UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 20222023

☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

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)

Delaware 27-1994406

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

   

3600 Wilshire Blvd., Suite 1720,

Los Angeles, California

 90010
(Address of principal executive offices) (Zip Code)

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:

Title of each classTrading Symbol(s)Name of each exchange on which registered
Common stock, $0.000001 par valueBRFHThe Nasdaq Capital Market

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.

Large accelerated filer ☐Accelerated filer ☐
Non-accelerated filer ☐

Smaller reporting company ☒

Emerging growth company ☒

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: 12,929,74113,037,948 shares as of July 25, 2022.August 9, 2023.

 

 

TABLE OF CONTENTS

 

  

Page

Number

PART I - FINANCIAL INFORMATION 
   
Item 1.Financial Statements.3
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations.1315
Item 3.Quantitative and Qualitative Disclosures About Market Risk.1819
Item 4.Controls and Procedures.1819
   
PART II - OTHER INFORMATION20
   
Item 1.Legal Proceedings.1920
Item 1A.Risk Factors.1920
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds.1920
Item 3.Defaults Upon Senior Securities.1920
Item 4.Mine Safety Disclosures.1920
Item 5.Other Information.1920
Item 6.Exhibits.2021
   
SIGNATURES2122

2
 

 

Item 1. Financial Statements.

Barfresh Food Group Inc.

Condensed Consolidated Balance Sheets

 

 June 30, December 31, 
 2022 2021  June 30,
2023		  December 31,
2022		 
 (Unaudited) (Audited)  (unaudited) (restated) 
Assets                
Current assets:                
Cash $3,533,000  $5,533,000  $952,000  $2,808,000 
Restricted cash  211,000   142,000   -   211,000 
Trade accounts receivable, net  1,245,000   1,223,000   362,000   126,000 
Other receivables  148,000   -   108,000   101,000 
Inventory, net  1,570,000   705,000   970,000   1,048,000 
Prepaid expenses and other current assets  50,000   64,000   99,000   79,000 
Total current assets  6,757,000   7,667,000   2,491,000   4,373,000 
Property, plant and equipment, net of depreciation  1,346,000   1,588,000   627,000   801,000 
Operating lease right-of-use assets, net  53,000   87,000   -   18,000 
Intangible assets, net of amortization  339,000   370,000   275,000   306,000 
Deposits  7,000   7,000   7,000   7,000 
Total assets $8,502,000  $9,719,000  $3,400,000  $5,505,000 
                
Liabilities and Stockholders’ Equity                
Current liabilities:                
Accounts payable $1,277,000  $974,000  $775,000  $1,534,000 
Disputed co-manufacturer accounts payable (Note 5)  499,000   499,000 
Accrued expenses  200,000   228,000   340,000   286,000 
Accrued payroll and employee related  226,000   212,000   323,000   233,000 
Lease liability  58,000   81,000   -   20,000 
Total current liabilities  1,761,000   1,495,000   1,937,000   2,572,000 
Long term liabilities:        
Accrued interest  -   34,000 
Lease liability  -   14,000 
Total liabilities  1,761,000   1,543,000   1,937,000   2,572,000 
                
Commitments and contingencies (Note 5)  -    -    -   - 
                
Stockholders’ equity:                
Preferred stock, $0.000001 par value, 5,000,000 shares authorized, NaN issued or outstanding  -   - 
Common stock, $0.000001 par value; 295,000,000 shares authorized; 12,919,899 and 12,905,112 shares issued and outstanding at June 30, 2022 and December 31, 2021, respectively  -   - 
Preferred stock, $0.000001 par value, 400,000 shares authorized, none issued or outstanding  -   - 
Common stock, $0.000001 par value; 23,000,000 shares authorized; 13,002,603 and 12,934,741 shares issued and outstanding at June 30, 2023 and December 31, 2022, respectively  -   - 
Additional paid in capital  60,537,000   60,341,000   61,082,000   60,905,000 
Accumulated deficit  (53,796,000)  (52,165,000)  (59,619,000)  (57,972,000)
Total stockholders’ equity  6,741,000   8,176,000   1,463,000   2,933,000 
Total liabilities and stockholders’ equity $8,502,000  $9,719,000  $3,400,000  $5,505,000 
        

 

See the accompanying notes to the condensed consolidated financial statements

3
 

 

Barfresh Food Group Inc.

Condensed Consolidated Statements of Operations

For the three and six months ended June 30, 20222023 and 20212022

(Unaudited)

 

 2022 2021 2022 2021          
 For the three months ended
June 30,		 For the six months ended
June 30,		  For the three months ended June 30, For the six months ended June 30, 
 2022 2021 2022 2021  2023 2022
(restated)		 2023 2022
(restated)		 
Revenue $2,799,000  $1,301,000  $5,325,000  $2,316,000  $1,511,000  $2,799,000  $3,602,000  $5,325,000 
Cost of revenue  1,916,000   739,000   3,678,000   1,405,000   1,037,000   1,916,000   2,273,000   3,678,000 
Gross profit  883,000   562,000   1,647,000   911,000   474,000   883,000   1,329,000   1,647,000 
              
Operating expenses:                                
Selling and marketing  690,000   443,000   1,322,000   756,000 
Selling, marketing and distribution  625,000   701,000   1,293,000   1,376,000 
General and administrative  813,000   575,000   1,678,000   1,013,000   493,000   802,000   1,487,000   1,624,000 
Depreciation and amortization  117,000   146,000   278,000   293,000   98,000   96,000   196,000   236,000 
Total operating expenses  1,620,000   1,164,000   3,278,000   2,062,000   1,216,000   1,599,000   2,976,000   3,236,000 
                
Operating loss  (737,000)  (602,000)  (1,631,000)  (1,151,000)
                
Other (income)/expenses                
Gain from derivative liability  -   -   -   (16,000)
Gain from debt extinguishment - Paycheck Protection Program  -   (568,000)  -   (568,000)
Loss on debt extinguishment  -   194,000   -   194,000 
Interest  -   69,000   -   128,000 
Total other expense  -   (305,000)  -   (262,000)
                                
Net loss $(737,000) $(297,000) $(1,631,000) $(889,000) $(742,000) $(716,000) $(1,647,000) $(1,589,000)
                                
Per share information - basic and fully diluted:                                
Weighted average shares outstanding  12,915,000   12,066,000   12,915,000   11,769,000   13,003,000   12,915,000   12,990,000   12,915,000 
Weighted average shares outstanding - basic  13,003,000   12,915,000   12,990,000   12,915,000 
Net loss per share $(0.06) $(0.02) $(0.13) $(0.08) $(0.06) $(0.06) $(0.13) $(0.12)
Net loss per share - Basic $(0.06) $(0.06) $(0.13) $(0.12)

 

See the accompanying notes to the condensed consolidated financial statements

 

4
 

 

Barfresh Food Group Inc.

