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 September 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: 001-41228
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 class | Trading Symbol(s) | Name of each exchange on which registered | ||
| Common stock, $0.000001 par value | BRFH | The 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: shares as of November 7, 2022.October 25, 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. | |
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk. | |
| Item 4. | Controls and Procedures. | |
| PART II - OTHER INFORMATION | 23 | |
| Item 1. | Legal Proceedings. | |
| Item 1A. | Risk Factors. | |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. | |
| Item 3. | Defaults Upon Senior Securities. | |
| Item 4. | Mine Safety Disclosures. | |
| Item 5. | Other Information. | |
| Item 6. | Exhibits. | |
| SIGNATURES | ||
| 2 |
Item 1. Financial Statements.
Barfresh Food Group Inc.
Condensed Consolidated Balance Sheets
| September 30, | December 31, | September 30, | December 31, | |||||||||||||
| 2022 | 2021 | 2023 | 2022 | |||||||||||||
| (Unaudited) | (Audited) | (unaudited) | (restated) | |||||||||||||
| Assets | ||||||||||||||||
| Current assets: | ||||||||||||||||
| Cash | $ | 2,837,000 | $ | 5,533,000 | $ | 1,011,000 | $ | 2,808,000 | ||||||||
| Restricted cash | 211,000 | 142,000 | - | 211,000 | ||||||||||||
| Trade accounts receivable, net | 1,142,000 | 1,223,000 | 1,159,000 | 126,000 | ||||||||||||
| Other receivables | 77,000 | - | 116,000 | 101,000 | ||||||||||||
| Inventory, net | 602,000 | 705,000 | 748,000 | 1,048,000 | ||||||||||||
| Prepaid expenses and other current assets | 137,000 | 64,000 | 167,000 | 79,000 | ||||||||||||
| Total current assets | 5,006,000 | 7,667,000 | 3,201,000 | 4,373,000 | ||||||||||||
| Property, plant and equipment, net of depreciation | 1,241,000 | 1,588,000 | 487,000 | 801,000 | ||||||||||||
| Operating lease right-of-use assets, net | 36,000 | 87,000 | - | 18,000 | ||||||||||||
| Intangible assets, net of amortization | 323,000 | 370,000 | 258,000 | 306,000 | ||||||||||||
| Deposits | 7,000 | 7,000 | 7,000 | 7,000 | ||||||||||||
| Total assets | $ | 6,613,000 | $ | 9,719,000 | $ | 3,953,000 | $ | 5,505,000 | ||||||||
| Liabilities and Stockholders’ Equity | ||||||||||||||||
| Current liabilities: | ||||||||||||||||
| Accounts payable | $ | 1,802,000 | $ | 974,000 | $ | 1,692,000 | $ | 1,534,000 | ||||||||
| Disputed co-manufacturer accounts payable (Note 5) | 499,000 | 499,000 | ||||||||||||||
| Accrued expenses | 315,000 | 228,000 | 229,000 | 286,000 | ||||||||||||
| Accrued payroll and employee related | 231,000 | 212,000 | 240,000 | 233,000 | ||||||||||||
| Lease liability | 39,000 | 81,000 | - | 20,000 | ||||||||||||
| Total current liabilities | 2,387,000 | 1,495,000 | 2,660,000 | 2,572,000 | ||||||||||||
| Long term liabilities: | ||||||||||||||||
| Accrued interest | - | 34,000 | ||||||||||||||
| Lease liability | - | 14,000 | ||||||||||||||
| Total liabilities | 2,387,000 | 1,543,000 | 2,660,000 | 2,572,000 | ||||||||||||
| Commitments and contingencies (Note 5) | - | - | - | - | ||||||||||||
| Stockholders’ equity: | ||||||||||||||||
| Preferred stock, $ par value, shares authorized, issued or outstanding | - | - | - | - | ||||||||||||
| Common stock, $ par value; shares authorized; and shares issued and outstanding at September 30, 2022 and December 31, 2021, respectively | - | - | ||||||||||||||
| Common stock, $ par value; shares authorized; and shares issued and outstanding at September 30, 2023 and December 31, 2022, respectively | - | - | ||||||||||||||
| Additional paid in capital | 60,730,000 | 60,341,000 | 61,388,000 | 60,905,000 | ||||||||||||
| Accumulated deficit | (56,504,000 | ) | (52,165,000 | ) | (60,095,000 | ) | (57,972,000 | ) | ||||||||
| Total stockholders’ equity | 4,226,000 | 8,176,000 | 1,293,000 | 2,933,000 | ||||||||||||
| Total liabilities and stockholders’ equity | $ | 6,613,000 | $ | 9,719,000 | $ | 3,953,000 | $ | 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 nine months ended September 30, 20222023 and 20212022
(Unaudited)
| 2022 | 2021 | 2022 | 2021 | 2023 | 2022 (restated) | 2023 | 2022 (restated) | |||||||||||||||||||||||||
| For the three months ended September 30, | For the nine months ended September 30, | For the three months ended September 30, | For the nine months ended September 30, | |||||||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | 2023 | 2022 (restated) | 2023 | 2022 (restated) | |||||||||||||||||||||||||
| Revenue | $ | 2,406,000 | $ | 1,930,000 | $ | 7,731,000 | $ | 4,246,000 | $ | 2,603,000 | $ | 2,406,000 | $ | 6,205,000 | $ | 7,731,000 | ||||||||||||||||
| Cost of revenue | 3,129,000 | 1,209,000 | 6,807,000 | 2,614,000 | 1,690,000 | 3,129,000 | 3,963,000 | 6,807,000 | ||||||||||||||||||||||||
| Gross profit | (723,000 | ) | 721,000 | 924,000 | 1,632,000 | 913,000 | (723,000 | ) | 2,242,000 | 924,000 | ||||||||||||||||||||||
| Operating expenses: | ||||||||||||||||||||||||||||||||
| Selling, marketing and distribution | 815,000 | 480,000 | 2,137,000 | 1,236,000 | 697,000 | 860,000 | 1,990,000 | 2,236,000 | ||||||||||||||||||||||||
