Functional Brands Inc.: Form 10-Q for the period ended Sep 30, 2025

You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and related notes and other financial information appearing elsewhere in this Quarterly Report on Form 10-Q. References to “Note” are to the notes included in our unaudited consolidated financial statements appearing elsewhere in this Quarterly Report.

Cautionary note regarding forward looking statements

This report contains forward-looking statements that can involve substantial risks and uncertainties. All statements other than statements of historical facts contained in this report are forward-looking statements. In some cases, you can identify forward-looking statements by terms such as “anticipate,” “believe,” “can,” “contemplate,” “continue,” “could,” “estimate,” “expect,” “future”, “goal,” “intend,” “may,” “outlook,” “plan,” “potential,” “predict,” “project,” “should,” “target,” “will,” or “would” or the negative of these terms or other similar expressions, although not all forward-looking statements contain these words. Forward-looking statements contained in this report may include, but are not limited to, statements about:

• our goal and strategies;
• our future business development, financial condition and results of operations;
• expected changes in our revenue, costs or expenditures;
• growth of and competition trends in our industry;
• our expectations regarding demand for, and market acceptance of, our products;
• our expectations regarding our relationships with investors, institutional funding partners and other parties with whom we collaborate;
• fluctuations in general economic and business conditions in the markets in which we operate; and
• relevant government policies and regulations relating to our industry.

We have based these forward-looking statements largely on our current expectations and projections about our business, the industry in which we operate, and financial trends that we believe may affect our business, financial condition, results of operations, and prospects, but these forward-looking statements are not guarantees of future performance or development. These statements are based upon information available to us as of the date of this report, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and you are cautioned not to unduly rely upon these statements. Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained in this report, whether as a result of any new information, future events, or otherwise.

There are a number of risks, uncertainties, and other important factors that could cause our actual results to differ materially from the forward-looking statements contained in this report, including, among others, those factors set forth in the “Risk Factors” section of our Registration Statement on Form S-1, as amended, and may be subsequently updated by information in future annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Forms 8-K, filed with the Securities and Exchange Commission from time to time.

Overview

Our Company operates in the nutraceutical supplement industry. We are a manufacturer and distributor of supplements in categories such as pain, energy, prenatal, general health, bone and joint, gastro, immunity, cardiac, detox, mental clarity and focus, sleep, prenatal and urinary. Our end markets focus on end-consumers through different channels that include pharmacies, U.S. wholesalers, international distributors and direct-to-consumers sales. Our products are sold over-the-counter, and consumers do not need a prescription to purchase our products.

Results of Operations

Comparison of the Three and Nine Months Ended September 30, 2025, to the Three and Nine Months Ended September 30, 2024

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Net revenue

Net revenue for the three months ended September 30, 2025, was $1,694,174 compared to $1,395,913 for the three months ended September 30, 2024, representing an increase of approximately 21%. This increase of $298,261 in net revenue was primarily due to the increase in the demand from our direct to consumer sales channel.

Net revenue for the nine months ended September 30, 2025, was $5,116,963 compared to $4,886,359 for the nine months ended September 30, 2024, representing an increase of approximately 5%. This increase of $230,604 in net revenue was primarily due to the increase in the demand from our direct to consumer sales channel.

Cost of goods sold

Cost of goods sold for the three months ended September 30, 2025 was $715,824, compared to $632,194 for the three months ended September 30, 2024, representing an increase of approximately 13%. This increase of $83,630 in cost of goods sold was primarily due to the increase in revenue.

Cost of goods sold for the nine months ended September 30, 2025 was $2,303,752, compared to $2,268,986 for the nine months ended September 30, 2024, representing an increase of approximately 2%. This increase of $34,766 is primarily due to an increase in revenue, as well as tightening of cost controls while negotiating better terms with vendors.

Gross profit

Gross profit as a percentage of net revenue for the three months ended September 30, 2025 was 57.7%, compared to 54.7% for the three months ended September 30, 2024, representing an increase of 3.0%. The increase was primarily due to increase in revenue.