Condensed Consolidated Statements of Cash Flows

For the six months ended June 30, 20222023 and 2021

(Unaudited)2022

 

 2022 2021  2023 2022
(restated)		 
Net loss $(1,631,000) $(889,000) $(1,647,000) $(1,589,000)
Adjustments to reconcile net loss        
to net cash used in operating activities        
Adjustments to reconcile net loss to net cash used in operating activities                
Depreciation and amortization  286,000   293,000   205,000   244,000 
Stock-based compensation  93,000   10,000   118,000   93,000 
Stock and options issued for services  98,000   75,000   83,000   98,000 
Interest expense related to debt discount  -   56,000 
Gain on debt extinguishment - Paycheck Protection Program  -   (568,000)
Gain on derivative  -   (16,000)
Loss on debt extinguishment  -   194,000 
Changes in assets and liabilities                
Accounts receivable  (22,000)  (120,000)  (236,000)  (22,000)
Other receivables  (148,000)  -   (7,000)  (148,000)
Inventories  (865,000)  (162,000)  78,000   (865,000)
Prepaid expenses and other assets  11,000   5,000   (22,000)  11,000 
Accounts payable  303,000��  289,000   (759,000)  303,000 
Accrued expenses  (14,000)  77,000   120,000   (48,000)
Accrued interest  (34,000)  72,000 
Net cash used in operating activities  (1,923,000)  (684,000)  (2,067,000)  (1,923,000)
                
Investing activities                
Purchase of property and equipment  (13,000)  (39,000)  -   (13,000)
Net cash used in investing activities  (13,000)  (39,000)  -   (13,000)
                
Financing activities                
Proceeds from issuance of stock  5,000   6,000,000   -   5,000 
Proceeds from note payable  -   568,000 
Repayment of convertible notes  -   (840,000)
Net cash from financing activities  5,000   5,728,000 
        
Net change in cash and restricted cash  (1,931,000)  5,005,000 
Net cash provided by financing activities  -   5,000 
Net decrease in cash and restricted cash  (2,067,000)  (1,931,000)
Cash and restricted cash, beginning of period  5,675,000   1,959,000   3,019,000   5,675,000 
Cash and restricted cash, end of period $3,744,000  $6,964,000  $952,000  $3,744,000 
                
Cash paid during the period for:        
Cash paid for amounts included in the measurement of lease liabilities $20,000  $38,000 
Cash paid during the year for:        
Amounts included in the measurement of lease liabilities $20,000  $20,000 
                
Non-cash financing and investing activities:                
Net carrying value of convertible notes and accrued interest extinguished through issuance of stock $-  $467,000 
Accrued interest paid in stock $-  $151,000 
Equipment included in accounts payable and accrued liability $-  $26,000 
Value of shares relinquished in modification of stock-based compensation awards (Note 6) $24,000  $- 

 

See the accompanying notes to the condensed consolidated financial statements

 

5
 

 

Barfresh Food Group Inc.

Notes to Condensed Consolidated Financial Statements

June 30, 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

  For the three months ended June 30,  For the six months ended June 30, 
  2023  2022  2023  2022 
Manufacturer A  50%  25%  49%  27%
Manufacturer B  34%  0%  41%  0%
Manufacturer C  16%  4%  10%  6%
Manufacturer D  0%  59%  0%  59%
Manufacturer E  0%  12%  0%  8%

6

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.

6

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 June 30, 2022, December 31, 2021 and June 30, 2021 approximates their fair values, except for the derivative liability, which was carried at fair value prior to its extinguishment.value.

 

Restricted Cash

 

At June 30, 2022 and December 31, 2021,2022, the Company had approximately $211,000 and $142,000, respectively, in restricted cash related to a co-packing agreement. The restrictions were released in June 2023.

 

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 December 31, 2021, the Company’sexpected credit and collectability trends for the allowance for doubtfulcredit losses based on our assessment of various factors, including historical experience, the age of the accounts was approximately $121,000. The Company did not have an allowance for doubtful accountsreceivable 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 June 30, 2022. The2023 and December 31, 2022, there was no allowance is estimated based on evaluation of collectability of outstanding accounts receivable. Delinquent accounts are written-off when it is determined that the amounts are uncollectible.for expected credit losses.

 

Other Receivables

 

Other receivables consist of the Company’s 2021 Employer Retention Tax Credit claim, amounts due from vendors for materials acquired on their behalf for use in manufacturing the Company’s products.products, vendor rebates and freight claims.

 

7

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, net of rebates and other marketing allowances.goods. The Company applies the following five steps:

 

 1)Identify the contract with a customer
   
  A contract with a customer exists when (i)(I) the Company enters into an enforceable contract with a customer that defines each party’s rights, (ii) the contract has commercial substance and, (iii) the Company determines that collection of substantially all consideration for goods or services that are transferred is probable. For the Company, the contract is the approved sales order, which may also be supplemented by other agreements that formalize various terms and conditions with customers.

7

 2)Identify the performance obligation in the contract
   
  Performance obligations promised in a contract are identified based on the goods or services that will be transferred to the customer. For the Company, this consists of the delivery of frozen beverages, which provide immediate benefit to the customer.

 3)Determine the transaction price
   
  The transaction price is determined based on the consideration to which the Company will be entitled in exchange for transferring goods and is generally stated on the approved sales order. Variable consideration, which typically includes rebates or discounts, are estimated utilizing the most likely amount methodmethod. Provisions for refunds are generally provided for in the period the related sales are recorded, based on management’s assessment of historical and amounts recorded as revenue and accounts receivable reflect such estimates at the time of shipment.  Subsequent adjustments to estimates of variable consideration have not been material.projected trends.
   
 4)

Allocate the transaction price to performance obligations in the contract

 

Since ourthe Company’s contracts contain a single performance obligation, delivery of frozen beverages, the transaction price is allocated to that single performance obligation.

