January 10, 2022, the Company sold 3,031 shares of common stock to the Company’s Chief Operating Officer at $1.65 per share for proceeds of $5,000.
On January 17, 2022, the Company awarded 12,300 shares of common stock to a consultant for services provided. The fair value of the common stock was $20,295 based on recent sales of common stock to third parties.
On April 30, 2022, the Company awarded 2,500 shares of common stock to a consultant for services provided. The fair value of the common stock was $4,125 based on recent sales of common stock to third parties.
On September 19, 2022, the Company awarded options to purchase 25,008 shares of common stock under the 2022 Plan at an exercise price equal to $1.65 per share, exercisable over a ten-year period to an employee. One fourth of the options vest one year from the grant date, and the remaining shares vest monthly over a thirty-six (36) month period from the 1-year anniversary of the grant date.
On various origination dates between January 5, 2023 and March 27, 2023, the Company sold a total of eleven (11) individual convertible promissory notes (“First Quarter of 2023 Convertible Notes”) with substantially the same terms. These unsecured convertible notes, bearing interest at 8% per annum, mature on the earlier of: a) June 30, 2023, b) the closing of a Qualified Subsequent Financing, c) the closing of a change of control, or d) the Company’s S-1 registration statement being declared effective and the signing of a firm commitment underwriting agreement for a capital raise of at least ten million dollars ($10,000,000). Each note is convertible at a fixed conversion price of $1.65 per common share, and all interest shall be deemed to have stopped accruing as of a date selected by the Company that is up to 10 days prior to the effective date of the registration statement filed in connection with the IPO. Each note is mandatorily convertible upon the Company’s S-1 registration statement being declared effective and the signing of a firm commitment underwriting agreement for a capital raise of at least ten million dollars ($10,000,000). The notes carry a default interest rate of 18% per annum. The Company received aggregate proceeds of $467,500 on the sale of the Convertible Notes, including $25,000 received from a related party. The public offering proceeds threshold for conversion of the Convertible Notes has been amended to $5,000,000.
On February 28, 2023, the Company awarded fully vested options to purchase 40,000 shares of common stock under the 2022 Plan at an exercise price equal to $1.65 per share, exercisable over a ten-year period to an employee.
On March 15, 2023, the Company completed the sale of a promissory note in the principal amount of $200,000 to an accredited investor, pursuant to a Loan Agreement between the Company and such investor. The promissory note bears an interest at 18% per annum, based on a 360-day year, and carries a monthly default rate of 1.5% of all outstanding principal, interest, fees and penalties. The note matures on September 14, 2023, and is secured by the Company’s accounts receivable from Walmart.
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Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
The list of exhibits is set forth under “Exhibit Index” at the end of this registration statement and is incorporated herein by reference.
(b) Financial Statement Schedules
See the “Index to Financial Statements” for a list of the financial statements included in this registration statement. All financial statement schedules are omitted because they are not required, are inapplicable, or the information is included in our financial statements or notes to those financial statements contained in this registration statement.
Item 17. Undertakings.
Insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended, or the Securities Act, may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes:
| (1) | For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b) (1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. | |
| (2) | For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. |
| II-11 |
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized in the City of Bend, State of Oregon, on May 11, 2023.
| BRANCHOUT FOOD INC. | ||
| By: | /s/ Eric Healy | |
| Name: | Eric Healy | |
| Title: | Chief Executive Officer & | |
| Chairman of the Board of Directors | ||
Pursuant to the requirements of the Securities Act of 1933, as amended, this registration statement has been signed by the following persons in the capacities and on the dates indicated.
| Signature | Title | Date | ||
| /s/ Eric Healy | Chief Executive Officer and Chairman of the Board | May 11, 2023 | ||
| Eric Healy | (Principal Executive Officer) | |||
| * | Chief Financial Officer and Director | |||
| Douglas Durst | (Principal Accounting and Financial Officer) | May 11, 2023 | ||
| /s/ Eric Healy | Attorney-in-fact | May 11, 2023 | ||
| Eric Healy |
| II-12 |
EXHIBIT INDEX
| * | Filed herewith. |
| ** | To be filed by amendment. |
| *** | Previously filed. |
| + | Indicates a management contract or compensatory plan or arrangement. |
| £ | Portions of this exhibit have been redacted pursuant to Item 601(b)(10)(iv) of Regulation S-K |
| II-13 |
Exhibit 1.1
UNDERWRITING AGREEMENT
by and between
BRANCHOUT FOOD INC.
And
ALEXANDER CAPITAL, L.P.,
as Representative of the Several Underwriters
BRANCHOUT FOOD INC.
UNDERWRITING AGREEMENT
[●], 2023
Alexander Capital, L.P.
As Representative of the several Underwriters named on Schedule 1 attached hereto
c/o Alexander Capital, L.P.
17 State Street, 5th Floor
New York, NY 10004
Ladies and Gentlemen:
The undersigned, BranchOut Food Inc., a company incorporated under the laws of the State of Nevada (the “Company”), hereby confirms its agreement (this “Agreement”) with Alexander Capital, L.P., as the representative of the several underwriters named in Schedule 1 hereto (the “Representative” and such other underwriters being collectively called the “Underwriters” or, individually, an “Underwriter”) as follows:
1. Purchase and Sale of Shares.
1.1. Firm Shares.
1.1.1. Nature and Purchase of Firm Shares.
(i) On the basis of the representations and warranties herein contained, but subject to the terms and conditions herein set forth, the Company agrees to issue and sell to the several Underwriters, an aggregate of [1,250,000] shares (the “Firm Shares”) of the Company’s common stock, par value $0.0001 per share (the “Common Stock”).
(ii) The Underwriters, severally and not jointly, agree to purchase from the Company the number of Firm Shares set forth opposite their respective names on Schedule 1 attached hereto and made a part hereof at a purchase price of $[●] per share ([●]% of the per Firm Share offering price). The Firm Shares are to be offered initially to the public at the offering price set forth on the cover page of the Prospectus (as defined in Section 2.1.1 hereof).
1.1.2. Shares Payment and Delivery.
(i) Delivery and payment for the Firm Shares shall be made at 10:00 a.m., Eastern time, on the second (2nd) Business Day following the effective date (the “Effective Date”) of the Registration Statement (as defined in Section 2.1.1 below) (or the third (3rd) Business Day following the Effective Date if the Registration Statement is declared effective after 4:01 p.m., Eastern time) or at such other time as shall be agreed upon by the Representative and the Company, at the offices of Sullivan & Worcester LLP, 1633 Broadway, New York, NY 10019 (“Representative Counsel”), or at such other place (or remotely by other electronic transmission) as shall be agreed upon by the Representative and the Company. The hour and date of delivery and payment for the Firm Shares is called the “Closing Date.”
(ii) Payment for the Firm Shares shall be made on the Closing Date by wire transfer in Federal (same day) funds, payable to the order of the Company, upon delivery of the certificates (in form and substance satisfactory to the Underwriters) representing the Firm Shares (or through the facilities of the Depository Trust Company (“DTC”)) for the account of the Underwriters. The Firm Shares shall be registered in such name or names and in such authorized denominations as the Representative may request in writing at least two (2) full Business Days prior to the Closing Date. The Company shall not be obligated to sell or deliver the Firm Shares except upon tender of payment by the Representative for all of the Firm Shares. The term “Business Day” means any day other than a Saturday, a Sunday or a legal holiday or a day on which banking institutions are authorized or obligated by law to close in New York, New York.
1.2. Over-allotment Option.
1.2.1. Option Shares. For the purposes of covering any over-allotments in connection with the distribution and sale of the Firm Shares, the Company hereby grants to the Underwriters an option to purchase up to [187,500] additional shares of Common Stock, representing fifteen percent (15%) of the Firm Shares sold in the offering, from the Company (the “Over-allotment Option”). Such [187,500] additional shares of Common Stock, the net proceeds of which will be deposited with the Company’s account, are hereinafter referred to as “Option Shares.” The purchase price to be paid per Option Share shall be equal to the price per Firm Share set forth in Section 1.1.1 hereof. The Firm Shares and the Option Shares are hereinafter referred to together as the “Public Securities.” The offering and sale of the Public Securities is hereinafter referred to as the “Offering.”
1.2.2. Exercise of Option. The Over-allotment Option granted pursuant to Section 1.2.1 hereof may be exercised by the Representative as to all (at any time) or any part (from time to time) of the Option Shares within 45 days after the Effective Date. The Underwriters shall not be under any obligation to purchase any Option Shares prior to the exercise of the Over-allotment Option. The Over-allotment Option granted hereby may be exercised by the giving of oral notice to the Company from the Representative, which must be confirmed in writing by overnight mail or electronic transmission setting forth the number of Option Shares to be purchased and the date and time for delivery of and payment for the Option Shares (the “Option Closing Date”), which shall not be later than five (5) full Business Days after the date of the notice or such other time as shall be agreed upon by the Company and the Representative, at the offices of Representative Counsel or at such other place (including remotely other electronic transmission) as shall be agreed upon by the Company and the Representative. If such delivery and payment for the Option Shares does not occur on the Closing Date, the Option Closing Date will be as set forth in the notice. Upon exercise of the Over-allotment Option with respect to all or any portion of the Option Shares, subject to the terms and conditions set forth herein, (i) the Company shall become obligated to sell to the Underwriters the number of Option Shares specified in such notice and (ii) each of the Underwriters, acting severally and not jointly, shall purchase that portion of the total number of Option Shares then being purchased as set forth in Schedule 1 opposite the name of such Underwriter.
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1.2.3. Payment and Delivery. Payment for the Option Shares shall be made on the Option Closing Date by wire transfer in Federal (same day) funds, payable to the order of the Company upon delivery to the Representative of certificates (in form and substance satisfactory to the Underwriters) representing the Option Shares (or through the facilities of DTC) for the account of the Underwriters. The Option Shares shall be registered in such name or names and in such authorized denominations as the Representative may request in writing at least two (2) full Business Days prior to the Option Closing Date. The Company shall not be obligated to sell or deliver the Option Shares except upon tender of payment by the Representative for applicable Option Shares. The Option Closing Date may be simultaneous with, but not earlier than, the Closing Date; and in the event that such time and date are simultaneous with the Closing Date, the term “Closing Date” shall refer to the time and date of delivery of the Firm Shares and Option Shares.
1.3. Representative’s Warrants.
1.3.1. Purchase Warrants. The Company hereby agrees to issue and sell to the Representative (and/or its designee(s)) on the Closing Date a warrant, substantially in the form attached hereto as Exhibit A (the “Representative’s Warrants”) for the purchase of an aggregate of up to [86,250] shares of Common Stock, representing6% of the Firm Shares (including the Option Shares), for an aggregate purchase price of $100. The Representative’s Warrants shall be exercisable upon issuance, in whole or in part, commencing on a date which is 180 days after the commencement of sales of the Company’s securities in connection with the Offering (the “Commencement Date”) and shall be exercisable until the five-year anniversary of the Commencement Date at an initial exercise price per share of Common Stock of $[●], which is equal to 120% of the initial public offering price of the Firm Shares. The Representative’s Warrants and the shares of Common Stock issuable upon exercise thereof are hereinafter referred to together as the “Representative’s Securities.” The Representative understands and agrees that there are significant restrictions pursuant to FINRA Rule 5110 against transferring the Representative’s Warrants and the underlying shares of Common Stock during the one hundred eighty (180) days after the Commencement Date, and by its acceptance thereof, it shall agree that it will not sell, transfer, assign, pledge or hypothecate the Representative’s Warrants, or any portion thereof, or be the subject of any hedging, short sale, derivative, put or call transaction that would result in the effective economic disposition of such securities for a period of one hundred eighty (180) days following the Commencement Date to anyone other than (i) an Underwriter or a selected dealer in connection with the Offering, or (ii) a bona fide officer or partner of the Representative or of any such Underwriter or selected dealer; and only if any such transferee agrees to the foregoing lock-up restrictions.
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1.3.2. Delivery. Delivery of the Representative’s Warrants shall be made on the Closing Date and shall be issued in the name or names and in such authorized denominations as the Representative may request in writing.
2. Representations and Warranties of the Company. The Company represents and warrants to the Underwriters as of the Applicable Time (as defined below), as of the Closing Date and as of the Option Closing Date, if any, as follows:
2.1. Filing of Registration Statement.
2.1.1. Pursuant to the Securities Act. The Company has filed with the U.S. Securities and Exchange Commission (the “Commission”) a registration statement, and an amendment or amendments thereto, on Form S-1 (File No. 333-271422), including any related prospectus or prospectuses, for the registration of the Public Securities under the Securities Act of 1933, as amended (the “Securities Act”), which registration statement and amendment or amendments have been prepared by the Company in all material respects in conformity with the requirements of the Securities Act and the rules and regulations of the Commission under the Securities Act (the “Securities Act Regulations”) and will contain all material statements that are required to be stated therein in accordance with the Securities Act and the Securities Act Regulations. Except as the context may otherwise require, such registration statement, as amended, on file with the Commission at the time the registration statement became effective (including the Preliminary Prospectus included in the registration statement, financial statements, schedules, exhibits and all other documents filed as a part thereof or incorporated therein and all information deemed to be a part thereof as of the Effective Date pursuant to paragraph (b) of Rule 430A of the Securities Act Regulations (the “Rule 430A Information”)), is referred to herein as the “Registration Statement.” If the Company files any registration statement pursuant to Rule 462(b) of the Securities Act Regulations, then after such filing, the term “Registration Statement” shall include such registration statement filed pursuant to Rule 462(b). The Registration Statement has been declared effective by the Commission on the date hereof.
Each prospectus used prior to the effectiveness of the Registration Statement, and each prospectus that omitted the Rule 430A Information that was used after such effectiveness and prior to the execution and delivery of this Agreement, is herein called a “Preliminary Prospectus.” The Preliminary Prospectus, subject to completion, dated [●], 2023, that was included in the Registration Statement immediately prior to the Applicable Time is hereinafter called the “Pricing Prospectus.” The final prospectus in the form first furnished to the Underwriters for use in the Offering is hereinafter called the “Prospectus.” Any reference to the “most recent Preliminary Prospectus” shall be deemed to refer to the latest Preliminary Prospectus included in the Registration Statement.
“Applicable Time” means 5:00 p.m., Eastern time, on the date of this Agreement.
“Issuer Free Writing Prospectus” means any “issuer free writing prospectus,” as defined in Rule 433 of the Securities Act Regulations (“Rule 433”), including without limitation any “free writing prospectus” (as defined in Rule 405 of the Securities Act Regulations) relating to the Public Securities that is (i) required to be filed with the Commission by the Company, (ii) a “road show that is a written communication” within the meaning of Rule 433(d)(8)(i), whether or not required to be filed with the Commission, or (iii) exempt from filing with the Commission pursuant to Rule 433(d)(5)(i) because it contains a description of the Public Securities or of the Offering that does not reflect the final terms, in each case in the form filed or required to be filed with the Commission or, if not required to be filed, in the form retained in the Company’s records pursuant to Rule 433(g).
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“Issuer General Use Free Writing Prospectus” means any Issuer Free Writing Prospectus that is intended for general distribution to prospective investors (other than a “bona fide electronic road show,” as defined in Rule 433 (the “Bona Fide Electronic Road Show”))
“Issuer Limited Use Free Writing Prospectus” means any Issuer Free Writing Prospectus that is not an Issuer General Use Free Writing Prospectus.
“Pricing Disclosure Package” means the Pricing Prospectus and the information included on Schedule 2-A hereto, all considered together.
2.1.2. Pursuant to the Exchange Act. The Company has filed with the Commission a Form 8-A (File Number 001-[●]) providing for the registration pursuant to Section 12(b) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), of the shares of Common Stock. The registration of the shares of Common Stock under the Exchange Act has been declared effective by the Commission on or prior to the date hereof. The Company has taken no action designed to, or likely to have the effect of, terminating the registration of the shares of Common Stock under the Exchange Act, nor has the Company received any notification that the Commission is contemplating terminating such registration.
2.2. Stock Exchange Listing. The shares of Common Stock have been approved for listing on the Nasdaq Capital Market (the “Exchange”) subject only to official notice of issuance, and the Company has taken no action designed to, or likely to have the effect of, delisting the shares of Common Stock from the Exchange, nor has the Company received any notification that the Exchange is contemplating terminating such listing except as described in the Registration Statement, the Pricing Disclosure Package and the Prospectus.
2.3. No Stop Orders, etc. Neither the Commission nor, to the Company’s knowledge, any state regulatory authority has issued any order preventing or suspending the use of the Registration Statement, any Preliminary Prospectus or the Prospectus or has instituted or, to the Company’s knowledge, threatened to institute, any proceedings with respect to such an order. The Company has complied with each request (if any) from the Commission for additional information.
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2.4. Disclosures in Registration Statement.
2.4.1. Compliance with Securities Act and 10b-5 Representation.
(i) Each of the Registration Statement and any post-effective amendment thereto, at the time it became effective, complied in all material respects with the requirements of the Securities Act and the Securities Act Regulations. Each Preliminary Prospectus, including the prospectus filed as part of the Registration Statement as originally filed or as part of any amendment or supplement thereto, and the Prospectus, at the time each was filed with the Commission, complied in all material respects with the requirements of the Securities Act and the Securities Act Regulations. Each Preliminary Prospectus delivered to the Underwriters for use in connection with this Offering and the Prospectus was or will be identical to the electronically transmitted copies thereof filed with the Commission pursuant to EDGAR, except to the extent permitted by Regulation S-T.
(ii) Neither the Registration Statement nor any amendment thereto, at its effective time, as of the Applicable Time, at the Closing Date or at any Option Closing Date (if any), contained, contains or will contain an untrue statement of a material fact or omitted, omits or will omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading.
(iii) The Pricing Disclosure Package, as of the Applicable Time, at the Closing Date or at any Option Closing Date (if any), did not, does not and will not include an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; and each Issuer Limited Use Free Writing Prospectus does not conflict in any material respect with the information contained in the Registration Statement, any Preliminary Prospectus, the Pricing Prospectus or the Prospectus, and each such Issuer Limited Use Free Writing Prospectus, as supplemented by and taken together with the Pricing Prospectus as of the Applicable Time, did not include an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading; provided, however, that this representation and warranty shall not apply to statements made or statements omitted in reliance upon and in conformity with written information furnished to the Company with respect to the Underwriters by the Representative expressly for use in the Registration Statement, the Pricing Prospectus or the Prospectus or any amendment thereof or supplement thereto. The parties acknowledge and agree that such information provided by or on behalf of any Underwriter consists solely of the disclosure contained in the “Underwriting” section of the Prospectus (the “Underwriters’ Information”).
(iv) Neither the Prospectus nor any amendment or supplement thereto (including any prospectus wrapper), as of its issue date, at the time of any filing with the Commission pursuant to Rule 424(b), at the Closing Date or at any Option Closing Date, included, includes or will include an untrue statement of a material fact or omitted, omits or will omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided, however, that this representation and warranty shall not apply to the Underwriters’ Information.
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2.4.2. Disclosure of Agreements. The agreements and documents described in the Registration Statement, the Pricing Disclosure Package and the Prospectus conform in all material respects to the descriptions thereof contained therein and there are no agreements or other documents required by the Securities Act and the Securities Act Regulations to be described in the Registration Statement, the Pricing Disclosure Package and the Prospectus or to be filed with the Commission as exhibits to the Registration Statement, that have not been so described or filed. Each agreement or other instrument (however characterized or described) to which the Company is a party or by which it is or may be bound or affected and (i) that is referred to in the Registration Statement, the Pricing Disclosure Package and the Prospectus, or (ii) is material to the Company’s business, has been duly authorized and validly executed by the Company, is in full force and effect in all material respects and is enforceable against the Company and, to the Company’s knowledge, the other parties thereto, in accordance with its terms, except (x) as such enforceability may be limited by bankruptcy, insolvency, reorganization or similar laws affecting creditors’ rights generally, (y) as enforceability of any indemnification or contribution provision may be limited under the federal and state securities laws, and (z) that the remedy of specific performance and injunctive and other forms of equitable relief may be subject to the equitable defenses and to the discretion of the court before which any proceeding therefor may be brought. Except as disclosed in the Registration Statement, the Pricing Disclosure Package and the Prospectus, none of such agreements or instruments has been assigned by the Company, and neither the Company nor, to the Company’s knowledge, any other party is in default thereunder and, to the Company’s knowledge, no event has occurred that, with the lapse of time or the giving of notice, or both, would constitute a default thereunder except for such defaults that would not reasonably be expected to result in a Material Adverse Change (as defined below). To the Company’s knowledge, performance by the Company of the material provisions of such agreements or instruments will not result in a violation of any existing applicable law, rule, regulation, judgment, order or decree of any governmental agency or court, domestic or foreign, having jurisdiction over the Company or any of its assets or businesses (each, a “Governmental Entity”), including, without limitation, those relating to environmental laws and regulations or taxes, except for such violations that would not reasonably be expected to result in any change or development that, singularly or in the aggregate, would involve a material adverse change, in or affecting the condition (financial or otherwise), results of operations, business, assets or prospects of the Company (a “Material Adverse Change”).
2.4.3. Prior Securities Transactions. No securities of the Company have been sold by the Company or by or on behalf of, or for the benefit of, any person or persons controlling, controlled by or under common control with the Company, except as disclosed in the Registration Statement, the Pricing Disclosure Package and the Preliminary Prospectus.
2.4.4. Regulations. The disclosures in the Registration Statement, the Pricing Disclosure Package and the Prospectus concerning the effects of federal, state, local and all foreign regulation on the Offering and the Company’s business as currently contemplated are correct in all material respects and no other such regulations are required to be disclosed in the Registration Statement, the Pricing Disclosure Package and the Prospectus which are not so disclosed.
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2.5. Changes After Dates in Registration Statement.
2.5.1. No Material Adverse Change. Since the respective dates as of which information is given in the Registration Statement, the Pricing Disclosure Package and the Prospectus, except as otherwise specifically stated therein: (i) there has been no material adverse change in the financial position or results of operations of the Company, nor to the Company’s knowledge, a Material Adverse Change; and (ii) there have been no material transactions entered into by the Company not in the ordinary course of business, other than as contemplated pursuant to this Agreement.
2.5.2. Recent Securities Transactions, etc. Subsequent to the respective dates as of which information is given in the Registration Statement, the Pricing Disclosure Package and the Prospectus, and except as may otherwise be indicated or contemplated herein or disclosed in the Registration Statement, the Pricing Disclosure Package and the Prospectus, the Company has not: (i) issued any securities, other than securities issued pursuant to the Company’s existing equity incentive plans or shares issuable upon the exercise of then outstanding options, warrants and convertible securities, which in each case were disclosed in the Prospectus, Pricing Disclosure Package or the Registration Statement, or incurred any liability or obligation, direct or contingent, for borrowed money; or (ii) declared or paid any dividend or made any other distribution on or in respect to its capital stock.
2.6. Independent Accountants. To the knowledge of the Company, M&K CPAS, PLLC (the “Auditor”), whose report is filed with the Commission as part of the Registration Statement, the Pricing Disclosure Package and the Prospectus, is an independent registered public accounting firm as required by the Securities Act and the Securities Act Regulations and the Public Company Accounting Oversight Board. Except as disclosed in the Registration Statement, the Pricing Disclosure Package and the Prospectus, the Auditor has not, during the periods covered by the financial statements included in the Registration Statement, the Pricing Disclosure Package and the Prospectus, provided to the Company any non-audit services, as such term is used in Section 10A(g) of the Exchange Act.
2.7. Financial Statements, etc. The financial statements, including the notes thereto and supporting schedules, if any, included in the Registration Statement, the Pricing Disclosure Package and the Prospectus, fairly in all material respects present the financial position and the results of operations of the Company at the dates and for the periods to which they apply; and such financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”), consistently applied throughout the periods involved (provided that unaudited interim financial statements are subject to year-end audit adjustments that are not expected to be material in the aggregate and do not contain all footnotes required by GAAP); and any supporting schedules included in the Registration Statement present fairly in all material respects the information required to be stated therein. Except as included therein, no historical or pro forma financial statements are required to be included in the Registration Statement, the Pricing Disclosure Package or the Prospectus under the Securities Act or the Securities Act Regulations. The pro forma and pro forma as adjusted financial information and the related notes, if any, included in the Registration Statement, the Pricing Disclosure Package and the Prospectus have been properly compiled and prepared in accordance with the applicable requirements of the Securities Act and the Securities Act Regulations and present fairly in all material respects the information shown therein, and the assumptions used in the preparation thereof are reasonable and the adjustments used therein are appropriate to give effect to the transactions and circumstances referred to therein. All disclosures contained in the Registration Statement, the Pricing Disclosure Package or the Prospectus regarding “non-GAAP financial measures” (as such term is defined by the rules and regulations of the Commission), if any, comply with Regulation G of the Exchange Act and Item 10 of Regulation S-K of the Securities Act, to the extent applicable. Each of the Registration Statement, the Pricing Disclosure Package and the Prospectus discloses all material off-balance sheet transactions, arrangements, obligations (including contingent obligations), and other relationships of the Company with unconsolidated entities or other persons that may have a material current or future effect on the Company’s financial condition, changes in financial condition, results of operations, liquidity, capital expenditures, capital resources, or significant components of revenues or expenses. Except as disclosed in the Registration Statement, the Pricing Disclosure Package and the Prospectus, (a) neither the Company nor any of its direct or indirect subsidiaries, including each entity disclosed or described in the Registration Statement, the Pricing Disclosure Package and the Prospectus as being a subsidiary of the Company (each a “Subsidiary” and, collectively, the “Subsidiaries”), has incurred any material liabilities or obligations, direct or contingent, or entered into any material transactions other than in the ordinary course of business, (b) the Company has not declared or paid any dividends or made any distribution of any kind with respect to its capital stock, (c) there has not been any change in the capital stock of the Company of any of its Subsidiaries, or, other than in the course of business, any grants under any stock compensation plan, and (d) there has not been any Material Adverse Change in the Company’s long-term or short-term debt. The Company represents that it has no Subsidiaries other than those listed in Exhibit 21.1 to the Registration Statement.
