UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the quarterly period ended March 31, 20222023

For the transition period from ________________ to ___________________

Commission File Number: 000-55131001-41228

BARFRESH FOOD GROUP INC.

(Exact name of registrant as specified in its charter)

310-598-7113

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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.

If an emerging growth company, indicate by the check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ]☐ No ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 12,919,899 13,002,603shares as of April 25, 2022.21, 2023.

TABLE OF CONTENTS

Item 1. Financial Statements.

Barfresh Food Group Inc.

Condensed Consolidated Balance Sheets

See the accompanying notes to the condensed consolidated financial statements

Barfresh Food Group Inc.

Condensed Consolidated Statements of Operations

For the three months ended March 31, 20222023 and 20212022

(Unaudited)

See the accompanying notes to the condensed consolidated financial statements

Barfresh Food Group Inc.

Condensed Consolidated Statements of Cash Flows

For the three months ended March 31, 20222023 and 20212022

(Unaudited)

See the accompanying notes to the condensed consolidated financial statements

Barfresh Food Group Inc.

Notes to Condensed Consolidated Financial Statements

March 31, 20222023

(Unaudited)

Note 1. Description of the Business, Basis of Presentation, and Summary of Significant Accounting Policies

Barfresh Food Group Inc., (“we,” “us,” “our,” and the “Company”) was incorporated on February 25, 2010 in the State of Delaware. The Company is engaged in the manufacturemanufacturing and distribution of ready-to-drink and ready-to-blend beverages, particularly, smoothies, shakes and frappes.

Basis of Presentation

The accompanying condensed consolidated financial statements are unaudited. These unaudited interim condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) and applicable rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Certain information and footnote disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. Accordingly, these interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the fiscal year ended December 31, 20212022 included in the Company’s Annual Report on Form 10-K, as filed with the SEC on March 10, 2022.2, 2023. In management’s opinion, the unaudited interim condensed consolidated financial statements reflect all adjustments, which are of a normal and recurring nature, that are necessary for a fair presentation of financial results for the interim periods presented. Operating results for any quarter are not necessarily indicative of the results for the full fiscal year.

Reverse Stock Split

Effective December 29, 2021, the Company amended its certificate of incorporation to implement a 1-for-13 reverse stock split of its issued and outstanding shares of common stock. All the share numbers, share prices, exercise prices and other per share information throughout these financial statements have been adjusted, on a retroactive basis, to reflect the 1-for-13 reverse stock split.

Principles of Consolidation

The consolidated financial statements include the financial statements of the Company and our wholly owned subsidiaries, Barfresh Inc. and Barfresh Corporation Inc. (formerly known as Smoothie, Inc.). All inter-company balances and transactions among the companies have been eliminated upon consolidation.

Use of Estimates

The preparation of consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities in the balance sheets and revenues and expenses during the years reported. Actual results may differ from these estimates.

Vendor Concentrations

The Company is exposed to supply risk as a result of concentrations in its vendor base resulting from the use of a limited number of contract manufacturers. Purchases from the Company’s significant contract manufacturers as a percentage of all finished goods purchased were as follows:

Schedule of Company’s Contract Manufacturers of Finished Goods

Summary of Significant Accounting Policies

There have been no changes to our significant accounting policies described in our Annual Report on Form 10-K for the year ended December 31, 2021,2022, as filed with the SEC on March 10, 20222, 2023 that have had a material impact on our condensed consolidated financial statements and related notes.