   
 5)Recognize Revenuerevenue when or as the Company satisfies a performance obligation
   
  

The Company recognizes revenue from the sale of frozen beverages when title and risk of loss passes and the customer accepts the goods, which generally occurs at the time of delivery to a customer warehouse. Customer sales incentives such as volume-based rebates or discounts are treated as a reduction of sales at the time the sale is recognized. Shipping and handling costs are treated as fulfillmentfulfilment costs and presented in distribution, selling and administrative costs.

 

Payments that are received before performance obligations are recorded are shown as current liabilities.

   
  The Company evaluated the requirement to disaggregate revenue and concluded that substantially all of its revenue comes from smoothiea single product, frozen beverages.

 

8

ShippingStorage and StorageShipping Costs

 

ShippingStorage and handlingoutbound freight costs are included in selling, marketing and marketing expenses.distribution expense. For the three months ending June 30, 2023 and 2022, storage and 2021, shipping and handling costsoutbound freight totaled approximately $371,000251,000 and $257,000319,000, respectively. For the six months ending June 30, 2023 and 2022, storage and 2021, shipping and handling costsoutbound freight totaled approximately $757,000562,000 and $401,000768,000, respectively.

 

Research and Development

 

Expenditures for research activities relating to product development and improvement are charged to expense as incurred. The Company incurred approximately $97,00035,000 and $127,00096,000, in research and development expensesexpense for the three months ending June 30, 20222023 and 2021,2022, respectively. For the six months ending June 30, 2023 and 2022, and 2021, research and development expense totaledthe Company incurred approximately $66,00056,000 and $138,000126,000, respectively.

8

Loss Per Share

 

AtFor the three and six months ended June 30, 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 20212022 financial statements to conform to the 20222023 presentation, includingnamely the presentation of selling, marketing and marketingdistribution expense apart from general and administrative expense in the condensed consolidated statement of operations, the reclassification of materials shipping from selling, marketing and distribution to cost of revenue, and the presentation of a reconciliation of the components of net cash used in operating activities as well as the inclusion of operating lease payments in operating activities in the condensed consolidated statement of cash flows.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.Restatement of Prior Financial Information

This Company’s previously filed unaudited statement of operations and cash flow statement and audited balance sheets have been restated to correct errors in calculating depreciation. From a quantitative and qualitative perspective, the Company determined that correcting the previously filed financial statements would not require amendment to its previously filed reports on Form 10-Q and 10-K. The effect of the correction of previously issued financial statements is summarized below:

Schedule of Prior Financial Information

          
  December 31, 2022 
  As Previously Reported  Adjustment  Restated 
Consolidated Balance Sheet            
Property, plant and equipment, net of depreciation $389,000  $412,000  $801,000 
Total assets $5,093,000  $412,000  $5,505,000 
Accumulated deficit $(58,384,000) $412,000  $(57,972,000)
Total stockholders’ equity $2,521,000  $412,000  $2,933,000 
Total liabilities and stockholders’ equity $5,093,000  $412,000  $5,505,000 

9

          
  Three-months ended June 30, 2022 
  As Previously Reported  Adjustment  Restated 
Consolidated Statement of Operations         
Depreciation and amortization $117,000  $(21,000) $96,000 
Total operating expenses $1,620,000  $(21,000) $1,599,000 
Net loss $(737,000) $21,000  $(716,000)

          
  Six-months ended June 30, 2022 
  As Previously Reported  Adjustment  Restated 
Consolidated Statement of Operations         
Depreciation and amortization $278,000  $(42,000) $236,000 
Total operating expenses $3,278,000  $(42,000) $3,236,000 
Net loss $(1,631,000) $42,000  $(1,589,000)
             
Consolidated Statement of Cash Flows            
Net loss $(1,631,000) $42,000  $(1,589,000)
Depreciation and amortization $286,000  $(42,000) $244,000 
Net cash used in operating activities $(1,923,000) $-  $(1,923,000)

Note 3. Inventory

 

Inventory consists of the following:

Schedule of Inventory

  June 30,
2023		  December 31,
2022		 
Raw materials $25,000  $65,000 
Finished goods  945,000   983,000 
Inventory, net $970,000  $1,048,000 

  June 30,  December 31, 
  2022  2021 
Raw materials $214,000  $105,000 
Finished goods  1,356,000   600,000 
Inventory, net $1,570,000  $705,000 
10

Note 3.4. Property Plant and Equipment

 

Property and equipment, net consist of the following:

Schedule of Major Classes of Property and Equipment, Net

  June 30,  December 31, 
  2022  2021 
Manufacturing and customer equipment $3,814,000  $3,800,000 
Other property  36,000   36,000 
Property and equipment, gross  3,850,000   3,836,000 
Less: accumulated depreciation  (3,150,000)  (2,894,000)
Property and equipment  700,000   942,000 
Equipment not yet placed in service  646,000   646,000 
Property and equipment, net of depreciation $1,346,000  $1,588,000 

9
  June 30,
2023		  December 31,
2022		 
     
  June 30,
2023		  December 31,
2022		 
Manufacturing equipment $1,618,000  $1,618,000 
Customer equipment  1,417,000   1,417,000 
Property and equipment, gross  3,035,000   3,035,000 
Less: accumulated depreciation  (2,408,000)  (2,234,000)
Property and equipment, net of depreciation $627,000  $801,000 

 

Depreciation expense related to these assets was approximately $110,00087,000 and $130,00090,000 each of the three months ended June 30, 2023 and 2022, respectively, and $174,000 and $212,000, respectively, for the six months ended June 30, 2023 and 2022. Depreciation expense in cost of revenue was $5,000 and $10,000 for the three months ended June 30, 20222023 and 2021,2022, respectively, and $255,00010,000 and $261,000 for each of the six months ended June 30, 20222023 and 2021, respectively. Depreciation expense in cost of revenue was approximately $10,000 and $12,000 for three months ended June 30, 2022, and 2021, respectively, and $10,000 and $18,000 for the six months ended June 30, 2022 and 2021, respectively.

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.

Upon debt extinguishment the Company’s derivative liability was revalued at approximately $25,000, resulting in a gain of approximately $16,000 for the six months ended June 30, 2021. The derivative value of $25,000 was included in the determining the loss on debt extinguishment.

 

Note 5. 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 September 30, 2023. The Company’s periodic lease cost was approximately $20,000 for each of the three months ended June 30, 20222023 and 2021, respectively,2022 and $40,000 for each of the six months ended June 30, 20222023 and 2021, respectively. As of June 30, 2022, our right of use asset was approximately $2022.

53,000.