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2.8. Authorized Capital; Options, etc. The Company had, at the date or dates indicated in the Registration Statement, the Pricing Disclosure Package and the Prospectus, the duly authorized, issued and outstanding capitalization as set forth therein. Based on the assumptions stated in the Registration Statement, the Pricing Disclosure Package and the Prospectus, the Company will have on the Closing Date the adjusted stock capitalization set forth therein. Except as set forth in, or contemplated by, the Registration Statement, the Pricing Disclosure Package and the Prospectus, on the Effective Date, as of the Applicable Time and on the Closing Date and any Option Closing Date, there will be no stock options, warrants, or other rights to purchase or otherwise acquire any authorized, but unissued shares of Common Stock of the Company or any security convertible or exercisable into shares of Common Stock of the Company, or any contracts or commitments to issue or sell shares of Common Stock or any such options, warrants, rights or convertible securities.
2.9. Valid Issuance of Securities, etc.
2.9.1. Outstanding Securities. All issued and outstanding securities of the Company issued prior to the transactions contemplated by this Agreement have been duly authorized and validly issued and are fully paid and non-assessable; the holders thereof have no rights of rescission with respect thereto, and are not subject to personal liability by reason of being such holders; and none of such securities were issued in violation of the preemptive rights of any holders of any security of the Company or similar contractual rights granted by the Company. The authorized shares of Common Stock conform in all material respects to all statements relating thereto contained in the Registration Statement, the Pricing Disclosure Package and the Prospectus. The offers and sales of the outstanding shares of Common Stock were at all relevant times either registered under the Securities Act and the applicable state securities or “blue sky” laws or, based in part on the representations and warranties of the purchasers of such Shares, exempt from such registration requirements. The description of the Company’s stock option, stock bonus and other stock plans or arrangements, and the options or other rights granted thereunder, as described in the Registration Statement, the Pricing Disclosure Package and the Prospectus, accurately and fairly present, in all material respects, the information required to be shown with respect to such stock plans, arrangements and the options and rights granted thereunder.
2.9.2. Securities Sold Pursuant to this Agreement. The Public Securities and Representative’s Securities have been duly authorized for issuance and sale and, when issued and paid for, will be validly issued, fully paid and non-assessable; the holders thereof are not and will not be subject to personal liability by reason of being such holders; the Public Securities and Representative’s Securities are not and will not be subject to the preemptive rights of any holders of any security of the Company or similar contractual rights granted by the Company; and all corporate action required to be taken for the authorization, issuance and sale of the Public Securities and Representative’s Securities has been duly and validly taken. The Public Securities and Representative’s Securities conform in all material respects to all statements with respect thereto contained in the Registration Statement, the Pricing Disclosure Package and the Prospectus. All corporate action required to be taken for the authorization, issuance and sale of the Representative’s Warrants has been duly and validly taken; the shares of Common Stock issuable upon exercise of the Representative’s Warrants have been duly authorized and reserved for issuance by all necessary corporate action on the part of the Company and when paid for and issued in accordance with the Representative’s Warrants, such shares of Common Stock will be validly issued, fully paid and non-assessable; the holders thereof are not and will not be subject to personal liability by reason of being such holders; and such shares of Common Stock are not and will not be subject to the preemptive rights of any holders of any security of the Company or similar contractual rights granted by the Company.
2.10. Registration Rights of Third Parties. Except as set forth in the Registration Statement, the Pricing Disclosure Package and the Prospectus, no holders of any securities of the Company or any rights exercisable for or convertible or exchangeable into securities of the Company have the right to require the Company to register any such securities of the Company under the Securities Act or to include any such securities in a registration statement to be filed by the Company.
2.11. Validity and Binding Effect of Agreements. This Agreement and the Representative’s Warrants have been duly and validly authorized by the Company, and, when executed and delivered, will constitute, the valid and binding agreements of the Company, enforceable against the Company in accordance with their respective terms, except: (i) as such enforceability may be limited by bankruptcy, insolvency, reorganization or similar laws affecting creditors’ rights generally; (ii) as enforceability of any indemnification or contribution provision may be limited under the federal and state securities laws; and (iii) that the remedy of specific performance and injunctive and other forms of equitable relief may be subject to the equitable defenses and to the discretion of the court before which any proceeding therefor may be brought.
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2.12. No Conflicts, etc. The execution, delivery and performance by the Company of this Agreement, the Representative’s Warrants and all ancillary documents, the consummation by the Company of the transactions herein and therein contemplated and the compliance by the Company with the terms hereof and thereof do not and will not, with or without the giving of notice or the lapse of time or both: (i) result in a material breach of, or conflict in any material respect with any of the terms and provisions of, or constitute a material default under, or result in the creation, modification, termination or imposition of any material lien, charge or encumbrance upon any property or assets of the Company pursuant to the terms of any agreement or instrument to which the Company is a party; (ii) result in any violation of the provisions of the Company’s articles of incorporation (as the same may be amended or restated from time to time, the “Charter”) or the bylaws of the Company (the “Bylaws”); or (iii) violate any existing applicable law, rule, regulation, judgment, order or decree of any Governmental Entity as of the date hereof; except in the cases of clause (iii) above, for such breaches, conflicts or defaults that would not reasonably be expected to result in a Material Adverse Change.
2.13. No Defaults; Violations. No material default exists in the due performance and observance of any term, covenant or condition of any material license, contract, indenture, mortgage, deed of trust, note, loan or credit agreement, or any other agreement or instrument evidencing an obligation for borrowed money, or any other material agreement or instrument to which the Company is a party or by which the Company may be bound or to which any of the properties or assets of the Company is subject. The Company is not in violation of any term or provision of its Charter or Bylaws, or corresponding governing documents, as applicable. The Company is not in violation of any franchise, license, permit, applicable law, rule, regulation, judgment or decree of any Governmental Entity, except for such violations that would not reasonably be expected to result in a Material Adverse Change.
2.14. Corporate Power; Licenses; Consents.
2.14.1. Conduct of Business. Except as described in the Registration Statement, the Pricing Disclosure Package and the Prospectus, the Company has all requisite corporate power and authority, and has all necessary authorizations, approvals, orders, licenses, certificates and permits (“Permits”) of and from any Governmental Entity that it needs as of the date hereof to conduct its business purpose as described in the Registration Statement, the Pricing Disclosure Package and the Prospectus, except for such Permits the absence of which would not reasonably be expected to have a Material Adverse Change.
2.14.2. Transactions Contemplated Herein. The Company has all corporate power and authority to enter into this Agreement and to carry out the provisions and conditions hereof, and all consents, authorizations, approvals and orders required in connection therewith have been obtained. No consent, authorization or order of, and no filing with, any court, government agency or other body is required for the valid issuance, sale and delivery of the Public Securities and the consummation of the transactions and agreements contemplated by this Agreement and the Representative’s Warrants and as contemplated by the Registration Statement, the Pricing Disclosure Package and the Prospectus, except (i) such consents, approvals, authorizations, orders, filings, registrations or qualifications that have already been obtained or made and (ii) with respect to applicable federal and state securities laws and the rules and regulations of the Financial Industry Regulatory Authority, Inc. (“FINRA”).
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2.15. D&O Questionnaires. To the Company’s knowledge, all information contained in the questionnaires (the “Questionnaires”) completed by each of the Company’s directors and officers immediately prior to the Offering (the “Insiders”) as supplemented by all information concerning the Company’s directors, officers and principal stockholders as described in the Registration Statement, the Pricing Disclosure Package and the Prospectus, as well as in the Lock-Up Agreements (as defined in Section 2.24 below), provided to the Underwriters, is true and correct in all material respects and the Company has not become aware of any information which would cause the information disclosed in the Questionnaires to become materially inaccurate or incorrect in any material respect.
2.16. Litigation; Governmental Proceedings. There is no action, suit, proceeding, inquiry, arbitration, investigation, litigation or governmental proceeding pending or, to the Company’s knowledge, threatened against, or involving the Company or, to the Company’s knowledge, any executive officer or director, which has not been disclosed in the Registration Statement, the Pricing Disclosure Package and the Prospectus or in connection with the Company’s listing application for the listing of the Public Securities on the Exchange, which individually or in the aggregate, if determined adversely to the Company would reasonably be expected to have a Material Adverse Change.
2.17. Good Standing. The Company has been duly organized and is validly existing as a corporation and is in good standing under the laws of the State of Nevada as of the date hereof, and is duly qualified to do business and is in good standing in each other jurisdiction in which its ownership or lease of property or the conduct of business requires such qualification, except where the failure to qualify, singularly or in the aggregate, would not have or reasonably be expected to result in a Material Adverse Change.
2.18. Insurance. The Company carries or is entitled to the benefits of insurance, with reputable insurers, in such amounts and covering such risks which the Company believes are adequate, and all such insurance is in full force and effect. The Company has no reason to believe that it will not be able (i) to renew its existing insurance coverage as and when such policies expire or (ii) to obtain comparable coverage from similar institutions as may be necessary or appropriate to conduct its business as now conducted and at a cost that would not reasonably be expected to result in a Material Adverse Change.
2.19. Transactions Affecting Disclosure to FINRA.
2.19.1. Finder’s Fees. Except as described in the Registration Statement, the Pricing Disclosure Package and the Prospectus, there are no claims, payments, arrangements, agreements or understandings relating to the payment of a finder’s, consulting or origination fee by the Company or any Insider with respect to the sale of the Public Securities hereunder or any other arrangements, agreements or understandings of the Company or, to the Company’s knowledge, any of its stockholders that may affect the Underwriters’ compensation, as determined by FINRA and neither the Company nor, to the Company’s knowledge any Insider has paid any monies or other compensation or issued any securities to any member of FINRA, or to any affiliate or associate of such a member, regarding this Offering.
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2.19.2. Payments Within Twelve (12) Months. Except as described in the Registration Statement, the Pricing Disclosure Package and the Prospectus, the Company has not made any direct or indirect payments (in cash, securities or otherwise) in connection with the Offering to: (i) any person, as a finder’s fee, consulting fee or otherwise, in consideration of such person raising capital for the Company or introducing to the Company persons who raised or provided capital to the Company; (ii) any FINRA member; or (iii) any person or entity that has any direct or indirect affiliation or association with any FINRA member, within the twelve (12) months prior to the Effective Date, other than the payment to the Underwriters as provided hereunder.
2.19.3. Use of Proceeds. None of the net proceeds of the Offering will be paid by the Company to any participating FINRA member or its affiliates, except as specifically authorized herein.
2.19.4. FINRA Affiliation. (i) No officer or director of the Company, and to the knowledge of the Company (ii) no beneficial owner of 5% or more of any class of the Company’s securities and (iii) no beneficial owner of the Company’s unregistered equity securities which were acquired during the 180-day period immediately preceding the filing of the Registration Statement, is an affiliate or associated person of a FINRA member participating in the Offering (as determined in accordance with the rules and regulations of FINRA).
2.19.5. Information. All information provided by the Company in its FINRA questionnaire to Representative Counsel specifically for use by Representative Counsel in connection with its Public Offering System filings (and related disclosure) with FINRA is true, correct and complete in all material respects.
2.20. Foreign Corrupt Practices Act. None of the Company nor, to the Company’s knowledge, any director, officer, agent, employee or affiliate of the Company or any other person acting on behalf of the Company, has, directly or indirectly, given or agreed to give any money, gift or similar benefit (other than legal price concessions to customers in the ordinary course of business) to any customer, supplier, employee or agent of a customer or supplier, or official or employee of any Governmental Entity or any political party or candidate for office (domestic or foreign) or other person who was, is, or may be in a position to help or hinder the business of the Company (or assist it in connection with any actual or proposed transaction) that (i) might subject the Company to any damage or penalty in any civil, criminal or governmental litigation or proceeding, (ii) if not given in the past, might have caused a Material Adverse Change or (iii) if not continued in the future, might adversely affect the assets, business, operations or prospects of the Company. The Company has taken reasonable steps to ensure that its accounting controls and procedures are sufficient to cause the Company to comply in all material respects with the Foreign Corrupt Practices Act of 1977, as amended.
2.21. Compliance with OFAC. None of the Company nor, to the Company’s knowledge, any director, officer, agent, employee or affiliate of the Company or any other person acting on behalf of the Company, is currently subject to any U.S. sanctions administered by the Office of Foreign Assets Control of the U.S. Department of the Treasury (“OFAC”), and the Company will not knowingly, directly or indirectly, use the proceeds of the Offering hereunder, or lend, contribute or otherwise make available such proceeds to any joint venture partner or other person or entity, for the purpose of financing the activities of any person currently subject to any U.S. sanctions administered by OFAC.
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2.22. Money Laundering Laws. The operations of the Company are and have been conducted at all times in compliance in all material respects with applicable financial recordkeeping and reporting requirements of the Currency and Foreign Transactions Reporting Act of 1970, as amended, the money laundering statutes of all jurisdictions, the rules and regulations thereunder and any related or similar rules, regulations or guidelines, issued, administered or enforced by any Governmental Entity (collectively, the “Money Laundering Laws”); and no action, suit or proceeding by or before any Governmental Entity involving the Company with respect to the Money Laundering Laws is pending or, to the best knowledge of the Company, threatened.
2.23. Officers’ Certificate. Any certificate signed by any duly authorized officer of the Company and delivered to the Representative or to Representative Counsel shall be deemed a representation and warranty by the Company to the Underwriters as to the matters covered thereby.
2.24. Lock-Up Agreements. Schedule 3 hereto contains a complete and accurate list of the Company’s officers, directors and each owner of at least 5% of the Company’s outstanding shares of Common Stock (or securities convertible or exercisable into shares of Common Stock) that will be subject to a Lock-Up Agreement (collectively, the “Lock-Up Parties”). The Company has caused each of the Lock-Up Parties to deliver to the Representative an executed Lock-Up Agreement, in the form attached hereto as Exhibit B (the “Lock-Up Agreement”), prior to the execution of this Agreement.
2.25. Related Party Transactions. There are no business relationships or related party transactions involving the Company or any other person required to be described in the Registration Statement, the Pricing Disclosure Package and the Prospectus that have not been described as required.
2.26. Board of Directors. The Board of Directors of the Company is comprised of the persons set forth under the heading of the Pricing Prospectus and the Prospectus captioned “Management.” The qualifications of the persons serving as board members and the overall composition of the board comply with the Exchange Act, the Exchange Act Regulations, the Sarbanes-Oxley Act of 2002 and the rules promulgated thereunder (the “Sarbanes-Oxley Act”) applicable to the Company and the listing rules of the Exchange. At least one member of the Audit Committee of the Board of Directors of the Company qualifies as an “audit committee financial expert,” as such term is defined under Regulation S-K and the listing rules of the Exchange. In addition, at least a majority of the persons serving on the Board of Directors qualify as “independent,” as defined under the listing rules of the Exchange.
2.27. Sarbanes-Oxley Compliance. Upon consummation of the Offering, the Company will design and implement internal controls in accordance with the requirements of the Sarbanes-Oxley Act. Upon such design and implementation, the Company will comply with the Disclosure, Compliance, and Accounting Controls in all material respects with Rule 13a-15 or 15d-15 under the Exchange Act Regulations, and such controls and procedures, when implemented, will be effective to ensure that all material information concerning the Company will be made known on a timely basis to the individuals responsible for the preparation of the Company’s Exchange Act filings and other public disclosure documents, as applicable.
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2.28. Accounting Controls. The Company maintains systems of “internal control over financial reporting” (as defined under Rules 13a-15 and 15d-15 under the Exchange Act Regulations) that comply in all material respects with the requirements of the Exchange Act applicable to the Company and have been designed by, or under the supervision of, its respective principal executive and principal financial officers, or persons performing similar functions, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP, including, but not limited to, internal accounting controls sufficient to provide reasonable assurance that (i) transactions are executed in accordance with management’s general or specific authorizations; (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with GAAP and to maintain asset accountability; (iii) access to assets is permitted only in accordance with management’s general or specific authorization; and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. Except as disclosed in the Registration Statement, the Pricing Disclosure Package and the Prospectus, the Company is not aware of any material weaknesses in its internal controls. The Company’s auditors and the Audit Committee of the Board of Directors of the Company have been advised of: (i) all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are known to the Company’s management and that have adversely affected or are reasonably likely to adversely affect the Company’s ability to record, process, summarize and report financial information; and (ii) any fraud known to the Company’s management, whether or not material, that involves management or other employees who have a significant role in the Company’s internal controls over financial reporting.
2.29. No Investment Company Status. The Company is not and, after giving effect to the Offering and the application of the proceeds thereof as described in the Registration Statement, the Pricing Disclosure Package and the Prospectus, will not be, required to register as an “investment company,” as defined in the Investment Company Act of 1940, as amended.
2.30. No Labor Disputes. No labor dispute with the employees of the Company exists or, to the knowledge of the Company, is imminent. The Company is not aware that any key employee or significant group of employees of the Company plans to terminate employment with the Company.
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2.31. Intellectual Property Rights. The Company owns or possesses or has valid rights to use all patents, patent applications, trademarks, service marks, trade names, trademark registrations, service mark registrations, copyrights, licenses, inventions, trade secrets and similar rights (“Intellectual Property Rights”) necessary for the conduct of the business of the Company as currently carried on and as described in the Registration Statement, the Pricing Disclosure Package and the Prospectus. To the knowledge of the Company, no action or use by the Company necessary for the conduct of its business as currently carried on and as described in the Registration Statement and the Prospectus will involve or give rise to any infringement of, or license or similar fees for, any Intellectual Property Rights of others (other than license or similar fees described or contemplated in the Registration Statement, the Pricing Disclosure Package and the Prospectus). The Company has not received any notice alleging any such infringement, fee or conflict with asserted Intellectual Property Rights of others. Except as described in the Registration Statement, the Pricing Disclosure Package and the Prospectus and except as would not reasonably be expected to result, individually or in the aggregate, in a Material Adverse Change (A) to the knowledge of the Company, there is no infringement, misappropriation or violation by third parties of any of the Intellectual Property Rights owned by the Company; (B) there is no pending or, to the knowledge of the Company, threatened action, suit, proceeding or claim by others challenging the rights of the Company in or to any such Intellectual Property Rights, and the Company is unaware of any facts which would form a reasonable basis for any such claim, that would, individually or in the aggregate, together with any other claims referred to in this Section 2.32, reasonably be expected to result in a Material Adverse Change; (C) the Intellectual Property Rights owned by the Company and, to the knowledge of the Company, the Intellectual Property Rights licensed to the Company have not been adjudged by a court of competent jurisdiction invalid or unenforceable, in whole or in part, and there is no pending or, to the Company’s knowledge, threatened action, suit, proceeding or claim by others challenging the validity or scope of any such Intellectual Property Rights, and the Company is unaware of any facts which would form a reasonable basis for any such claim that would, individually or in the aggregate, together with any other claims referred to in this Section 2.32, reasonably be expected to result in a Material Adverse Change; (D) there is no pending or, to the Company’s knowledge, threatened action, suit, proceeding or claim by others that the Company infringes, misappropriates or otherwise violates any Intellectual Property Rights or other proprietary rights of others, the Company has not received any written notice of such claim, and the Company is unaware of any other facts which would form a reasonable basis for any such claim that would, individually or in the aggregate, together with any other claims referred to in this Section 2.32, reasonably be expected to result in a Material Adverse Change; and (E) to the Company’s knowledge, no employee of the Company is in or has ever been in violation in any material respect of any term of any employment contract, patent disclosure agreement, invention assignment agreement, non-competition agreement, non-solicitation agreement, nondisclosure agreement or any restrictive covenant to or with a former employer where the basis of such violation relates to such employee’s employment with the Company, or actions undertaken by the employee while employed with the Company and could reasonably be expected to result, individually or in the aggregate, in a Material Adverse Change. To the Company’s knowledge, all material technical information developed by and belonging to the Company which has not been patented has been kept confidential. The Company is not a party to or bound by any options, licenses or agreements with respect to the Intellectual Property Rights of any other person or entity that are required to be set forth in the Registration Statement, the Pricing Disclosure Package and the Prospectus and are not described therein. The Registration Statement, the Pricing Disclosure Package and the Prospectus contain in all material respects the same description of the matters set forth in the preceding sentence. None of the technology employed by the Company has been obtained or is knowingly being used by the Company in material violation of any contractual obligation binding on the Company or, to the Company’s knowledge, any of their respective officers, directors or employees, or otherwise in material violation of the rights of any persons. The Company owns or has a valid right to access and use all computer systems, networks, hardware, software, databases, websites, and equipment used to process, store, maintain and operate data, information, and functions used in connection with the business of the Company (the “Company IT Systems”). The Company IT Systems are adequate for, and operate and perform in all material respects as required in connection with, the operation of the business of the Company as currently conducted, except as would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. The Company has implemented commercially reasonable backup, security and disaster recovery technology consistent in all material respects with applicable regulatory standards and customary industry practices.
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2.32. Taxes. The Company has filed all material returns (as hereinafter defined) required to be filed with taxing authorities prior to the date hereof or has duly obtained extensions of time for the filing thereof. The Company has paid all material taxes (as hereinafter defined) shown as due on such returns that were filed and has paid all material taxes imposed on or assessed against the Company. The provisions for taxes payable, if any, shown on the financial statements filed with or as part of the Registration Statement are sufficient for all accrued and unpaid material taxes, whether or not disputed, and for all periods to and including the dates of such consolidated financial statements. Except as disclosed in writing to the Underwriters, (i) no material issues have been raised (and are currently pending) by any taxing authority in connection with any of the returns or taxes asserted as due from the Company, and (ii) no waivers of statutes of limitation with respect to the returns or collection of taxes have been given by or requested from the Company. There are no tax liens against the assets, properties or business of the Company other than liens for taxes not yet delinquent or being contested in good faith by appropriate proceedings and for which reserves in accordance with GAAP have been established in the Company’s books and records. The term “material taxes” means all federal, state, local, foreign and other net income, gross income, gross receipts, sales, use, ad valorem, transfer, franchise, profits, license, lease, service, service use, withholding, payroll, employment, excise, severance, stamp, occupation, premium, property, windfall profits, customs, duties or other taxes, fees, assessments or charges of any kind whatever, together with any interest and any penalties, additions to tax or additional amounts with respect thereto, other than those taxes, the failure of which to have paid, would not result in a Material Adverse Change. The term “material returns” means all returns, declarations, reports, statements and other documents required to be filed in respect to taxes, other than those returns, the failure of which to have filed, would not result in a Material Adverse Change.
2.33. ERISA Compliance. The Company and any “employee benefit plan” (as defined under the Employee Retirement Income Security Act of 1974, as amended, and the regulations and published interpretations thereunder (collectively, “ERISA”)) established or maintained by the Company or its “ERISA Affiliates” (as defined below) are in compliance in all material respects with ERISA. “ERISA Affiliate” means, with respect to the Company, any member of any group of organizations described in Sections 414(b),(c),(m) or (o) of the Internal Revenue Code of 1986, as amended, and the regulations and published interpretations thereunder (the “Code”) of which the Company is a member. No “reportable event” (as defined under ERISA) has occurred or is reasonably expected to occur with respect to any “employee benefit plan” established or maintained by the Company or any of its ERISA Affiliates. No “employee benefit plan” established or maintained by the Company or any of its ERISA Affiliates, if such “employee benefit plan” were terminated, would have any “amount of unfunded benefit liabilities” (as defined under ERISA). Neither the Company nor any of its ERISA Affiliates has incurred or reasonably expects to incur any material liability under (i) Title IV of ERISA with respect to termination of, or withdrawal from, any “employee benefit plan” or (ii) Sections 412, 4971, 4975 or 4980B of the Code. Each “employee benefit plan” established or maintained by the Company or any of its ERISA Affiliates that is intended to be qualified under Section 401(a) of the Code is so qualified and, to the knowledge of the Company, nothing has occurred, whether by action or failure to act, which would cause the loss of such qualification.
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2.34. Compliance with Laws. The Company: (A) is and at all times has been in compliance with all statutes, rules, or regulations applicable to the ownership, testing, development, manufacture, packaging, processing, use, distribution, marketing, labeling, promotion, sale, offer for sale, storage, import, export or disposal of any product manufactured or distributed by the Company (“Applicable Laws”), except as could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Change (any such noncompliance being referred to as “nonmaterial noncompliance” for the purposes of this Section 2.35); (B) has not received any warning letter, untitled letter or other correspondence or notice from any other Governmental Entity alleging or asserting material noncompliance with any Applicable Laws or any licenses, certificates, approvals, clearances, authorizations, permits and supplements or amendments thereto required by any such Applicable Laws (“Authorizations”); (C) possesses all material Authorizations and such material Authorizations are valid and in full force and effect and are not in material violation of any term of any such Authorizations; (D) has not received notice of any claim, action, suit, proceeding, hearing, enforcement, investigation, arbitration or other action from any Governmental Entity or third party alleging that any product operation or activity is in violation of any Applicable Laws or Authorizations and has no knowledge that any such Governmental Entity or third party is considering any such claim, litigation, arbitration, action, suit, investigation or proceeding that if brought would result in a Material Adverse Change; (E) has not received notice that any Governmental Entity has taken, is taking or intends to take action to limit, suspend, modify or revoke any Authorizations and has no knowledge that any such Governmental Entity is considering such action; (F) has filed, obtained, maintained or submitted all material reports, documents, forms, notices, applications and records, as required by any Applicable Laws or Authorizations and that all such reports, documents, forms, notices, applications, and records, were complete and correct in all material respects on the date filed (or were corrected or supplemented by a subsequent submission), except where the failure to file, obtain, maintain or submit would not, individually or in the aggregate, reasonably be expected to result in a Material Adverse Change; and (G) has not, either voluntarily or involuntarily, initiated, conducted, or issued or caused to be initiated, conducted or issued, any recall, market withdrawal or replacement, safety alert, post-sale warning, or other notice or action relating to the alleged lack of safety or any alleged product defect or violation and, to the Company’s knowledge, no third party has initiated, conducted or intends to initiate any such notice or action.
2.35. Environmental Matters.
2.35.1. The business and operations of the Company, have been and are being conducted in compliance with all applicable laws, ordinances, rules, regulations, licenses, permits, approvals, plans, authorizations or requirements relating to occupational safety and health, or pollution, or protection of health or the environment (including, without limitation, those relating to emissions, discharges, releases or threatened releases of pollutants, contaminants or hazardous or toxic substances, materials or wastes into ambient air, surface water, groundwater or land, or relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of chemical substances, pollutants, contaminants or hazardous or toxic substances, materials or wastes, whether solid, gaseous or liquid in nature) of any governmental department, commission, board, bureau, agency or instrumentality of the United States, any state or political subdivision thereof, or to the knowledge of the Company, any foreign jurisdiction (“Environmental Laws”), and all applicable judicial or administrative agency or regulatory decrees, awards, judgments and orders relating thereto, except where the failure to be in such compliance would not be reasonably expected, individually or in the aggregate, to have a Material Adverse Change; and the Company has not received any notice from any governmental instrumentality or any third party alleging any material violation thereof or liability thereunder (including, without limitation, liability for costs of investigating or remediating sites containing hazardous substances and/or damages to natural resources).