| General and administrative | 1,058,000 | 586,000 | 2,736,000 | 1,598,000 | 578,000 | 1,013,000 | 2,065,000 | 2,637,000 | ||||||||||||||||||||||||
| Depreciation and amortization | 112,000 | 163,000 | 390,000 | 456,000 | 114,000 | 91,000 | 310,000 | 327,000 | ||||||||||||||||||||||||
| Total operating expenses | 1,985,000 | 1,229,000 | 5,263,000 | 3,290,000 | 1,389,000 | 1,964,000 | 4,365,000 | 5,200,000 | ||||||||||||||||||||||||
| Operating loss | (2,708,000 | ) | (508,000 | ) | (4,339,000 | ) | (1,658,000 | ) | ||||||||||||||||||||||||
| Other (income)/expenses | ||||||||||||||||||||||||||||||||
| Gain from derivative liability | - | - | - | (16,000 | ) | |||||||||||||||||||||||||||
| Gain from debt extinguishment - Paycheck Protection Program | - | - | - | (568,000 | ) | |||||||||||||||||||||||||||
| Loss on debt extinguishment | - | - | - | 194,000 | ||||||||||||||||||||||||||||
| Interest | - | - | - | 128,000 | ||||||||||||||||||||||||||||
| Total other expense | - | - | - | (262,000 | ) | |||||||||||||||||||||||||||
| Net loss | $ | (2,708,000 | ) | $ | (508,000 | ) | $ | (4,339,000 | ) | $ | (1,396,000 | ) | $ | (476,000 | ) | $ | (2,687,000 | ) | $ | (2,123,000 | ) | $ | (4,276,000 | ) | ||||||||
| Per share information - basic and fully diluted: | ||||||||||||||||||||||||||||||||
| Weighted average shares outstanding | 12,931,000 | 12,892,000 | 12,920,000 | 12,143,000 | ||||||||||||||||||||||||||||
| Net loss per share | $ | (0.21 | ) | $ | (0.04 | ) | $ | (0.34 | ) | $ | (0.11 | ) | $ | ) | $ | ) | $ | ) | $ | ) | ||||||||||||
See the accompanying notes to the condensed consolidated financial statements
| 4 |
Barfresh Food Group Inc.
Condensed Consolidated Statements of Cash Flows
For the nine months ended September 30, 20222023 and 2021
(Unaudited)2022
| 2022 | 2021 | 2023 | 2022 (restated) | |||||||||||||
| Net loss | $ | (4,339,000 | ) | $ | (1,396,000 | ) | $ | (2,123,000 | ) | $ | (4,276,000 | ) | ||||
Adjustments to reconcile net loss to net cash used in operating activities | ||||||||||||||||
| Depreciation and amortization | 407,000 | 370,000 | 325,000 | 344,000 | ||||||||||||
| Stock-based compensation | 211,000 | 52,000 | 496,000 | 211,000 | ||||||||||||
| Stock and options issued for services | 173,000 | 75,000 | 11,000 | 173,000 | ||||||||||||
| 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 | 81,000 | (757,000 | ) | (1,033,000 | ) | 81,000 | ||||||||||
| Other receivables | (77,000 | ) | - | (15,000 | ) | (77,000 | ) | |||||||||
| Inventories | 103,000 | (308,000 | ) | 300,000 | 103,000 | |||||||||||
| Prepaid expenses and other assets | (78,000 | ) | (30,000 | ) | (27,000 | ) | (78,000 | ) | ||||||||
| Accounts payable | 828,000 | 1,064,000 | 195,000 | 828,000 | ||||||||||||
| Accrued expenses | 106,000 | 46,000 | (137,000 | ) | 72,000 | |||||||||||
| Accrued interest | (34,000 | ) | 72,000 | |||||||||||||
| Net cash used in operating activities | (2,619,000 | ) | (1,146,000 | ) | (2,008,000 | ) | (2,619,000 | ) | ||||||||
| Investing activities | ||||||||||||||||
| Purchase of property and equipment | (13,000 | ) | (137,000 | ) | - | (13,000 | ) | |||||||||
| Net cash used in investing activities | (13,000 | ) | (137,000 | ) | - | (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 | (2,627,000 | ) | 4,445,000 | |||||||||||||
| Net cash provided by financing activities | - | 5,000 | ||||||||||||||
| Net decrease in cash and restricted cash | (2,008,000 | ) | (2,627,000 | ) | ||||||||||||
| 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 | $ | 3,048,000 | $ | 6,404,000 | $ | 1,011,000 | $ | 3,048,000 | ||||||||
| Cash paid during the period for: | ||||||||||||||||
| Cash paid during the year for: | ||||||||||||||||
| Amounts included in the measurement of lease liabilities | $ | 60,000 | $ | 48,000 | $ | 20,000 | $ | 60,000 | ||||||||
| 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 | $ | - | $ | 85,000 | ||||||||||||
| Extinguishment of derivative liability | $ | - | $ | 25,000 | ||||||||||||
| Value of shares relinquished in modification of stock-based compensation awards (Note 7) | $ | 24,000 | $ | - | ||||||||||||
See the accompanying notes to the condensed consolidated financial statements
| 5 |
Barfresh Food Group Inc.
Notes to Condensed Consolidated Financial Statements
September 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.
Recent Business Developments
The Company’s products are produced to its specifications through several co-manufacturers. One of the Company’s co-manufacturers has provided approximately 58% of the Company’s products in the nine months ended September 30, 2022 under a Supply Agreement that expires in September 2025.
Over the course of 2022, the Company has experienced quality issues with the case packaging utilized by the co-manufacturer. In July of 2022, the Company began receiving customer complaints about the texture of the Company’s smoothie products produced by the same co-manufacturer. In response, subsequent to September 30, 2022, the Company has withdrawn product from the market and destroyed on-hand inventory. The results for the third quarter of 2022 reflect the estimated accounting impact of such actions, including $630,000 in refund and administrative fees due to customers and $932,000 to dispose of unsaleable inventory.