Legal Proceedings

Schreiber Dispute

 

The following table presentsCompany’s products are produced to its specifications through several contract manufacturers. One of the future operating lease payment asCompany’s contract manufacturers (the “Manufacturer”) provided approximately 52% and 42% of June 30, 2022.the Company’s products in the years ended December 31, 2022 and 2021, respectively, under a Supply Agreement with an initial term through September 2025.

Schedule

Over the course of Estimate Future Maturities2022, the Company experienced numerous quality issues with the case packaging utilized by the Manufacturer. In addition, in July of Lease Liabilities2022, 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.

     
2022 (six months remaining) $40,000 
2023  20,000 
Total lease payments  60,000 
Less: imputed interest  (2,000)
Total lease liability $58,000 

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 informed the Manufacturer that it intends to re-file the Complaint in California State Court by the end of August, 2023.

Due to the uncertainties surrounding the claim, the Company is not able to predict either the outcome or a range of 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 the Company’s 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 Company has partially mitigated the impact of the supply disruption with the introduction of its single-serve smoothie cartons.

11

Other 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.$100,000. Our legal counsel and management believe the probability of a material unfavorable outcome to beis remote.

10

 

Note 6. Stockholders’ Equity

 

The following are changes in stockholders’ equity for the six months ended June 30, 20212022 and June 30, 2022:2023:

 

Barfresh Food Group, Inc.

Condensed Consolidated Statements of Stockholders’ Equity

Schedule of Changes in Stockholders' Equity

  Shares  Amount  Capital  (Deficit)  Total 
        Additional       
  Common Stock  paid in  Accumulated    
  Shares  Amount  Capital  (Deficit)  Total 
Balance December 31, 2020  11,471,797  $-  $53,224,000  $(50,900,000) $2,324,000 
Issuance of stock for capital raise  1,282,051   -   6,000,000   -   6,000,000 
Conversion of debt and accrued interest  114,614   -   685,000   -   685,000 
Interest paid in shares  19,377   -   151,000   -   151,000 
Stock and options issued for services  4,579   -   75,000   -   75,000 
Stock-based compensation  -   -   10,000   -   10,000 
Issuance of stock for warrant exercise                    
Issuance of stock for warrant exercise, shares                    
Net loss  -   -   -   (889,000)  (889,000)
Balance June 30, 2021  12,892,418  $-  $60,145,000  $(51,789,000) $8,356,000 

                
        Additional       
  Common Stock  paid in  Accumulated    
  Shares  Amount  Capital  (Deficit)  Total 
Balance December 31, 2021  12,905,112  $-  $60,341,000  $(51,838,000) $8,503,000 
Shares issued for warrant exercise  986   -   5,000   -   5,000 
Equity-based compensation  -   -   93,000   -   93,000 
Issuance of stock and options for services  13,801   -   98,000   -   98,000 
                     
Net loss  -   -   -   (1,589,000)  (1,589,000)
Balance June 30, 2022  12,919,899  $-  $60,537,000  $(53,427,000) $7,110,000 

 

        Additional       
  Common Stock  paid in  Accumulated    
  Shares  Amount  Capital  (Deficit)  Total 
Balance December 31, 2022  12,934,741  $-  $60,905,000  $(57,972,000) $2,933,000 
Balance  12,934,741  $-  $60,905,000  $(57,972,000) $2,933,000 
                     
Equity-based compensation  35,659   -   118,000   -   118,000 
Cash settlement of equity-based compensation  -   -   (24,000)  -   (24,000)
Issuance of stock and options for services  32,203   -   83,000   -   83,000 
Net loss  -   -   -   (1,647,000)  (1,647,000)
Balance June 30, 2023  13,002,603  $-  $61,082,000  $(59,619,000) $1,463,000 
Balance  13,002,603  $-  $61,082,000  $(59,619,000) $1,463,000 

        Additional       
  Common Stock  paid in  Accumulated    
  Shares  Amount  Capital  (Deficit)  Total 
Balance December 31, 2021  12,905,112  $-  $60,341,000  $(52,165,000) $8,176,000 
Issuance of stock for warrant exercise  986   -   5,000   -   5,000 
Stock-based compensation  -   -   93,000   -   93,000 
Stock and options issued for services  13,801   -   98,000   -   98,000 
Net loss  -   -   -   (1,631,000)  (1,631,000)
Balance June 30, 2022  12,919,899  $-  $60,537,000  $(53,796,000) $6,741,000 

Warrants

 

During the six months ended June 30, 2022,2023, 99,274684,639 warrants at a weighted average exercise price of $8.975.85 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 June 2023, the Company’s stockholders adopted the 2023 Equity Incentive Plan (the “2023 Plan”), reserving 650,000 shares for future issuance. The Board of Directors discontinued further grants under the 2015 Plan.

As of June 30, 2023, the Company has $194,000 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 1.7 years.

12

Stock Options

 

The following is a summary of stock option activity for the six months ended June 30, 2022:2023:

Summary of Stock Options Activity 

  Number of
Options		  Weighted
average exercise
price per share		  Remaining term
in years		 
Outstanding on December 31, 2021  625,016  $7.55   3.8 
Issued  50,722  $6.00     
Cancelled/expired  (13,080) $4.92     
Outstanding on June 30, 2022  662,658  $7.48   3.5 
             
Exercisable, June 30, 2022  571,746  $7.77   2.9 
  Number of Options  Weighted
average
exercise price
per share		  Remaining
term in years		 
Outstanding on December 31, 2022  682,939  $7.30   3.2 
Issued  42,045  $1.48   8.0 
Cancelled/expired  (108,871) $8.38     
Outstanding on June 30, 2023  616,113  $6.71   3.6 
             
Exercisable, June 30, 2023  554,902  $6.96   2.8 

 

11

The fair value of the options issued was calculated using the Black-Scholes option pricing model, based on the following:

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

 2022  2023 
Expected term (in years)  5.5 - 8   8.0 
Weighted average expected volatility  84.8%
Weighted average risk-free interest rate  2.1%
Expected volatility  84.4%
Risk-free interest rate  3.6%
Expected dividends $-  $- 
Weighted average grant date fair value per share $4.53  $1.19 

 

As of June 30, 2022, the Company has approximately $228,000 of unrecognized share-based compensation expense related to unvested options, which is expected to be recognized over the remaining weighted average period of 2.4 years.Restricted Stock

 

The following is a summary of restricted stock award and restricted stock unit activity for the six months ended June 30, 2022:2023:

Summary of Restricted Stock Award and Restricted Stock Unit Activity

 Number of
shares		 Weighted
average grant
date fair value		  Number of
shares		  Weighted
average grant
date fair value		 
Unvested at January 1, 2022  -  $- 
Unvested at January 1, 2023  41,923  $4.92 
Granted  41,554  $5.40   5,000  $1.25 
Vested  (4,386) $5.06 
Forfeited  (1,754) $5.06   (9,931) $3.33 
Unvested at June 30, 2022  39,800  $5.41 
Unvested at June 30, 2023  32,606  $4.82 

 

AsPerformance Stock Units

During 2022 and 2023, the Company issued performance share units (“PSUs”) that represented shares potentially issuable based upon Company and individual performance in the years of issuance.