Gross profit as a percentage of net revenue for the nine months ended September 30, 2025 was 55.0%, compared to $53.6% for the nine months ended September 30, 2024, representing an increase of approximately 1.4%. The increase was primarily due to an increase in revenue as well as tightening cost controls and negotiating better terms with vendors.

Sales and marketing expenses

Sales and marketing expenses for the three months ended September 30, 2025, was $118,876 compared to $156,497 for the three months ended September 30, 2024, representing a decrease of approximately 24%. This decrease of $37,621 was primarily due to a reduction in costs associated with marketing.

Sales and marketing expenses for the nine months ended September 30, 2025, was $462,545 compared to $454,714 for the nine months ended September 30, 2024, representing an increase of approximately 2%. This increase of $7,831 was primarily due to the Company’s increase of its product advertising campaign.

General and administrative expenses

General and administrative expenses for the three months ended September 30, 2025, was $937,762, compared to $825,993 for the three months ended September 30, 2024, representing an increase of approximately 14%. This increase of $111,769 was primarily attributable to an increase in stock-based compensation of $88,500, professional services of $87,000 and a bonus accrual of $105,000 offset by decreases in payroll of approximately $35,500 and $33,900 in office supplies.

General and administrative expenses for the nine months ended September 30, 2025, was $2,616,489 compared to $2,256,004 for the nine months ended September 30, 2024, representing an increase of approximately 16%. This increase of $360,485 was primarily attributed due to an increase stock-based compensation of $598,856, and a bonus accrual of $105,000 offset by decreases in professional services of approximately 202,000 and payroll of $66,000.

Interest expense

Interest expense for the three months ended September 30, 2025 was $155,310, compared to $69,638 for the three months ended September 30, 2024, representing an increase of approximately 123%. This increase of $85,672 in interest expense was primarily the result of increased loans.

Interest expense for the nine months ended September 30, 2025 was $321,417, compared to $189,552 for the nine months ended September 30, 2024, representing an increase of approximately 70%. This increase of $131,865 in interest expense was primarily the result of increased loans.

Other income

Other income for the three months ended September 30, 2025 was $492,599 compared to other income of $328 for the three months ended September 30, 2024. This increase in other income was primarily the result of an Employee Retention Tax Credit (“ERTC”) reimbursement of $491,801 received during the three months ended September 30, 2025.

Other income for the nine months ended September 30, 2025 was $493,403 compared to other expenses of $1,291 for the nine months ended September 30, 2024 This increase in other income was primarily the result of an ERTC reimbursement of $491,801 received during the nine months ended September 30, 2025.

Liquidity and Capital Resources

Sources and Uses of Cash for the nine months ended September 30, 2025 and 2024

The table below, for the periods indicated, provides selected cash flow information:

Material cash requirements from known contractual and other obligations:

Excluding debt obligations from ongoing operations, the Company owes $2,227,366 payable for the Kirkman acquisition as of September 30, 2025 (See Note 10, Business Combination). On September 24, 2024, the Company executed a Forbearance Agreement with the former owner of Kirkman. This allows the postponement of principal payment. On the same date, the Company executed a Confession of Judgement in connection with the principal owed. This allowed the seller to enter a judgement against the Company in The Circuit Court of The State of Oregon for the County of Clackamas. On September 30, 2025, the Company executed the ninth amended forbearance agreement.

Use of cash

The change in net cash used in financing activities was primarily the result of the payment for payable acquisition as well as line of credit repayment.

Source of cash

Cash Flows from Operating Activities

Net cash provided by operating activities for the nine months ended September 30, 2025 was $1,478,358, compared to net cash used in operating activities of $54,178 during the nine months ended September 30, 2024, representing an increase of approximately 2,829%. This increase of $1,532,536 in net cash provided by operating activities was primarily attributable to an increase in net income of $187,769 non-cash expenses from stock-based compensation of $598,855, issuance of warrants of $45,263, and issuance of shares to debenture holders of $50,630, and increase in accounts receivable of $321,370 and accounts payable and accrued liabilities of $259,763

Cash Flows from Investing Activities

Net cash used in investing activities for the nine months ended September 30, 2025 was $8,512, compared to net cash used in investing activities of $1,881 during the nine months ended September 30, 2024, representing an increase of approximately 353%. This increase of $6,631 in net cash used in investing activities is attributable to purchase of long-term assets during the period.