The Company has been attempting to informally resolve the issues. However, on November 4, 2022, in response to a formal proposal of alternate resolutions, the Company received notification from its co-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, claiming that the co-manufacturer has not met its obligations under the Agreement, and seeking economic damages. Due to the uncertainties of litigation, the Company is not able to predict either the outcome or a range of reasonably possible recoveries that could result from its legal action against the co-manufacturer, and no gain contingencies have been recorded. The Company anticipates that the disruption in its supply resulting from the dispute will 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.
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 disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates are based on information available as of the date of the financial statements; therefore, actualyears 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 percentpercentage of all finished goods purchased were as follows:
Schedule of Company’s ContactContract Manufacturers of Finished Goods
| For the three months ended September 30, | For the nine months ended September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Manufacturer A | 55 | % | 0 | % | 47 | % | 0 | % | ||||||||
| Manufacturer B | 37 | % | 31 | % | 44 | % | 28 | % | ||||||||
| Manufacturer C | 8 | % | 6 | % | 9 | % | 6 | % | ||||||||
| Manufacturer D | 0 | % | 54 | % | 0 | % | 58 | % | ||||||||
| Manufacturer E | 0 | % | 9 | % | 0 | % | 8 | % | ||||||||
| For the three months ended September 30, | For the nine months ended September 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Manufacturer A | 54 | % | 31 | % | 58 | % | 42 | % | ||||||||
| Manufacturer B | 31 | % | 32 | % | 28 | % | 36 | % | ||||||||
| Manufacturer C | 9 | % | 30 | % | 8 | % | 15 | % | ||||||||
| Manufacturer D | 6 | % | 7 | % | 6 | % | 7 | % | ||||||||
| 100 | % | 100 | % | 100 | % | 100 | % | |||||||||
| 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.
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 definitionrequires 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 both significant to the fair value and unobservable as(i.e., supported by little or no market activity).
The Company’s financial instruments consist of cash, restricted cash, accounts receivable and accounts payable. The carrying value of the reporting date. The types of assets and liabilities included in Level 3 are those with inputs requiring significant management judgment or estimation, such as complex and subjective models and forecasts used to determine theCompany’s financial instruments approximates their fair value.
Our financial instruments consist of cash, accounts receivable, accounts payable, advanced payments, restricted cash, as well as our Paycheck Protection Program (“PPP”) loan, convertible notes, and derivative liabilities which were settled in 2021. The carrying value of our financial instruments on September 30, 2022, December 31, 2021 and September 30, 2021 approximates their fair values, except for the derivative liability, which was carried at fair value prior to its extinguishment.
Restricted Cash
At September 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 September 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 | ||
| 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 | ||
| 4) | Allocate the transaction price to performance obligations in the contract
Since | |
| 5) | Recognize | |
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 fulfilment 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 |
| 8 |
Storage and Shipping Costs
Storage and outbound freight costs are included in selling, marketing and marketingdistribution expense. For the three months ending September 30, 20222023 and 2021,2022, storage and outbound freight totaled approximately $450,000370,000 and $316,000273,000, respectively. For the nine months ending September 30, 20222023 and 2021,2022, storage and outbound freight costs totaled approximately $1,208,000932,000 and $717,0001,040,000, respectively.
Research and Development
Expenditures for research activities relating to product development and improvement are charged to expense as incurred. The Company incurred approximately $220,00032,000 and $34,000220,000, in research and development expense for the three months ending September 30, 20222023 and 2021,2022, respectively. For the nine months ending September 30, 2023 and 2022, and 2021, research and development expense totaledthe Company incurred approximately $347,00088,000 and $173,000347,000, respectively.
AtFor the three and nine months ended September 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
| As Previously Reported | Adjustment | Restated | ||||||||||
| 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 |
| As Previously Reported | Adjustment | Restated | ||||||||||
| Three-months ended September 30, 2022 | ||||||||||||
| As Previously Reported | Adjustment | Restated | ||||||||||
| Consolidated Statement of Operations | ||||||||||||
| Depreciation and amortization | $ | 112,000 | $ | (21,000 | ) | $ | 91,000 | |||||
| Total operating expenses | $ | 1,985,000 | $ | (21,000 | ) | $ | 1,964,000 | |||||
| Net loss | $ | (2,708,000 | ) | $ | 21,000 | $ | (2,687,000 | ) | ||||
| As Previously Reported | Adjustment | Restated | ||||||||||
| Nine-months ended September 30, 2022 | ||||||||||||
| As Previously Reported | Adjustment | Restated | ||||||||||
| Consolidated Statement of Operations | ||||||||||||
| Depreciation and amortization | $ | 390,000 | $ | (63,000 | ) | $ | 327,000 | |||||