13

The following table summarizes the activity for the Company’s unvested PSUs for the three months ended June 30, 2022,2023:

Summary of Performance Stock Unit Activity

  Number of shares  Weighted
average grant
date fair value		 
Unvested at January 1, 2023  17,678  $4.50 
Cash settled  (17,678) $4.50 
Granted  281,934  $1.58 
Vested  (45,251) $1.36 
Unvested at June 30, 2023  236,683  $1.63 

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 hasperformance targets were modified to allow approximately $175,00071,000 PSU to vest, with an additional time-based vesting requirement for approximately 26,000 of unrecognized share-basedthe 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 related to restricted stock awards and restricted stock units, which is expected to be recognized overin the remaining weighted average period of 2.4 years.six-months ended June 30, 2023.

The Company adopted a 2023 PSU program in April 2023, granting approximately 211,000 PSUs at target performance. The results for the three-month period ended June 30, 2023 include the reversal of $67,000 in stock-based compensation expense recorded in the three months ended March 31, 2023, as management does not anticipate at this time that 2023 performance will be achieved. The results of operations for the six months ended June 30, 2023 includes no expense for the 2023 PSU program. Estimates of expense associated with 2023 performance will be reassessed each quarter through the performance period.

Note 7. 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 June 30, 2022,2023, the estimated effective tax rate for the 20222023 was zero.zero.

 

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 and six months ended June 30, 20222023 and 2021,2022, the Company did not incur any interest and penalties associated with tax positions. As of June 30, 2022,2023, the Company did not have any significant unrecognized uncertain tax positions.

 

Note 8. Subsequent Event

In August 2023, the Company received subscriptions of approximately $1,130,000 of a $2,000,000 privately placed convertible debt offering. The debt may be drawn in 25% increments, matures on the anniversary of the draw, bears interest at 10% per annum for the term, regardless of earlier payment or conversion, and is mandatorily convertible as to principal and interest into shares of the Company’s common stock at any time prior to maturity at the greater of $1.20 or 85% of the volume-weighted average price of the common stock for the ten trading days immediately preceding the written notice of the conversion (the “Conversion Price”). If the Company has not exercised the mandatory conversion, the holder of the debt has the option after six months and on up to four occasions to convert all or any portion of the principal and interest into shares of the Company’s common stock at the Conversion Price.

Note 9. Liquidity

During the six months ended June 30, 2023, the Company used cash for operations of $2,067,000. 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 5, 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 June 30, 2023, the Company has $952,000 of cash and in August 2023, obtained a funding commitment of approximately $1,130,000 as more fully described in Note 8. As such, 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.

1214
 

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.have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”).

Recent Accounting Pronouncements

See Note 1 to the accompanying notes to unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for further details regarding this topic.

13

 

Results of Operations

 

Results of Operation for the Three Months Ended June 30, 20222023 as Compared to the Three Months Ended June 30, 20212022

 

Revenue and cost of revenue

 

Revenue increased by approximately $1,498,000 (115%)decreased $1,288,000, or 46%, from approximately $1,301,000 in 2021 to approximately $2,799,000 in 2022.2022 to $1,511,000 in 2023. The overalldecline in revenue for the second quarter 2022 was higher due to growth in “Twist & Go”™ revenuelimited supply caused by 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 20222023 was approximately $1,916,000$1,037,000 as compared to approximately $739,000$1,916,000 in 2021.2022. Our gross profit was approximately$474,000 (31%) and $883,000 (32%) for 2023 and $562,000 (43%) for 2022, and 2021, respectively. Gross margins decreasedCost of revenue declined as a result of the 46% decrease in the second quarter primarily due torevenue as well as a shift in product mix which includes resulting from the limited supply of smoothie bottles, partially offset by additional inventory reserves, resulting from the quality complaints.

“Twist & Go”™ at slightly lower product margins.

15

 

Selling, marketing and marketing expensesdistribution expense

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

 

  Three
months ended
June 30,
2023		  Three
months ended
June 30,
2022		  Change  Percent 
Sales and marketing $374,000  $382,000  $(8,000)  -2%
Storage and outbound freight  251,000   319,000   (68,000)  -21%
  $625,000  $701,000  $(76,000)  -11%

  Three months ended
June 30,		  Three months ended
June 30,		       
  2022  2021  Change  Percent 
Sales and marketing  319,000   186,000   133,000   72%
Storage and outbound freight  371,000   257,000   114,000   44%
   690,000   443,000   247,000   56%

Selling, marketing and distribution expense decreased approximately $76,000 (11%) from approximately $701,000 in 2022 to $625,000 in 2023.

Sales and marketing expenses increasedexpense decreased approximately $133,000 (72%$8,000 (2%) from approximately $186,000$382,000 in 20212022 to $319,000$374,000 in 2022. The increase in sales and marketing expenses was primarily the result of the retention of new employees and outside service providers to assist with sales and initiatives, as well as participation in education nutrition trade shows in 2022.2023.

Storage and outbound freight expense increaseddecreased approximately $114,000 (44%$68,000 (21%) from approximately $257,000$319,000 in 2022 to $251,000 in 2023. The decrease was the result of the 46% decrease in revenue, offset by higher costs resulting from product mix and inefficiencies due to production transitions.

General and administrative expense

  Three months ended June 30,
2023		  Three months ended June 30,
2022		  Change  Percent 
Personnel costs $244,000  $362,000  $(118,000)  -33%
Stock based compensation  (15,000)  114,000   (129,000)  -113%
Legal, professional and consulting fees  59,000   52,000   7,000   13%
Director fees paid in cash  25,000   25,000   -   0%
Research and development  35,000   96,000   (61,000)  -64%
Other general and administrative expenses  145,000   153,000   (8,000)  -5%
  $493,000  $802,000  $(309,000)  -39%

General and administrative expense decreased approximately $309,000 (39%) from approximately $802,000 in 2022 to $493,000 in 2023.