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2.35.2. There has been no storage, generation, transportation, use, handling, treatment, Release or threat of Release of Hazardous Materials (as defined below) by or caused by the Company (or, to the knowledge of the Company, any other entity (including any predecessor) for whose acts or omissions the Company is or could reasonably be expected to be liable) at, on, under or from any property or facility now or previously owned, operated or leased by the Company, or at, on, under or from any other property or facility, in violation of any Environmental Laws or in a manner or amount or to a location that could reasonably be expected to result in any liability under any Environmental Law, except for any violation or liability which would not, individually or in the aggregate, have a Material Adverse Change. “Hazardous Materials” means any material, chemical, substance, waste, pollutant, contaminant, compound, mixture, or constituent thereof, in any form or amount, including petroleum (including crude oil or any fraction thereof) and petroleum products, natural gas liquids, asbestos and asbestos containing materials, naturally occurring radioactive materials, brine, and drilling mud, regulated or which can give rise to liability under any Environmental Law. “Release” means any spilling, leaking, seepage, pumping, pouring, emitting, emptying, discharging, injecting, escaping, leaching, dumping, disposing, depositing, dispersing, or migrating in, into or through the environment, or in, into from or through any building or structure.
2.36. Ineligible Issuer. At the time of filing the Registration Statement and any post-effective amendment thereto, at the time of effectiveness of the Registration Statement and any amendment thereto, at the earliest time thereafter that the Company or another offering participant made a bona fide offer (within the meaning of Rule 164(h)(2) of the Securities Act Regulations) of the Public Securities, and at the date hereof, the Company was not and is not an “ineligible issuer,” as defined in Rule 405, without taking account of any determination by the Commission pursuant to Rule 405 that it is not necessary that the Company be considered an ineligible issuer.
2.37. Real and Personal Property. Except as set forth in the Registration Statement, the Pricing Disclosure Package and the Prospectus, the Company has good and marketable title in fee simple to, or have valid rights to lease or otherwise use, all items of real or personal property which are material to the business of the Company, in each case free and clear of all liens, encumbrances, security interests, claims and defects that do not, singly or in the aggregate, materially affect the value of such property and do not interfere with the use made and proposed to be made of such property by the Company; and all of the leases and subleases material to the business of the Company, considered as one enterprise, and under which the Company holds properties described in the Registration Statement, the Pricing Disclosure Package and the Prospectus, are in full force and effect, and the Company has not received any notice of any material claim of any sort that has been asserted by anyone adverse to the rights of the Company under any of the leases or subleases mentioned above, or affecting or questioning the rights of the Company to the continued possession of the leased or subleased premises under any such lease or sublease.
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2.38. Contracts Affecting Capital. There are no transactions, arrangements or other relationships between and/or among the Company, any of its affiliates (as such term is defined in Rule 405 of the Securities Act Regulations) and any unconsolidated entity, including, but not limited to, any structured finance, special purpose or limited purpose entity that could reasonably be expected to materially affect the Company’s liquidity or the availability of or requirements for their capital resources required to be described or incorporated by reference in the Registration Statement, the Pricing Disclosure Package and the Prospectus which have not been described or incorporated by reference as required.
2.39. Loans to Directors or Officers. There are no outstanding loans, advances (except normal advances for business expenses in the ordinary course of business) or guarantees or indebtedness by the Company to or for the benefit of any of the officers or directors of the Company or any of their respective family members, except as disclosed in the Registration Statement, the Pricing Disclosure Package and the Prospectus.
2.40. Smaller Reporting Company. As of the time of filing of the Registration Statement, the Company was a “smaller reporting company,” as defined in Rule 12b-2 of the Exchange Act Regulations.
2.41. Industry Data. The statistical and market-related data included in each of the Registration Statement, the Pricing Disclosure Package and the Prospectus are based on or derived from sources that the Company reasonably and in good faith believes are reliable and accurate or represent the Company’s good faith estimates that are made on the basis of data derived from such sources.
2.42. Testing-the-Waters Communications. The Company has not (i) alone engaged in any Testing-the-Waters Communications, other than Testing-the-Waters Communications with the written consent of the Representative and with entities that are qualified institutional buyers within the meaning of Rule 144A under the Securities Act or institutions that are accredited investors within the meaning of Rule 501 under the Securities Act and (ii) authorized anyone other than the Representative to engage in Testing-the-Waters Communications. “Testing-the-Waters Communication” means any oral or written communication with potential investors undertaken in reliance on Section 5(d) of the Securities Act. The Company confirms that the Representative has been authorized to act on its behalf in undertaking Testing-the-Waters Communications. The Company has not distributed any Written Testing-the-Waters Communications other than those listed on Schedule 2-B hereto. “Written Testing-the-Waters Communication” means any Testing-the-Waters Communication that is a written communication within the meaning of Rule 405 under the Securities Act.
2.43. Margin Securities. The Company owns no “margin securities” as that term is defined in Regulation U of the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”), and none of the proceeds of Offering will be used, directly or indirectly, for the purpose of purchasing or carrying any margin security, for the purpose of reducing or retiring any indebtedness which was originally incurred to purchase or carry any margin security or for any other purpose which might cause any of the Common Stock to be considered a “purpose credit” within the meanings of Regulation T, U or X of the Federal Reserve Board.
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2.44. Confidentiality and Non-Competition. To the Company’s knowledge, no director, officer, key employee or consultant of the Company is subject to any confidentiality, non-disclosure, non-competition agreement or non-solicitation agreement with any employer (other than the Company) or prior employer that could materially affect his or her ability to be and act in his or her respective capacity of the Company or reasonably be expected to result in a Material Adverse Change.
2.45. Corporate Records. The minute books of the Company have been made available to the Representative and Representative Counsel and such books (i) contain minutes of all material meetings and actions of the Board of Directors (including each board committee) and stockholders of the Company, and (ii) reflect all material transactions referred to in such minutes.
2.46. Diligence Materials. The Company has provided to the Representative and Representative Counsel all materials required or necessary to respond in all material respects to the diligence request submitted to the Company or its counsel by the Representative.
2.47. Stabilization. Neither the Company nor, to its knowledge, any of its employees, directors or stockholders (without the consent of the Representative) has taken, directly or indirectly, any action designed to or that has constituted or that might reasonably be expected to cause or result in, under Regulation M of the Exchange Act, or otherwise, stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Public Securities.
2.48. XBRL. The interactive data in eXtensible Business Reporting Language included or incorporated by reference in the Registration Statement fairly presents the information called for in all material respects and has been prepared in accordance with the Commission’s rules and guidelines applicable thereto.
3. Covenants of the Company. The Company covenants and agrees as follows:
3.1. Amendments to Registration Statement. Until the later of the Closing Date and the exercise in full or expiration of the Over-allotment Option specified in Section 1.2 hereof, the Company shall deliver to the Representative, prior to filing, any amendment or supplement to the Registration Statement or Prospectus proposed to be filed after the Effective Date and not file any such amendment or supplement to which the Representative shall reasonably object in writing.
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3.2. Federal Securities Laws.
3.2.1. Compliance. Until the later of the Closing Date and the exercise in full or expiration of the Over-allotment Option specified in Section 1.2 hereof, the Company, subject to Section 3.2.2, shall comply in all material respects with the requirements of Rule 430A of the Securities Act Regulations, and will notify the Representative promptly, and confirm the notice in writing, (i) when any post-effective amendment to the Registration Statement shall become effective or any amendment or supplement to the Prospectus shall have been filed; (ii) of the receipt of any comments from the Commission; (iii) of any request by the Commission for any amendment to the Registration Statement or any amendment or supplement to the Prospectus or for additional information; (iv) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or any post-effective amendment or of any order preventing or suspending the use of any Preliminary Prospectus or the Prospectus, or of the suspension of the qualification of the Public Securities and Representative’s Securities for offering or sale in any jurisdiction, or of the initiation or threatening of any proceedings for any of such purposes or of any examination pursuant to Section 8(d) or 8(e) of the Securities Act concerning the Registration Statement; and (v) if the Company becomes the subject of a proceeding under Section 8A of the Securities Act in connection with the Offering of the Public Securities and Representative’s Securities. The Company shall effect all filings required under Rule 424(b) of the Securities Act Regulations, in the manner and within the time period required by Rule 424(b) (without reliance on Rule 424(b)(8)), and shall take such steps as it deems reasonably necessary to ascertain promptly whether the form of prospectus transmitted for filing under Rule 424(b) was received for filing by the Commission and, in the event that it was not, it will promptly file such prospectus. The Company shall use its commercially reasonable efforts to prevent the issuance of any stop order, prevention or suspension and, if any such order is issued, to obtain the lifting thereof at the earliest possible moment.
3.2.2. Continued Compliance. Until the later of the Closing Date and the exercise in full or expiration of the Over-allotment Option specified in Section 1.2 hereof, the Company shall comply in all material respects with the Securities Act, the Securities Act Regulations, the Exchange Act and the Exchange Act Regulations so as to permit the completion of the distribution of the Public Securities as contemplated in this Agreement and in the Registration Statement, the Pricing Disclosure Package and the Prospectus. If at any time when a prospectus relating to the Public Securities is (or, but for the exception afforded by Rule 172 of the Securities Act Regulations (“Rule 172”), would be) required by the Securities Act to be delivered in connection with sales of the Public Securities, any event shall occur or condition shall exist as a result of which it is necessary, in the opinion of counsel for the Underwriters or for the Company, to (i) amend the Registration Statement in order that the Registration Statement will not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading; (ii) amend or supplement the Pricing Disclosure Package or the Prospectus in order that the Pricing Disclosure Package or the Prospectus, as the case may be, will not include any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein not misleading in the light of the circumstances existing at the time it is delivered to a purchaser; or (iii) amend the Registration Statement or amend or supplement the Pricing Disclosure Package or the Prospectus, as the case may be, in order to comply with the requirements of the Securities Act or the Securities Act Regulations, the Company will promptly (A) give the Representative notice of such event; (B) prepare any amendment or supplement as may be necessary to correct such statement or omission or to make the Registration Statement, the Pricing Disclosure Package or the Prospectus comply with such requirements and, a reasonable amount of time prior to any proposed filing or use, furnish the Representative with copies of any such amendment or supplement; and (C) file with the Commission any such amendment or supplement; provided that the Company shall not file or use any such amendment or supplement to which the Representative or Representative Counsel shall reasonably object. The Company will furnish to the Underwriters such number of copies of such amendment or supplement as the Underwriters may reasonably request. The Company has given the Representative notice of any filings made pursuant to the Exchange Act or the Exchange Act Regulations within 48 hours prior to the Applicable Time. The Company shall give the Representative notice of its intention to make any such filing from the Applicable Time until the later of the Closing Date and the exercise in full or expiration of the Over-allotment Option specified in Section 1.2 hereof and will furnish the Representative with copies of the related document(s) a reasonable amount of time prior to such proposed filing, as the case may be, and will not file or use any such document to which the Representative or counsel for the Underwriters shall reasonably object.
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3.2.3. Exchange Act Registration. For a period of three (3) years after the date of this Agreement, the Company shall use its commercially reasonable efforts to maintain the registration of the shares of Common Stock under the Exchange Act. The Company shall not deregister the shares of Common Stock under the Exchange Act without the prior written consent of the Representative.
3.2.4. Free Writing Prospectuses. The Company agrees that, unless it obtains the prior written consent of the Representative, it shall not make any offer relating to the Public Securities that would constitute an Issuer Free Writing Prospectus or that would otherwise constitute a “free writing prospectus,” or a portion thereof, required to be filed by the Company with the Commission or retained by the Company under Rule 433.
3.2.5. Testing-the-Waters Communications. If at any time following the distribution of any Written Testing-the-Waters Communication there occurred or occurs an event or development as a result of which such Written Testing-the-Waters Communication included or would include an untrue statement of a material fact or omitted or would omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances existing at that subsequent time, not misleading, the Company shall promptly notify the Representative and shall promptly amend or supplement, at its own expense, such Written Testing-the-Waters Communication to eliminate or correct such untrue statement or omission.
3.3. Delivery to the Underwriters of Registration Statements. The Company has delivered or made available or shall deliver or make available to the Representative and Representative Counsel, without charge, signed copies of the Registration Statement as originally filed and each amendment thereto (including exhibits filed therewith) and signed copies of all consents and certificates of experts, and will also deliver to the Underwriters, upon request and without charge, a conformed copy of the Registration Statement as originally filed and each amendment thereto (without exhibits) for each of the Underwriters. The copies of the Registration Statement and each amendment thereto furnished to the Underwriters will be identical to the electronically transmitted copies thereof filed with the Commission pursuant to EDGAR, except to the extent permitted by Regulation S-T.
3.4. Delivery to the Underwriters of Prospectuses. The Company has delivered or made available or will deliver or make available to each Underwriter, without charge, as many copies of each Preliminary Prospectus as such Underwriter reasonably requested, and the Company hereby consents to the use of such copies for purposes permitted by the Securities Act. The Company will furnish to each Underwriter, without charge, during the period when a prospectus relating to the Public Securities is (or, but for the exception afforded by Rule 172, would be) required to be delivered under the Securities Act, such number of copies of the Prospectus (as amended or supplemented) as such Underwriter may reasonably request. The Prospectus and any amendments or supplements thereto furnished to the Underwriters will be identical to the electronically transmitted copies thereof filed with the Commission pursuant to EDGAR, except to the extent permitted by Regulation S-T.
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3.5. Events Requiring Notice to the Representative. The Company shall notify the Representative promptly and confirm the notice in writing: (i) of the issuance by any state securities commission of any proceedings for the suspension of the qualification of the Public Securities for offering or sale in any jurisdiction or of the initiation, or the threatening, of any proceeding for that purpose; (ii) of the mailing and delivery to the Commission for filing of any amendment or supplement to the Registration Statement or Prospectus; (iii) of the receipt of any comments or request for any additional information from the Commission; and (iv) of the happening of any event during the period described in this Section 3.5 that, in the judgment of the Company, makes any statement of a material fact made in the Registration Statement, the Pricing Disclosure Package or the Prospectus untrue or that requires the making of any changes in (A) the Registration Statement in order to make the statements therein not misleading, or (B) in the Pricing Disclosure Package or the Prospectus in order to make the statements therein, in light of the circumstances under which they were made, not misleading.
3.6. Review of Financial Statements. For a period of three (3) years after the date of this Agreement, the Company, at its expense, shall cause its regularly engaged independent registered public accounting firm to review (but not audit) the Company’s financial statements for each of the three fiscal quarters immediately preceding the announcement of any quarterly financial information.
3.7. Listing. The Company shall use its commercially reasonable efforts to maintain the listing of the shares of Common Stock (including the Public Securities) on the Exchange for at least three (3) years from the date of this Agreement.
3.8. Reports to the Representative.
3.8.1. Periodic Reports, etc. For a period of not less than one (1) year after the date of this Agreement, the Company shall furnish or make available to the Representative copies of such financial statements and other periodic and special reports as the Company from time to time furnishes generally to holders of any class of its securities and also promptly furnish to the Representative: (i) a copy of each periodic report the Company shall be required to file with the Commission under the Exchange Act and the Exchange Act Regulations; (ii) a copy of every press release and every news item and article with respect to the Company or its affairs which was released by the Company; (iii) a copy of each Current Report on Form 8-K prepared and filed by the Company; (iv) five copies of each registration statement filed by the Company under the Securities Act; and (v) such additional documents and information with respect to the Company and the affairs of any future subsidiaries of the Company as the Representative may from time to time reasonably request; provided the Representative shall sign, if requested by the Company, a Regulation FD compliant confidentiality agreement which is reasonably acceptable to the Representative and Representative Counsel in connection with the Representative’s receipt of such information. Documents filed with the Commission pursuant to its EDGAR system shall be deemed to have been delivered to the Representative pursuant to this Section 3.8.1.
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3.8.2. Transfer Agent; Transfer Sheets. For a period of one (1) year after the date of this Agreement, the Company shall retain a transfer agent and registrar acceptable to the Representative (the “Transfer Agent”) and shall furnish to the Representative at the Company’s sole cost and expense such transfer sheets of the Company’s securities as the Representative may reasonably request, including the daily and monthly consolidated transfer sheets of the Transfer Agent and DTC. Securitize, LLC, formerly Pacific Stock Transfer Company, is acceptable to the Representative to act as Transfer Agent for the shares of Common Stock.
3.9. Payment of Expenses
3.9.1. General Expenses Related to the Offering. The Company hereby agrees to pay on each of the Closing Date and the Option Closing Date, if any, to the extent not paid at the Closing Date, all expenses incident to the performance of the obligations of the Company under this Agreement, including, but not limited to: (a) all filing fees and communication expenses relating to the registration of the shares of Common Stock to be sold in the Offering (including the Over-allotment Shares) with the Commission; (b) all Public Filing System filing fees associated with the review of the Offering by FINRA; (c) all fees and expenses relating to the listing of such Public Securities on the Exchange and such other stock exchanges as the Company and the Representative together determine; (d) all fees, expenses and disbursements relating to background checks of the Company’s officers and directors; (e) all fees, expenses and disbursements, if any, relating to the registration or qualification of the Public Securities under the “blue sky” securities laws of such states and other jurisdictions as the Representative may reasonably designate, as applicable; (f) all fees, expenses and disbursements relating to the registration, qualification or exemption of the Public Securities under the securities laws of such foreign jurisdictions as the Representative may reasonably designate; (g) the costs of all mailing and printing of the underwriting documents (including, without limitation, the Underwriting Agreement, any Blue Sky Surveys and, if appropriate, any Agreement Among Underwriters, Selected Dealers’ Agreement, Underwriters’ Questionnaire and Power of Attorney), Registration Statements, Prospectuses and all amendments, supplements and exhibits thereto and as many preliminary and final Prospectuses as the Representative may reasonably deem necessary; (h) the costs of preparing, printing and delivering certificates representing the Public Securities; (i) fees and expenses of the Transfer Agent for the shares of Common Stock; (j) stock transfer and/or stamp taxes, if any, payable upon the transfer of securities from the Company to the Underwriters; (k) the cost associated with the Underwriter’s use of book-building and compliance software for the Offering; (l) the costs associated with one set of bound volumes of the public offering materials as well as commemorative lucite mementos, each of which the Company or its designee shall provide within a reasonable time after the Closing Date in such quantities as the Representative may reasonably request; (m) the fees and expenses of the Company’s accountants; (n) the fees and expenses of the Company’s legal counsel and other agents and representatives; (o) the fees and expenses of the Representative Counsel not to exceed $150,000; and (p) the Underwriter’s actual accountable “road show” expenses for the Offering; provided, that the maximum amount that the Company shall pay for items (d), (k), (l), (o) and (p) and shall be $200,000. The Representative may deduct from the net proceeds of the Offering payable to the Company on the Closing Date, or the Option Closing Date, if any, the expenses set forth herein to be paid by the Company to the Underwriters, other than amounts already advanced to the Representative as of the date of this Underwriting Agreement. The Company previously paid the Representative an advance in the amount of $25,000 to be applied towards accountable expenses due and payable to the Representative.
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3.9.2. Non-accountable Expenses. The Company further agrees that, in addition to the expenses payable pursuant to Section 3.9.1, on the Closing Date it shall pay to the Representative, by deduction from the net proceeds of the Offering contemplated herein, a non-accountable expense allowance equal to one percent (1%) of the gross proceeds received by the Company from the sale of the Firm Shares (excluding the Option Shares), less the Advance (as such term is defined in Section 8.3 hereof), provided, however, that in the event that the Offering is terminated, the Company agrees to reimburse the Underwriters pursuant to Section 8.3 hereof.
3.10. Application of Net Proceeds. The Company shall apply the net proceeds from the Offering received by it in a manner consistent with the application thereof described under the caption “Use of Proceeds” in the Registration Statement, the Pricing Disclosure Package and the Prospectus.
3.11. Delivery of Earnings Statements to Security Holders. The Company shall make generally available to its security holders as soon as practicable, but not later than the first day of the fifteenth (15th) full calendar month following the date of this Agreement, an earnings statement (which need not be certified by independent registered public accounting firm unless required by the Securities Act or the Securities Act Regulations, but which shall satisfy the provisions of Rule 158(a) under Section 11(a) of the Securities Act) covering a period of at least twelve (12) consecutive months beginning after the date of this Agreement.
3.12. [Intentionally Left Blank]
3.13. Internal Controls. The Company shall use its best efforts to maintain a system of internal accounting controls for itself sufficient to provide reasonable assurances that: (i) transactions are executed in accordance with management’s general or specific authorization; (ii) transactions are recorded as necessary in order to permit preparation of financial statements in accordance with GAAP and to maintain accountability for assets; (iii) access to assets is permitted only in accordance with management’s general or specific authorization; and (iv) the recorded accountability for assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences.
3.14. Accountants. As of the date of this Agreement, the Company has retained an independent registered public accounting firm reasonably acceptable to the Representative, and the Company shall continue to retain an independent registered public accounting firm for a period of at least three (3) years after the date of this Agreement. The Representative acknowledges that the Auditor is acceptable to the Representative.
3.15. FINRA. The Company shall advise the Representative (who shall make an appropriate filing with FINRA) if it is or becomes aware that (i) any officer or director of the Company, (ii) any beneficial owner of 5% or more of any class of the Company’s securities or (iii) any beneficial owner of the Company’s unregistered equity securities which were acquired during the 180 days immediately preceding the filing of the Registration Statement, is or becomes an affiliate or associated person of a FINRA member participating in the Offering (as determined in accordance with the rules and regulations of FINRA).
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3.16. No Fiduciary Duties. The Company acknowledges and agrees that the Underwriters’ responsibility to the Company is solely contractual in nature and that none of the Underwriters or their affiliates or any selling agent shall be deemed to be acting in a fiduciary capacity, or otherwise owes any fiduciary duty to the Company or any of its affiliates in connection with the Offering and the other transactions contemplated by this Agreement.
3.17. Company Lock-Up Agreements.
3.17.1. Restriction on Sale of Capital Stock. The Company, on behalf of itself and any successor entity, agrees that, without the prior written consent of the Representative, it will not, for a period of three hundred sixty (360) days after the date of this Agreement (the “Lock-Up Period”), (i) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend, or otherwise transfer or dispose of, directly or indirectly, any shares of capital stock of the Company or any securities convertible into or exercisable or exchangeable for shares of capital stock of the Company; or (ii) complete any offering of debt securities of the Company (other than debt securities convertible into shares of Common Stock of the Company); or (iii) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of capital stock of the Company, whether any such transaction described in clause (i) or (ii) above is to be settled by delivery of shares of capital stock of the Company or such other securities, in cash or otherwise.
The restrictions contained in this Section 3.17.1 shall not apply to (i) the shares of Common Stock to be sold hereunder, (ii) the issuance by the Company of shares of Common Stock upon the exercise of a stock option or warrant or the conversion of a security outstanding on the date hereof, of which the Representative has been advised in writing, (iii) the issuance by the Company of stock options or shares of capital stock of the Company under any equity compensation plan of the Company or (iv) the filing of a registration statement on Form S-8 with the Commission.
Notwithstanding the foregoing, if (i) during the last seventeen (17) days of the Lock-Up Period, the Company issues an earnings release or material news or a material event relating to the Company occurs, or (ii) prior to the expiration of the Lock-Up Period, the Company announces that it will release earnings results or becomes aware that material news or a material event will occur during the 16-day period beginning on the last day of the Lock-Up Period, the restrictions imposed by this Section 3.17.1 shall continue to apply until the expiration of the 18-day period beginning on the issuance of the earnings release or the occurrence of such material news or material event, as applicable, unless the Representative waives, in writing, such extension; provided, however, that this extension of the Lock-Up Period shall not apply to the extent that FINRA has amended or repealed NASD Rule 2711(f)(4), or has otherwise provided written interpretive guidance regarding such rule, in each case, so as to eliminate the prohibition of any broker, dealer, or member of a national securities association from publishing or distributing any research report, with respect to the securities of an Emerging Growth Company prior to or after the expiration of any agreement between the broker, dealer, or member of a national securities association and the Emerging Growth Company or its stockholders that restricts or prohibits the sale of securities held by the Emerging Growth Company or its stockholders after the initial public offering date.
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3.17.2. Restriction on Continuous Offerings. Notwithstanding the restrictions contained in Section 3.17.1, the Company, on behalf of itself and any successor entity, agrees that, without the prior written consent of the Representative, it will not, for a period of 12 months after the date of this Agreement, directly or indirectly in any “at-the-market” or continuous equity transaction, offer to sell, sell, contract to sell, grant any option to sell or otherwise dispose of shares of capital stock of the Company or any securities convertible into or exercisable or exchangeable for shares of capital stock of the Company.
3.18. Release of D&O Lock-up Period. If the Representative, in its sole discretion, agrees to release or waive the restrictions set forth in the Lock-Up Agreements described in Section 2.24 hereof for an officer or director of the Company and provides the Company with notice of the impending release or waiver at least three (3) Business Days before the effective date of the release or waiver, the Company agrees to announce the impending release or waiver by a press release substantially in the form of Exhibit C hereto through a major news service at least two (2) Business Days before the effective date of the release or waiver.
3.19. Blue Sky Qualifications. The Company shall use its commercially reasonable efforts, in cooperation with the Underwriters, if necessary, to qualify the Public Securities for offering and sale under the applicable securities laws of such states and other jurisdictions (domestic or foreign) as the Representative may designate and to maintain such qualifications in effect so long as required to complete the distribution of the Public Securities; provided, however, that the Company shall not be obligated to file any general consent to service of process or to qualify as a foreign corporation or as a dealer in securities in any jurisdiction in which it is not so qualified or to subject itself to taxation in respect of doing business in any jurisdiction in which it is not otherwise so subject.
3.20. Reporting Requirements. The Company, during the period when a prospectus relating to the Public Securities is (or, but for the exception afforded by Rule 172, would be) required to be delivered under the Securities Act, will use its commercially reasonable efforts to file all documents required to be filed with the Commission pursuant to the Exchange Act within the time periods required by the Exchange Act and Exchange Act Regulations. Additionally, the Company shall report the use of proceeds from the issuance of the Public Securities as may be required under Rule 463 under the Securities Act Regulations.
3.21. Emerging Growth Company Status. The Company shall promptly notify the Representative if the Company ceases to be an Emerging Growth Company at any time prior to the later of (i) completion of the distribution of the Public Securities within the meaning of the Securities Act and (ii) fifteen (15) days following the completion of the Lock-Up Period.