| Total operating expenses | $ | 5,263,000 | $ | (63,000 | ) | $ | 5,200,000 | |||||
| Net loss | $ | (4,339,000 | ) | $ | 63,000 | $ | (4,276,000 | ) | ||||
| Consolidated Statement of Cash Flows | ||||||||||||
| Net loss | $ | (4,339,000 | ) | $ | 63,000 | $ | (4,276,000 | ) | ||||
| Depreciation and amortization | $ | 407,000 | $ | (63,000 | ) | $ | 344,000 | |||||
| Net cash used in operating activities | $ | (2,619,000 | ) | $ | - | $ | (2,619,000 | ) | ||||
Note 3. Inventory
Inventory consists of the following:
Schedule of Inventory
| September 30, | December 31, | |||||||||||||||
| 2022 | 2021 | September 30, 2023 | December 31, 2022 | |||||||||||||
| Raw materials | $ | 40,000 | $ | 105,000 | $ | 28,000 | $ | 65,000 | ||||||||
| Finished goods | 562,000 | 600,000 | 720,000 | 983,000 | ||||||||||||
| Inventory, net | $ | 602,000 | $ | 705,000 | $ | 748,000 | $ | 1,048,000 | ||||||||
Note 3.4. Property Plant and Equipment
Property and equipment, net consist of the following:
Schedule of Major Classes of Property and Equipment, Net
| September 30, | December 31, | |||||||
| 2022 | 2021 | |||||||
| Manufacturing and customer equipment | $ | 3,815,000 | $ | 3,800,000 | ||||
| Other property | 36,000 | 36,000 | ||||||
| Property and equipment, gross | 3,851,000 | 3,836,000 | ||||||
| Less: accumulated depreciation | (3,256,000 | ) | (2,894,000 | ) | ||||
| Property and equipment | 595,000 | 942,000 | ||||||
| Equipment not yet placed in service | 646,000 | 646,000 | ||||||
| Property and equipment, net of depreciation | $ | 1,241,000 | $ | 1,588,000 | ||||
| September 30, 2023 | December 31, 2022 | |||||||
| Manufacturing equipment | $ | 1,546,000 | $ | 1,618,000 | ||||
| Customer equipment | 1,410,000 | 1,417,000 | ||||||
| Property and equipment, gross | 2,956,000 | 3,035,000 | ||||||
| Less: accumulated depreciation | (2,469,000 | ) | (2,234,000 | ) | ||||
| Property and equipment, net of depreciation | $ | 487,000 | $ | 801,000 | ||||
Depreciation expense related to these assets was approximately $105,000102,000 and $147,00085,000 each of the three months ended September 30, 2023 and 2022, respectively, and $277,000 and $297,000, respectively, for the nine months ended September 30, 2023 and 2022. Depreciation expense in cost of revenue was $4,000 and $10,000 for the three months ended September 30, 20222023 and 2021,2022, respectively, and $360,00013,000 and $407,00019,000 for the nine months ended September 30, 2023 and 2022, and 2021, respectively. Depreciation expense in cost of revenue was approximately $10,000 and $18,000 for the nine months ended September 30, 2022 and 2021, respectively. There was no depreciation expense included in cost of revenue for the three months ended September 30, 2022 or 2021.
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 nine months ended September 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-cancellable operating lease which expiresexpired on March 31, 2023, and was extended in a series of amendments through March 31, 2024. The Company’s periodic lease cost was approximately $20,000 for each of the three months ended September 30, 20222023 and 2021, respectively,2022 and $60,000 for each of the nine months ended September 30, 20222023 and 2021, respectively. As of September 30, 2022, our right of use asset was approximately $36,000.2022.
The following table presents the future operating lease payment as of September 30, 2022:
Schedule of Estimate Future Maturities of Lease Liabilities
| 2022 (three months remaining) | $ | 20,000 | ||
| 2023 | 20,000 | |||
| Total lease payments | 40,000 | |||
| Less: imputed interest | (1,000 | ) | ||
| Total lease liability | $ | 39,000 |
Legal Proceedings
AsSchreiber 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, under a Supply Agreement with an initial term through September 2025.
Over the course of 2022, the 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 Note 1,the Supply Agreement. However, on November 4, 2022, in response to a formal proposal of alternate resolutions, the Company hasreceived 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 lawsuit againstcomplaint in the United States District Court for the Central District of California, Western Division (the “Complaint”), claiming that the Manufacturer had not met its co-manufacturer, Schreiber Foods, Inc.,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 allowed the parties to reach a potential resolution outside of the court system. However, as the parties were once again unable to come to an agreement, the Company re-filed the Complaint in California State Court in 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 cannot be predicted at this time.is uncertain. The Company has mitigated the impact of the supply disruption with the introduction of its single-serve smoothie cartons; however the product format has not been accepted by some customers or as a substitute for the bottle product in all use cases.
| 11 |
Other legal matters
From time to time, various lawsuits and legal proceedings may arise in the ordinary course of business. LitigationHowever, 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. Convertible Debt Subscriptions
From July to October of 2023, the Company executed subscription agreements for $1,880,000 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. The Company made its initial drawdown on the convertible debt on October 23, 2023, as described in Note 10.
Note 6.7. Stockholders’ Equity
The following are changes in stockholders’ equity for the nine months ended September 30, 20212022 and September 30, 2022:2023:
Barfresh Food Group, Inc.