Personnel cost represents the cost of employees including salaries, bonuses, employee benefits and employment taxes and continues to be our largest cost. Personnel cost decreased by approximately $118,000 (33%) from approximately $362,000 to $244,000 and stock-based compensation decreased by approximately $129,000 (113%) from $114,000 to ($15,000). The decrease in personnel cost and stock-based compensation resulted primarily from the confirmation and recognition of our 2021 COVID-related tax credit, reduction in headcount, and reversal of previously recognized compensation under our 2023 performance stock unit program, as management does not currently expect that performance criteria will be achieved.

Research and development expense decreased approximately $61,000 (64%) from approximately $96,000 in 2022 to $371,000$35,000 in 2022.2023 as activities were minimized to conserve working capital.

16

Net loss

We had net losses of approximately $742,000 and $716,000 for the three-month periods ended June 30, 2023 and 2022, respectively. The increase of approximately $26,000, was primarilythe result of the aforementioned changes in revenue, partially offset by reductions in cost and expenses.

Results of Operation for the Six Months Ended June 30, 2023 as Compared to the six Months Ended June 30, 2022

Revenue and cost of revenue

Revenue decreased $1,723,000, or 32%, from $5,325,000 in 2022 to $3,602,000 in 2023. The decline in revenue was due to limited supply caused by our product withdrawal resulting from quality complaints with product purchased from the Manufacturer. We anticipate that our revenues will be adversely impacted as a result of the 115% increasedispute unless and until new sources of reliable supply at sufficient volume can be identified and developed, the timing of which is uncertain.

Cost of revenue for 2023 was $2,273,000 as compared to $3,678,000 in 2022. Our gross profit was $1,329,000 (37%) and $1,647,000 (31%) for 2023 and 2022, respectively. Cost of revenue declined as a result of the 32% decrease in revenue tempered by logistics efficienciesas well as a shift in product mix resulting from the increased volume in core markets served.limited supply of smoothie bottles, partially offset by additional inventory reserves resulting from the quality complaints.

Selling, marketing and distribution expense

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

  Six
months ended
June 30,		  Six
months ended
June 30,		       
  2023  2022  Change  Percent 
Sales and marketing $731,000  $608,000  $123,000   20%
Storage and outbound freight  562,000   768,000   (206,000)  -27%
  $1,293,000  $1,376,000  $(83,000)  -6%

Selling, marketing and distribution expense decreased approximately $83,000 (6%) from approximately $1,376,000 in 2022 to $1,293,000 in 2023.

Sales and marketing expense increased approximately $123,000 (20%) from approximately $608,000 in 2022 to $731,000 in 2023, primarily due to product sampling of smoothie carton products and equipment maintenance incurred to relaunch bulk product sales in locations that had been non-operational as a result of COVID shutdowns and subsequent labor shortages.

Storage and outbound freight expense decreased approximately $206,000 (27%) from approximately $768,000 in 2022 to $562,000 in 2023. The decrease was the result of the 32% decrease in revenue, offset by higher costs resulting from product mix and inefficiencies due to production transitions.

17

 

General and administrative expensesexpense

Our general and administrative expenses increased by 41%, or approximately $237,000, from approximately $575,000 in 2021 to approximately $813,000 in 2022, primarily driven by personnel, including non-cash stock-based compensation, and other general and administrative expenses. The following is a breakdown of our general and administrative expenses for the three months ended June 30, 2022, and 2021:

  Three months ended
June 30,		  Three months ended
June 30,		       
  2022  2021  Change  Percent 
Personnel costs  358,000   210,000   148,000   70%
Stock-based compensation  64,000   45,000   19,000   42%
Legal, professional and consulting fees  64,000   101,000   (37,000)  -37%
Director fees  62,000   73,000   (11,000)  -15%
Research and development  97,000   70,000   27,000   39%
Other general and administrative expenses  168,000   76,000   92,000   121%
   813,000   575,000   238,000   41%

14
  Six months
ended June 30,
2023		  

Six months
ended June 30,
2022

  Change  Percent 
Personnel costs $733,000  $670,000  $63,000   9%
Stock based compensation  191,000   199,000   (8,000)  -4%
Legal, professional and consulting fees  173,000   213,000   (40,000)  -19%
Director fees paid in cash  50,000   50,000   -   0%
Research and development  56,000   126,000   (70,000)  -56%
Other general and administrative expenses  284,000   366,000   (82,000)  -22%
  $1,487,000  $1,624,000  $(137,000)  -8%

General and administrative expense decreased approximately $137,000 (8%) from approximately $1,624,000 in 2022 to $1,487,000 in 2023.

 

Personnel cost represents the cost of employees including salaries, bonuses, employee benefits and employment taxes and continues to be our largest cost. Personnel cost increased by approximately $148,000 (70%$63,000 (9%) from approximately $210,000$670,000 to $358,000.$733,000. The increase in personnel cost wasresulted primarily from an increase in headcount during the first quarter of 2023, partially offset by the decreaseconfirmation and recognition of our 2021 COVID-related tax credit, and a reduction in consulting fees as we choose to hire permanent staff asheadcount in the critical stagessecond quarter of the COVID-19 pandemic waned, rather than rely on consultants and temporary staff.

Stock based compensation is used as an incentive to attract new employees and to compensate existing employees. Stock based compensation includes stock issued and restricted stock units and options granted to employees and non-employees. Stock based compensation for the three months ended June 30, 2022 was approximately $64,000 compared to $45,000 for the three months ended June 30, 2021 due to the aforementioned increase in staffing.2023.

 

Research and development expenses increasedexpense decreased approximately $27,000 (39%$70,000 (56%) from approximately $70,000$126,000 in 20212022 to $96,000$56,000 in 2022. The increase is2023 as activities were minimized to conserve working capital.

Other general and administrative expenses decreased approximately $82,000 (22%) from approximately $366,000 in 2022 to $284,000 in 2023 primarily dueas a result of non-recurring costs related to material consumption and expiration,our uplisting to the NASDAQ stock exchange in 2022, partially offset by a reduction in labor hours for our development consulting team.

Other expenses increased approximately $93,000 (122%) from approximately $76,000 in 2021 to $169,000 in 2022. In 2022, we incurred approximately $65,000 in one-time costs related toby our dispute with the uplist of our common stock to the NASDAQ Stock Market. Additionally, 2021 benefited from the results of vendor payables reconciliation resulting in the reduction of vendor liabilities.Manufacturer.