Cash Flows from Financing Activities

Cash used in financing activities for the nine months ended September 30, 2025 was $676,164, compared to cash used in financing activities of $68,206 in the nine months ended September 30, 2024, representing an increase of approximately 891% This increase of $607,958 in cash used in financing activities is primarily attributed to an increase in deferred offering costs for the Direct Listing of approximately $572,185, decrease in proceeds from loan payables of $84,723 and a decrease in repayment of loans of $49,124 and decreases in payable for acquisition of $85,001

Sources of cash

On November 4, 2025, Functional Brands Inc. completed a private placement to six institutional investors for gross proceeds of $8,000,000, and net of commissions the Company received proceeds of approximately $7,360,000. In exchange the investors were issued a total of 100,000 Series A preferred shares and 80,000 Series B preferred shares

On April 29, 2025, the Company entered into a loan agreement with a third-party whereby the Company received $100,000. The term of the loan is for 1 year with a 22.95% finance charge.

On March 10, 2025, the Company executed a loan agreement with a related party in the amount of $225,000, with an annual interest rate of 18% and a due date of March 7, 2029.

During the year ended December 31, 2024 the Company entered into multiple lines of credit agreements with third parties to finance invoices to satisfy multiple vendors of which the following agreements are to be repaid during the year ended December 31, 2025.

On June 18, 2024, the Company executed a loan agreement with a lender in the amount of $150,000. The payment terms are 12.5% OID, initial principal amount consisting of a $150,000 loan plus $21,500 OID totaling $171,500. In addition, the loan required the Company to issue 37,500 warrants with anti-dilution protection as well as an equity interest in the amount of 2,045 shares of the Company’s stock with reverse split protection through the Senior Exchange Listing. Loan is to mature the earlier of six months from execution, completion of a senior exchange listing of the Company or as mutually agreed, with an interest rate of the higher of 12% or WSJ Prime plus 4% guaranteed.

On March 11, 2024, the Company executed a loan agreement with a related party in the amount of $130,000, with an annual interest rate of 20% and a due date of March 11, 2031.

On January 20, 2023, the Company entered a line of credit agreement with a third-party whereby the Company received $300,000. The terms of the loan were for one year, with a 27% contract interest rate. On January 22, 2024, the loan was settled in full, at which point the security interest was released by the lender.

On July 14, 2023, the Company entered into an additional line of credit agreement with a third-party whereby the Company received $100,000. The terms of the loan were for 42 weeks, with a 5% contract interest rate. On July 7, 2024, the loan was settled in full, at which point the security interest was released by the lender.

In December 2023, the Company entered into a short-term debt facility with a former related party, an officer and director of the parent company, Hemptown Organics Corp., whereby the Company received $247,634. The loan is non-interest-bearing and remains outstanding as at September 30, 2025.

Critical Accounting Policies and Estimates

Our management’s discussion and analysis of our financial condition and results of our operations is based on our unaudited consolidated financial statements and accompanying notes, which have been prepared in accordance with accounting principles generally accepted in the United States. Certain amounts included in or affecting the unaudited consolidated financial statements presented in this Form 10-Q and related disclosure must be estimated, requiring management to make assumptions with respect to values or conditions which cannot be known with certainty at the time the unaudited consolidated financial statements are prepared. Management believes that the accounting policies set forth below comprise the most important “critical accounting policies” for the Company. A “critical accounting policy” is one which is both important to the portrayal of our financial condition and results of operations and that involves difficult, subjective, or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Management evaluates such policies on an ongoing basis, based upon historical results and experience, consultation with experts and other methods that management considers reasonable in the particular circumstances under which the judgments and estimates are made, as well as management’s forecasts as to the manner in which such circumstances may change in the future.