Fair Value Measurement and Financial Instruments

Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 820, Fair Value Measurements and Disclosures (“ASC 820”), provides a comprehensive framework for measuring fair value and expands disclosures which are required about fair value measurements. Specifically, ASC 820 sets forth a definitionthat requires the valuation of fair value and establishes a hierarchy prioritizing the inputs to valuation techniques, giving the highest priority to quoted prices in active markets for identical assets and liabilities and the lowest prioritypermitted to unobservablebe either recorded or disclosed at fair value inputs. ASC 820 defines thebased on a hierarchy of available inputs as follows:

Level 1 – QuotedUnadjusted quoted prices are available in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities as of the reported date. The types of assets and liabilities included in Level 1 are highly liquid and actively traded instruments with quoted prices, such as equities listed on the New York Stock Exchange.liabilities;

Level 2 – Pricing inputs are other than quotedQuoted prices for similar assets and liabilities in active markets, butquoted prices for identical assets and liabilities in markets that are not active, or inputs that are observable, either directly or indirectly, observable asfor substantially the full term of the reported date. The types of assetsasset or liability; and liabilities in Level 2 are typically either comparable to actively traded securities or contracts or priced with models using highly observable inputs.

Level 3 – SignificantPrices or valuation techniques that require inputs to pricing that are unobservable as of the reporting date. The types of assets and liabilities included in Level 3 are those with inputs requiringboth significant management judgment or estimation, such as complex and subjective models and forecasts used to determine the fair value.value and unobservable (i.e., supported by little or no market activity).

OurThe Company’s financial instruments consist of cash, restricted cash, accounts receivable and accounts payable, advanced payments, restricted cash, as well as our PPP loan, convertible notes, and derivative liabilities which were settled in 2021.payable. The carrying value of ourthe Company’s financial instruments on March 31, 2022, December 31, 2021 and March 31, 2021 approximates their fair values, except for the derivative liability, which was carried at fair value prior to its extinguishment.value.

Restricted Cash

At each of March 31, 20222023 and December 31, 2021,2022, the Company had approximately $250,000211,000 and $142,000, respectively, in restricted cash related to a co-packing agreement.

Accounts Receivable and Allowances

AsAccounts receivable are recorded and carried at the original invoiced amount less allowances for credits and for any potential uncollectible amounts due to credit losses. We make estimates of eachthe expected credit and collectability trends for the allowance for credit losses based on our assessment of various factors, including historical experience, the age of the accounts receivable balances, credit quality of our customers, current economic conditions, and other factors that may affect our ability to collect from our customers. Expected credit losses are recorded as general and administrative expenses on our condensed consolidated statements of operations. As of March 31, 20222023 and December 31, 2021, the Company’s2022, there was no allowance for doubtful accounts was approximately $121,000. The allowance was estimated based on evaluation of collectability of outstanding accounts receivable.accounts.

Other Receivables

Other receivables consist of amounts due from vendors for materials acquired on their behalf for use in manufacturing the Company’s products.products, vendor rebates and freight claims.

Revenue Recognition

In accordance with ASC 606, Revenue from Contracts with Customers, revenue is recognized when a customer obtains ownership of promised goods. The amount of revenue recognized reflects the consideration to which the Company expects to be entitled to receive in exchange for these goods. The Company applies the following five steps:

ShippingStorage and StorageShipping Costs

ShippingStorage and handlingoutbound freight costs are included in generalselling, marketing and administrative expenses.distribution expense. For the three months ending March 31, 2023 and 2022, storage and 2021, shipping and handling costsoutbound freight totaled approximately $437,000311,000 and $144,000386,000, respectively.

Research and Development

Expenditures for research activities relating to product development and improvement are charged to expense as incurred. The Company incurred approximately $31,00021,000 and $68,00031,000, in research and development expensesexpense for the three months ending March 31, 20222023 and 2021,2022, respectively.

Loss Per Share

AtFor the three months ended March 31, 20222023 and 20212022 common stock equivalents have not been included in the calculation of net loss per share as their effect is anti-dilutive as a result of losses incurred.

Reclassifications

Certain reclassifications have been made to the 2022 financial statements to conform to the 2023 presentation, namely the presentation of selling and marketing expense apart from general and administrative expense in the consolidated statement of operations, the reclassification of materials shipping to cost of revenue, and the presentation of the components of cash used in operations.

Recent Pronouncements

From time to time, new accounting pronouncements are issued that we adopt as of the specified effective date. We have not determined if the impact of recently issued standards that are not yet effective will have an impact on our results of operations and financial position.