Operating loss

We had operating losses of approximately $737,000 and $602,000 for the three-month periods ended June 30, 2022 and 2021, respectively. The increase of approximately $135,000 or 22%, was primarily due to the increase in operating expenses, partially offset by the increase in gross profit.

Other income and expense

Interest expense was approximately $69,000 and loss on debt extinguishment was approximately $194,000 for the three months ended June 30, 2021. Interest related to convertible debt that was converted and repaid in 2021. We did not incur any interest expense for the three months ended June 30, 2022. We also recognized gain of $568,000 from the forgiveness of our PPP loan in 2021

 

Net loss

 

We had net losses of approximately $737,000$1,647,000 and $297,000 in the three-month periods ended June 30, 2022 and 2021, respectively, with the primary change due to the $568,000 gain on the forgiveness of the PPP loan in 2021.

15

Results of Operation for Six Months Ended June 30, 2022 as Compared to the Six Months Ended June 30, 2021

Revenue and cost of revenue

Revenue increased by approximately $3,009,000 (130%) from approximately $2,316,000 in 2021 to approximately $5,325,000 in 2022. The overall revenue for the six months ended June 30, 2022 was higher due to growth in “Twist & Go”™ revenue and the gradual return of single serve demand.

Cost of revenue for 2022 was approximately $3,678,000 as compared to approximately $1,405,000 in 2021. Our gross profit was approximately $1,647,000 (31%) and $911,000 (39%) for 2022 and 2021, respectively. Gross margins decreased in the six months ended June 30, 2022 primarily due to product mix which includes “Twist & Go”™ at slightly lower product margins.

Selling and marketing expenses

  Six months ended
June 30,		  Six months ended
June 30,		       
  2022  2021  Change  Percent 
Sales and marketing  565,000   355,000   210,000   59%
Storage and outbound freight  757,000   401,000   356,000   89%
   1,322,000   756,000   566,000   75%

Sales and marketing expenses increased approximately $210,000 (59%) from approximately $355,000 in 2021 to $565,000 in 2022. The increase in sales and marketing expenses was primarily the result of the retention of new employees and outside service providers to assist with sales initiatives, as well as participation in education nutrition trade shows in 2022.

Storage and outbound freight expense increased approximately $356,000 (89%) from approximately $401,000 in 2021 to $757,000 in 2022. The increase was primarily a result of the 130% increase in revenue, tempered by logistics efficiencies from the increased volume in core markets served.

General and administrative expenses

Our general and administrative expenses increased by 66%, or approximately $665,000, from approximately $1,013,000 in 2021 to approximately $1,677,000 in 2022, primarily driven by personnel, including non-cash stock-based compensation, shipping and storage and other general and administrative expenses. The following is a breakdown of our general and administrative expenses for the six months ended June 30, 2022, and 2021:

  Six months ended
June 30,		  Six months ended
June 30,		       
  2022  2021  Change  Percent 
Personnel costs  684,000   395,000   289,000   73%
Stock-based compensation  93,000   10,000   83,000   830%
Legal, professional and consulting fees  244,000   178,000   66,000   37%
Director fees  125,000   150,000   (25,000)  -17%
Research and development  127,000   138,000   (11,000)  -8%
Other general and administrative expenses  405,000   142,000   263,000   185%
   1,678,000   1,013,000   665,000   66%

16

Personnel cost represents the cost of employees including salaries, bonuses, employee benefits and employment taxes and continues to be our largest cost. Personnel cost increased by approximately $289,000 (73%) from approximately $395,000 to $684,000. The increase in personnel cost was partially offset by the decrease in consulting fees as we choose to hire permanent staff as the critical stages of the COVID-19 pandemic waned, rather than rely on consultants and temporary staff.

Stock based compensation is used as an incentive to attract new employees and to compensate existing employees. Stock based compensation includes stock issued and options granted to employees and non-employees. Stock based compensation for the six months ended June 30, 2022 was approximately $93,000 compared to $10,000 for the six months ended June 30, 2021 due to the aforementioned increase in staffing coupled with the departure of two key employees and the forfeiture of their unvested options in 2021.

Legal, professional, and consulting fees increased approximately $66,000 (37%) from approximately $178,000 in 2021 to $244,000 in 2022. The increase was primarily due to corporate development activities.

Research and development expenses decreased approximately $11,000 (8%) from approximately $138,000 in 2021 to $127,000 in 2022. The reduction is primarily due to a reduction in labor hours for our development consulting team.

Other expenses increased approximately $263,000 (185%) from approximately $142,000 in 2021 to $405,000 in 2022. In 2022, we incurred approximately $168,000 in one-time costs related to the uplist of our common stock to the NASDAQ Stock Market. Additionally, 2021 benefited from the results of vendor payables reconciliation resulting in the reduction of vendor liabilities.

Operating loss

We had operating losses of approximately $1,631,000 and $1,151,000$1,589,000 for the six-month periods ended June 30, 20222023 and 2021,2022, respectively. The increase of approximately $480,000 or 42%,$58,000, was primarily due to the increaseresult of the aforementioned changes in operating expenses,revenue, partially offset by the increasereductions in gross profit.

Other incomecost and expense

The change in the value of the derivative liability is based upon the Black-Scholes model from one period to another. The gain of approximately $16,000 for the six months ended June 30, 2021 was a result of the change in components of the Black-Scholes model. The derivative liability was settled upon conversion and repayment of the convertible notes in the second quarter of 2021.

Interest expense was approximately $128,000 for the six months ended June 30, 2021. Interest related to convertible debt that was converted and repaid in 2021. We did not incur any interest expense for the six months ended June 30, 2022.

Net loss

We had net losses of approximately $1,631,000 and $889,000 in the six-month periods ended June 30, 2022 and 2021, respectively, with the primary change due to the $568,000 gain on forgiveness of the PPP loan in 2021.expenses.

 

Liquidity and Capital Resources

 

As of June 30, 2022,2023, we had working capital of approximately $4,996,000 as$554,000 compared with approximately $6,172,000$1,801,000 at December 31, 2021.2022. The decrease in working capital surplus is primarily due to the operating loss for the six months ended June 30, 2022.2023.

 

During the six months ended June 30, 2022,2023, we used cash of approximately $1,923,000$2,067,000 in operations, and $13,000 for the purchase of equipment, partially offset by $5,000 from the issuance of stock pursuant to an outstanding warrant.operations.