3.22. Investor Relations. The Company shall use commercially reasonable efforts to maintain and execute an active investor relations program for a period of twelve (12) months following the Closing Date.
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4. Conditions of Underwriters’ Obligations. The obligations of the Underwriters to purchase and pay for the Public Securities, as provided herein, shall be subject to (i) the continuing accuracy of the representations and warranties of the Company as of the date hereof and as of each of the Closing Date and the Option Closing Date, if any; (ii) the accuracy of the statements of officers of the Company made pursuant to the provisions hereof; (iii) the performance by the Company of its obligations hereunder; and (iv) the following conditions:
4.1. Regulatory Matters.
4.1.1. Effectiveness of Registration Statement; Rule 430A Information. The Registration Statement has become effective not later than 5:00 p.m., Eastern time, on the date of this Agreement or such later date and time as shall be consented to in writing by the Representative, and, at each of the Closing Date and any Option Closing Date, no stop order suspending the effectiveness of the Registration Statement or any post-effective amendment thereto has been issued under the Securities Act, no order preventing or suspending the use of any Preliminary Prospectus or the Prospectus has been issued and no proceedings for any of those purposes have been instituted or are pending or, to the Company’s knowledge, contemplated by the Commission. The Company has complied with each request (if any) from the Commission for additional information. The Prospectus containing the Rule 430A Information shall have been filed with the Commission in the manner and within the time frame required by Rule 424(b) (without reliance on Rule 424(b)(8)) or a post-effective amendment providing such information shall have been filed with, and declared effective by, the Commission in accordance with the requirements of Rule 430A.
4.1.2. FINRA Clearance. On or before the date of this Agreement, the Representative shall have received clearance from FINRA as to the amount of compensation allowable or payable to the Underwriters as described in the Registration Statement.
4.1.3. Exchange Stock Market Clearance. On the Closing Date, the Company’s shares of Common Stock, including the Firm Shares, shall have been approved for listing on the Exchange, subject only to official notice of issuance. On the first Option Closing Date (if any), the Company’s shares of Common Stock, including the Option Shares, shall have been approved for listing on the Exchange, subject only to official notice of issuance.
4.2. Company Counsel Matters.
4.2.1. Closing Date Opinions of Counsel. On the Closing Date, the Representative shall have received the favorable opinions of Parr Brown Gee & Loveless, P.C., counsel to the Company, dated the Closing Date and addressed to the Representative[, substantially in the form attached hereto as Exhibit D].
4.2.2. Option Closing Date Opinions of Counsel. On the Option Closing Date, if any, the Representative shall have received the favorable opinion of counsel listed in Section 4.2.1, dated the Option Closing Date, addressed to the Representative and in form and substance reasonably satisfactory to the Representative, confirming as of the Option Closing Date, the statements made by such counsel in their opinion delivered on the Closing Date.
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4.3. Reliance. In rendering such opinions, such counsel may rely: (i) as to matters involving the application of laws other than the laws of the United States and jurisdictions in which they are admitted, to the extent such counsel deems proper and to the extent specified in such opinion, if at all, upon an opinion or opinions (in form and substance reasonably satisfactory to the Representative) of other counsel reasonably acceptable to the Representative, familiar with the applicable laws; and (ii) as to matters of fact, to the extent they deem proper, on certificates or other written statements of officers of the Company and officers of departments of various jurisdictions having custody of documents respecting the corporate existence or good standing of the Company, provided that copies of any such statements or certificates shall be delivered to Representative Counsel if requested.
4.4. Comfort Letters.
4.4.1. Cold Comfort Letter. Prior to the Closing Date the Representative shall have received a cold comfort letter containing statements and information of the type customarily included in accountants’ comfort letters with respect to the financial statements and certain financial information contained in the Registration Statement, the Pricing Disclosure Package and the Prospectus, addressed to the Representative and in form and substance satisfactory in all respects to the Representative and to the Auditor, dated as of the date of this Agreement.
4.4.2. Bring-down Comfort Letter. At each of the Closing Date and the Option Closing Date, if any, the Representative shall have received from the Auditor a letter, dated as of the Closing Date or the Option Closing Date, as applicable, to the effect that the Auditor reaffirms the statements made in the letter furnished pursuant to Section 4.3.1, except that the specified date referred to shall be a date not more than three (3) business days prior to the Closing Date or the Option Closing Date, as applicable.
4.5. Officers’ Certificates.
4.5.1. Officers’ Certificate. The Company shall have furnished to the Representative a certificate, dated the Closing Date and any Option Closing Date (if such date is other than the Closing Date), of its Chief Executive Officer and its Chief Financial Officer stating that (i) such officers have carefully examined the Registration Statement, the Pricing Disclosure Package, any Issuer Free Writing Prospectus and the Prospectus and, in their opinion, the Registration Statement and each amendment thereto, as of the Applicable Time and as of the Closing Date (or any Option Closing Date if such date is other than the Closing Date) did not include any untrue statement of a material fact and did not omit a material fact required to be stated therein or necessary to make the statements therein not misleading, and the Pricing Disclosure Package, as of the Applicable Time and as of the Closing Date (or any Option Closing Date if such date is other than the Closing Date), any Issuer Free Writing Prospectus as of its date and as of the Closing Date (or any Option Closing Date if such date is other than the Closing Date), the Prospectus and each amendment or supplement thereto, as of the respective date thereof and as of the Closing Date, did not include any untrue statement of a material fact and did not omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances in which they were made, not misleading, (ii) since the effective date of the Registration Statement, no event has occurred which should have been set forth in a supplement or amendment to the Registration Statement, the Pricing Disclosure Package or the Prospectus, (iii) to their knowledge, after reasonable inquiry, as of the Closing Date (or any Option Closing Date if such date is other than the Closing Date), the representations and warranties of the Company in this Agreement are true and correct and the Company has complied with all agreements and satisfied all conditions on its part to be performed or satisfied hereunder at or prior to the Closing Date (or any Option Closing Date if such date is other than the Closing Date), and (iv) there has not been, subsequent to the date of the most recent audited financial statements included or incorporated by reference in the Pricing Disclosure Package, any material adverse change in the financial position or results of operations of the Company, or any change or development that, singularly or in the aggregate, would involve a material adverse change or a prospective material adverse change, in or affecting the condition (financial or otherwise), results of operations, business, assets or prospects of the Company, except as set forth in the Prospectus.
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4.5.2. Secretary’s Certificate. At each of the Closing Date and the Option Closing Date, if any, the Representative shall have received a certificate of the Company signed by the Secretary of the Company, dated the Closing Date or the Option Closing Date, as the case may be, respectively, certifying: (i) that each of the Charter and Bylaws is true and complete, has not been modified and is in full force and effect; (ii) that the resolutions of the Company’s Board of Directors relating to the Offering are in full force and effect and have not been modified; and (iii) as to the incumbency of the officers of the Company. The documents referred to in such certificate shall be attached to such certificate.
4.5.3. Chief Financial Officer’s Certificate. At each of the Closing Date and the Option Closing Date, if any, the Representative shall have received a certificate of the Chief Financial Officer of the Company, dated the Closing Date or the Option Closing Date, as the case may be, respectively, with respect to the accuracy of certain information contained in the Registration Statement, the Pricing Disclosure Package and the Prospectus, in a form reasonably acceptable to the Representative.
4.6. No Material Changes. Prior to and on each of the Closing Date and each Option Closing Date, if any: (i) there shall have been no Material Adverse Change or development involving a prospective Material Adverse Change in the condition or prospects or the business activities, financial or otherwise, of the Company from the latest dates as of which such condition is set forth in the Registration Statement, the Pricing Disclosure Package and the Prospectus; (ii) no action, suit or proceeding, at law or in equity, shall have been pending, or to the Company’s knowledge, threatened against the Company or any Insider before or by any court or federal or state commission, board or other administrative agency wherein an unfavorable decision, ruling or finding may result in a Material Adverse Change, except as set forth in the Registration Statement, the Pricing Disclosure Package and the Prospectus; (iii) no stop order shall have been issued under the Securities Act and no proceedings therefor shall have been initiated or threatened by the Commission; and (iv) the Registration Statement, the Pricing Disclosure Package and the Prospectus and any amendments or supplements thereto shall contain all material statements which are required to be stated therein in accordance with the Securities Act and the Securities Act Regulations and shall conform in all material respects to the requirements of the Securities Act and the Securities Act Regulations, and neither the Registration Statement, the Pricing Disclosure Package nor the Prospectus nor any amendment or supplement thereto shall contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading.
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4.7. Delivery of Agreements.
4.7.1. Lock-Up Agreements. On or before the date of this Agreement, the Company shall have delivered to the Representative executed copies of the Lock-Up Agreements from each of the persons listed in Schedule 3 hereto.
4.7.2. Representative’s Warrants. On the Closing Date, the Company shall have delivered to the Representative executed copies of the Representative’s Warrants.
4.8. Additional Documents. At the Closing Date and at each Option Closing Date (if any) Representative Counsel shall have been furnished with such documents and opinions as they may reasonably require in order to evidence the accuracy of any of the representations or warranties, or the fulfillment of any of the conditions, herein contained; and all proceedings taken by the Company in connection with the issuance and sale of the Public Securities and the Representative’s Securities as herein contemplated shall be satisfactory in form and substance to the Representative and Representative Counsel.
5. Indemnification.
5.1. Indemnification of the Underwriters.
5.1.1. General. Subject to the conditions set forth below, the Company agrees to indemnify and hold harmless each Underwriter, its affiliates and each of its and their respective directors, officers, members, employees, representatives and agents and each person, if any, who controls any such Underwriter within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act (collectively the “Underwriter Indemnified Parties,” and each an “Underwriter Indemnified Party”), against any and all loss, liability, claim, damage and expense whatsoever (including but not limited to any and all legal or other expenses documented and reasonably incurred in investigating, preparing or defending against any litigation, commenced or threatened, or any claim whatsoever, whether arising out of any action between any of the Underwriter Indemnified Parties and the Company or between any of the Underwriter Indemnified Parties and any third party, or otherwise) to which they or any of them may become subject under the Securities Act, the Exchange Act or any other statute or at common law or otherwise or under the laws of foreign countries, arising out of or based upon any untrue statement or alleged untrue statement of a material fact contained in (i) the Registration Statement, the Pricing Disclosure Package, the Preliminary Prospectus, the Prospectus, or in any Issuer Free Writing Prospectus or in any Written Testing-the-Waters Communication (as from time to time each may be amended and supplemented); (ii) any materials or information provided to investors by, or with the approval of, the Company in connection with the marketing of the Offering, including any “road show” or investor presentations made to investors by the Company (whether in person or electronically); or (iii) any application or other document or written communication (in this Section 5, collectively called “application”) executed by the Company or based upon written information furnished by the Company in any jurisdiction in order to qualify the Public Securities under the securities laws thereof or filed with the Commission, any state securities commission or agency, the Exchange or any other national securities exchange; or the omission or alleged omission therefrom of a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, unless such statement or omission was made in reliance upon, and in conformity with, the Underwriters’ Information. With respect to any untrue statement or omission or alleged untrue statement or omission made in the Pricing Disclosure Package, the indemnity agreement contained in this Section 5.1.1 shall not inure to the benefit of any Underwriter Indemnified Party to the extent that any loss, liability, claim, damage or expense of such Underwriter Indemnified Party results from the fact that a copy of the Prospectus was not given or sent to the person asserting any such loss, liability, claim or damage at or prior to the written confirmation of sale of the Public Securities to such person as required by the Securities Act and the Securities Act Regulations, and if the untrue statement or omission has been corrected in the Prospectus, unless such failure to deliver the Prospectus was a result of non-compliance by the Company with its obligations under Section 3.3 hereof.
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5.1.2. Procedure. If any action is brought against an Underwriter Indemnified Party in respect of which indemnity may be sought against the Company pursuant to Section 5.1.1, such Underwriter Indemnified Party shall promptly notify the Company in writing of the institution of such action and the Company shall assume the defense of such action, including the employment and fees of counsel (subject to the reasonable approval of such Underwriter Indemnified Party) and payment of actual expenses. Such Underwriter Indemnified Party shall have the right to employ its or their own counsel in any such case, but the fees and expenses of such counsel shall be at the expense of such Underwriter Indemnified Party unless (i) the employment of such counsel at the expense of the Company shall have been authorized in writing by the Company in connection with the defense of such action, or (ii) the Company shall not have employed counsel to have charge of the defense of such action within a reasonable time after receipt by the Company of notice of the institution of such action, or (iii) such indemnified party or parties shall have reasonably concluded that there may be defenses available to it or them which are different from or additional to those available to the Company (in which case the Company shall not have the right to direct the defense of such action on behalf of the indemnified party or parties), in any of which events the reasonable fees and expenses of not more than one additional firm of attorneys selected by the Underwriter Indemnified Party (in addition to local counsel) shall be borne by the Company. Notwithstanding anything to the contrary contained herein, if any Underwriter Indemnified Party shall assume the defense of such action as provided above, the Company shall have the right to approve the terms of any settlement of such action, which approval shall not be unreasonably withheld.
5.2. Indemnification of the Company. Each Underwriter, severally and not jointly, agrees to indemnify and hold harmless the Company, its directors, its officers who signed the Registration Statement and persons who control the Company within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act, against any and all loss, liability, claim, damage and expense described in the foregoing indemnity from the Company to the several Underwriters, as incurred, but only with respect to untrue statements or omissions, or alleged untrue statements or omissions made in the Registration Statement, any Preliminary Prospectus, the Pricing Disclosure Package or Prospectus or any amendment or supplement thereto or in any application, in reliance upon, and in strict conformity with, the Underwriters’ Information. In case any action shall be brought against the Company or any other person so indemnified based on any Preliminary Prospectus, the Registration Statement, the Pricing Disclosure Package or Prospectus or any amendment or supplement thereto or any application, and in respect of which indemnity may be sought against any Underwriter, such Underwriter shall have the rights and duties given to the Company, and the Company and each other person so indemnified shall have the rights and duties given to the several Underwriters by the provisions of Section 5.1.2. The Company agrees to promptly notify the Representative of the commencement of any litigation or proceedings against the Company or any of its officers, directors or any person, if any, who controls the Company within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act, in connection with the issuance and sale of the Public Securities or in connection with the Registration Statement, the Pricing Disclosure Package, the Prospectus, or any Issuer Free Writing Prospectus or any Written Testing-the-Waters Communication.
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5.3. Contribution.
5.3.1. Contribution Rights. If the indemnification provided for in this Section 5 shall for any reason be unavailable to or insufficient to hold harmless an indemnified party under Section 5.1 or 5.2 in respect of any loss, claim, damage or liability, or any action in respect thereof, referred to therein, then each indemnifying party shall, in lieu of indemnifying such indemnified party, contribute to the amount paid or payable by such indemnified party as a result of such loss, claim, damage or liability, or action in respect thereof, (i) in such proportion as shall be appropriate to reflect the relative benefits received by the Company, on the one hand, and the Underwriters, on the other, from the Offering of the Public Securities, or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company, on the one hand, and the Underwriters, on the other, with respect to the statements or omissions that resulted in such loss, claim, damage or liability, or action in respect thereof, as well as any other relevant equitable considerations. The relative benefits received by the Company, on the one hand, and the Underwriters, on the other, with respect to such Offering shall be deemed to be in the same proportion as the total net proceeds from the Offering of the Public Securities purchased under this Agreement (before deducting expenses) received by the Company, as set forth in the table on the cover page of the Prospectus, on the one hand, and the total underwriting discounts and commissions received by the Underwriters with respect to the shares of the Common Stock purchased under this Agreement, as set forth in the table on the cover page of the Prospectus, on the other hand. The relative fault shall be determined by reference to whether the untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact relates to information supplied by the Company or the Underwriters, the intent of the parties and their relative knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the Underwriters agree that it would not be just and equitable if contributions pursuant to this Section 5.3.1 were to be determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation that does not take into account the equitable considerations referred to herein. The amount paid or payable by an indemnified party as a result of the loss, claim, damage or liability, or action in respect thereof, referred to above in this Section 5.3.1 shall be deemed to include, for purposes of this Section 5.3.1, all documented and reasonably incurred legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this Section 5.3.1 in no event shall an Underwriter be required to contribute any amount in excess of the amount by which the total underwriting discounts and commissions received by such Underwriter with respect to the Offering of the Public Securities exceeds the amount of any damages that such Underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation.
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5.3.2. Contribution Procedure. Within fifteen (15) days after receipt by any party to this Agreement (or its representative) of notice of the commencement of any action, suit or proceeding, such party will, if a claim for contribution in respect thereof is to be made against another party (“contributing party”), notify the contributing party of the commencement thereof, but the failure to so notify the contributing party will not relieve it from any liability which it may have to any other party other than for contribution hereunder. In case any such action, suit or proceeding is brought against any party, and such party notifies a contributing party or its representative of the commencement thereof within the aforesaid 15 days, the contributing party will be entitled to participate therein with the notifying party and any other contributing party similarly notified. Any such contributing party shall not be liable to any party seeking contribution on account of any settlement of any claim, action or proceeding affected by such party seeking contribution on account of any settlement of any claim, action or proceeding affected by such party seeking contribution without the written consent of such contributing party. The contribution provisions contained in this Section 5.3.2 are intended to supersede, to the extent permitted by law, any right to contribution under the Securities Act, the Exchange Act or otherwise available. Each Underwriter’s obligations to contribute pursuant to this Section 5.3 are several and not joint.
6. Defaults.
6.1. Default by an Underwriter.
6.1.1. Default Not Exceeding 10% of Firm Shares or Option Shares. If any Underwriter or Underwriters shall default in its or their obligations to purchase the Firm Shares or the Option Shares, if the Over-allotment Option is exercised hereunder, and if the number of the Firm Shares or Option Shares with respect to which such default relates does not exceed in the aggregate 10% of the number of Firm Shares or Option Shares that all Underwriters have agreed to purchase hereunder, then such Firm Shares or Option Shares to which the default relates shall be purchased by the non-defaulting Underwriters in proportion to their respective commitments hereunder.
6.1.2. Default Exceeding 10% of Firm Shares or Option Shares. In the event that the default addressed in Section 6.1 relates to more than 10% of the Firm Shares or Option Shares, the Representative may in its discretion arrange for themselves or for another party or parties to purchase such Firm Shares or Option Shares to which such default relates on the terms contained herein. If, within one (1) Business Day after such default relating to more than 10% of the Firm Shares or Option Shares, the Representative does not arrange for the purchase of such Firm Shares or Option Shares, then the Company shall be entitled to a further period of one (1) Business Day within which to procure another party or parties reasonably satisfactory to the Representative to purchase said Firm Shares or Option Shares on such terms. In the event that neither the Representative nor the Company arrange for the purchase of the Firm Shares or Option Shares to which a default relates as provided in this Section 6, this Agreement will automatically be terminated by the Representative or the Company without liability on the part of the Company (except as provided in Sections 3.8 and 5 hereof) or the several Underwriters (except as provided in Section 5 hereof); provided, however, that if such default occurs with respect to the Option Shares, this Agreement will not terminate as to the Firm Shares; and provided, further, that nothing herein shall relieve a defaulting Underwriter of its liability, if any, to the other Underwriters and to the Company for damages occasioned by its default hereunder.
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6.1.3. Postponement of Closing Date. In the event that the Firm Shares or Option Shares to which the default relates are to be purchased by the non-defaulting Underwriters, or are to be purchased by another party or parties as aforesaid, the Representative or the Company shall have the right to postpone the Closing Date or Option Closing Date for a reasonable period, but not in any event exceeding five (5) Business Days, in order to effect whatever changes may thereby be made necessary in the Registration Statement, the Pricing Disclosure Package or the Prospectus or in any other documents and arrangements, and the Company agrees to file promptly any amendment to the Registration Statement, the Pricing Disclosure Package or the Prospectus that in the opinion of counsel for the Underwriter may thereby be made necessary. The term “Underwriter” as used in this Agreement shall include any party substituted under this Section 6 with like effect as if it had originally been a party to this Agreement with respect to such shares of Common Stock.
7. Additional Covenants.
7.1. Board Composition and Board Designations. The Company shall ensure that: (i) the qualifications of the persons serving as members of the Board of Directors and the overall composition of the Board comply with the Sarbanes-Oxley Act, with the Exchange Act and with the listing rules of the Exchange or any other national securities exchange, as the case may be, in the event the Company seeks to have its Public Securities listed on another exchange or quoted on an automated quotation system, and (ii) if applicable, at least one member of the Audit Committee of the Board of Directors qualifies as an “audit committee financial expert,” as such term is defined under Regulation S-K and the listing rules of the Exchange.
7.2. Prohibition on Press Releases and Public Announcements. The Company shall not issue press releases or engage in any other publicity without the Representative’s prior written consent (which consent shall not be unreasonably withheld), for a period ending at 5:00 p.m., Eastern time, on the first (1st) Business Day following the forty-fifth (45th) day after the Closing Date, other than normal and customary releases issued in the ordinary course of the Company’s business.
8. Effective Date of this Agreement and Termination Thereof.
8.1. Effective Date. This Agreement shall become effective when both the Company and the Representative have executed the same and delivered counterparts of such signatures to the other party.
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8.2. Termination. The Representative shall have the right to terminate this Agreement at any time prior to any Closing Date, (i) if any domestic or international event or act or occurrence has materially disrupted, or in the Representative’s reasonable opinion will in the immediate future materially disrupt, general securities markets in the United States; or (ii) if trading on the New York Stock Exchange or the Nasdaq Stock Market LLC shall have been suspended or materially limited, or minimum or maximum prices for trading shall have been fixed, or maximum ranges for prices for securities shall have been required by FINRA or by order of the Commission or any other government authority having jurisdiction; or (iii) if the United States shall have become involved in a new war or an increase in major hostilities; or (iv) if a banking moratorium has been declared by a New York State or federal authority; or (v) if a moratorium on foreign exchange trading has been declared which materially adversely impacts the United States securities markets; or (vi) if the Company shall have sustained a material loss by fire, flood, accident, hurricane, earthquake, theft, sabotage or other calamity or malicious act which, whether or not such loss shall have been insured, will, in the Representative’s reasonable opinion, make it inadvisable to proceed with the delivery of the Firm Shares or Option Shares; or (vii) if the Company is in material breach of any of its representations, warranties or covenants hereunder; or (viii) if the Representative shall have become aware after the date hereof of such a material adverse change in the conditions or prospects of the Company, or such adverse material change in general market conditions as in the Representative’s reasonable judgment would make it impracticable to proceed with the offering, sale and/or delivery of the Public Securities or to enforce contracts made by the Underwriters for the sale of the Public Securities; or (ix) if any other event listed in the Engagement Agreement occurs which grants the Representative the right not to proceed with the Offering.
8.3. Expenses. Notwithstanding anything to the contrary in this Agreement, except in the case of a default by the Underwriters, pursuant to Section 6.1.2 above, in the event that this Agreement shall not be carried out for any reason whatsoever, within the time specified herein or any extensions thereof pursuant to the terms herein, the Company shall be obligated to pay to the Underwriters their actual and accountable out-of-pocket expenses related to the transactions contemplated herein then due and payable (including the fees and disbursements of Representative Counsel) up to an aggregate of $200,000, inclusive of any advance for accountable expenses previously paid by the Company to the Representative (the “Advance”) and upon demand the Company shall pay the full amount thereof to the Representative on behalf of the Underwriters; provided, however, that such expense cap in no way limits or impairs the indemnification and contribution provisions of this Agreement. Notwithstanding the foregoing, any advance received by the Representative will be reimbursed to the Company to the extent not actually incurred in compliance with FINRA Rule 5110(f)(2)(C).
8.4. Indemnification. Notwithstanding any contrary provision contained in this Agreement, any election hereunder or any termination of this Agreement, and whether or not this Agreement is otherwise carried out, the provisions of Section 5 shall remain in full force and effect and shall not be in any way affected by, such election or termination or failure to carry out the terms of this Agreement or any part hereof.
8.5. Representations, Warranties, Agreements to Survive. All representations, warranties and agreements contained in this Agreement or in certificates of officers of the Company submitted pursuant hereto, shall remain operative and in full force and effect regardless of (i) any investigation made by or on behalf of any Underwriter or its Affiliates or selling agents, any person controlling any Underwriter, its officers or directors or any person controlling the Company or (ii) delivery of and payment for the Public Securities.
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9. Miscellaneous.
9.1. Notices. All communications hereunder, except as herein otherwise specifically provided, shall be in writing and shall be mailed (registered or certified mail, return receipt requested), personally delivered or sent by facsimile transmission or email with confirmation and shall be deemed given when so delivered or faxed or emailed with confirmation or if mailed, two (2) days after such mailing.
If to the Representative:
Alexander Capital, L.P.
17 State Street, 5th Floor
New York, NY 10004
Attention: Jonathan Gazdak, Managing Director
Email: jgazdak@alexandercapitallp.com
with a copy (which shall not constitute notice) to:
Sullivan & Worcester LLP
1633 Broadway
New York, NY 10019
Attn: David E. Danovitch, Esq.
Email: ddanovitch@sullivanlaw.com
If to the Company:
BranchOut Food Inc.
205 SE Davis Ave., Suite C
Bend, Oregon 97702
Attention: Eric Healy, Chief Executive Officer
Email: eric@branchoutfood.com
with copies (which shall not constitute notice) to:
Rowland Day, Esq.
465 Echo Bay Trail
Bigfork, Montana 59911
Email: rday@rdaylaw.com
Parr Brown Gee & Loveless, P.C.
101 South 200 East, Suite 700
Salt Lake City, Utah 84111
Attention: Dane Johansen, Esq.
Email: djohansen@parrbrown.com
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9.2. Headings. The headings contained herein are for the sole purpose of convenience of reference, and shall not in any way limit or affect the meaning or interpretation of any of the terms or provisions of this Agreement.
9.3. Amendment. This Agreement may only be amended by a written instrument executed by each of the parties hereto.
9.4. Entire Agreement. This Agreement (together with the other agreements and documents being delivered pursuant to or in connection with this Agreement) constitutes the entire agreement of the parties hereto with respect to the subject matter hereof and thereof, and supersedes all prior agreements and understandings of the parties, oral and written, with respect to the subject matter hereof. Notwithstanding anything to the contrary set forth herein, it is understood and agreed by the parties hereto that all other terms and conditions of that certain engagement letter between the Company and the Representative, dated October 31, 2022, as amended by that certain letter dated April 19, 2023 (together, the “Engagement Agreement”), shall remain in full force and effect; provided that, in the event of any conflict between the terms of this Agreement and the Engagement Agreement, the terms of this Agreement shall control.