Condensed Consolidated Statements of Stockholders’ Equity
Schedule of Changes in Stockholders' Equity
| 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 | |||||||||||||||
| Issuance of stock for services | 4,579 | - | 75,000 | - | 75,000 | |||||||||||||||
| Equity based compensation | - | - | 52,000 | - | 52,000 | |||||||||||||||
| Shares issued for warrant exercise | ||||||||||||||||||||
| Shares issued for warrant exercise, shares | ||||||||||||||||||||
| Net loss | - | - | - | (1,396,000 | ) | (1,396,000 | ) | |||||||||||||
| Balance September 30, 2021 | 12,892,418 | $ | - | $ | 60,187,000 | $ | (52,296,000 | ) | $ | 7,891,000 | ||||||||||
| Shares | Amount | Capital | (Deficit) | Total | ||||||||||||||||
| 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 | 5,000 | - | 211,000 | - | 211,000 | |||||||||||||||
| Cash settlement of equity-based compensation | ||||||||||||||||||||
| Issuance of stock and options for services | 23,643 | - | 173,000 | - | 173,000 | |||||||||||||||
| Net loss | - | - | - | (4,276,000 | ) | (4,276,000 | ) | |||||||||||||
| Balance September 30, 2022 | 12,934,741 | $ | - | $ | 60,730,000 | $ | (56,114,000 | ) | $ | 4,616,000 | ||||||||||
| 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 | ||||||||||
| Beginning balance | 12,905,112 | $ | - | $ | 60,341,000 | $ | (52,165,000 | ) | $ | 8,176,000 | ||||||||||
| Shares issued for warrant exercise | 986 | - | 5,000 | - | 5,000 | |||||||||||||||
| Equity based compensation | 5,000 | - | 211,000 | - | 211,000 | |||||||||||||||
| Issuance of stock for services | 23,643 | - | 173,000 | - | 173,000 | |||||||||||||||
| Net loss | - | - | - | (4,339,000 | ) | (4,339,000 | ) | |||||||||||||
| Balance September 30, 2022 | 12,934,741 | $ | - | $ | 60,730,000 | $ | (56,504,000 | ) | $ | 4,226,000 | ||||||||||
| Ending balance | 12,934,741 | $ | - | $ | 60,730,000 | $ | (56,504,000 | ) | $ | 4,226,000 | ||||||||||
| 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 | 165,779 | - | 496,000 | - | 496,000 | |||||||||||||||
| Cash settlement of equity-based compensation | - | - | (24,000 | ) | - | (24,000 | ) | |||||||||||||
| Issuance of stock and options for services | 4,094 | - | 11,000 | - | 11,000 | |||||||||||||||
| Net loss | - | - | - | (2,123,000 | ) | (2,123,000 | ) | |||||||||||||
| Balance September 30, 2023 | 13,104,614 | $ | - | $ | 61,388,000 | $ | (60,095,000 | ) | $ | 1,293,000 | ||||||||||
| Balance | 13,104,614 | $ | - | $ | 61,388,000 | $ | (60,095,000 | ) | $ | 1,293,000 | ||||||||||
Warrants
During the nine months ended September 30, 2022,2023, 102,852936,375 warrants at a weighted average exercise price of $8.826.00 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 shares for future issuance. The Board of Directors discontinued further grants under the 2015 Plan.
As of September 30, 2023, the Company has $ 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 years.
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Stock Options
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 | 56,980 | $ | 5.90 | |||||||||
| Cancelled/expired | (17,644 | ) | $ | 5.08 | ||||||||
| Outstanding on September 30, 2022 | 664,352 | $ | 7.38 | 3.2 | ||||||||
| Exercisable, September 30, 2022 | 577,242 | $ | 7.64 | 2.7 | ||||||||
| 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 | 63,545 | $ | 1.50 | 8.0 | ||||||||
| Cancelled/expired | (109,388 | ) | $ | 8.48 | ||||||||
| Outstanding on September 30, 2023 | 637,096 | $ | 6.54 | 3.6 | ||||||||
| Exercisable, September 30, 2023 | 576,393 | $ | 6.75 | 3.2 | ||||||||
Summary of Fair Value of Options Using Black-Sholes Option Pricing Model
| 2022 | ||||
| Expected term (in years) | - | |||
| Weighted average expected volatility | % | |||
| Weighted average risk-free interest rate | % | |||
| Expected dividends | $ | - | ||
| Weighted average grant date fair value per share | $ | 4.53 | ||
As of September 30, 2022, the Company has approximately $ of unrecognized share-based compensation expense related to unvested options, which is expected to be recognized over the remaining weighted average period of years.
| 2023 | ||||
| Expected term (in years) | ||||
| Expected volatility | % | |||
| Risk-free interest rate | % | |||
| Expected dividends | $ | - | ||
| Weighted average grant date fair value per share | $ | 1.19 | ||
Restricted Stock
Summary of Restricted Stock Award and Restricted Stock Unit Activity
Number of shares | Weighted average grant date fair value | |||||||
| Unvested at January 1, 2022 | - | $ | - | |||||
| Granted | 41,554 | $ | 5.27 | |||||
| Forfeited | (4,631 | ) | $ | 5.38 | ||||
| Unvested at September 30, 2022 | 36,923 | $ | 5.25 | |||||
As of September 30, 2022, the Company has approximately $ 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 years.
| Number of shares | Weighted average grant date fair value | |||||||
| Unvested at January 1, 2023 | 41,923 | $ | 4.92 | |||||
| Granted | 5,000 | $ | 1.25 | |||||
| Vested | (4,386 | ) | $ | 5.06 | ||||
| Forfeited | (9,931 | ) | $ | 3.33 | ||||
| Unvested at September 30, 2023 | 32,606 | $ | 4.82 | |||||
Performance StockShare Units
During the nine months ended September 30, 2022 and 2023, the Company issued performance share units (“PSUs”) that representrepresented shares potentially issuable in the future. Issuance is based upon Company and individual performance overin the remainderyears of 2022. The PSUs vest only upon the achievement of the applicable performance goals and depending on the particular grantee and achievement on the performance goals, the grantee may earn between % and % of the target PSUs. The fair value of PSUs is calculated based on the stock price on the date of grant.issuance.
| 13 |
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 | 357,689 | $ | 1.64 | |||||
| Vested | (45,251 | ) | $ | 1.36 | ||||
| Unvested at September 30, 2023 | 312,438 | $ | 1.68 | |||||
Number of shares | Weighted average grant date fair value | |||||||
| Unvested at January 1, 2022 | - | $ | - | |||||
| Granted | 123,512 | $ | 4.50 | |||||
| Forfeited | (1,889 | ) | $ | 4.50 | ||||
| Unvested at September 30, 2022 | 121,623 | $ | 4.50 | |||||
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 $, resulting in incremental compensation of $ after considering the $ fair value of the vested shares at the date of the modification. Additionally, the Company performance targets were modified to allow approximately PSUs to vest, with an additional time-based vesting requirement for approximately of the PSUs. Because the awards did not vest based on the original terms, the modification was considered a new grant, resulting in $ in compensation expense in the nine-months ended September 30, 2023.
The stock-based compensation expense recognized each period is dependent uponCompany adopted a 2023 PSU program in April 2023, granting approximately PSUs at target performance against company-wide metrics. An additional PSUs were granted in September 2023 for performance against individual goals, replacing the Company’s estimatecash bonus program. The results for the three and nine months ended September 30, 2023 include $ in expense for the 2023 PSU program. Estimates of expense associated with 2023 performance will be reassessed each quarter through the number of shares that will ultimately vest based on the achievement of certain performance conditions. Future stock-based compensation for unvested performance-based awards could reach a maximum of $, in 2022 assuming achievement at the maximum level.period.