The judgements made in applying accounting policies that have the most significant effect on the amounts recognized in the consolidated financial statements include:

• Obsolescence of inventories;
• Recoverability of the carrying value of long-lived assets including property and equipment, and intangible assets;
• Recoverability of carrying value of goodwill;
• Discount rate used to calculate present value of future minimum lease payments for right-of-use asset and liabilities;
• Recognition and measurement of provisions and contingencies; and
• Valuation of deferred income tax assets.

Inventories, net

The Company periodically reviews the value of items in inventory and provides write-downs or write-offs of inventory based on its assessment of market conditions, including forecasted demand compared to quantities on hand, as well as other factors such as potential excess or aged inventories based on product shelf life, and other factors that affect inventory obsolescence. As of September 30, 2025, the allowance for inventory obsolescence increased by $12,895 resulting in a reserve of $77,722. As of December 31, 2024 the inventory reserve was $64,827.

Long-Lived Assets

Long-lived assets consist primarily of property and equipment. Long-lived assets are tested for impairment when events and circumstances indicate the assets might be impaired by first comparing the estimated future undiscounted cash flows of the asset or asset group to the carrying value. If the carrying value exceeds the estimated future undiscounted cash flows, an impairment loss is recognized based on the amount that the carrying value exceeds the fair value of the asset or asset group. The Company did not recognize impairment losses during the nine months ended September 30, 2025, and 2024.

Fair value of financial instruments

The Company determines the fair value of financial assets and liabilities using the fair value hierarchy established in Accounting Standards Codification (“ASC”) Topic 820, Fair Value Measurement (“ASC 820”). 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. The hierarchy describes three levels of inputs that may be used to measure fair value, as follows:

• Level 1 — Observable inputs, such as quoted prices in active markets for identical assets and liabilities.
• Level 2 — Observable inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
• Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

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.

Application within the Company’s Financial Statements

The Company’s financial instruments consist primarily of cash, accounts receivable, accounts payable, accrued liabilities, related-party loans, line of credit, government loans, loans payable, convertible debentures (prior to conversion), and warrants issued in connection with financing arrangements. Management believes that, unless otherwise noted, the carrying amounts of these instruments approximate their fair values due to their short-term nature or because they bear interest at market rates.

The following items required fair value measurement or valuation analysis during the periods presented:

• Convertible Debenture
• Warrants Issued in Financing Transactions
• Equity Instruments Issued for Services and Financing
• Business Combination and Intangible Assets (Historical)
• Financial Instruments Carried at Amortized Cost

During the nine months ended September 30, 2025, the Company primarily applied fair value measurement to equity-linked financing instruments (warrants and stock issued for services), and historically, to convertible debt and business combination accounting. The majority of the Company’s remaining financial instruments are short-term or bear market-rate interest and therefore approximate fair value.

Segment Reporting

In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, which requires entities to report incremental information about significant segment expenses included in a segment’s profit or loss measure as well as the title and position of the chief operating decision maker (“CODM”). The new standard also requires interim disclosures related to reportable segment profit or loss and assets that had previously only been disclosed annually. The Company adopted ASU 2023-07 effective December 31, 2024 on a retrospective basis.

Income taxes

The Company must exercise judgment in determining the provision for income taxes. There are many transactions and calculations undertaken during the ordinary course of business for which the ultimate tax determination is uncertain. The Company recognizes liabilities and contingencies for expected tax audit issues based on the Company’s current understanding of the tax law. For matters where it is probable that an adjustment will be made, the Company records its best estimate of the tax liability including the related interest and penalties in the current tax provision.

In addition, the Company recognizes deferred tax assets relating to tax losses carried forward to the extent there are sufficient taxable temporary differences (deferred tax liabilities) relating to the same taxation authority and the same taxable entity against which the unused tax losses can be utilized. However, utilization of the tax losses also depends on the ability of the taxable entity to satisfy certain tests at the time the losses are recouped.