Note 2. Inventory

Inventory consists of the following:

Schedule of Inventory

Note 3. Property Plant and Equipment

Property and equipment, net consist of the following:

Schedule of Property and Equipment, Net

Depreciation expense related to these assets was approximately $145,00092,000 and $131,000145,000 for the three months ended March 31, 20222023 and 2021,2022, respectively. Depreciation expense in cost of revenue was approximately $6,0004,000 for the three months ended March 31, 2021.2023. There was 0no depreciation expense in cost of revenue for the three months ended March 31, 2022.

Note 4. Convertible Notes and Derivative Liability (Related and Unrelated Party)

In 2018, the Company issued Milestone I and Milestone II Convertible Notes, which were repaid and converted in the second quarter of 2021.

The Milestone II Convertible Notes contained variable conversion provisions based on the future price of the Company’s common stock, resulting in the potential issuance of an indeterminate number of shares of common stock upon conversion. The Company measured the fair value of the derivative resulting from the variable conversion provisions each reporting period. The fair value was reported as a derivative liability and the change in value of $16,787 was recorded as a gain in the accompanying condensed consolidated statement of operations for the three months ended March 31, 2021.

Note 5.4. Commitments and Contingencies

Lease Commitments

The Company leases office space under a non-cancelablenon-cancellable operating lease which expiresexpired on March 31, 2023, and was extended through June 30, 2023. OurThe Company’s periodic lease cost was approximately $20,000 for each of the three months ended March 31, 2023 and 2022.

Legal Proceedings

Schreiber Dispute

The Company’s products are produced to its specifications through several contract manufacturers. One of the Company’s contract manufacturers (the “Manufacturer”) provided approximately 52% and 42% of the Company’s products in the years ended December 31, 2022 and 2021, respectively. Asrespectively, under a Supply Agreement with an initial term through September 2025.

Over the course of March 31, 2022, ourthe Company experienced numerous quality issues with the case packaging utilized by the Manufacturer. In addition, in July of 2022, the Company began receiving customer complaints about the texture of the Company’s smoothie products produced by the Manufacturer. In response, the Company withdrew product from the market and destroyed on-hand inventory, withholding $499,000 in payments due to the Manufacturer.

The Company attempted to resolve the issues based on the contractual procedures described in the Supply Agreement. However, on November 4, 2022, in response to a formal proposal of alternate resolutions, the Company received notification from the Manufacturer that it was denying any responsibility for the defective manufacture of the product. In response, on November 10, 2022, the Company filed a complaint in the United States District Court for the Central District of California, Western Division (the “Complaint”), claiming that the Manufacturer had not met its obligations under the Supply Agreement, and seeking economic damages. In response, the Manufacturer terminated the Supply Agreement. On January 20, 2023, the Company filed a voluntary dismissal of the Complaint which allows the parties to reach a potential resolution outside of the court system. However, if the parties are once again unable to come to an agreement, the Company has the right to refile the Complaint in California State Court.

Due to the uncertainties surrounding the claim, the Company is not able to predict either the outcome or a range of use asset was $70,176.reasonably possible recoveries that could result from its actions against the Manufacturer, and no gain contingencies have been recorded. The disruption in its supply resulting from the dispute has and will continue to adversely impact its results of operations and cash flow until a suitable resolution is reached or new sources of reliable supply at sufficient volume can be identified and developed, the timing of which is uncertain.

The following table presents the future operating lease payment as of March 31, 2022.

Schedule of Estimate Future Maturities of Lease LiabilitiesOther legal matters

From time to time, various lawsuits and legal proceedings may arise in the ordinary course of business. However, litigation is subject to inherent uncertainties and an adverse result in these or other matters may arise from time to time that may harm our business. The Company isWe are currently the defendant in one legal proceeding for an amount less than $100,000. Our legal counsel and management believe the probability of a material unfavorable outcome to beis remote.