Note 7.8. 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 September 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 nine months ended September 30, 20222023 and 2021,2022, the Company did not incur any interest and penalties associated with tax positions. As of September 30, 2022,2023, the Company did not have any significant unrecognized uncertain tax positions.
Note 8.9. Liquidity
During the nine months ended September 30, 2022 and 2021,2023, the Company used cash for operations of $2,619,000 2,008,000and $1,146,000, respectively.. 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 1, our litigation against co-manufacturer5, the dispute and subsequent contract termination with the Manufacturer has resulted in uncertainty aroundlimitations in our ability to procure product,certain products, which in turnhas and may continue to inhibit our ability to achieve positive cash flow.flow until we are able to expand our manufacturing capacity. Additionally, management has considered that dispute resolution, including litigation, is costly and will require the outlay of cash.
However, as of September 30, 2022, we have2023, the Company has $3,048,0001,011,000 of cash and restricted cash andfunding commitments of approximately $1,880,000, as more fully described in Note 6. As such, even though we havemanagement has identified certain indicators, these indicators do not raise substantial doubt regarding the Company’s ability to continue as a going concern. However, the Companymanagement 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.
| 14 |
Note 10. Subsequent Event – Nasdaq Compliance
On May 5, 2023, the Company received a notice letter from the Listing Qualifications Staff of The Nasdaq Stock Market, LLC (“Nasdaq”) notifying the Company that it was not in compliance with the Listing Rule 5550(b) (the “Rule”), which requires listed companies to maintain a minimum $2,500,000 stockholders’ equity, $35,000,000 market value of listed securities, or $500,000 net income from continuing operations. In its quarterly report for the period ended March 31, 2023, the Company reported stockholders’ equity of $1,845,000, and as a result, did not satisfy the Rule. On June 14, 2023, the Company received a letter from Nasdaq granting the Company an extension through October 30, 2023 to regain compliance with the Rule.
On October 23, 2023, the Company issued convertible notes in the amount of $1,390,000 pursuant to the subscription agreements described in Note 6. Note balances of $1,207,000 were immediately converted into approximately shares of common stock. A pro-forma balance sheet giving effect to the transactions is presented below:
Schedule of Pro-forma Balance Sheet
| September 30, 2023 (unaudited) | Convertible Debt Drawdown | Conversion of Debt to Equity | September 30, 2023 (proforma, unaudited) | |||||||||||||
| Assets | ||||||||||||||||
| Current assets: | ||||||||||||||||
| Cash | $ | 1,011,000 | $ | 1,390,000 | $ | - | $ | 2,401,000 | ||||||||
| Trade accounts receivable, net | 1,159,000 | 1,159,000 | ||||||||||||||
| Other receivables | 116,000 | 116,000 | ||||||||||||||
| Inventory, net | 748,000 | 748,000 | ||||||||||||||
| Prepaid expenses and other current assets | 167,000 | 167,000 | ||||||||||||||
| Total current assets | 3,201,000 | 1,390,000 | - | 4,591,000 | ||||||||||||
| Property, plant and equipment, net of depreciation | 487,000 | 487,000 | ||||||||||||||
| Intangible assets, net of amortization | 258,000 | 258,000 | ||||||||||||||
| Deposits | 7,000 | 7,000 | ||||||||||||||
| Total assets | $ | 3,953,000 | $ | 1,390,000 | $ | - | $ | 5,343,000 | ||||||||
| Liabilities and Stockholders’ Equity | ||||||||||||||||
| Current liabilities: | ||||||||||||||||
| Accounts payable | $ | 1,692,000 | $ | - | $ | - | $ | 1,692,000 | ||||||||
| Disputed co-manufacturer accounts payable | 499,000 | 499,000 | ||||||||||||||
| Accrued expenses | 229,000 | 229,000 | ||||||||||||||
| Accrued payroll and employee related | 240,000 | 240,000 | ||||||||||||||
| Convertible notes payable | - | 1,390,000 | (1,207,000 | ) | 183,000 | |||||||||||
| Total current liabilities | 2,660,000 | 1,390,000 | (1,207,000 | ) | 2,843,000 | |||||||||||
| Total liabilities | 2,660,000 | 1,390,000 | (1,207,000 | ) | 2,843,000 | |||||||||||
| Stockholders’ equity: | ||||||||||||||||
| Common stock | - | - | ||||||||||||||
| Additional paid in capital | 61,388,000 | 61,388,000 | ||||||||||||||
| Accumulated deficit | (60,095,000 | ) | 1,207,000 | (58,888,000 | ) | |||||||||||
| Total stockholders’ equity | 1,293,000 | - | 1,207,000 | 2,500,000 | ||||||||||||
| Total liabilities and stockholders’ equity | $ | 3,953,000 | $ | 1,390,000 | $ | - | $ | 5,343,000 | ||||||||
Management believes that taking into consideration the October 23, 2023 note issuance and conversion, the Company satisfies the stockholders’ equity requirement on a pro-forma basis as of September 30, 2023 and as of October 26, 2023. Nasdaq will continue to monitor the Company’s ongoing compliance with the Rule and, if at the time of its next periodic report the Company does not evidence compliance, it may be subject to delisting.
| 15 |
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 Pronouncementshave been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”).
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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.
