Functional Brands Inc.: Form 10-Q for the period ended Mar 31, 2026

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 Months Ended March 31, 2026, to the Three Months Ended March 31, 2025

Net revenue for the three months ended March 31, 2026 was $1,645,524 compared to $1,590,256 for the three months ended March 31, 2025 representing an increase of approximately 3%. This increase of $55,268 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 March 31, 2026 was $684,391 compared to $723,492 for the three months ended March 31, 2025 representing a decrease of approximately 5%. This decrease of $39,101 in cost of goods primarily due to receiving better terms on raw materials.

Gross profit

Gross profit for the three months ended March 31, 2026 was $961,133 compared to 866,764 representing an increase of 11%. This increase of $94,369 was primarily due to the increase in demand from direct to consumer sales channel and better terms on our raw materials.

Sales and marketing expenses

Sales and marketing expenses for the three months ended March 31, 2026, was $263,707 compared to $178,630 for the three months ended March 31, 2025, representing an increase of approximately 48%. This increase of $85,077 was primarily due to the increase in amazon referral fees and commissions.

General and administrative expenses

General and administrative expenses for the three months ended March 31, 2026 was $1,380,231, compared to $720,234 for the three months ended March 31, 2025, representing an increase of approximately 92%. This increase of $659,997 was primarily attributable to an increase payroll of approximately $200,000, an increase in professional fees of $300,000, an increase in amazon seller fees of approximately $69,000, increase in insurance premiums of $50,000, and an increase in of $30,000 in public company fees.

Other income / (expenses)

Other income /expense for the three months ended March 31, 2026 was a negative $6,307,984 compared to a negative of $94,682 for the three month ended March 31, 2025, representing an increase of approximately 6562%. This increase of $6,213,302 was primarily due to a reduction in interest expense of $69,290, change of fair value of derivative liability of $25,374, and a loss on issuance of preferred stock of $6,310,464.

Liquidity and Capital Resources

Sources and Uses of Cash for the three months ended March 31, 2026 and 2025

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

33

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

During the three months ended March 31, 2026, we used $424,559 in operating activities as a result of our net loss of $6,990,789, $123,288 in stock-based compensation, offset by change in fair value of derivative liabilities of $25,374, loss on issuance of preferred stock of $6,310,464, dividends of $77,050, and net changes in operating assets and liabilities of $130,909.

During the three months ended March 31, 2025, our operating activities provided $175,993 of cash as a result of our net loss of $126,782, offset primarily by stock-based compensation of $252,905, amortization of right-of-use and intangible assets of $91,887. and net changes in operating assets and liabilities of $(87,876).

Cash Flows from Financing Activities

During the three months ended March 31, 2026, our financing activities used $1,224,170 of cash proceeds resulting primarily from $450,000 in repayment of liability conditional timing, $149,137 in repayment of loans, and $616,027 buyback of series A preferred shares,

During the three months ended March 31, 2025, we used $174,004 in financing activities primarily as a result of deferred offering costs of $127,775, repayment of loans for $50,177 and proceeds from line of credit for 48,947.

Letter of Intent

On May 11, 2026, the Company entered into a binding letter of intent with a third party regarding a proposed acquisition of certain intellectual property and related assets.

Under the terms of such letter of intent, the proposed consideration for the acquired assets is expected to consist of convertible preferred stock of the Company with an aggregate stated value of approximately $142.9 million, subject to independent third-party valuation and verification. The preferred stock is expected to automatically convert into shares of the Company’s common stock upon receipt of the required stockholder approval. Based on the capitalization assumptions set forth in the letter of intent, following the closing of the proposed transaction and prior to giving effect to any other equity financing, the current stockholders of the Company would own approximately 1.72% of the combined surviving company and the seller would own approximately 98.28% of the combined surviving company.

If the proposed transaction is not consummated, the Company may not obtain the strategic assets, anticipated financing opportunities, business expansion, or other benefits expected from the transaction. As a result, the Company would need to continue to rely on its existing operations, available cash resources, debt or equity financing alternatives, expense reductions, or other strategic transactions to fund its obligations and execute its business plan. There can be no assurance that such alternatives would be available on acceptable terms, or at all.

Amendment

On May 11, 2026, the Company entered into a Conversion Price Reduction and Waiver Agreement with certain holders of the Company’s Series C Convertible Preferred Stock and related senior secured convertible promissory notes. Pursuant to the agreement, the conversion price applicable to the Series C Convertible Preferred Stock during the Fixed Conversion Period was amended to $0.1636 per share of common stock, replacing and superseding the previously applicable Tier 1, Tier 2 and Tier 3 fixed conversion prices and related tier allocation in their entirety.

In addition, pursuant to the agreement, any unpaid cash consideration under the applicable exchange documents as of the effective date of the agreement is to be added to and capitalized as additional principal under each applicable holder’s existing note.

Sources of cash

On November 5, 2025 the company entered into a loan agreement with a third party whereby the company received approximately $169,048. The terms of the loan are for 10 months, with a 7.0% interest rate over the term of the loan.