Note 6.5. Stockholders’ Equity

The following are changes in stockholders’ equity for the three months ended March 31, 20212022 and March 31, 2022:2023:

Schedule of Changes in Stockholders' Equity

Warrants

During the three months ended March 31, 2022,2023, 96,664684,639 warrants at ana weighted average exercise price of $9.105.85 per share expired, and 986 warrants at an exercise price of $5.07 per share were exercised for proceeds of approximately $5,000.expired.

Equity Incentive Plan

Through 2022, the Company issued equity awards under the 2015 Equity Incentive Plan (the “2015 Plan”) and outside the Plan. In March 2023, the Board of Directors adopted the 2023 Equity Incentive Plan (the “2023 Plan”), reserving 650,000 shares for future issuance, and discontinuing further grants under the 2015 Plan.

As of March 31, 2023, the Company has $227,000 of total unrecognized share-based compensation expense relative to unvested options, stock awards and stock units, which is expected to be recognized over the remaining weighted average period of 1.8 years.

Equity Incentive PlanStock Options

The following is a summary of stock option activity for the three months ended March 31, 2022:2023:

Summary of Stock Options Activity

The fair value of the options issued (approximately $105,000, in the aggregate) was calculated using the Black-SholesBlack-Scholes option pricing model, based on the following:

Summary of Fair Value of Options Using Black-Sholes Option Pricing Model

As of March 31, 2022, the Company has approximately $189,000 of unrecognized share-based compensation expense related to unvested options, which is expected to be recognized over the remaining weighted average period of 2.2 years.Restricted Stock

The following is a summary of restricted stock award and restricted stock unit activity for the three months ended March 31, 2022:2023:

Summary of Restricted Stock Award and Restricted Stock Unit Activity

As of March 31, 2022, the Company has approximately $

202,000 of unrecognized share-based compensation expense related to restricted stock awards and restricted stock units, which is expected to be recognized over the remaining weighted average period of

2.6 years.Performance Stock Units

During 2022, the Company issued performance share units (“PSUs”) that represented shares potentially issuable based upon Company and individual performance in 2022.

The following table summarizes the activity for the Company’s unvested PSUs for the three months ended March 31, 2023:

Summary of Performance Stock Unit Activity

In February 2023, the unvested awards issued for individual performance and outstanding at January 1, 2023 were modified to cash-settle the original grant-date fair value of approximately $80,000, resulting in incremental compensation of $56,000 after considering the $24,000 fair value of the vested shares at the date of the modification. Additionally, the Company performance targets were modified to allow approximately 71,000 PSU to vest, with an additional time-based vesting requirement for approximately 26,000 of the PSU. Because the awards did not vest based on the original terms, the modification was considered a new grant, resulting in $64,000 in compensation expense in the three-months ended March 31, 2023.

The Company adopted a 2023 PSU program in April 2023, granting approximately 172,000 PSUs at target performance. The results for the three-month period ended March 31, 2023 include $67,000 in stock-based compensation expense as management determined that the service inception date preceded the grant date.

Note 7.6. Income Taxes

ASC 740 requires a valuation allowance to reduce the deferred tax assets reported if, based on the weight of evidence, it is more than likely than not that some portion or all the deferred tax assets will not be recognized. Accordingly, at this time the Company has placed a valuation allowance on all tax assets. As of March 31, 2022,2023, the estimated effective tax rate for the year2023 was 0zero.

There are open statutes of limitations for taxing authorities in federal and state jurisdictions to audit our tax returns from 20172018 through the current period. Our policy is to account for income tax related interest and penalties in income tax expense in the statement of operations.

For the three months ended March 31, 20222023 and 2021,2022, the Company did not incur any interest and penalties associated with tax positions. As of March 31, 2022,2023, the Company did not have any significant unrecognized uncertain tax positions.