Results of Operations
Results of Operation for the Three Months Ended September 30, 20222023 as Compared to the Three Months Ended September 30, 20212022
Revenue and cost of revenue
Revenue increased by approximately $476,000 (25%)$197,000, or 8%, from approximately $1,930,000 in 2021 to approximately $2,406,000 in 2022. The overall revenue for the third quarter2022 to $2,603,000 in 2023. Revenue in 2022 was highernegatively impacted by the $630,000 claims estimate resulting from the market withdrawal of product purchased from the Manufacturer due to growthquality complaints. Excluding the refund claims estimate, revenue was $3,036,000 in “Twist & Go”™ revenue2022 and the gradual return of single serve demand. Revenuetherefore decreased by $433,000 in the third quarter of 2022 was adversely impacted by a withdrawal of “Twist & Go”™2023, or 14% based on product manufactured by one of its co-manufacturers. The withdrawal resulted from quality complaints that are the subject of a legal dispute that is more fully described in the footnotes of the accompanying financial statements. As a result of the withdrawal, we recorded a reserve for anticipated sales claims and distributor administrative fees of $630,000. The Company anticipates that itsshipped. Our revenues will behave been adversely impacted as a result of lost customers and supply constraints resulting from the product issues and related dispute unless and untilwith the Manufacturer. While the introduction of our carton packaging format has mitigated the loss of supply, the product offering has not been accepted by some customers or as a suitable resolution is reached or new sources of reliable supply at sufficient volume can besubstitute for the bottle product in all use cases. We have identified and developed,are actively working to develop additional smoothie bottle manufacturing capacity. We expect expanded capacity to become available in early 2024, subject to the timing of which is uncertain.risks and uncertainties associated with contracting and pre-production activities.
Cost of revenue for 20222023 was approximately $3,129,000$1,690,000 as compared to approximately $1,209,000$3,129,000 in 2021.2022. Cost of revenue in the third quarter of 2022 was adverselynegatively impacted by the anticipated disposal$932,000 inventory write-off related to the product withdrawal. Excluding the inventory write-off, cost of withdrawn inventory, amounting to $932,000 including ancillary costs. Our gross profitrevenue was approximately ($723,000) (-30%) and $721,000 (37%) for$2,197,000 in 2022, and 2021, respectively.therefore decreased by $507,000 in 2023, or 23% based on product shipped. Excluding the impact of the product withdrawal, on both revenue and cost of revenue ourdeclined due to lower revenue, and lower product cost due to a shift in product mix resulting from the limited supply of smoothie bottles.
Our gross profit inwas $913,000 (35%) and ($723,000) (-30%) for 2023 and 2022, respectively. Adjusted for the third quarterproduct withdrawal, our 2022 gross profit was $839,000 (28%). The decreaseAdjusted comparative gross margin improvement is a result of favorable product mix, pricing actions, and a slight improvement in the third quarter is primarily due to product mix which includes a higher proportioncost of “Twist & Go”™ at slightly lower product margins.supply chain components.
Selling, marketing and distribution expense
Our operations were primarily directed towards increasing sales and expanding our distribution network.
| Three months ended September 30, | Three months ended September 30, | |||||||||||||||||||||||||||||||
| 2022 | 2021 | Change | Percent | Three months ended September 30, 2023 | Three months ended September 30, 2022 | Change | Percent | |||||||||||||||||||||||||
| Sales and marketing | $ | 365,000 | $ | 164,000 | $ | 201,000 | 123 | % | $ | 327,000 | $ | 410,000 | $ | (83,000 | ) | -20 | % | |||||||||||||||
| Storage and outbound freight | 450,000 | 316,000 | 134,000 | 42 | % | 370,000 | 450,000 | (80,000 | ) | -18 | % | |||||||||||||||||||||
| $ | 815,000 | $ | 480,000 | $ | 335,000 | 70 | % | |||||||||||||||||||||||||
| Sales, marketing and distribution expense | $ | 697,000 | $ | 860,000 | $ | (163,000 | ) | -19 | % | |||||||||||||||||||||||
Selling, marketing and distribution expense decreased approximately $163,000 (-19%) from approximately $860,000 in 2022 to $697,000 in 2023.
Sales and marketing expense increaseddecreased approximately $201,000 (123%$83,000 (-20%) from approximately $164,000$410,000 in 20212022 to $365,000$327,000 in 2022.2023. The increase in sales and marketing expense was primarily thedecrease is a result of the retention of new employeesheadcount reductions and outside service providerslower broker commissions due to assist with saleslower revenue and initiatives, including, beginning in the third quarter of 2022, brokers specializing in the school market. Additionally, the Company increased its participation in education nutrition trade shows in 2022.product mix.
Storage and outbound freight expense increaseddecreased approximately $134,000 (42%$80,000 (-18%) from approximately $316,000 in 2021 to $450,000 in 2022. The increase was2022 to $370,000 in 2023, primarily as a result of the 25% increase14% decrease in product shipped as described in the discussion of revenue andfor the additional shipments that were ultimately not recognized as revenue duecomparative quarters. The volume-related decrease in expense was enhanced by freight efficiencies compared to the aforementioned product withdrawal.2022.
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General and administrative expense
Three months ended September 30, | Three months ended September 30, | Change | Percent | |||||||||||||
| Personnel costs | $ | 196,000 | $ | 336,000 | $ | (140,000 | ) | -42 | % | |||||||
| Stock-based compensation | 240,000 | 156,000 | 84,000 | 54 | % | |||||||||||
| Legal, professional and consulting fees | 61,000 | 98,000 | (37,000 | ) | -38 | % | ||||||||||
| Director fees paid in cash | (50,000 | ) | 25,000 | (75,000 | ) | -300 | % | |||||||||
| Research and development | 32,000 | 220,000 | (188,000 | ) | -85 | % | ||||||||||
| Other general and administrative expenses | 99,000 | 178,000 | (79,000 | ) | -44 | % | ||||||||||
| General and administrative expense | $ | 578,000 | $ | 1,013,000 | $ | (435,000 | ) | -43 | % | |||||||
General and administrative expense decreased approximately $435,000 (-43%) from approximately $1,013,000 in 2022 to $578,000 in 2023.