Emerging Growth Company and Smaller Reporting Company Status

We are an “emerging growth company,” as defined in the Jump Start Our Business Startups Act of 2012 (“JOBS Act”). As an emerging growth company, we are eligible to take advantage of certain exemptions from various reporting and disclosure requirements that are applicable to public companies that are not emerging growth companies, and we have elected to take advantage of those exemptions. For so long as we remain an emerging growth company, we will not be required to:

• have an auditor attestation report on our internal control over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”);
• submit certain executive compensation matters to Member advisory votes pursuant to the “say on frequency” and “say on pay” provisions (requiring a non-binding Member vote to approve compensation of certain executive officers) and the “say on golden parachute” provisions (requiring a non-binding Member vote to approve golden parachute arrangements for certain executive officers in connection with mergers and certain other business combinations) of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010; or
• disclose certain executive compensation related items, such as the correlation between executive compensation and performance and comparisons of the chief executive officer’s compensation to median employee compensation.

In addition, the JOBS Act provides that an emerging growth company may take advantage of an extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies. This means that an emerging growth company can delay adopting certain accounting standards until such standards are otherwise applicable to private companies. We have elected to take advantage of the extended transition period. Since we will not be required to comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for other public companies, our financial statements may not be comparable to the financial statements of companies that comply with public company effective dates. If we were to subsequently elect to comply with these public company effective dates, such election would be irrevocable pursuant to Section 107 of the JOBS Act.

We will remain an emerging growth company for up to the last day of the fiscal year following the fifth anniversary of our Direct Listing, or until the earliest of: (i) the last date of the fiscal year during which we had total annual gross revenues of $1.235 billion or more; (ii) the date on which we have, during the previous three-year period, issued more than $1.0 billion in non-convertible debt; or (iii) the date on which we are deemed to be a “large accelerated filer” as defined under Rule 12b-2 under the Exchange Act.

We do not believe that being an emerging growth company will have a significant impact on our business. Also, even once we are no longer an emerging growth company, we still may not be subject to auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act unless we meet the definition of a large accelerated filer or an accelerated filer under Section 12b-2 of the Exchange Act.

We are also a “smaller reporting company,” meaning that the market value of our stock held by non-affiliates plus the proposed aggregate amount of gross proceeds to us as a result of this offering is less than $700 million and our annual revenue was less our annual revenue is less than $100 million during the most recently completed fiscal year. We may continue to be a smaller reporting company after this offering if either (i) the market value of our stock held by non-affiliates is less than $250 million or (ii) our annual revenue is less than $100 million during the most recently completed fiscal year and the market value of our stock held by non-affiliates is less than $700 million.

If we are a smaller reporting company at the time we cease to be an EGC, we may continue to rely on exemptions from certain disclosure requirements that are available to smaller reporting companies. Specifically, as a smaller reporting company we may choose to present only the two most recent fiscal years of audited financial statements in our Annual Report on Form 10-K and, similar to EGCs, smaller reporting companies have reduced disclosure obligations regarding executive compensation.

We are a smaller reporting company, as defined by Rule 12b-2 of the Exchange Act, and as a result are not required to provide the information required by this Item.

Evaluation of Disclosure Controls and Procedures

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

Evaluation of Disclosure Controls and Procedures

As required by Rules 13a-15 and 15d-15 under the Exchange Act, our Chief Executive Officer and Chief Financial Officer carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2025. Based upon their evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures (as defined in Rules 13a-15 (e) and 15d-15 (e) under the Exchange Act) were not effective due to the existence of the material weaknesses in the Company’s internal control over financial reporting.

Notwithstanding the conclusion by our Chief Executive Officer and Chief Financial Officer that our disclosure controls and procedures as of September 30, 2025 were not effective, and notwithstanding material weaknesses in our internal control over financial reporting, management believes that the unaudited consolidated financial statements and related financial information included in this Report fairly present in all material respects our financial condition, results of operations and cash flows as of the dates presented, and for the periods ended on such dates, in conformity with accounting principles generally accepted in the United States (“U.S. GAAP”).

Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting during the quarter ended September 30, 2025 that have materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.

As of the date of this Quarterly Report, there have been no material changes with respect to those risk factors previously disclosed in our Registration Statement filed with the SEC. Any of these factors could result in a significant or material adverse effect on our results of operations or financial condition. Additional risk factors not presently known to us or that we currently deem immaterial may also impair our business or results of operations.