9.5. Binding Effect. This Agreement shall inure solely to the benefit of and shall be binding upon the Representative, the Underwriters, the Company, the controlling persons, directors and officers referred to in Section 5 hereof, and their respective successors, legal representatives, heirs and assigns, and no other person shall have or be construed to have any legal or equitable right, remedy or claim under or in respect of or by virtue of this Agreement or any provisions herein contained. The term “successors and assigns” shall not include a purchaser, in its capacity as such, of securities from any of the Underwriters.
9.6. Governing Law; Consent to Jurisdiction; Trial by Jury. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of New York, without giving effect to conflict of laws principles thereof. The Company hereby agrees that any action, proceeding or claim against it arising out of, or relating in any way to this Agreement shall be brought and enforced in the New York Supreme Court, County of New York, or in the United States District Court for the Southern District of New York, and irrevocably submits to such jurisdiction, which jurisdiction shall be exclusive. The Company hereby waives any objection to such exclusive jurisdiction and that such courts represent an inconvenient forum. Any such process or summons to be served upon the Company may be served by transmitting a copy thereof by registered or certified mail, return receipt requested, postage prepaid, addressed to it at the address set forth in Section 9.1 hereof. Such mailing shall be deemed personal service and shall be legal and binding upon the Company in any action, proceeding or claim. The Company agrees that the prevailing party(ies) in any such action shall be entitled to recover from the other party(ies) all of its reasonable attorneys’ fees and expenses relating to such action or proceeding and/or incurred in connection with the preparation therefor. The Company (on its behalf and, to the extent permitted by applicable law, on behalf of its stockholders and affiliates) and each of the Underwriters hereby irrevocably waives, to the fullest extent permitted by applicable law, any and all right to trial by jury in any legal proceeding arising out of or relating to this Agreement or the transactions contemplated hereby.
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9.7. Execution in Counterparts. This Agreement may be executed in one or more counterparts, and by the different parties hereto in separate counterparts, each of which shall be deemed to be an original, but all of which taken together shall constitute one and the same agreement, and shall become effective when one or more counterparts has been signed by each of the parties hereto and delivered to each of the other parties hereto. Delivery of a signed counterpart of this Agreement by facsimile or email/pdf transmission shall constitute valid and sufficient delivery thereof.
9.8. Waiver, etc. The failure of any of the parties hereto to at any time enforce any of the provisions of this Agreement shall not be deemed or construed to be a waiver of any such provision, nor to in any way effect the validity of this Agreement or any provision hereof or the right of any of the parties hereto to thereafter enforce each and every provision of this Agreement. No waiver of any breach, non-compliance or non-fulfillment of any of the provisions of this Agreement shall be effective unless set forth in a written instrument executed by the party or parties against whom or which enforcement of such waiver is sought; and no waiver of any such breach, non-compliance or non-fulfillment shall be construed or deemed to be a waiver of any other or subsequent breach, non-compliance or non-fulfillment.
[Signature Page Follows]
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If the foregoing correctly sets forth the understanding between the Underwriters and the Company, please so indicate in the space provided below for that purpose, whereupon this Agreement shall constitute a binding agreement between us.
| Very truly yours, | ||
| BRANCHOUT FOOD INC. | ||
| By: | ||
| Eric Healy | ||
| Chief Executive Officer | ||
Confirmed
as of the date first written above mentioned,
on behalf of itself and as Representative of the several
Underwriters named on Schedule 1 hereto:
| ALEXANDER CAPITAL, L.P. | ||
| By: | ||
| Jonathan Gazdak | ||
| Managing Director | ||
[BranchOut Food Inc. - Underwriting Agreement Signature Page]
SCHEDULE 1
| Underwriter | Total Number of Firm Shares to be Purchased | Number of Additional Shares to be Purchased if the Over- Allotment Option is Fully Exercised | ||||||
| Alexander Capital, L.P. | 1,250,000 | 187,500 | ||||||
| TOTAL | 1,250,000 | 187,500 | ||||||
SCHEDULE 2-A
Pricing Information
Number of Firm Shares: [1,250,000]
Number of Option Shares: [187,500]
Public Offering Price per Share: $[●]
Underwriting Discount per Share: $[●]
Underwriting Non-accountable expense allowance per Share: $[●]
Proceeds to Company per Share (before expenses): $[●]
SCHEDULE 2-B
Written Testing-the-Waters Communications
[None.]
SCHEDULE 3
List of Lock-Up Parties
| Directors & Officers: |
| Eric Healy |
| Douglas Durst |
| John Dalfonsi |
| David Israel |
| Greg Somerville |
| [●] |
| Stockholders: |
| Eric Healy |
| David Israel |
| [●] |
EXHIBIT A
Form of Representative’s Warrant
| A-1 |
EXHIBIT B
Form of Lock-Up Agreement
[__], 2023
Alexander Capital, L.P., as Representative
17 State Street
New York, New York 10004
Ladies and Gentlemen:
The undersigned understands that you, as representative (the “Representative”) of the several Underwriters (as defined below), propose to enter into an Underwriting Agreement (the “Underwriting Agreement”) with BranchOut Food Inc., a Nevada corporation (the “Company”), providing for the initial public offering (the “Initial Public Offering”) by the several underwriters named in [ ] of the Underwriting Agreement of shares of common stock, par value $0.001 per share, of the Company (the “Shares”). Capitalized terms used herein and not otherwise defined shall have the meanings set forth in the Underwriting Agreement.
To induce the Representative to continue its efforts in connection with the Initial Public Offering, the undersigned hereby agrees that, without the prior written consent of the Representative, the undersigned will not, during the period commencing on the date hereof and ending 360 days after the date of the final prospectus (the “Prospectus”) relating to the Initial Public Offering (the “Lock-Up Period”), (1) offer, pledge, sell, contract to sell, grant, lend, or otherwise transfer or dispose of, directly or indirectly, any Shares or any securities convertible into or exercisable or exchangeable for Shares, whether now owned or hereafter acquired by the undersigned or with respect to which the undersigned has or hereafter acquires the power of disposition (collectively, the “Lock-Up Securities”); (2) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of the Lock-Up Securities, whether any such transaction described in clause (1) or (2) above is to be settled by delivery of Lock-Up Securities, in cash or otherwise; (3) make any demand for or exercise any right with respect to the registration of any Lock-Up Securities; or (4) publicly disclose the intention to make any offer, sale, pledge or disposition, or to enter into any transaction, swap, hedge or other arrangement relating to any Lock-Up Securities.
| B-1 |
Notwithstanding the foregoing, and subject to the conditions below, the undersigned may transfer Lock-Up Securities without the prior written consent of the Representative in connection with (a) transactions relating to Lock-Up Securities acquired in open market transactions after the completion of the Initial Public Offering; (b) transfers of Lock-Up Securities as a bona fide gift or gifts or for estate planning purposes, by will, other testamentary document or intestacy or to a family member or trust for the benefit of a family member (for purposes of this lock-up agreement, “family member” means any relationship by blood, marriage or adoption, not more remote than first cousin); (c) transfers of Lock-Up Securities to a charity or educational institution; (d) if the undersigned, directly or indirectly, controls a corporation, partnership, limited liability company, trust or other business entity, any transfers of Lock-Up Securities to any shareholder, partner or member of, or owner of similar equity interests in, the undersigned, as the case may be, (e) if required by the terms of a qualified domestic relations order, divorce settlement, divorce decree, separation agreement or court order, (f) transfers to any trust for the direct or indirect benefit of the undersigned or the immediate family of the undersigned, or if the undersigned is a trust, to a trustor or beneficiary of the trust or to the estate of a beneficiary of such trust, (g) transfers to a nominee or custodian of a person or entity to whom a disposition or transfer would be permissible under clauses (b), (d), (e) or (f) above, (h) transfers to the Company from an employee or other service provider of the Company upon death, disability or termination of employment or service, in each case, of such employee or other service provider, (i) transfers to the Company in connection with the vesting, settlement, or exercise of restricted stock units, options, warrants or other rights to purchase shares of Common Stock (including, in each case, by way of “net” or “cashless” exercise), including for the payment of exercise price and tax and remittance payments due as a result of the vesting, settlement, or exercise of such restricted stock units, options, warrants or rights, provided that any such shares of Common Stock received upon such exercise, vesting or settlement shall be subject to the terms of this Lock-up Agreement, and provided further that any such restricted stock units, options, warrants or rights are held by the undersigned pursuant to an agreement or equity awards granted under a stock incentive plan or other equity award plan, each such agreement or plan which is described in the [Registration Statement, the Pricing Disclosure Package and the Prospectus], and (j) transfers pursuant to a bona fide third-party tender offer, merger, consolidation or other similar transaction that is approved by the Board of Directors of the Company and made to all holders of the Company’s capital stock involving a Change of Control (as defined below) of the Company (for purposes hereof, “Change of Control” shall mean the transfer (whether by tender offer, merger, consolidation or other similar transaction), in one transaction or a series of related transactions, to a person or group of affiliated persons, of shares of capital stock if, after such transfer, such person or group of affiliated persons would hold at least a majority of the outstanding voting securities of the Company (or the surviving entity)); provided that in the event that such tender offer, merger, consolidation or other similar transaction is not completed, the undersigned’s Lock-Up Securities shall remain subject to the provisions of this Lock-up Agreement; provided that in the case of any transfer pursuant to the foregoing clauses (b), (c), (d) or (g), if applicable, (i) any such transfer shall not involve a disposition for value and (ii) each transferee shall sign and deliver to the Representative a lock-up agreement substantially in the form of this lock-up agreement. The undersigned also agrees and consents to the entry of stop transfer instructions with the Company’s Transfer Agent and registrar against the transfer of the undersigned’s Lock-Up Securities except in compliance with this lock-up agreement.
If (i) during the last 17 days of the Lock-Up Period, the Company issues an earnings release or material news or a material event relating to the Company occurs, or (ii) prior to the expiration of the Lock-Up Period, the Company announces that it will release earnings results or becomes aware that material news or a material event will occur during the 16-day period beginning on the last day of the Lock-Up Period, the restrictions imposed by this lock-up agreement shall continue to apply until the expiration of the 18-day period beginning on the issuance of the earnings release or the occurrence of such material news or material event, as applicable, unless the Representative waives, in writing, such extension.
| B-2 |
If the undersigned is an officer or director of the Company, the undersigned further agrees that the foregoing provisions shall be equally applicable to any issuer-directed Shares the undersigned may purchase in the Initial Public Offering.
The Representative agrees that, at least three (3) business days before the effective date of any release or waiver of the foregoing restrictions in connection with a transfer of Lock-Up Securities, the Representative will notify the Company of the impending release or waiver; and the Company has agreed in the Underwriting Agreement to announce the impending release or waiver by press release through a major news service at least two (2) business days before the effective date of the release or waiver. Any release or waiver granted by the Representative hereunder to any such officer or director shall only be effective two (2) business days after the publication date of such press release. The provisions of this paragraph will not apply if (a) the release or waiver is effected solely to permit a transfer of Lock-Up Securities not for consideration and (b) the transferee has agreed in writing to be bound by the same terms described in this lock-up agreement to the extent and for the duration that such terms remain in effect at the time of such transfer.
No provision in this lock-up agreement shall be deemed to restrict or prohibit the exercise, exchange or conversion by the undersigned of any securities exercisable or exchangeable for or convertible into Shares, as applicable; provided that the undersigned does not transfer the Shares acquired on such exercise, exchange or conversion during the Lock-Up Period, unless otherwise permitted pursuant to the terms of this lock-up agreement. In addition, no provision herein shall be deemed to restrict or prohibit the entry into or modification of a so-called “10b5-1” plan at any time (other than the entry into or modification of such a plan in such a manner as to cause the sale of any Lock-Up Securities within the Lock-Up Period).
The undersigned understands that the Company and the Representative are relying upon this lock-up agreement in proceeding toward consummation of the Initial Public Offering. The undersigned further understands that this lock-up agreement is irrevocable and shall be binding upon the undersigned’s heirs, legal representatives, successors and assigns. The undersigned hereby represents and warrants that the undersigned has full power and authority to enter into this lock-up agreement and that this lock-up agreement has been duly authorized (if the undersigned is not a natural person) and constitutes the legal, valid and binding obligation of the undersigned, enforceable in accordance with its terms. Upon request, the undersigned hereby agrees to execute any additional documents necessary in connection with the enforcement hereof.
The undersigned understands that, if the Underwriting Agreement is not executed by [__], 2023, or if the Underwriting Agreement (other than the provisions thereof which survive termination) shall terminate or be terminated prior to payment for and delivery of the Shares to be sold thereunder, then this lock-up agreement shall be void and of no further force or effect.
Whether or not the Initial Public Offering actually occurs depends on a number of factors, including market conditions. The Initial Public Offering will only be made pursuant to an Underwriting Agreement, the terms of which are subject to negotiation between the Company and the Representative.
This agreement and any matters related to this lock-up agreement shall be governed by and construed in accordance with the laws of the State of New York without regard to principles of conflict of laws that would result in the application of any law other than the laws of the State of New York. The undersigned agrees that any suit or proceeding arising in respect of this lock-up agreement will be tried exclusively in the U.S. District Court for the Southern District of New York or, if that court does not have subject matter jurisdiction, in any state court located in the City and County of New York and the undersigned agrees to submit to the jurisdiction of, and to venue in, such courts.
Delivery of a signed copy of this lock-up agreement by facsimile or e-mail/.pdf transmission shall be as effective as the delivery of the original hereof.
[Signature page follows]
| B-3 |
| Very truly yours, | |
| (Name - Please Print) | |
| (Name of Signatory, in the case of entities - Please Print) | |
| (Signature) | |
| (Title of Signatory, in the case of entities - Please Print) | ||
| Address: | ||
| B-4 |
EXHIBIT C
Form of Press Release
BranchOut Food Inc.
[Date]
BranchOut Food Inc. (the “Company”) announced today that Alexander Capital, L.P., acting as representative for the underwriters in the Company’s initial public offering of _______ shares of the Company’s common stock, is [waiving] [releasing] a lock-up restriction with respect to _________ shares of the Company’s common stock held by [certain officers or directors] [an officer or director] of the Company. The [waiver] [release] will take effect on _________, 20___, and the shares may be sold on or after such date.
This press release is not an offer or sale of the securities in the United States or in any other jurisdiction where such offer or sale is prohibited, and such securities may not be offered or sold in the United States absent registration or an exemption from registration under the Securities Act of 1933, as amended.
| C-1 |
[EXHIBIT D
Form of Opinions of Counsel]
| D-1 |
Exhibit 3.2
BYLAWS
OF
BRANCHOUT FOOD INC.
DATED NOVEMBER 12, 2021
ARTICLE I
OFFICES
Section 1.1 Principal Office. The principal office and place of business of BranchOut Food Inc. (the “Corporation”) shall be at 205 SE Davis Ave, Suite C, Bend, OR 97702.
Section 1.2 Other Offices. Other offices and places of business either within or without the State of Nevada may be established from time to time by resolution of the board of directors of the Corporation (the “Board of Directors”) or as the business of the Corporation may require. The street address of the Corporation’s resident agent is the registered office of the Corporation in Nevada.
ARTICLE II
STOCKHOLDERS
Section 2.1 Annual Meeting. The annual meeting of the stockholders of the Corporation shall be held on such date and at such time as may be designated from time to time by the Board of Directors. At the annual meeting, directors shall be elected and any other business may be transacted as may be properly brought before the meeting.
Section 2.2 Special Meetings.
(a) Special meetings of the stockholders may be called only by the chairman of the board, if any, or the chief executive officer, if any, or, if there be no chairman of the board and no chief executive officer, by the president, and shall be called by the secretary upon the written request of at least a majority of the authorized number of directors. Such request shall state the purpose or purposes of the meeting. Stockholders shall have no right to request or call a special meeting.
(b) No business shall be acted upon at a special meeting of stockholders except as set forth in the notice of the meeting.
Section 2.3 Place of Meetings. Any meeting of the stockholders of the Corporation may be held at the Corporation’s registered office in the State of Nevada or at such other place in or out of the State of Nevada and United States as may be designated in the notice of meeting. A waiver of notice signed by all stockholders entitled to vote may designate any place for the holding of such meeting.
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Section 2.4 Notice of Meetings; Waiver of Notice.
(a) The president, chief executive officer, if any, a vice president, the secretary, an assistant secretary or any other individual designated by the Board of Directors shall sign and deliver or cause to be delivered to the stockholders written notice of any stockholders’ meeting not less than ten (10) days, but not more than sixty (60) days, before the date of such meeting. The notice shall state the place, date and time of the meeting and the purpose or purposes for which the meeting is called. The notice shall contain or be accompanied by such additional information as may be required by Nevada Revised Statutes (“NRS”), including, without limitation, NRS 78.379, 92A.120 or 92A.410.
(b) In the case of an annual meeting, subject to Section 2.13 below, any proper business may be presented for action, except that (i) if a proposed plan of merger, conversion or exchange is submitted to a vote, the notice of the meeting must state that the purpose, or one of the purposes, of the meeting is to consider the plan of merger, conversion or exchange and must contain or be accompanied by a copy or summary of the plan; and (ii) if a proposed action creating dissenters’ rights is to be submitted to a vote, the notice of the meeting must state that the stockholders are or may be entitled to assert dissenters’ rights under NRS 92A.300 to 92A.500, inclusive, and be accompanied by a copy of those sections.
(c) A copy of the notice shall be personally delivered or mailed postage prepaid to each stockholder of record entitled to vote at the meeting at the address appearing on the records of the Corporation. Upon mailing, service of the notice is complete, and the time of the notice begins to run from the date upon which the notice is deposited in the mail. If the address of any stockholder does not appear upon the records of the Corporation or is incomplete, it will be sufficient to address any notice to such stockholder at the registered office of the Corporation.
(d) The written certificate of the individual signing a notice of meeting, setting forth the substance of the notice or having a copy thereof attached, the date the notice was mailed or personally delivered to the stockholders and the addresses to which the notice was mailed, shall be prima facie evidence of the manner and fact of giving such notice.
(e) Any stockholder may waive notice of any meeting by a signed writing, either before or after the meeting. Such waiver of notice shall be deemed the equivalent of the giving of such notice.
Section 2.5 Determination of Stockholders of Record.
(a) For the purpose of determining the stockholders entitled to notice of and to vote at any meeting of stockholders or any adjournment thereof, or entitled to receive payment of any distribution or the allotment of any rights, or entitled to exercise any rights in respect of any change, conversion, or exchange of stock or for the purpose of any other lawful action, the directors may fix, in advance, a record date, which shall not be more than sixty (60) days nor less than ten (10) days before the date of such meeting, if applicable.
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(b) If no record date is fixed, the record date for determining stockholders: (i) entitled to notice of and to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held; and (ii) for any other purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto. A determination of stockholders of record entitled to notice of or to vote at any meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting and must fix a new record date if the meeting is adjourned to a date more than 60 days later than the date set for the original meeting.
Section 2.6 Quorum; Adjourned Meetings.
(a) Unless the Articles of Incorporation provide for a different proportion, stockholders holding at least a majority of the voting power of the Corporation’s capital stock, represented in person or by proxy (regardless of whether the proxy has authority to vote on all matters), are necessary to constitute a quorum for the transaction of business at any meeting. If, on any issue, voting by classes or series is required by the laws of the State of Nevada, the Articles of Incorporation or these Bylaws, at least a majority of the voting power, represented in person or by proxy (regardless of whether the proxy has authority to vote on all matters), within each such class or series is necessary to constitute a quorum of each such class or series.
(b) If a quorum is not represented, a majority of the voting power represented or the person presiding at the meeting may adjourn the meeting from time to time until a quorum shall be represented. At any such adjourned meeting at which a quorum shall be represented, any business may be transacted which might have been transacted as originally called. When a stockholders’ meeting is adjourned to another time or place hereunder, notice need not be given of the adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken. However, if a new record date is fixed for the adjourned meeting, notice of the adjourned meeting must be given to each stockholder of record as of the new record date. The stockholders present at a duly convened meeting at which a quorum is present may continue to transact business until adjournment, notwithstanding the departure of enough stockholders to leave less than a quorum of the voting power.
Section 2.7 Voting.
(a) Unless otherwise provided in the NRS or in the Articles of Incorporation, each stockholder of record, or such stockholder’s duly authorized proxy, shall be entitled to one (1) vote for each share of voting stock standing registered in such stockholder’s name at the close of business on the record date.
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(b) Except as otherwise provided herein, all votes with respect to shares standing in the name of an individual at the close of business on the record date (including pledged shares) shall be cast only by that individual or such individual’s duly authorized proxy. With respect to shares held by a representative of the estate of a deceased stockholder, or a guardian, conservator, custodian or trustee, even though the shares do not stand in the name of such holder, votes may be cast by such holder upon proof of such representative capacity. In the case of shares under the control of a receiver, the receiver may cast votes carried by such shares even though the shares do not stand of record in the name of the receiver; provided, that the order of a court of competent jurisdiction which appoints the receiver contains the authority to cast votes carried by such shares. If shares stand of record in the name of a minor, votes may be cast by the duly appointed guardian of the estate of such minor only if such guardian has provided the Corporation with written proof of such appointment.
(c) With respect to shares standing of record in the name of another corporation, partnership, limited liability company or other legal entity on the record date, votes may be cast: (i) in the case of a corporation, by such individual as the bylaws of such other corporation prescribe, by such individual as may be appointed by resolution of the Board of Directors of such other corporation or by such individual (including, without limitation, the officer making the authorization) authorized in writing to do so by the chairman of the board, if any, president, chief executive officer, if any, or any vice president of such corporation; and (ii) in the case of a partnership, limited liability company or other legal entity, by an individual representing such stockholder upon presentation to the Corporation of satisfactory evidence of his or her authority to do so.
(d) Notwithstanding anything to the contrary contained herein and except for the Corporation’s shares held in a fiduciary capacity, the Corporation shall not vote, directly or indirectly, shares of its own stock owned by it; and such shares shall not be counted in determining the total number of outstanding shares entitled to vote.
(e) Any holder of shares entitled to vote on any matter may cast a portion of the votes in favor of such matter and refrain from casting the remaining votes or cast the same against the proposal, except in the case of elections of directors. If such holder entitled to vote does vote any of such stockholder’s shares affirmatively and fails to specify the number of affirmative votes, it will be conclusively presumed that the holder is casting affirmative votes with respect to all shares held.
(f) With respect to shares standing of record in the name of two or more persons, whether fiduciaries, members of a partnership, joint tenants, tenants in common, husband and wife as community property, tenants by the entirety, voting trustees or otherwise and shares held by two or more persons (including proxy holders) having the same fiduciary relationship in respect to the same shares, votes may be cast in the following manner:
(i) If only one person votes, the vote of such person binds all.
(ii) If more than one person casts votes, the act of the majority so voting binds all.
(iii) If more than one person casts votes, but the vote is evenly split on a particular matter, the votes shall be deemed cast proportionately, as split.
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(g) If a quorum is present, unless the Articles of Incorporation, these Bylaws, the NRS, or other applicable law provide for a different proportion, action by the stockholders entitled to vote on a matter, other than the election of directors, is approved by and is the act of the stockholders if the number of votes cast in favor of the action exceeds the number of votes cast in opposition to the action, unless voting by classes or series is required for any action of the stockholders by the laws of the State of Nevada, the Articles of Incorporation or these Bylaws, in which case the number of votes cast in favor of the action by the voting power of each such class or series must exceed the number of votes cast in opposition to the action by the voting power of each such class or series.
(h) If a quorum is present, directors shall be elected by a plurality of the votes cast.
Section 2.8 Proxies. At any meeting of stockholders, any holder of shares entitled to vote may designate, in a manner permitted by the laws of the State of Nevada, another person or persons to act as a proxy or proxies. Every proxy shall continue in full force and effect until its expiration or revocation in a manner permitted by the laws of the State of Nevada.
Section 2.9 No Action Without A Meeting. No action shall be taken by the stockholders except at an annual or special meeting of stockholders called and noticed in the manner required by these Bylaws. Prior to the completion of the initial public offering of the Corporation, the stockholders may take action by written consent. After the completion of the initial public offering of the Corporation, the stockholders may not in any circumstance take action by written consent.
Section 2.10 Organization.
(a) Meetings of stockholders shall be presided over by the chairman of the board, or, in the absence of the chairman, by the vice-chairman of the board, or in the absence of the vice-chairman, the president, or, in the absence of the president, by the chief executive officer, if any, or, in the absence of the foregoing persons, by a chairman designated by the Board of Directors, or, in the absence of such designation by the Board of Directors, by a chairman chosen at the meeting by the stockholders entitled to cast a majority of the votes which all stockholders present in person or by proxy are entitled to cast. The secretary, or in the absence of the secretary an assistant secretary, shall act as secretary of the meeting, but in the absence of the secretary and any assistant secretary the chairman of the meeting may appoint any person to act as secretary of the meeting. The order of business at each such meeting shall be as determined by the chairman of the meeting. The chairman of the meeting shall have the right and authority to prescribe such rules, regulations and procedures and to do all such acts and things as are necessary or desirable for the proper conduct of the meeting, including, without limitation, the establishment of procedures for the maintenance of order and safety, limitation on the time allotted to questions or comments on the affairs of the Corporation, restrictions on entry to such meeting after the time prescribed for the commencement thereof and the opening and closing of the voting polls.
(b) The chairman of the meeting may appoint one or more inspectors of elections. The inspector or inspectors may (i) ascertain the number of shares outstanding and the voting power of each; (ii) determine the number of shares represented at a meeting and the validity of proxies or ballots; (iii) count all votes and ballots; (iv) determine any challenges made to any determination made by the inspector(s); and (v) certify the determination of the number of shares represented at the meeting and the count of all votes and ballots.
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Section 2.11 Absentees’ Consent to Meetings. Transactions of any meeting of the stockholders are as valid as though had at a meeting duly held after regular call and notice if a quorum is represented, either in person or by proxy, and if, either before or after the meeting, each of the persons entitled to vote, not represented in person or by proxy (and those who, although present, either object at the beginning of the meeting to the transaction of any business because the meeting has not been lawfully called or convened or expressly object at the meeting to the consideration of matters not included in the notice which are legally or by the terms of these Bylaws required to be included therein), signs a written waiver of notice and/or consent to the holding of the meeting or an approval of the minutes thereof. All such waivers, consents, and approvals shall be filed with the corporate records and made a part of the minutes of the meeting. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person objects at the beginning of the meeting to the transaction of any business because the meeting is not lawfully called, noticed or convened and except that attendance at a meeting is not a waiver of any right to object to the consideration of matters not properly included in the notice if such objection is expressly made at the time any such matters are presented at the meeting. Neither the business to be transacted at nor the purpose of any regular or special meeting of stockholders need be specified in any written waiver of notice or consent, except as otherwise provided in these Bylaws.