Note 7. Liquidity

During the three months ended March 31, 2023, the Company used cash for operations of $1,242,000. The Company has a history of operating losses and negative cash flow, which were expected to improve with growth, offset by working capital required to achieve such growth. As described more fully in Note 4, the dispute and subsequent contract termination with the Manufacturer has resulted in uncertainty around our ability to procure product, which in turn may inhibit our ability to achieve positive cash flow. Additionally, management has considered that dispute resolution, including litigation, is costly and will require the outlay of cash.

However, as of March 31, 2023, the Company has $1,777,000 of cash and restricted cash and even though management has identified certain indicators, these indicators do not raise substantial doubt regarding the Company’s ability to continue as a going concern. However, management cannot predict, with certainty, the outcome of its potential actions to generate liquidity, including the availability of additional financing, or whether such actions would generate the expected liquidity as planned.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion should be read in conjunction with the financial information included elsewhere in this Quarterly Report on Form 10-Q (this “Report”), including our unaudited condensed consolidated financial statements and the related notes and with our audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2021,2022, as filed with the SEC on March 10, 2022,2, 2023, and other reports that we file with the SEC from time to time.

References in this Quarterly Report on Form 10-Q to “us”, “we”, “our” and similar terms refer to Barfresh Food Group Inc.

Cautionary Note Regarding Forward-Looking Statements

This discussion includes forward-looking statements, as that term is defined in the federal securities laws, based upon current expectations that involve risks and uncertainties, such as plans, objectives, expectations, and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors. Words such as “anticipate”, “estimate”, “plan”, “continuing”, “ongoing”, “expect”, “believe”, “intend”, “may”, “will”, “should”, “could” and similar expressions are used to identify forward-looking statements.

We caution you that these statements are not guarantees of future performance or events and are subject to a number of uncertainties, risks and other influences, many of which are beyond our control, which may influence the accuracy of the statements and the projections upon which the statements are based. Any one or more of these uncertainties, risks and other influences could materially affect our results of operations and whether forward-looking statements made by us ultimately prove to be accurate. Our actual results, performance and achievements could differ materially from those expressed or implied in these forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statements, whether from new information, future events or otherwise.

Critical Accounting Policies

There have been no changes to our significant accounting policies described in our Annual Report on Form 10-K for the year ended December 31, 2021, as filed with the SEC on March 10, 2022, that have a material impact on our condensedOur consolidated financial statements and related notes.

Recent Accounting Pronouncements

See Note 1 tohave been prepared in conformity with accounting principles generally accepted in the accompanying notes to unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for further details regarding this topic.United States of America (“GAAP”).

Results of Operations

Results of Operation for Three Months Ended March 31, 20222023 as Compared to the Three Months Ended March 31, 20212022

Revenue and cost of revenue

Revenue increased by approximately $1,511,000 (149%)decreased $435,000, or 17%, from approximately $1,015,000 in 2021 to approximately $2,526,000 in 2022.2022 to $2,091,000 in 2023. The overalldecline in revenue for the first quarter 2022 was higher due to growth in “Twist & Go”™ revenuelimited supply due to our product withdrawal resulting from the quality complaints with product purchased from the Manufacturer. We anticipate that our revenues will be adversely impacted as a result of the dispute unless and until new sources of reliable supply at sufficient volume can be identified and developed, the gradual returntiming of single serve demand.which is uncertain.

Cost of revenue for 2023 was $1,236,000 as compared to $1,762,000 in 2022. Our gross profit was $855,000 (41%) and $764,000 (30%) for 2023 and 2022, respectively. Cost of revenue declined as a result of the 17% decrease in revenue, partially offset by lower costs relative to revenue on the smoothie carton product, resulting in the 1,100-basis point gross margin improvement.

Cost of revenue for 2022 was approximately $1,710,000 as compared to approximately $666,000 in 2021. Our gross profit was approximately $816,000 (32%)Selling, marketing and $349,000 (34%) for 2022 and 2021, respectively. Gross margins decreased in the first quarter primarily due to product mix which includes “Twist & Go”™ at slightly lower product margins.

Operating expensesdistribution expense

Our operations were primarily directed towards increasing sales and expanding our distribution network.