 

The impact of COVID-19 on the Company is constantly evolving. The direct impact to our operations had begun to take effect at the close of the first quarter ended March 31, 2020. Specifically, our business was impacted by dining bans targeted at restaurants to reduce the size of public gatherings. Such bans precluded our single serve products from being served at those establishments for a number of weeks, and in some instances, resulted in abandoned product launches. Furthermore, many school districts closed regular attendance for a period of time thereby disrupting sales of product into that channel. More recently, we have experienced a disruption in the supply chain for manufacturing our products due to COVID-19. While further developments surrounding COVID-19 may arise, the business climate appears to have stabilized in 2023.

On June 1, 2021, the Company completed a private placement of 1,282,051 shares of its common stock at $4.68 per share, resulting in gross proceeds of $6,000,000. In addition, holders of debt converted a total of $399,000 in principal and $234,000 in interest into 133,991 shares of common stock and debt in the amount of $840,000 was retired, leaving the Company with no debt.

1718
 

In August 2023, the Company received subscriptions of approximately $1,130,000 of a $2,000,000 privately placed convertible debt offering. The debt may be drawn in 25% increments, matures on the anniversary of the draw, bears interest at 10% per annum for the term, regardless of earlier payment or conversion, and is mandatorily convertible as to principal and interest into shares of the Company’s common stock at any time prior to maturity at the greater of $1.20 or 85% of the volume-weighted average price of the common stock for the ten trading days immediately preceding the written notice of the conversion (the “Conversion Price”). If the Company has not exercised the mandatory conversion, the holder of the debt has the option after six months and on up to four occasions to convert all or any portion of the principal and interest into shares of the Company’s common stock at the Conversion Price.

 

Our liquidity needs will depend on how quickly we are able to profitably ramp up sales, as well as our ability to control and reduce variable operating expenses, and to continue to control and reduce fixed overhead expense. Our recent business developments with the Manufacturer impact our supply chain and will result in increased legal cost and are expected to have a negative impact on our financial position, results of operations and cash flow.

 

Our operations to date have been financed by the sale of securities, the issuance of convertible debt and the issuance of short-term debt, including related party advances. If we are unable to generate sufficient cash flow from operations with the capital raised we will be required to raise additional funds either in the form of equity or in the form of debt. There are no assurances that we will be able to generate the necessary capital to carry out our current plan of operations.

We have entered into a direct lease for premises covering the period April 1, 2019 to March 31, 2023. The aggregate minimum lease payments under the non-cancellable direct lease as of June 30, 2022 are approximately $60,000.

 

Off-Balance Sheet Arrangements

 

We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses,expense, results of operations, liquidity, capital expenditures or capital resources that are material to stockholders.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

 

Not required because we are a smaller reporting company.

 

Item 4. Controls and Procedures.

 

Evaluation of Disclosure Controls and Procedures

 

Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Securities and Exchange Act of 1934 Rule 13(a)-15(e). Disclosure controls and procedures are designed to provide reasonable assurance that the information required to be disclosed in the reports that we file or submit under the Exchange Act has been appropriately recorded, processed, summarized and reported on a timely basis and are effective in ensuring that such information is accumulated and communicated to the Company’s management, as appropriate to allow timely decisions regarding required disclosure. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that as of June 30, 2022,2023, our disclosure controls and procedures are not effective.

 

Management has identified the following material weaknesses in our internal control over financial reporting:

 

Management has concluded that there is a material weakness due to the control environment.environment which led to a restatement in the current quarter. The control environment is impacted due to the company’s inadequate segregation of duties.duties, including information technology control activities.

 

In an effort to remediate the identified material weakness and enhance our internal control over financial reporting, we have hired additional personnel and are reassigning control responsibilities in conjunction with the implementation of a new enterprise resource planning system. We believe that we are taking the steps necessary to ensure that we are able to properly implement internal control procedures.

19

 

Since the assessment of the effectiveness of our internal control over financial reporting did identify material weaknesses, management considers its internal control over financial reporting to be ineffective.

 

In an effort to remediate the identified material weakness and enhance our internal control over financial reporting, we have hired additional personnel to help ensure that we are able to properly implement internal control procedures.

Management believes that the material weakness set forth above did not have an effect on our financial results.

 

18

Changes in Internal Control over Financial Reporting

 

There have been no changes in the Company’s internal control over financial reporting during the three months ended June 30, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.None

 

PART II- OTHER INFORMATION

 

Item 1. Legal Proceedings.

 

NeitherAs described in Note 5, the Company nor its subsidiaries are partyhas an on-going dispute with the Manufacturer, the outcome of which cannot be predicted at this time.

From time to or have property thattime, various lawsuits and legal proceedings may arise in the ordinary course of business. However, litigation is the subject of any material pending legal proceedings. We may be subject to ordinary legal proceedings incidental to our businessinherent uncertainties and an adverse result in these or other matters may arise from time to time that may harm our business. We are not requiredcurrently the defendant in one legal proceeding for an amount less than $100,000. Our legal counsel and management believe a material unfavorable outcome to be disclosed under this Item 1.remote.

 

Item 1A. Risk Factors.

 

Not required because we are a smaller reporting company.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

None.

 

Item 3. Defaults Upon Senior Securities.

 

None.

 

Item 4. Mine Safety Disclosures.

 

Not applicable.

 

Item 5. Other Information.

 

None.

 

1920
 

Item 6. Exhibits.

 

Exhibit No. Description
   
31.1 Certification of Principal Executive Officer pursuant to Rule 13a-14(a) (filed herewith)
   
31.2 Certification of Principal Financial Officer pursuant to Rule 13a-14(a) (filed herewith)
   
32.1 Certification pursuant to 18 U.S.C. Section 1350 (furnished herewith)
   
101.INS Inline XBRL Instance Document*
101.SCH Inline XBRL Taxonomy Extension Schema Document*
101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document*
101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document*
101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document*
101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document*
104 Cover Page Interactive Data File (embedded within the Inline XBRL document)
   
  *XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.
   
  In accordance with SEC Release 33-8238, Exhibit 32.1 is furnished and not filed.

 

2021
 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 BARFRESH FOOD GROUP INC.
   
Date: July 28, 2022August 14, 2023By:/s/ Riccardo Delle Coste
  

Riccardo Delle Coste

Chief Executive Officer

(Principal Executive Officer)

   
Date: July 28, 2022August 14, 2023By:/s/ Lisa Roger
  

Chief Financial Officer

(Principal Financial Officer)

 

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