Section 2.12 Director Nominations. Nominations of persons for election to the Board of Directors of the Corporation may be made by the Board of Directors, by a committee appointed by the Board of Directors, or by any stockholder of record entitled to vote in the election of directors who complies with the notice procedures set forth in Section 2.13 below.
Section 2.13 Advance Notice of Stockholder Proposals and Director Nominations by Stockholders. At any annual or special meeting of stockholders, proposals by stockholders and persons nominated for election as directors by stockholders shall be considered only if advance notice thereof has been timely given by the stockholder as provided herein and such proposals or nominations are otherwise proper for consideration under applicable law, the Articles of Incorporation and these Bylaws. Notice of any proposal to be presented by any stockholder or of the name of any person to be nominated by any stockholder for election as a director of the Corporation at any meeting of stockholders shall be delivered to the secretary of the Corporation at its principal office not less than sixty (60) nor more than ninety (90) days prior to the day of the meeting; provided, however, that if the date of the meeting is first publicly announced or disclosed (in a public filing or otherwise) less than seventy (70) days prior to the day of the meeting, such advance notice shall be given not more than ten (10) days after such date is first so announced or disclosed. Public notice shall be deemed to have been given more than seventy (70) days in advance of the annual meeting if the Corporation shall have previously disclosed, in these Bylaws or otherwise, that the annual meeting in each year is to be held on a determinable date, unless and until the Board of Directors determines to hold the meeting on a different date. For purposes of this Section, public disclosure of the date of a forthcoming meeting may be made by the Corporation not only by giving formal notice of the meeting, but also by notice to a national securities exchange, the Nasdaq National Market or the Nasdaq SmallCap Market (if a corporation’s common stock is then listed on such exchange or quoted on either such Nasdaq market), by filing a report under Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended (the “Act”) (if the Corporation is then subject thereto), by mailing to stockholders, or by a general press release.
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Any stockholder who gives notice of any such proposal shall deliver therewith the text of the proposal to be presented and a brief written statement of the reasons why such stockholder favors the proposal and setting forth such stockholder’s name and address, the number and class of all shares of each class of stock of the Corporation beneficially owned by such stockholder and any material interest of such stockholder in the proposal (other than as a stockholder). Any stockholder desiring to nominate any person for election as a director of the Corporation shall deliver with such notice a statement, in writing, setting forth (a) the name of the person to be nominated; (b) the number and class of all shares of each class of stock of the Corporation beneficially owned by such person; (c) the information regarding such person required by paragraphs (a), (e) and (f) of Item 401 of Regulation S-K adopted by the Securities and Exchange Commission (the “SEC”) (or the corresponding provisions of any regulation subsequently adopted by the SEC applicable to the Corporation), and any other information regarding such person which would be required to be included in a proxy statement filed pursuant to the proxy rules of the SEC, had such nominee been nominated, or intended to be nominated by the Board of Directors; (d) such person’s signed consent to serve as a director of the Corporation if elected; (e) such stockholder’s name and address and the number and class of all shares of each class of stock of the Corporation beneficially owned by such stockholder; (f) a representation that such stockholder is a holder of record of stock of the Corporation entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice; and (g) a description of all arrangements or understandings between the stockholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nominations are to be made by the stockholder. As used herein, shares “beneficially owned” shall mean all shares as to which such person, together with such person’s affiliates and associates (as defined in Rule 12b-2 under the Act), may be deemed to beneficially own pursuant to Rules 13d-3 and 13d-5 under the Act, as well as all shares as to which such person, together with such person’s affiliates and associates, has a right to become the beneficial owner pursuant to any agreement or understanding, whereupon the exercise of warrants, options or rights to convert or exchange (whether such rights are exercisable immediately or only after the passage of time or the occurrence of conditions). The person presiding at the meeting shall determine whether such notice has been duly given and shall direct that proposals and nominees not be considered if such notice has not been duly given. Notwithstanding anything in these Bylaws to the contrary, no business shall be conducted at a meeting except in accordance with the procedures set forth in this Section. Notwithstanding the foregoing provisions hereof, a stockholder shall also comply with all applicable requirements of the Act, and the rules and regulations thereunder with respect to the matters set forth herein.
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ARTICLE III
DIRECTORS
Section 3.1 General Powers; Performance of Duties. The business and affairs of the Corporation shall be managed by or under the direction of the Board of Directors, except as otherwise provided in Chapter 78 of the NRS or the Articles of Incorporation.
Section 3.2 Number, Tenure, and Qualifications. The Board of Directors of the Corporation shall consist of at least one (1) individual(s) and not more than eleven (11) individuals. The number of directors within the foregoing fixed minimum and maximum may be established and changed from time to time by resolution adopted by the Board of Directors of the Corporation without amendment to these Bylaws or the Articles of Incorporation. Each director shall hold office until his or her successor shall be elected or appointed and qualified or until his or her earlier death, retirement, disqualification, resignation or removal. No reduction of the number of directors shall have the effect of removing any director prior to the expiration of his or her term of office. No provision of this Section shall be restrictive upon the right of the Board of Directors to fill vacancies or upon the right of the stockholders to remove directors as is hereinafter provided.
Section 3.3 Chairman of the Board. The Board of Directors shall elect a chairman of the board from the members of the Board of Directors who shall preside at all meetings of the Board of Directors and stockholders at which he or she shall be present and shall have and may exercise such powers as may, from time to time, be assigned to him or her by the Board of Directors, these Bylaws or as may be provided by law.
Section 3.4 Vice-Chairman of the Board. The Board of Directors shall elect a vice-chairman of the board from the members of the Board of Directors who shall preside at all meetings of the Board of Directors and stockholders at which he or she shall be present and the chairman is not present and shall have and may exercise such powers as may, from time to time, be assigned to him or her by the Board of Directors, these Bylaws or as may be provided by law.
Section 3.5 Elections and Terms. The Board of Directors, other than those who may be elected by the holders of any classes or series of stock having a preference over the common stock as to dividends or upon liquidation, shall be elected for a term ending at the next following Annual Meeting of the Stockholders and until their successors have been duly elected and qualified.
Section 3.6 Removal and Resignation of Directors. Except as otherwise provided in the NRS, any director may be removed from office with or without cause by the affirmative vote of the holders of not less than two-thirds (2/3) of the voting power of the issued and outstanding stock of the Corporation entitled to vote generally in the election of directors (voting as a single class) excluding stock entitled to vote only upon the happening of a fact or event unless such fact or event shall have occurred. In addition, the Board of Directors of the Corporation, by majority vote, may declare vacant the office of a director who has been declared incompetent by an order of a court of competent jurisdiction, convicted of a felony or found to be unsuitable to serve as a director of the Corporation. Any director may resign effective upon giving written notice, unless the notice specifies a later time for effectiveness of such resignation, to the chairman of the board, if any, the president or the secretary, or in the absence of all of them, any other officer.
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Section 3.7 Vacancies; Newly Created Directorships. Any vacancies on the Board of Directors resulting from death, resignation, retirement, disqualification, removal from office, or other cause, and newly created directorships resulting from any increase in the authorized number of directors, may be filled by a majority vote of the directors then in office or by a sole remaining director, in either case though less than a quorum, and the director(s) so chosen shall hold office for a term expiring at the next annual meeting of stockholders at which the term of the class to which he or she has been elected expires, or until his or her earlier resignation or removal. No decrease in the number of directors constituting the Board of Directors shall shorten the term of any incumbent directors.
Section 3.8 Annual and Regular Meetings. Immediately following the adjournment of, and at the same place as, the annual or any special meeting of the stockholders at which directors are elected, the Board of Directors, including directors newly elected, shall hold its annual meeting without call or notice, other than this provision, to elect officers and to transact such further business as may be necessary or appropriate. The Board of Directors may provide by resolution the place, date, and hour for holding regular meetings between annual meetings.
Section 3.9 Special Meetings. Except as otherwise required by law, special meetings of the Board of Directors may be called only by the chairman of the board, if any, or if there be no chairman of the board, by any of the chief executive officer, if any, the president, or the secretary, and shall be called by the chairman of the board, if any, the president, the chief executive officer, if any, or the secretary upon the request of at least a majority of the authorized number of directors. If the chairman of the board, or if there be no chairman of the board, each of the president, chief executive officer, if any, and secretary, refuses or neglects to call such special meeting, a special meeting may be called by a written request signed by at least a majority of the authorized number of directors.
Section 3.10 Place of Meetings. Any regular or special meeting of the directors of the Corporation may be held at such place as the Board of Directors, or in the absence of such designation, as the notice calling such meeting, may designate. A waiver of notice signed by the directors may designate any place for the holding of such meeting.
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Section 3.11 Notice of Meetings. Except as otherwise provided in Section 3.8 above, there shall be delivered to each director at the address appearing for him or her on the records of the Corporation, at least twenty-four (24) hours before the time of such meeting, a copy of a written notice of any meeting (a) by delivery of such notice personally, (b) by mailing such notice postage prepaid, (c) by facsimile, (d) by overnight courier, (e) by telegram, or (f) by electronic transmission or electronic writing, including, but not limited to, email. If mailed to an address inside the United States, the notice shall be deemed delivered two (2) business days following the date the same is deposited in the United States mail, postage prepaid. If mailed to an address outside the United States, the notice shall be deemed delivered four (4) business days following the date the same is deposited in the United States mail, postage prepaid. If sent via facsimile, by electronic transmission or electronic writing, including, but not limited to, email, the notice shall be deemed delivered upon sender’s receipt of confirmation of the successful transmission. If sent via overnight courier, the notice shall be deemed delivered the business day following the delivery of such notice to the courier. If the address of any director is incomplete or does not appear upon the records of the Corporation it will be sufficient to address any notice to such director at the registered office of the Corporation. Any director may waive notice of any meeting, and the attendance of a director at a meeting and oral consent entered on the minutes of such meeting shall constitute waiver of notice of the meeting unless such director objects, prior to the transaction of any business, that the meeting was not lawfully called, noticed or convened. Attendance for the express purpose of objecting to the transaction of business thereat because the meeting was not properly called or convened shall not constitute presence or a waiver of notice for purposes hereof.
Section 3.12 Quorum; Adjourned Meetings.
(a) A majority of the directors in office, at a meeting duly assembled, is necessary to constitute a quorum for the transaction of business.
(b) At any meeting of the Board of Directors where a quorum is not present, a majority of those present may adjourn, from time to time, until a quorum is present, and no notice of such adjournment shall be required. At any adjourned meeting where a quorum is present, any business may be transacted which could have been transacted at the meeting originally called.
Section 3.13 Manner of Acting. Except as provided in Section 3.14 below, the affirmative vote of a majority of the directors present at a meeting at which a quorum is present is the act of the Board of Directors.
Section 3.14 Super-majority Approval. Notwithstanding anything to the contrary contained in these Bylaws or the Articles of Incorporation, the following actions may be taken by the Corporation only upon the approval of two-thirds of the directors present at a meeting at which a quorum is present is the act of the Board of Directors:
(a) any voluntary dissolution or liquidation of the Corporation.
(b) the sale of all or substantially all of the assets of the Corporation.
(c) the filing of a voluntary petition of bankruptcy by the Corporation.
Section 3.15 Telephonic Meetings. Members of the Board of Directors or of any committee designated by the Board of Directors may participate in a meeting of the Board of Directors or such committee by means of a telephone conference or video or similar method of communication by which all persons participating in such meeting can hear each other. Participation in a meeting pursuant to this Section 3.15 constitutes presence in person at the meeting.
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Section 3.16 Action Without Meeting. Any action required or permitted to be taken at a meeting of the Board of Directors or of a committee thereof may be taken without a meeting if, before or after the action, a written consent thereto is signed by all of the members of the Board of Directors or the committee. The written consent may be signed in counterparts, including, without limitation, facsimile counterparts, and shall be filed with the minutes of the proceedings of the Board of Directors or committee.
Section 3.17 Powers and Duties.
(a) Except as otherwise restricted by the laws of the State of Nevada or the Articles of Incorporation, the Board of Directors has full control over the business and affairs of the Corporation. The Board of Directors may delegate any of its authority to manage, control or conduct the business of the Corporation to any standing or special committee, or to any officer or agent, and to appoint any persons to be agents of the Corporation with such powers, including the power to subdelegate, and upon such terms as may be deemed fit.
(b) The Board of Directors, in its discretion, or the officer of the Corporation presiding at a meeting of stockholders, in his discretion, may (i) require that any votes cast at such meeting shall be cast by written ballot, and/or (ii) submit any contract or act for approval or ratification at any annual meeting of the stockholders or any special meeting properly called and noticed for the purpose of considering any such contract or act, provided a quorum is present.
(c) The Board of Directors may, by resolution passed by a majority of the board, designate one or more committees, each committee to consist of one or more of the directors of the Corporation. The Board of Directors may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence or disqualification of a member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he, she or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. Subject to applicable law and to the extent provided in the resolution of the Board of Directors, any such committee shall have and may exercise all the powers of the Board of Directors in the management of the business and affairs of the Corporation. Such committee or committees shall have such name or names as may be determined from time to time by resolution adopted by the Board of Directors. The committees shall keep regular minutes of their proceedings and report the same to the Board of Directors when required.
Section 3.18 Compensation. The Board of Directors, without regard to personal interest, may establish the compensation of directors for services in any capacity. If the Board of Directors establishes the compensation of directors pursuant to this subsection, such compensation is presumed to be fair to the Corporation unless proven unfair by a preponderance of the evidence.
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Section 3.19 Organization. Meetings of the Board of Directors shall be presided over by the chairman of the board, or in the absence of the chairman of the board by the vice-chairman, or in his or her absence by a chairman chosen at the meeting. The secretary, or in the absence of the secretary an assistant secretary, shall act as secretary of the meeting, but in the absence of the secretary and any assistant secretary the chairman of the meeting may appoint any person to act as secretary of the meeting. The order of business at each such meeting shall be as determined by the chairman of the meeting.
ARTICLE IV
OFFICERS
Section 4.1 Election. The Board of Directors, at its annual meeting, shall elect and appoint a chief executive officer, president, a secretary, and a treasurer. Said officers shall serve until the next succeeding annual meeting of the Board of Directors and until their respective successors are elected and appointed and shall qualify or until their earlier resignation or removal. The Board of Directors may from time to time, by resolution, elect or appoint such other officers and agents as it may deem advisable, who shall hold office at the pleasure of the board, and shall have such powers and duties and be paid such compensation as may be directed by the board. Any individual may hold two or more offices.
Section 4.2 Removal; Resignation. Any officer or agent elected or appointed by the Board of Directors may be removed by the Board of Directors with or without cause. Any officer may resign at any time upon written notice to the Corporation. Any such removal or resignation shall be subject to the rights, if any, of the respective parties under any contract between the Corporation and such officer or agent.
Section 4.3 Vacancies. Any vacancy in any office because of death, resignation, removal or otherwise may be filled by the Board of Directors for the unexpired portion of the term of such office.
Section 4.4 Chief Executive Officer. The Board of Directors may elect a chief executive officer who, subject to the supervision and control of the Board of Directors, shall have the ultimate responsibility for the management and control of the business and affairs of the Corporation, and shall perform such other duties and have such other powers which are delegated to him or her by the Board of Directors, these Bylaws or as may be provided by law.
Section 4.5 President. The president, subject to the supervision and control of the Board of Directors, shall in general actively supervise and control the business and affairs of the Corporation. The president shall keep the Board of Directors fully informed as the Board of Directors may request and shall consult the Board of Directors concerning the business of the Corporation. The president shall perform such other duties and have such other powers which are delegated and assigned to him or her by the Board of Directors if any, these Bylaws or as may be provided by law.
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Section 4.6 Vice Presidents. The Board of Directors may elect one or more vice presidents. In the absence or disability of the president, or at the president’s request, the vice president or vice presidents, in order of their rank as fixed by the Board of Directors, and if not ranked, the vice presidents in the order designated by the Board of Directors, or in the absence of such designation, in the order designated by the president, shall perform all of the duties of the president, and when so acting, shall have all the powers of, and be subject to all the restrictions on the president. Each vice president shall perform such other duties and have such other powers which are delegated and assigned to him or her by the Board of Directors, the president, these Bylaws or as may be provided by law.
Section 4.7 Secretary. The secretary shall attend all meetings of the stockholders, the Board of Directors and any committees, and shall keep, or cause to be kept, the minutes of proceeds thereof in books provided for that purpose. He or she shall keep, or cause to be kept, a register of the stockholders of the Corporation and shall be responsible for the giving of notice of meetings of the stockholders, the Board of Directors and any committees, and shall see that all notices are duly given in accordance with the provisions of these Bylaws or as required by law. The secretary shall be custodian of the corporate seal, the records of the Corporation, the stock certificate books, transfer books and stock ledgers, and such other books and papers as the Board of Directors or appropriate committee may direct. The secretary shall perform all other duties commonly incident to his or her office and shall perform such other duties which are assigned to him or her by the Board of Directors, the chief executive officer, if any, the president, these Bylaws or as may be provided by law.
Section 4.8 Assistant Secretaries. An assistant secretary shall, at the request of the secretary, or in the absence or disability of the secretary, perform all the duties of the secretary. He or she shall perform such other duties as are assigned to him or her by the Board of Directors, the chief executive officer, if any, the president, these Bylaws or as may be provided by law.
Section 4.9 Treasurer. The treasurer, subject to the order of the Board of Directors, shall have the care and custody of, and be responsible for, all of the money, funds, securities, receipts and valuable papers, documents and instruments of the Corporation, and all books and records relating thereto. The treasurer shall keep, or cause to be kept, full and accurate books of accounts of the Corporation’s transactions, which shall be the property of the Corporation, and shall render financial reports and statements of condition of the Corporation when so requested by the Board of Directors, the chairman of the board, if any, the chief executive officer, if any, or the president. The treasurer shall perform all other duties commonly incident to his or her office and such other duties as may, from time to time, be assigned to him or her by the Board of Directors, the chief executive officer, if any, the president, these Bylaws or as may be provided by law. The treasurer shall, if required by the Board of Directors, give bond to the Corporation in such sum and with such security as shall be approved by the Board of Directors for the faithful performance of all the duties of the treasurer and for restoration to the Corporation, in the event of the treasurer’s death, resignation, retirement or removal from office, of all books, records, papers, vouchers, money and other property in the treasurer’s custody or control and belonging to the Corporation. The expense of such bond shall be borne by the Corporation. If a chief financial officer of the Corporation has not been appointed, the treasurer may be deemed the chief financial officer of the Corporation.
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Section 4.10 Assistant Treasurers. An assistant treasurer shall, at the request of the treasurer, or in the absence or disability of the treasurer, perform all the duties of the treasurer. He or she shall perform such other duties which are assigned to him or her by the Board of Directors, the chief executive officer, the president, the treasurer, these Bylaws or as may be provided by law. The Board of Directors may require an assistant treasurer to give a bond to the Corporation in such sum and with such security as it may approve, for the faithful performance of the duties of the assistant treasurer, and for restoration to the Corporation, in the event of the assistant treasurer’s death, resignation, retirement or removal from office, of all books, records, papers, vouchers, money and other property in the assistant treasurer’s custody or control and belonging to the Corporation. The expense of such bond shall be borne by the Corporation.
Section 4.11 Execution of Negotiable Instruments, Deeds and Contracts. All checks, drafts, notes, bonds, bills of exchange, and orders for the payment of money of the Corporation; all deeds, mortgages, proxies, powers of attorney and other written contracts, documents, instruments and agreements to which the Corporation shall be a party; and all assignments or endorsements of stock certificates, registered bonds or other securities owned by the Corporation shall be signed in the name of the Corporation by such officers or other persons as the Board of Directors may from time to time designate. The Board of Directors may authorize the use of the facsimile signatures of any such persons. Any officer of the Corporation shall be authorized to attend, act and vote, or designate another officer or an agent of the Corporation to attend, act and vote, at any meeting of the owners of any entity in which the Corporation may own an interest or to take action by written consent in lieu thereof. Such officer or agent, at any such meeting or by such written action, shall possess and may exercise on behalf of the Corporation any and all rights and powers incident to the ownership of such interest.
ARTICLE V
CAPITAL STOCK
Section 5.1 Issuance. Shares of the Corporation’s authorized stock shall, subject to any provisions or limitations of the laws of the State of Nevada, the Articles of Incorporation or any contracts or agreements to which the Corporation may be a party, be issued in such manner, at such times, upon such conditions and for such consideration as shall be prescribed by the Board of Directors.
Section 5.2 Stock Certificates and Uncertified Shares. Every holder of stock in the Corporation shall be entitled to have a certificate signed by or in the name of the Corporation by the president, the chief executive officer, if any, or a vice president, and by the secretary or an assistant secretary, of the Corporation (or any other two officers or agents so authorized by the Board of Directors), certifying the number of shares of stock owned by him, her or it in the Corporation; provided, however, that the Board of Directors may authorize the issuance of uncertificated shares of some or all of any or all classes or series of the Corporation’s stock. Any such issuance of uncertificated shares shall have no effect on existing certificates for shares until such certificates are surrendered to the Corporation, or on the respective rights and obligations of the stockholders. Whenever such certificate is countersigned or otherwise authenticated by a transfer agent or a transfer clerk and by a registrar (other than the Corporation), then a facsimile of the signatures of any corporate officers or agents, the transfer agent, transfer clerk or the registrar of the Corporation may be printed or lithographed upon the certificate in lieu of the actual signatures. In the event that any officer or officers who have signed, or whose facsimile signatures have been used on any certificate or certificates for stock cease to be an officer or officers because of death, resignation or other reason, before the certificate or certificates for stock have been delivered by the Corporation, the certificate or certificates may nevertheless be adopted by the Corporation and be issued and delivered as though the person or persons who signed the certificate or certificates, or whose facsimile signature or signatures have been used thereon, had not ceased to be an officer or officers of the Corporation.
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Within a reasonable time after the issuance or transfer of uncertificated shares, the Corporation shall send to the registered owner thereof a written statement certifying the number of shares owned by him, her or it in the Corporation and, at least annually thereafter, the Corporation shall provide to such stockholders of record holding uncertificated shares, a written statement confirming the information contained in such written statement previously sent. Except as otherwise expressly provided by law, the rights and obligations of the stockholders shall be identical whether or not their shares of stock are represented by certificates.
Each certificate representing shares shall state the following upon the face thereof: the name of the state of the Corporation’s organization; the name of the person to whom issued; the number and class of shares and the designation of the series, if any, which such certificate represents; the par value of each share, if any, represented by such certificate or a statement that the shares are without par value. Certificates of stock shall be in such form consistent with law as shall be prescribed by the Board of Directors. No certificate shall be issued until the shares represented thereby are fully paid. In addition to the above, all certificates evidencing shares of the Corporation’s stock or other securities issued by the Corporation shall contain such legend or legends as may from time to time be required by the NRS, or such other federal, state or local laws or regulations then in effect.
Section 5.3 Surrendered; Lost or Destroyed Certificates. All certificates surrendered to the Corporation, except those representing shares of treasury stock, shall be canceled and no new certificate shall be issued until the former certificate for a like number of shares shall have been canceled, except that in case of a lost, stolen, destroyed or mutilated certificate, a new one may be issued therefor. However, any stockholder applying for the issuance of a stock certificate in lieu of one alleged to have been lost, stolen, destroyed or mutilated shall, prior to the issuance of a replacement, provide the Corporation with his, her or its affidavit of the facts surrounding the loss, theft, destruction or mutilation and, if required by the Board of Directors, an indemnity bond in an amount not less than twice the current market value of the stock, and upon such terms as the treasurer or the Board of Directors shall require which shall indemnify the Corporation against any loss, damage, cost or inconvenience arising as a consequence of the issuance of a replacement certificate.
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Section 5.4 Replacement Certificate. When the Articles of Incorporation are amended in any way affecting the statements contained in the certificates for outstanding shares of capital stock of the Corporation or it becomes desirable for any reason, in the discretion of the Board of Directors, including, without limitation, the merger of the Corporation with another Corporation or the conversion or reorganization of the Corporation, to cancel any outstanding certificate for shares and issue a new certificate therefor conforming to the rights of the holder, the Board of Directors may order any holders of outstanding certificates for shares to surrender and exchange the same for new certificates within a reasonable time to be fixed by the Board of Directors. The order may provide that a holder of any certificate(s) ordered to be surrendered shall not be entitled to vote, receive distributions or exercise any other rights of stockholders of record until the holder has complied with the order, but the order operates to suspend such rights only after notice and until compliance.
Section 5.5 Transfer of Shares. No transfer of stock shall be valid as against the Corporation except on surrender and cancellation of the certificates therefor accompanied by an assignment or transfer by the registered owner made either in person or under assignment. Whenever any transfer shall be expressly made for collateral security and not absolutely, the collateral nature of the transfer shall be reflected in the entry of transfer in the records of the Corporation.
Section 5.6 Transfer Agent; Registrars. The Board of Directors may appoint one or more transfer agents, transfer clerks and registrars of transfer and may require all certificates for shares of stock to bear the signature of such transfer agents, transfer clerks and/or registrars of transfer.
Section 5.7 Miscellaneous. The Board of Directors shall have the power and authority to make such rules and regulations not inconsistent herewith as it may deem expedient concerning the issue, transfer, and registration of certificates for shares of the Corporation’s stock.
Section 5.8 Nevada Control Share Law. The provisions of NRS 78.378 to NRS 78.3793, inclusive, do not, and shall not, apply to any acquisition of a controlling interest in the Corporation.
ARTICLE VI
DISTRIBUTIONS
Distributions may be declared, subject to the provisions of the laws of the State of Nevada and the Articles of Incorporation, by the Board of Directors and may be paid in cash, property, shares of corporate stock, or any other medium. The Board of Directors may fix in advance a record date, as provided in Section 2.5 above, prior to the distribution for the purpose of determining stockholders entitled to receive any distribution.