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 August 29, 2025 the Company entered into a loan agreement with a third party whereby the Company received approximately $95,277. The terms of the loan were for 10 months, with a 7.5% interest rate over the term of the loan.

On August 21, 2025, the Company entered into two lines of credit agreements with a third-party whereby the Company received a total of $26,354. The term of the loans were for six months, with a 9% contract interest rate. The loans are to be repaid in Feb 2026.

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 three months ended March 31, 2025 the Company entered into multiple lines of credit agreements with third parties to finance invoices to satisfy multiple vendors of which were repaid during the three months ended March 31, 2026.

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.

Critical Accounting Policies and Estimates

Our management’s discussion and analysis of our financial condition and results of our operations is based on our audited 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 audited consolidated financial statements presented in this Form 10-K 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 audited 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 March 31, 2026, the allowance for inventory obsolescence decreased by $53,855 resulting in a reserve of $10,972. As of December 31, 2025 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 years ended March 31, 2026, 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 three months ended March 31, 2026, 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.

Derivative liabilities

Accounting for Convertible Preferred Stock and Embedded Derivative Liabilities

The Company issued Series A and Series B convertible preferred stock that contain complex conversion features. The accounting for these instruments requires significant judgment in the application of U.S. GAAP, including ASC 480 – Distinguishing Liabilities from Equity, ASC 815 – Derivatives and Hedging, and ASC 820 – Fair Value Measurement. Management evaluates the contractual terms of these instruments to determine the appropriate classification and measurement of the preferred stock and any embedded features.

Classification of Preferred Stock

Management evaluates whether preferred stock instruments should be classified as liabilities or equity under ASC 480. Instruments are classified as liabilities if they are mandatorily redeemable, require the issuer to repurchase shares by transferring assets, or obligate the issuer to issue a variable number of shares with a fixed or predominantly fixed monetary value.

The Company’s Series A and Series B preferred stock do not contain mandatory redemption provisions, holder put rights, or other obligations requiring the Company to transfer cash or other assets to the holders. Accordingly, management concluded that the preferred stock represents equity instruments and the host contracts are classified within stockholders’ equity.

Embedded Conversion Features

The preferred stock includes conversion features that allow holders to convert the preferred shares into common stock at variable conversion prices that are subject to market-based adjustments, reset provisions, and anti-dilution protections.

Management evaluates these features under ASC 815 to determine whether they must be separated from the host instrument and accounted for as derivatives. This assessment requires judgment regarding whether the features:

• Meet the definition of a derivative under ASC 815
• Are clearly and closely related to the host contract
• Qualify for equity classification under ASC 815-40

The Company concluded that the embedded conversion features meet the definition of derivatives because they are based on the Company’s stock price, involve a notional amount representing the shares issuable upon conversion, require minimal initial investment, and permit net settlement through the issuance of publicly traded shares.

Management further concluded that the conversion features are not clearly and closely related to the equity host instrument and do not qualify for equity classification because the variable conversion pricing and reset mechanisms cause the features to fail the “indexed to the Company’s own stock” requirement under ASC 815-40. Accordingly, the embedded conversion features are bifurcated and recorded separately as derivative liabilities.

Initial Measurement and Allocation of Proceeds

At issuance, the derivative liabilities are measured at fair value. The Company determined the fair value of the embedded conversion features using a Monte Carlo simulation model, which incorporates assumptions regarding expected stock price volatility, expected term, risk-free interest rates, and the impact of contractual reset and floor provisions.

The proceeds received from the issuance of the preferred stock are allocated between the derivative liability and the preferred stock host instrument using the residual method. Under this method, the derivative liability is recorded at fair value and the remaining amount of the proceeds is allocated to the preferred stock. Because the stated value of the preferred shares exceeds the amount allocated to the host instrument, the Company records the difference as a contra-equity discount within stockholders’ equity.

Subsequent Measurement

After initial recognition, the derivative liabilities are remeasured at fair value at each reporting date, with changes in fair value recognized in the consolidated statements of operations. The preferred stock host instrument remains classified within equity and is not subsequently remeasured.

Upon conversion of preferred shares into common stock, the Company derecognizes the associated portion of the derivative liability and adjusts the related equity discount accordingly.

Fair Value Measurements and Significant Estimates

The valuation of the derivative liabilities involves the use of significant unobservable inputs and requires substantial management judgment. Key assumptions used in the valuation model include:

• Expected volatility of the Company’s common stock
• Expected term of the instruments
• Risk-free interest rates
• Expected conversion behavior and the impact of contractual reset provisions

Because these assumptions are not directly observable in the market, the derivative liabilities are classified as Level 3 measurements within the fair value hierarchy under ASC 820.

Changes in these assumptions or market conditions could materially affect the estimated fair value of the derivative liabilities and result in significant non-cash gains or losses in future reporting periods.

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.

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 March 31, 2026. 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 March 31, 2026 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 March 31, 2026 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 Form 10-K 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.