ARTICLE VII
RECORDS; REPORTS; SEAL; AND FINANCIAL MATTERS
Section 7.1 Records. All original records of the Corporation, shall be kept at the principal office of the Corporation by or under the direction of the secretary or at such other place or by such other person as may be prescribed by these Bylaws or the Board of Directors.
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Section 7.2 Corporate Seal. The Board of Directors may, by resolution, authorize a seal, and the seal may be used by causing it, or a facsimile, to be impressed or affixed or reproduced or otherwise. Except when otherwise specifically provided herein, any officer of the Corporation shall have the authority to affix the seal to any document requiring it.
Section 7.3 Fiscal Year-End. The fiscal year-end of the Corporation shall be such date as may be fixed from time to time by resolution of the Board of Directors.
ARTICLE VIII
INDEMNIFICATION
Section 8.1 Indemnification and Insurance.
(a) Indemnification of Directors and Officers.
(i) For purposes of this Article, (A) “Indemnitee” shall mean each director or officer who was or is a party to, or is threatened to be made a party to, or is otherwise involved in, any Proceeding (as hereinafter defined), by reason of the fact that he or she is or was a director or officer of the Corporation or a director or officer or an affiliate of a predecessor corporation or member, manager or managing member of a predecessor limited liability company or affiliate of such limited liability company or is or was serving in any capacity at the request of the Corporation as a director, officer, employee, agent, partner, member, manager or fiduciary of, or in any other capacity for, another corporation or any partnership, joint venture, limited liability company, trust, or other enterprise; and (B) “Proceeding” shall mean any threatened, pending, or completed action, suit or proceeding (including, without limitation, an action, suit or proceeding by or in the right of the Corporation), whether civil, criminal, administrative, or investigative.
(ii) Each Indemnitee shall be indemnified and held harmless by the Corporation to the fullest extent permitted by Nevada law, against all expense, liability and loss (including, without limitation, attorneys’ fees, judgments, fines, taxes, penalties, and amounts paid or to be paid in settlement) reasonably incurred or suffered by the Indemnitee in connection with any Proceeding; provided that such Indemnitee either is not liable pursuant to NRS 78.138 or acted in good faith and in a manner such Indemnitee reasonably believed to be in or not opposed to the best interests of the Corporation and, with respect to any Proceeding that is criminal in nature, had no reasonable cause to believe that his or her conduct was unlawful. The termination of any Proceeding by judgment, order, settlement, conviction or upon a plea of nolo contendere or its equivalent, does not, of itself, create a presumption that the Indemnitee is liable pursuant to NRS 78.138 or did not act in good faith and in a manner in which he or she reasonably believed to be in or not opposed to the best interests of the Corporation, or that, with respect to any criminal proceeding he or she had reasonable cause to believe that his or her conduct was unlawful. The Corporation shall not indemnify an Indemnitee for any claim, issue or matter as to which the Indemnitee has been adjudged by a court of competent jurisdiction, after exhaustion of all appeals therefrom, to be liable to the Corporation or for any amounts paid in settlement to the Corporation, unless and only to the extent that the court in which the Proceeding was brought or other court of competent jurisdiction determines upon application that in view of all the circumstances of the case, the Indemnitee is fairly and reasonably entitled to indemnity for such amounts as the court deems proper. Except as so ordered by a court and for advancement of expenses pursuant to this Section, indemnification may not be made to or on behalf of an Indemnitee if a final adjudication establishes that his or her acts or omissions involved intentional misconduct, fraud or a knowing violation of law and was material to the cause of action. Notwithstanding anything to the contrary contained in these Bylaws, no director or officer may be indemnified for expenses incurred in defending any threatened, pending, or completed action, suit or proceeding (including without limitation, an action, suit or proceeding by or in the right of the Corporation), whether civil, criminal, administrative or investigative, that such director or officer incurred in his or her capacity as a stockholder.
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(iii) Indemnification pursuant to this Section shall continue as to an Indemnitee who has ceased to be a director or officer of the Corporation or member, manager or managing member of a predecessor limited liability company or affiliate of such limited liability company or a director, officer, employee, agent, partner, member, manager or fiduciary of, or to serve in any other capacity for, another corporation or any partnership, joint venture, limited liability company, trust, or other enterprise and shall inure to the benefit of his or her heirs, executors and administrators.
(iv) The expenses of Indemnitees must be paid by the Corporation or through insurance purchased and maintained by the Corporation or through other financial arrangements made by the Corporation, as they are incurred and in advance of the final disposition of the Proceeding, upon receipt of an undertaking by or on behalf of the director or officer to repay the amount if it is ultimately determined by a court of competent jurisdiction that he or she is not entitled to be indemnified by the Corporation. To the extent that a director or officer of the Corporation is successful on the merits or otherwise in defense of any Proceeding, or in the defense of any claim, issue or matter therein, the Corporation shall indemnify him or her against expenses, including attorneys’ fees, actually and reasonably incurred in by him or her in connection with the defense.
(b) Indemnification of Employees and Other Persons. The Corporation may, by action of its Board of Directors and to the extent provided in such action, indemnify employees, advisors, and other persons as though they were Indemnitees.
(c) Non-Exclusivity of Rights. The rights to indemnification provided in this Article shall not be exclusive of any other rights that any person may have or hereafter acquire under any statute, provision of the Articles of Incorporation or these Bylaws, agreement, vote of stockholders or directors, or otherwise.
(d) Insurance. The Corporation may purchase and maintain insurance or make other financial arrangements on behalf of any Indemnitee for any liability asserted against him or her and liability and expenses incurred by him or her in his or her capacity as a director, officer, employee, member, managing member or agent, or arising out of his or her status as such, whether or not the Corporation has the authority to indemnify him or her against such liability and expenses.
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(e) Other Financial Arrangements. The other financial arrangements which may be made by the Corporation may include the following (i) the creation of a trust fund; (ii) the establishment of a program of self-insurance; (iii) the securing of its obligation of indemnification by granting a security interest or other lien on any assets of the Corporation; (iv) the establishment of a letter of credit, guarantee or surety. No financial arrangement made pursuant to this subsection may provide protection for a person adjudged by a court of competent jurisdiction, after exhaustion of all appeals therefrom, to be liable for intentional misconduct, fraud, or a knowing violation of law, except with respect to advancement of expenses or indemnification ordered by a court.
(f) Other Matters Relating to Insurance or Financial Arrangements. Any insurance or other financial arrangement made on behalf of a person pursuant to this Section may be provided by the Corporation or any other person approved by the Board of Directors, even if all or part of the other person’s stock or other securities is owned by the Corporation. In the absence of fraud (i) the decision of the Board of Directors as to the propriety of the terms and conditions of any insurance or other financial arrangement made pursuant to this Section and the choice of the person to provide the insurance or other financial arrangement is conclusive; and (ii) the insurance or other financial arrangement is not void or voidable and does not subject any director approving it to personal liability for his action; even if a director approving the insurance or other financial arrangement is a beneficiary of the insurance or other financial arrangement.
Section 8.2 Amendment. The provisions of this Article VIII relating to indemnification shall constitute a contract between the Corporation and each of its directors and officers which may be modified as to any director or officer only with that person’s consent or as specifically provided in this Section. Notwithstanding any other provision of these Bylaws relating to their amendment generally, any repeal or amendment of this Article which is adverse to any director or officer shall apply to such director or officer only on a prospective basis, and shall not limit the rights of an Indemnitee to indemnification with respect to any action or failure to act occurring prior to the time of such repeal or amendment. Notwithstanding any other provision of these Bylaws (including, without limitation, Article X below), no repeal or amendment of these Bylaws shall affect any or all of this Article VIII so as to limit or reduce the indemnification in any manner unless adopted by (a) the unanimous vote of the directors of the Corporation then serving, or (b) by the stockholders as set forth in Article X hereof; provided that no such amendment shall have a retroactive effect inconsistent with the preceding sentence.
ARTICLE IX
CHANGES IN NEVADA LAW
References in these Bylaws to Nevada law or the NRS or to any provision thereof shall be to such law as it existed on the date these Bylaws were adopted or as such law thereafter may be changed; provided that (a) in the case of any change which expands the liability of directors or officers or limits the indemnification rights or the rights to advancement of expenses which the Corporation may provide in Article VIII hereof, the rights to limited liability, to indemnification and to the advancement of expenses provided in the Articles of Incorporation and/or these Bylaws shall continue as theretofore to the extent permitted by law; and (b) if such change permits the Corporation, without the requirement of any further action by stockholders or directors, to limit further the liability of directors or limit the liability of officers or to provide broader indemnification rights or rights to the advancement of expenses than the Corporation was permitted to provide prior to such change, then liability thereupon shall be so limited and the rights to indemnification and the advancement of expenses shall be so broadened to the extent permitted by law.
ARTICLE X
AMENDMENT OR REPEAL
Section 10.1 Amendment of Bylaws.
(a) Board of Directors. In furtherance and not in limitation of the powers conferred by statute, the Board of Directors of the Corporation is expressly authorized to adopt, repeal, alter, amend and rescind these Bylaws.
(b) Stockholders. Notwithstanding Section 10.1(a) above, these Bylaws may be rescinded, altered, amended or repealed in any respect by the affirmative vote of the holders of at least sixty-six and two-thirds percent (66 2/3%) of the outstanding voting power of the Corporation, voting together as a single class.
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Exhibit 4.3
Representative’s Warrant Agreement
THE REGISTERED HOLDER OF THIS PURCHASE WARRANT BY ITS ACCEPTANCE HEREOF, AGREES THAT IT WILL NOT SELL, TRANSFER OR ASSIGN THIS PURCHASE WARRANT EXCEPT AS HEREIN PROVIDED AND THE REGISTERED HOLDER OF THIS PURCHASE WARRANT AGREES THAT IT WILL NOT SELL, TRANSFER, ASSIGN, PLEDGE OR HYPOTHECATE THIS PURCHASE WARRANT OR CAUSE IT TO BE THE SUBJECT OF ANY HEDGING, SHORT SALE, DERIVATIVE, PUT, OR CALL TRANSACTION THAT WOULD RESULT IN THE EFFECTIVE ECONOMIC DISPOSITION OF THE PURCHASE WARRANT BY ANY PERSON FOR A PERIOD OF ONE YEAR FOLLOWING THE COMMENCEMENT DATE (DEFINED BELOW) TO ANYONE OTHER THAN (I) ALEXANDER CAPITAL, L.P. OR AN UNDERWRITER OR A SELECTED DEALER IN CONNECTION WITH THE OFFERING, OR (II) A BONA FIDE OFFICER OR PARTNER OF ALEXANDER CAPITAL, L.P. OR OF ANY SUCH UNDERWRITER OR SELECTED DEALER AND IN ACCORDANCE WITH FINRA RULE 5110(E)(2).
THIS PURCHASE WARRANT IS NOT EXERCISABLE PRIOR TO [●], 2023. VOID AFTER 5:00 P.M., EASTERN TIME, [●], 2028.
COMMON STOCK PURCHASE WARRANT
For the Purchase of Up To [●] Shares of Common Stock
of
BRANCHOUT FOOD INC.
THIS CERTIFIES THAT, in consideration of funds duly paid by or on behalf of Alexander Capital, L.P. (“Holder”), as registered owner of this Common Stock Purchase Warrant (this “Purchase Warrant”), to BranchOut Food Inc. a Nevada corporation (the “Company”), Holder is entitled, at any time or from time to time from [●], 2023, (the “Commencement Date”), and at or before 5:00 p.m., Eastern time, [●] , 2028 (the “Expiration Date”), but not thereafter, to subscribe for, purchase and receive, in whole or in part, up to [●] shares (the “Shares”) of common stock of the Company, par value $0.001 per share (the “Common Stock”), subject to adjustment as provided in Section 5 hereof. If the Expiration Date is a day on which banking institutions are authorized by law to close, then this Purchase Warrant may be exercised on the next succeeding day which is not such a day in accordance with the terms herein. During the period ending on the Expiration Date, the Company agrees not to take any action that would terminate this Purchase Warrant. This Purchase Warrant is initially exercisable at $[●] per Share; provided, however, that upon the occurrence of any of the events specified in Section 5 hereof, the rights granted by this Purchase Warrant, including the exercise price per Share and the number of Shares to be received upon such exercise, shall be adjusted as therein specified. This Purchase Warrant is being issued pursuant to the certain Underwriting Agreement (the “Underwriting Agreement”), dated [●], 2023, by and among the Company, the Representative and other underwriters named therein, providing for the public offering (the “Offering”) of shares of Common Stock. The term “Exercise Price” shall mean the initial exercise price or the adjusted exercise price, as applicable. Initially capitalized terms not otherwise defined herein shall have the meanings given to those terms in the Underwriting Agreement.
1. Exercise.
1.1 Exercise Form. In order to exercise this Purchase Warrant, the exercise form attached hereto (the “Notice of Exercise”) must be duly executed and completed and delivered to the Company, together with this Purchase Warrant and payment of the Exercise Price for the Shares being purchased payable in cash by wire transfer of immediately available funds to an account designated by the Company or by certified check or official bank check. If the subscription rights represented hereby shall not be exercised at or before 5:00 p.m., Eastern time, on the Expiration Date, this Purchase Warrant shall become and be void without further force or effect, and all rights represented hereby shall cease and expire.
1.2 Cashless Exercise. If at any time after one hundred eighty (180) days after the Commencement Date there is no effective registration statement registering or no current prospectus available for the resale of the Shares by the Holder, then in lieu of exercising this Purchase Warrant by payment of cash or check payable to the order of the Company pursuant to Section 1.1 above, Holder may elect to receive the number of Shares equal to the value of this Purchase Warrant (or the portion thereof being exercised), by surrender of this Purchase Warrant to the Company, together with the exercise form attached hereto, in which event the Company shall issue to Holder, Shares in accordance with the following formula:
| X = | Y(A-B) | ||
| A |
Where,
X = The number of Shares to be issued to Holder;
Y = The number of Shares for which the Purchase Warrant is being exercised;
A = The fair market value of one Share; and
B = The Exercise Price.
For purposes of this Section 1.2, the fair market value of a Share is defined as follows:
(i) if the Company’s Common Stock is traded on a securities exchange, the fair market value shall be deemed to be the closing price on such exchange on the Trading Day (as defined below) immediately prior to the date the exercise form is submitted to the Company in connection with the exercise of the Purchase Warrant; or
(ii) if the Company’s Common Stock is actively traded over-the-counter, the fair market value shall be deemed to be the closing bid price on the Trading Day immediately prior to the date the exercise form is submitted to the Company in connection with the exercise of the Purchase Warrant; or
(iii) if there is no active public market, the value shall be the fair market value thereof, as determined in good faith by the Company’s Board of Directors.
As used herein and below, “Trading Day” means a day on which the principal Trading Market or if applicable, the OTCQB or OTCQX Markets operated by OTC Markets Group, Inc., or any similar over the counter market is open for trading; and “Trading Market” means any of the following markets or exchanges on which the Common Stock is listed or quoted for trading on the date in question: the NYSE American, the Nasdaq Capital Market, the Nasdaq Global Market, the Nasdaq Global Select Market, the New York Stock Exchange or any successors to any of the foregoing.
1.3 Legend. Each certificate for the securities purchased under this Purchase Warrant shall bear a legend substantially in the form as follows unless such securities have been registered under the Securities Act of 1933, as amended (the “Securities Act”):
“The securities represented by this certificate have not been registered under the Securities Act of 1933, as amended (the “Securities Act”), or applicable state law. Neither the securities nor any interest therein may be offered for sale, sold or otherwise transferred except pursuant to an effective registration statement under the Securities Act, or pursuant to an exemption from registration under the Securities Act and applicable state law which, in the opinion of counsel to the Company, is available.”
1.4 No Obligation to Net Cash Settle. Notwithstanding anything to the contrary contained in this Purchase Warrant, in no event will the Company be required to net cash settle the exercise of the Purchase Warrant. The holder of the Purchase Warrant will not be entitled to exercise the purchase option unless it exercises such Purchase Warrant pursuant to the cashless exercise right or a registration statement is effective, or an exemption from the registration requirements is available at such time and, if the Holder is not able to exercise the Purchase Warrant, the Purchase Warrant will expire worthless.
1.5 Mechanics of Exercise.
(i) Delivery of Shares Upon Exercise. The Company shall cause the Shares purchased hereunder to be transmitted by Securitize, LLC, formerly Pacific Stock Transfer Company (the “Transfer Agent”) to the Holder by crediting the account of the Holder’s or its designee’s balance account with The Depository Trust Company through its Deposit or Withdrawal at Custodian system (“DWAC”) if the Company is then a participant in such system and either (A) there is an effective registration statement permitting the issuance of the Shares to or resale of the Shares by the Holder or (B) the Shares are eligible for resale by the Holder without volume or manner-of-sale limitations pursuant to Rule 144 (assuming cashless exercise of the Purchase Warrants), and otherwise by physical delivery of a certificate, registered in the Company’s share register in the name of the Holder or its designee, for the number of Shares to which the Holder is entitled pursuant to such exercise to the address specified by the Holder in the Notice of Exercise by the date that is the earliest of (i) two (2) Trading Days after the delivery to the Company of the Notice of Exercise, provided that payment of the aggregate Exercise Price (other than in the instance of a cashless exercise) is received by the Company by such date, (ii) one (1) Trading Day after delivery of the aggregate Exercise Price to the Company and (iii) the number of Trading Days comprising the Standard Settlement Period (as defined below) after the delivery to the Company of the Notice of Exercise (such date, the “Warrant Share Delivery Date”). Upon delivery of the Notice of Exercise, the Holder shall be deemed for all corporate purposes to have become the holder of record of the Shares with respect to which this Purchase Warrant has been exercised, irrespective of the date of delivery of the Shares, provided that payment of the aggregate Exercise Price (other than in the case of a cashless exercise) is received within the earlier of (i) two (2) Trading Days and (ii) the number of Trading Days comprising the Standard Settlement Period following delivery of the Notice of Exercise. The Company agrees to maintain a transfer agent that is a participant in the FAST program so long as this Purchase Warrant remains outstanding and exercisable. As used herein, “Standard Settlement Period” means the standard settlement period, expressed in a number of Trading Days, on the Company’s primary Trading Market with respect to the Common Stock as in effect on the date of delivery of the Notice of Exercise.
(ii) Delivery of New Warrants Upon Exercise. If this Purchase Warrant shall have been exercised in part, the Company shall, at the request of a Holder and upon surrender of this Purchase Warrant certificate, at the time of delivery of the Shares, deliver to the Holder a new Purchase Warrant evidencing the rights of the Holder to purchase the unpurchased Shares called for by this Purchase Warrant, which new Purchase Warrant shall in all other respects be identical with this Purchase Warrant.
(iii) Rescission Rights. If the Company fails to cause the Transfer Agent to transmit to the Holder the Shares pursuant to Section 1.5(i) hereof by the Warrant Share Delivery Date, then the Holder will have the right to rescind such exercise.
(iv) Compensation for Buy-In on Failure to Timely Deliver Shares Upon Exercise. In addition to any other rights available to the Holder, if the Company fails to cause the Transfer Agent to transmit to the Holder the Shares in accordance with the provisions of Section 2(d)(i) above pursuant to an exercise on or before the Warrant Share Delivery Date (other than any such failure that is solely due to any action or inaction by the Holder with respect to such exercise), and if after such date the Holder is required by its broker to purchase (in an open market transaction or otherwise) or the Holder’s brokerage firm otherwise purchases, shares of Common Stock to deliver in satisfaction of a sale by the Holder of the Shares which the Holder anticipated receiving upon such exercise (a “Buy-In”), then the Company shall (A) pay in cash to the Holder the amount, if any, by which (x) the Holder’s total purchase price (including brokerage commissions, if any) for the shares of Common Stock so purchased exceeds (y) the amount obtained by multiplying (1) the number of Shares that the Company was required to deliver to the Holder in connection with the exercise at issue times (2) the price at which the sell order giving rise to such purchase obligation was executed, and (B) at the option of the Holder, either reinstate the portion of the Purchase Warrant and equivalent number of Shares for which such exercise was not honored (in which case such exercise shall be deemed rescinded) or deliver to the Holder the number of shares of Common Stock that would have been issued had the Company timely complied with its exercise and delivery obligations hereunder. For example, if the Holder purchases Common Stock having a total purchase price of $11,000 to cover a Buy-In with respect to an attempted exercise of shares of Common Stock with an aggregate sale price giving rise to such purchase obligation of $10,000, under clause (A) of the immediately preceding sentence the Company shall be required to pay the Holder $1,000. The Holder shall provide the Company written notice indicating the amounts payable to the Holder in respect of the Buy-In and, upon request of the Company, evidence of the amount of such loss. Nothing herein shall limit a Holder’s right to pursue any other remedies available to it hereunder, at law or in equity including, without limitation, a decree of specific performance and/or injunctive relief with respect to the Company’s failure to timely deliver shares of Common Stock upon exercise of the Warrant as required pursuant to the terms hereof.
(v) No Fractional Shares or Scrip. No fractional shares or scrip representing fractional shares shall be issued upon the exercise of this Purchase Warrant. As to any fraction of a share which the Holder would otherwise be entitled to purchase upon such exercise, the Company shall, at its election, either pay a cash adjustment in respect of such final fraction in an amount equal to such fraction multiplied by the Exercise Price or round up to the next whole share.
(vi) Charges, Taxes and Expenses. Issuance of Shares shall be made without charge to the Holder for any issue or transfer tax or other incidental expense in respect of the issuance of such Shares, all of which taxes and expenses shall be paid by the Company, and such Shares shall be issued in the name of the Holder or in such name or names as may be directed by the Holder; provided, however, that in the event that Shares are to be issued in a name other than the name of the Holder, this Purchase Warrant when surrendered for exercise shall be accompanied by the assignment form attached hereto (the “Assignment Form”) duly executed by the Holder and the Company may require, as a condition thereto, the payment of a sum sufficient to reimburse it for any transfer tax incidental thereto. The Company shall pay all Transfer Agent fees required for same-day processing of any Notice of Exercise.
(vii) Closing of Books. The Company will not close its stockholder books or records in any manner which prevents the timely exercise of this Purchase Warrant, pursuant to the terms hereof.
1.6 Holder’s Exercise Limitations. The Company shall not effect any exercise of this Purchase Warrant, and a Holder shall not have the right to exercise any portion of this Purchase Warrant, pursuant to Section 1 hereof or otherwise, to the extent that after giving effect to such issuance after exercise as set forth on the applicable Notice of Exercise, the Holder (together with the Holder’s Affiliates (as defined below), and any other Persons (as defined below) acting as a group together with the Holder or any of the Holder’s Affiliates (such Persons, “Attribution Parties”)), would beneficially own in excess of the Beneficial Ownership Limitation (as defined below). For purposes of the foregoing sentence, the number of shares of Common Stock beneficially owned by the Holder and its Affiliates and Attribution Parties shall include the number of shares of Common Stock issuable upon exercise of this Purchase Warrant with respect to which such determination is being made, but shall exclude the number of shares of Common Stock which would be issuable upon (i) exercise of the remaining, nonexercised portion of this Purchase Warrant beneficially owned by the Holder or any of its Affiliates or Attribution Parties and (ii) exercise or conversion of the unexercised or nonconverted portion of any other securities of the Company (including, without limitation, any other Common Stock Equivalents (as defined below)) subject to a limitation on conversion or exercise analogous to the limitation contained herein beneficially owned by the Holder or any of its Affiliates or Attribution Parties. Except as set forth in the preceding sentence, for purposes of this Section 1.6, beneficial ownership shall be calculated in accordance with Section 13(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and the rules and regulations promulgated thereunder, it being acknowledged by the Holder that the Company is not representing to the Holder that such calculation is in compliance with Section 13(d) of the Exchange Act and the Holder is solely responsible for any schedules required to be filed in accordance therewith. To the extent that the limitation contained in this Section 1.6 applies, the determination of whether this Purchase Warrant is exercisable (in relation to other securities owned by the Holder together with any Affiliates and Attribution Parties) and of which portion of this Purchase Warrant is exercisable shall be in the sole discretion of the Holder, and the submission of a Notice of Exercise shall be deemed to be the Holder’s determination of whether this Purchase Warrant is exercisable (in relation to other securities owned by the Holder together with any Affiliates and Attribution Parties) and of which portion of this Purchase Warrant is exercisable, in each case subject to the Beneficial Ownership Limitation, and the Company shall have no obligation to verify or confirm the accuracy of such determination. In addition, a determination as to any group status as contemplated above shall be determined in accordance with Section 13(d) of the Exchange Act and the rules and regulations promulgated thereunder. For purposes of this Section 1.6, in determining the number of outstanding shares of Common Stock, a Holder may rely on the number of outstanding shares of Common Stock as reflected in (A) the Company’s most recent periodic or annual report filed with the U.S. Securities and Exchange Commission (the “Commission”), as the case may be, (B) a more recent public announcement by the Company or (C) a more recent written notice by the Company or the Transfer Agent setting forth the number of shares of Common Stock outstanding. Upon the written or oral request of a Holder, the Company shall within one Trading Day confirm orally and in writing to the Holder the number of shares of Common Stock then outstanding. In any case, the number of outstanding shares of Common Stock shall be determined after giving effect to the conversion or exercise of securities of the Company, including this Purchase Warrant, by the Holder or its Affiliates or Attribution Parties since the date as of which such number of outstanding shares of Common Stock was reported. The “Beneficial Ownership Limitation” shall be 4.99% of the number of shares of the Common Stock outstanding immediately after giving effect to the issuance of shares of Common Stock issuable upon exercise of this Purchase Warrant. The Holder, upon notice to the Company, may increase or decrease the Beneficial Ownership Limitation provisions of this Section 1.6, provided that the Beneficial Ownership Limitation in no event exceeds 9.99% of the number of shares of the Common Stock outstanding immediately after giving effect to the issuance of shares of Common Stock upon exercise of this Purchase Warrant held by the Holder and the provisions of this Section 1.6 shall continue to apply. Any increase in the Beneficial Ownership Limitation will not be effective until the 61st day after such notice is delivered to the Company. The provisions of this paragraph shall be construed and implemented in a manner otherwise than in strict conformity with the terms of this Section 1.6 to correct this paragraph (or any portion hereof) which may be defective or inconsistent with the intended Beneficial Ownership Limitation herein contained or to make changes or supplements necessary or desirable to properly give effect to such limitation. The limitations contained in this paragraph shall apply to a successor holder of this Purchase Warrant. As used herein, “Affiliate” means any Person that, directly or indirectly through one or more intermediaries, controls or is controlled by or is under common control with a Person, as such terms are used in and construed under Rule 405 under the Securities Act; “Person” means an individual or corporation, partnership, trust, incorporated or unincorporated association, joint venture, limited liability company, joint stock company, government (or an agency or subdivision thereof) or other entity of any kind.
2. Transfer.
2.1 General Restrictions. The registered Holder of this Purchase Warrant agrees by his, her or its acceptance hereof, that such Holder will not: (a) sell, transfer, assign, pledge or hypothecate this Purchase Warrant for a period of one hundred eighty (180) days following the Commencement Date to anyone other than: (i) Alexander Capital, L.P. (“Alexander Capital”) or another underwriter or a selected dealer participating in the Offering, or (ii) a bona fide officer or partner of Alexander Capital or of any such underwriter or selected dealer, in each case in accordance with FINRA Rule 5110(e)(1), or (b) cause this Purchase Warrant or the securities issuable hereunder to be the subject of any hedging, short sale, derivative, put or call transaction that would result in the effective economic disposition of this Purchase Warrant or the securities hereunder, except as provided for in FINRA Rule 5110(e)(2). On and or after the Commencement Date, or the date on which this Purchase Warrant was initially issued by the Company, as applicable, transfers of the Purchase Warrant and/or the underlying Shares to others may be made subject to compliance with or exemptions from applicable securities laws, including Rule 144 promulgated under the Securities Act. In order to make any permitted assignment, the Holder must deliver to the Company the Assignment Form duly executed and completed, together with this Purchase Warrant and payment of all transfer taxes, if any, payable in connection therewith. The Company shall within five (5) Business Days transfer this Purchase Warrant on the books of the Company and shall execute and deliver a new purchase warrants or purchase warrants of like tenor to the appropriate assignee(s) expressly evidencing the right to purchase the aggregate number of Shares purchasable hereunder or such portion of such number as shall be contemplated by any such assignment.
2.2 Restrictions Imposed by the Securities Act. The securities evidenced by this Purchase Warrant shall not be transferred unless and until: (i) the Company has received the opinion of counsel for the Holder that the securities may be transferred pursuant to an exemption from registration under the Securities Act and applicable state securities laws, the availability of which is established to the reasonable satisfaction of the Company (the Company hereby agreeing that the opinion of Sullivan & Worcester LLP shall be deemed satisfactory evidence of the availability of an exemption), or (ii) a registration statement or a post-effective amendment to such registration statement relating to the offer and sale of such securities has been filed by the Company and declared effective by the Commission and compliance with applicable state securities law has been established.
3. Registration Rights.
3.1 “Piggy-Back” Registration.
3.1.1 Grant of Right. The Holder, along with the holders of all of the other Representative’s Warrants (as such term is defined in the Underwriting Agreement) shall have the right, for a period of no more than seven (7) years after the Commencement Date in accordance with FINRA Rule 5110(g)(8)(D), to include any portion of the Shares underlying this Purchase Warrant and the shares of Common Stock underlying all of the other Representative’s Warrants (collectively, the “Registrable Securities”) as part of any other registration of securities filed by the Company (other than in connection with a transaction contemplated by Rule 145(a) promulgated under the Securities Act or pursuant to Form S-8 or any equivalent form); provided, however, that if, solely in connection with any primary underwritten public offering for the account of the Company, the managing underwriter(s) thereof shall, in its reasonable discretion, impose a limitation on the number of shares of Common Stock which may be included in the registration statement because, in such underwriter(s)’ judgment, marketing or other factors dictate such limitation is necessary to facilitate public distribution, then the Company shall be obligated to include in such registration statement only such limited portion of the Registrable Securities with respect to which the Holder and the holders of the other Representative’s Warrants have requested inclusion thereunder as the underwriter shall reasonably permit. Any exclusion of Registrable Securities shall be made pro rata among the Holder and the holders of the other Representative’s Warrants seeking to include Registrable Securities in proportion to the number of Registrable Securities sought to be included by the holder and the holders of the other Representative’s Warrants; provided, however, that the Company shall not exclude any Registrable Securities unless the Company has first excluded all outstanding securities, the holders of which are not entitled to inclusion of such securities in such registration statement or are not entitled to pro rata inclusion with the Registrable Securities.
3.1.2 Terms. The Company shall bear all fees and expenses attendant to registering the Registrable Securities pursuant to Section 3.1.1 hereof, but the Holder and the holders of the other Representative’s Warrants shall pay any and all underwriting commissions and the expenses of any legal counsel selected by the Holder and the holders of the other Representative Warrants to represent them in connection with the sale of the Registrable Securities. In the event of such a proposed registration, the Company shall furnish the then holders of outstanding Registrable Securities with not less than thirty (30) days written notice prior to the proposed date of filing of such registration statement. Such notice to such holders shall continue to be given for each registration statement filed by the Company until such time as all of the Registrable Securities have been sold by the Holder and the holders of the other Representative Warrants. The holders of the Registrable Securities shall exercise the “piggy-back” rights provided for herein by giving written notice within ten (10) days of the receipt of the Company’s notice of its intention to file a registration statement. Except as otherwise provided in this Purchase Warrant, there shall be no limit on the number of times the Holder may request registration under this Section 3.1.2; provided, however, that such registration rights shall terminate upon on the seventh anniversary of the Commencement Date. Notwithstanding the provisions of this Section 3.1.2, the Holder will not be entitled to more than one demand registration right under this Section 3.1.2 in accordance with FINRA Rule 5110(g)(8)(B) and the Representative’s Warrants will not have a duration of more than five years from the Commencement Date pursuant to FINRA Rule 5110(g)(8)(C).
3.2 General Terms.
3.2.1 Indemnification. The Company shall indemnify the Holder(s) of the Registrable Securities to be sold pursuant to any registration statement hereunder and each person, if any, who controls such Holders within the meaning of Section 15 of the Securities Act or Section 20(a) of the Exchange Act, against all loss, claim, damage, expense or liability (including all reasonable attorneys’ fees and other expenses reasonably incurred in investigating, preparing or defending against any claim whatsoever) to which any of them may become subject under the Securities Act, the Exchange Act or otherwise, arising from such registration statement but only to the same extent and with the same effect as the provisions pursuant to which the Company has agreed to indemnify the Underwriters contained in Section 5.1 of the Underwriting Agreement. The Holder(s) of the Registrable Securities to be sold pursuant to such registration statement, and their successors and assigns, shall severally, and not jointly, indemnify the Company and its affiliates, against all loss, claim, damage, expense or liability (including all reasonable attorneys’ fees and other expenses reasonably incurred in investigating, preparing or defending against any claim whatsoever) to which they may become subject under the Securities Act, the Exchange Act or otherwise, arising from information furnished by or on behalf of such Holders, or their successors or assigns, in writing, for specific inclusion in such registration statement to the same extent and with the same effect as the provisions contained in Section 5.2 of the Underwriting Agreement pursuant to which the Underwriters have agreed to indemnify the Company.
3.2.2 Exercise of Purchase Warrant. Nothing contained in this Purchase Warrant shall be construed as requiring the Holder to exercise this Purchase Warrant prior to or after the initial filing of any registration statement or the effectiveness thereof.
3.2.3 Documents Delivered to Holders. The Company shall furnish to each Holder participating in any underwritten offerings and to each underwriter of any such offering, a signed counterpart, addressed to such Holder and underwriter, of: (i) an opinion of counsel to the Company, dated the effective date of such registration statement (and an opinion dated the date of the closing under any underwriting agreement related thereto), and (ii) a “cold comfort” letter dated the effective date of such registration statement (and a letter dated the date of the closing under the underwriting agreement) signed by the independent registered public accounting firm which has issued a report on the Company’s financial statements included in such registration statement, in each case covering substantially the same matters with respect to such registration statement (and the prospectus included therein) and, in the case of such accountants’ letter, with respect to events subsequent to the date of such financial statements, as are customarily covered in opinions of issuer’s counsel and in accountants’ letters delivered to underwriters in underwritten public offerings of securities. The Company shall also deliver promptly to each Holder participating in the underwritten offering requesting the correspondence and memoranda described below and to the managing underwriter copies of all correspondence between the Commission and the Company, its counsel or auditors and all memoranda relating to discussions with the Commission or its staff with respect to the registration statement and permit each Holder and underwriter to do such investigation, upon reasonable advance notice, with respect to information contained in or omitted from the registration statement as it deems reasonably necessary to comply with applicable securities laws or rules of FINRA. Such investigation shall include access to books, records and properties and opportunities to discuss the business of the Company with its officers and independent auditors, all to such reasonable extent and at such reasonable times as any such Holder shall reasonably request.
3.2.4 Underwriting Agreement. In the event the Company shall enter into an underwriting agreement with any managing underwriter(s), if any, selected by the Company with respect to the Registrable Securities that are being registered pursuant to this Section 3, which managing underwriter shall be reasonably satisfactory to the holders of at least 51% of the Registerable Securities, such agreement shall be reasonably satisfactory in form and substance to the Company and such managing underwriters, and shall contain such representations, warranties and covenants by the Company and such other terms as are customarily contained in agreements of that type used by the managing underwriter. The Holders shall be parties to any underwriting agreement relating to an underwritten sale of their Registrable Securities and may, at their option, require that any or all the representations, warranties and covenants of the Company to or for the benefit of such underwriters shall also be made to and for the benefit of such Holders. Such Holders shall not be required to make any representations or warranties to or agreements with the Company or the underwriters except as they may relate to such Holders, their Shares and their intended methods of distribution.
3.2.5 Documents to be Delivered by Holder(s). Each of the Holder(s) participating in any of the foregoing offerings shall furnish to the Company a completed and executed questionnaire provided by the Company requesting information customarily sought of selling security holders.
3.2.6 Damages. Should the registration or the effectiveness thereof required by Section 3.1 hereof be delayed by the Company or the Company otherwise fails to comply with such provisions, the Holder(s) shall, in addition to any other legal or other relief available to the Holder(s), be entitled to seek specific performance or other equitable (including injunctive) relief against the threatened breach of such provisions or the continuation of any such breach, without the necessity of proving actual damages and without the necessity of posting bond or other security.
4. New Purchase Warrants to be Issued.
4.1 Partial Exercise or Transfer. Subject to the restrictions in Section 2 hereof, this Purchase Warrant may be exercised or assigned in whole or in part. In the event of the exercise or assignment hereof in part only, upon surrender of this Purchase Warrant for cancellation, together with the duly executed exercise or assignment form and funds sufficient to pay any Exercise Price and/or transfer tax if exercised pursuant to Section 1.1 hereof, the Company shall cause to be delivered to the Holder without charge a new Purchase Warrant of like tenor to this Purchase Warrant in the name of the Holder evidencing the right of the Holder to purchase the number of Shares purchasable hereunder as to which this Purchase Warrant has not been exercised or assigned.
4.2 Lost Certificate. Upon receipt by the Company of evidence satisfactory to it of the loss, theft, destruction or mutilation of this Purchase Warrant and of reasonably satisfactory indemnification or the posting of a bond, the Company shall execute and deliver a new Purchase Warrant of like tenor and date. Any such new Purchase Warrant executed and delivered as a result of such loss, theft, mutilation or destruction shall constitute a substitute contractual obligation on the part of the Company.
5. Adjustments.
5.1 Adjustments to Exercise Price and Number of Securities. The Exercise Price and the number of Shares underlying this Purchase Warrant shall be subject to adjustment from time to time as hereinafter set forth:
5.1.1 Share Dividends; Stock Splits. If, after the date hereof, and subject to the provisions of Section 5.3 below, the number of outstanding Shares is increased by a stock dividend payable in Shares or by a stock split of shares of Common Stock or other capital stock of the Company, or other similar event, then, on the effective day thereof, the number of Shares purchasable hereunder shall be increased in proportion to such increase in outstanding shares, and the Exercise Price shall be proportionately decreased.
5.1.2 Aggregation of Shares. If, after the date hereof, and subject to the provisions of Section 5.3 below, the number of outstanding Shares is decreased by a consolidation, combination or reclassification of shares of Common Stock or other capital stock of the Company, or other similar event, then, on the effective date thereof, the number of Shares purchasable hereunder shall be decreased in proportion to such decrease in outstanding shares, and the Exercise Price shall be proportionately increased.
5.1.3 Replacement of Securities upon Reorganization, etc. In case of any reclassification or reorganization of the outstanding shares of Common Stock or other capital stock of the Company, other than a change covered by Section 5.1.1 or 5.1.2 hereof or that solely affects the par value of such Shares, or in the case of any share reconstruction or amalgamation or consolidation of the Company with or into another corporation or other entity (other than a consolidation or share reconstruction or amalgamation in which the Company is the continuing corporation and that does not result in any reclassification or reorganization of the Company’s outstanding shares), or in the case of any sale or conveyance to another corporation or entity of the property of the Company as an entirety or substantially as an entirety in connection with which the Company is dissolved, the Holder of this Purchase Warrant shall have the right thereafter (until the expiration of the right of exercise of this Purchase Warrant) to receive upon the exercise hereof, for the same aggregate Exercise Price payable hereunder immediately prior to such event, the kind and amount of shares of stock or other securities or property (including cash) receivable upon such reclassification, reorganization, share reconstruction or amalgamation, or consolidation, or upon a dissolution following any such sale or transfer, by a Holder of the number of Shares of the Company obtainable upon exercise of this Purchase Warrant immediately prior to such event; and if any reclassification also results in a change in Shares covered by Section 5.1.1 or 5.1.2 hereof, then such adjustment shall be made pursuant to Sections 5.1.1, 5.1.2 hereof and this Section 5.1.3. The provisions of this Section 5.1.3 shall similarly apply to successive reclassifications, reorganizations, share reconstructions or amalgamations, or consolidations, sales or other transfers.
5.1.4 Changes in Form of Purchase Warrant. This form of Purchase Warrant need not be changed because of any change pursuant to this Section 5.1, and Purchase Warrants issued after such change may state the same Exercise Price and the same number of Shares as are stated in the Purchase Warrants initially issued to the Holder. The acceptance by any Holder of the issuance of new Purchase Warrants reflecting a required or permissive change shall not be deemed to waive any rights to an adjustment occurring after the Commencement Date or the computation thereof.
5.2 Substitute Purchase Warrant. In case of any consolidation of the Company with, or share reconstruction or amalgamation of the Company with or into, another corporation or other entity (other than a consolidation or share reconstruction or amalgamation which does not result in any reclassification or change of the outstanding Shares), the corporation or other entity formed by such consolidation or share reconstruction or amalgamation shall execute and deliver to the Holder a supplemental Purchase Warrant providing that the holder of each Purchase Warrant then outstanding or to be outstanding shall have the right thereafter (until the stated expiration of such Purchase Warrant) to receive, upon exercise of such Purchase Warrant, the kind and amount of shares of stock and other securities and property receivable upon such consolidation or share reconstruction or amalgamation, by a holder of the number of Shares of the Company for which such Purchase Warrant might have been exercised immediately prior to such consolidation, share reconstruction or amalgamation, sale or transfer. Such supplemental Purchase Warrant shall provide for adjustments which shall be identical to the adjustments provided for in this Section 5. The above provision of this Section 5.2 shall similarly apply to successive consolidations or share reconstructions or amalgamations.
5.3 Elimination of Fractional Interests. The Company shall not be required to issue certificates representing fractions of Shares upon the exercise of this Purchase Warrant, nor shall it be required to issue scrip or pay cash in lieu of any fractional interests, it being the intent of the parties that all fractional interests shall be eliminated by rounding any fraction up or down, as the case may be, to the nearest whole number of Shares or other securities, properties or rights.
6. Reservation and Listing. The Company shall at all times reserve and keep available out of its authorized Shares, solely for the purpose of issuance upon exercise of this Purchase Warrant, such number of Shares or other securities, properties or rights as shall be issuable upon the exercise thereof. The Company covenants and agrees that, upon exercise of this Purchase Warrant and payment of the Exercise Price therefor, in accordance with the terms hereby, all Shares and other securities issuable upon such exercise shall be duly and validly issued, fully paid and non-assessable and not subject to preemptive rights of any stockholder. As long as this Purchase Warrant shall be outstanding, the Company shall use commercially reasonable efforts to cause all Shares issuable upon exercise of this Purchase Warrant to be listed (subject to official notice of issuance) on all national securities exchanges (or, if applicable, on the OTC Bulletin Board or any successor trading market) on which the shares of Common Stock issued to the public in the Offering may then be listed and/or quoted.
7. Certain Notice Requirements.
7.1 Holder’s Right to Receive Notice. Nothing herein shall be construed as conferring upon the Holders the right to vote or consent or to receive notice as a stockholder for the election of directors or any other matter, or as having any rights whatsoever as a stockholder of the Company. If, however, at any time prior to the expiration of this Purchase Warrant and their exercise, any of the events described in Section 7.2 below shall occur, then, in one or more of said events, the Company shall give written notice of such event at least fifteen (15) days prior to the date fixed as a record date or the date of closing the transfer books for the determination of the stockholders entitled to such dividend, distribution, conversion or exchange of securities or subscription rights, or entitled to vote on such proposed dissolution, liquidation, winding up or sale. Such notice shall specify such record date or the date of the closing of the transfer books, as the case may be. Notwithstanding the foregoing, the Company shall deliver to each Holder a copy of each notice given to the other stockholders of the Company at the same time and in the same manner that such notice is given to the stockholders.
7.2 Events Requiring Notice. The Company shall be required to give the notice described in this Section 7 upon one or more of the following events: (i) if the Company shall take a record of the holders of its shares of Common Stock for the purpose of entitling them to receive a dividend or distribution payable otherwise than in cash, or a cash dividend or distribution payable otherwise than out of retained earnings, as indicated by the accounting treatment of such dividend or distribution on the books of the Company, (ii) the Company shall offer to all the holders of its shares of Common Stock any additional shares of capital stock of the Company or securities convertible into or exchangeable for shares of capital stock of the Company, or any option, right or warrant to subscribe therefor, or (iii) a dissolution, liquidation or winding up of the Company (other than in connection with a consolidation or share reconstruction or amalgamation) or a sale of all or substantially all of its property, assets and business shall be proposed.
7.3 Notice of Change in Exercise Price. The Company shall, promptly after an event requiring a change in the Exercise Price pursuant to Section 5 hereof, send notice to the Holders of such event and change (“Price Notice”). The Price Notice shall describe the event causing the change and the method of calculating same and shall be certified as being true and accurate by the Company’s Chief Financial Officer.
7.4 Transmittal of Notices. All notices, requests, consents and other communications under this Purchase Warrant shall be in writing and shall be deemed to have been duly made when hand delivered, or mailed by express mail or private courier service: (i) if to the registered Holder of this Purchase Warrant, to the address of such Holder as shown on the books of the Company, or (ii) if to the Company, to following address or to such other address as the Company may designate by notice to the Holders:
If to the Holder:
Alexander Capital, L.P.
17 State Street, 5th Floor
New York, NY 10004
Attention: Jonathan Gazdak, Managing Director
Email: jgazdak@alexandercapitallp.com
with a copy (which shall not constitute notice) to:
Sullivan & Worcester LLP
1633 Broadway
New York, NY 10019
Attn: David E. Danovitch, Esq.
Email: ddanovitch@sullivanlaw.com
If to the Company:
BranchOut Food Inc.
205 SE Davis Ave., Suite C
Bend, Oregon 97702
Attention: Eric Healy, Chief Executive Officer
Email: eric@branchoutfood.com
with copies (which shall not constitute notice) to:
Rowland Day, Esq.
465 Echo Bay Trail
Bigfork, Montana 59911
Email: rday@rdaylaw.com
Parr Brown Gee & Loveless, P.C.
101 South 200 East, Suite 700
Salt Lake City, Utah 84111
Attention: Dane Johansen, Esq.
Email: djohansen@parrbrown.com
8. Miscellaneous.
8.1 Amendments. The Company and Alexander Capital may from time to time supplement or amend this Purchase Warrant without the approval of any of the Holders in order to cure any ambiguity, to correct or supplement any provision contained herein that may be defective or inconsistent with any other provisions herein, or to make any other provisions in regard to matters or questions arising hereunder that the Company and Alexander Capital may deem necessary or desirable and that the Company and Alexander Capital deem shall not adversely affect the interest of the Holders. All other modifications or amendments shall require the written consent of and be signed by the party against whom enforcement of the modification or amendment is sought.
8.2 Headings. The headings contained herein are for the sole purpose of convenience of reference, and shall not in any way limit or affect the meaning or interpretation of any of the terms or provisions of this Purchase Warrant.
8.3 Entire Agreement. This Purchase Warrant (together with the Underwriting Agreement and the other agreements and documents being delivered pursuant to or in connection with this Purchase Warrant and the Offering) constitutes the entire agreement of the parties hereto with respect to the subject matter hereof, and supersedes all prior agreements and understandings of the parties, oral and written, with respect to the subject matter hereof.
8.4 Binding Effect. This Purchase Warrant shall inure solely to the benefit of and shall be binding upon, the Holder and the Company and their permitted assignees, respective successors, legal representative and assigns, and no other person shall have or be construed to have any legal or equitable right, remedy or claim under or in respect of or by virtue of this Purchase Warrant or any provisions herein contained.
8.5 Governing Law; Submission to Jurisdiction; Trial by Jury. This Purchase Warrant shall be governed by and construed and enforced in accordance with the laws of the State of New York, without giving effect to conflict of laws principles thereof. The Company hereby agrees that any action, proceeding or claim against it arising out of, or relating in any way to this Purchase Warrant shall be brought and enforced in the New York Supreme Court, County of New York, or in the United States District Court for the Southern District of New York, and irrevocably submits to such jurisdiction, which jurisdiction shall be exclusive. The Company hereby waives any objection to such exclusive jurisdiction and that such courts represent an inconvenient forum. Any process or summons to be served upon the Company may be served by transmitting a copy thereof by registered or certified mail, return receipt requested, postage prepaid, addressed to it at the address set forth in Section 7 hereof. Such mailing shall be deemed personal service and shall be legal and binding upon the Company in any action, proceeding or claim. The Company and the Holder agree that the prevailing party(ies) in any such action shall be entitled to recover from the other party(ies) all of its reasonable attorneys’ fees and expenses relating to such action or proceeding and/or incurred in connection with the preparation therefor. The Company (on its behalf and, to the extent permitted by applicable law, on behalf of its stockholders and affiliates) and the Holder hereby irrevocably waive, to the fullest extent permitted by applicable law, any and all right to trial by jury in any legal proceeding arising out of or relating to this Agreement or the transactions contemplated hereby.
8.6 Waiver, etc. The failure of the Company or the Holder to at any time enforce any of the provisions of this Purchase Warrant shall not be deemed or construed to be a waiver of any such provision, nor to in any way affect the validity of this Purchase Warrant or any provision hereof or the right of the Company or any Holder to thereafter enforce each and every provision of this Purchase Warrant. No waiver of any breach, non-compliance or non-fulfillment of any of the provisions of this Purchase Warrant shall be effective unless set forth in a written instrument executed by the party or parties against whom or which enforcement of such waiver is sought; and no waiver of any such breach, non-compliance or non-fulfillment shall be construed or deemed to be a waiver of any other or subsequent breach, non-compliance or non-fulfillment.
8.7 Execution in Counterparts. This Purchase Warrant may be executed in one or more counterparts, and by the different parties hereto in separate counterparts, each of which shall be deemed to be an original, but all of which taken together shall constitute one and the same agreement, and shall become effective when one or more counterparts has been signed by each of the parties hereto and delivered to each of the other parties hereto. Such counterparts may be delivered by facsimile transmission or other electronic transmission.
[Signature Page Follows]
IN WITNESS WHEREOF, the Company has caused this Purchase Warrant to be signed by its duly authorized officer as of the [●]th day of [●], 2023.
| Very truly yours, | ||
| BRANCHOUT FOOD INC. | ||
| By: | ||
| Eric Healy | ||
| Chief Executive Officer | ||
[Form to be used to exercise Purchase Warrant]
Date: _______________, 20___
The undersigned hereby elects irrevocably to exercise the Purchase Warrant for shares of common stock, par value $0.001 per share (the “Shares”), of BranchOut Food Inc., a Nevada corporation (the “Company”), and hereby makes payment of $ (at the rate of $[●] per Share) in payment of the Exercise Price pursuant thereto. Please issue the Shares as to which this Purchase Warrant is exercised in accordance with the instructions given below and, if applicable, a new Purchase Warrant representing the number of Shares for which this Purchase Warrant has not been exercised.
Or
The undersigned hereby elects irrevocably to convert its right to purchase ___ Shares of the Company under the Purchase Warrant for ______ Shares, as determined in accordance with the following formula:
| X = | Y(A-B) | ||
| A |
Where,
X = The number of Shares to be issued to Holder;
Y = The number of Shares for which the Purchase Warrant is being exercised;
A = The fair market value of one Share which is equal to $_____; and
B = The Exercise Price which is equal to $______ per share
The undersigned agrees and acknowledges that the calculation set forth above is subject to confirmation by the Company and any disagreement with respect to the calculation shall be resolved by the Company in its sole discretion.
Please issue the Shares as to which this Purchase Warrant is exercised in accordance with the instructions given below and, if applicable, a new Purchase Warrant representing the number of Shares for which this Purchase Warrant has not been exercised.
Signature
Signature Guaranteed
[Form to be used to assign Purchase Warrant]
ASSIGNMENT
(To be executed by the registered Holder to effect a transfer of the within Purchase Warrant):
FOR VALUE RECEIVED, __________________ does hereby sell, assign and transfer unto
| Name: | ||
| (Please Print) | ||
| Address: | ||
| (Please Print) | ||
| Phone Number: | ||
| Email Address: |
the right to purchase shares of common stock, par value $0.001 per share, of BranchOut Food Inc., a Nevada corporation (the “Company”), evidenced by the Purchase Warrant and does hereby authorize the Company to transfer such right to _________ on the books of the Company.
Dated: __________, 20__
Signature
Signature Guaranteed
NOTICE: The signature to this form must correspond with the name as written upon the face of the within Purchase Warrant without alteration or enlargement or any change whatsoever, and must be guaranteed by a bank, other than a savings bank, or by a trust company or by a firm having membership on a registered national securities exchange.
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the inclusion in this Registration Statement on Form S-1 of our report, which includes an explanatory paragraph as to the company’s ability to continue as a going concern, dated April 24, 2023 relating to the audit of the financial statements of BranchOut Food, Inc. for the years ending December 31, 2022 and 2021 and the reference to our firm under the caption “Experts” in the Registration Statement.
/s/ M&K CPAS, PLLC
www.mkacpas.com
Houston, Texas
May 11, 2023