Personnel cost represents the cost of employees including salaries, bonuses, employee benefits and employment taxes. Personnel cost decreased by approximately $140,000 (-42%) from approximately $336,000 to $196,000 and stock-based compensation increased by approximately $84,000 (54%) from $156,000 to $240,000. The decrease in personnel cost resulted from a reduction in headcount and the decision to issue stock-based compensation in lieu of cash bonuses for a portion of the performance criteria in 2023, resulting in a year-to-date reduction of personnel costs of $87,000, including a $60,000 reclassification of expense incurred in the first two quarters of 2023. Additionally, unpaid directors’ fees for 2023 that were expected to be paid in cash were also converted to stock-based compensation, resulting in a year-to-date reduction in cash expense of $75,000, including a $50,000 reclassification of expense incurred in the first two quarters of 2023. Excluding the impact of the compensation modifications for employees and directors, stock-based compensation decreased by $26,000 due to headcount reductions and the non-recurrence of a one-time grant in 2022.
Legal, professional and consulting fees decreased by $37,000 (-38%) as a result of a reduction in outside services in an effort to conserve working capital.
Research and development expense decreased approximately $188,000 (-85%) from approximately $220,000 in 2022 to $32,000 in 2023. Expense was elevated in 2022 as we incurred pre-production expense related to the launch of our carton format, while 2023 expense was limited as activities were minimized to conserve working capital.
Other general and administrative expenses decreased by approximately $79,000 (-44%) due to a reduction in local non-income based taxes and the timing of the Company’s annual meeting.
Net loss
We had net losses of approximately $476,000 and $2,687,000 for the three-month periods ended September 30, 2023 and 2022, respectively. The decrease in net loss of approximately $2,211,000, was the result of the non-recurrence of the estimated refund claims and inventory disposal costs associated with the product withdrawal, improved margins, and a reduction of approximately $575,000 in operating expenses due to cost saving measures and to a lesser extent, reduced volume of product shipped.
Results of Operation for the Nine Months Ended September 30, 2023 as Compared to the Nine Months Ended September 30, 2022
Revenue and cost of revenue
Revenue was $6,205,000 in 2023 compared to $7,731,000 in 2022, a decrease of $1,526,000, or 20%. Revenue in 2022 was negatively impacted by the $630,000 claims estimate resulting from the market withdrawal of product purchased from the Manufacturer. Excluding the refund claims estimate, revenue was $8,361,000 in 2022 and therefore decreased by $2,156,000 in 2023, or 26% based on product shipped. Our revenues have been adversely impacted as a result of lost customers and supply constraints resulting from the product issues and related dispute with the Manufacturer. While the introduction of our carton packaging format has mitigated the loss of supply, the product offering has not been accepted by some customers or as a substitute for the bottle product in all use cases. We have identified and are actively working to develop additional smoothie bottle manufacturing capacity. We expect expanded capacity to become available in early 2024, subject to the risks and uncertainties associated with contracting and pre-production activities.
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Cost of revenue was $3,963,000 in 2023 compared to $6,807,000 in 2022, a decrease of $2,844,000, or 42%. Cost of revenue in 2022 was negatively impacted by the $932,000 inventory write-off related to the product withdrawal. Excluding the inventory write-off, cost of revenue was $5,875,000 in 2022, and therefore decreased by $1,912,000 in 2023, or 33% based on product shipped. Excluding the impact of the product withdrawal, cost of revenue declined due to lower revenue, and lower product cost due to a shift in product mix resulting from the limited supply of smoothie bottles.
Our generalgross profit was $2,242,000 (36%) and $924,000 (12%) for 2023 and 2022, respectively. Adjusted for the product withdrawal, our 2022 gross profit was $2,486,000 (30%). Adjusted comparative gross margin improvement is a result of favorable product mix, pricing actions, and a slight improvement in the cost of supply chain components.
Selling, marketing and distribution expense
Our operations were primarily directed towards increasing sales and expanding our distribution network.
| Nine months ended September 30, | Nine months ended September 30, | |||||||||||||||
| 2023 | 2022 | Change | Percent | |||||||||||||
| Sales and marketing | $ | 1,058,000 | $ | 1,019,000 | $ | 39,000 | 4 | % | ||||||||
| Storage and outbound freight | 932,000 | 1,217,000 | (285,000 | ) | -23 | % | ||||||||||
| Sales, marketing and distribution expense | $ | 1,990,000 | $ | 2,236,000 | $ | (246,000 | ) | -11 | % | |||||||
Selling, marketing and distribution expense decreased approximately $246,000 (-11%) from approximately $2,236,000 in 2022 to $1,990,000 in 2023.
Sales and marketing expense increased approximately $39,000 (4%) from approximately $1,019,000 in 2022 to $1,058,000 in 2023. We incurred additional expense for product sampling of smoothie carton products, 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, and broker commissions as we engaged numerous regional K-12 specialists to expand our geographic reach in the third quarter of 2022. These increases were partially offset by a reduction in personnel costs.
Storage and outbound freight expense decreased approximately $285,000 (-23%) from approximately $1,217,000 in 2022 to $932,000 in 2023 primarily as a result of the 26% decrease in product shipped as described in the discussion of revenue for the comparative year-to-date periods. The volume-related decrease in expense was partially offset by higher costs resulting from product mix and inefficiencies due to production transitions.
General and administrative expense increased by 81%, or approximately $472,000, from approximately $586,000 in 2021 to approximately $1,058,000 in 2022, primarily driven by research and development, personnel, including non-cash stock-based compensation, and other general and administrative expense. The following is a breakdown of our general
| Nine months ended September 30, 2023 | Nine months ended September 30, 2022 | Change | Percent | |||||||||||||
| Personnel costs | $ | 929,000 | $ | 1,006,000 | $ | (77,000 | ) | -8 | % | |||||||
| Stock based compensation | 431,000 | 355,000 | 76,000 | 21 | % | |||||||||||
| Legal, professional and consulting fees | 236,000 | 311,000 | (75,000 | ) | -24 | % | ||||||||||
| Director fees paid in cash | - | 75,000 | (75,000 | ) | -100 | % | ||||||||||
| Research and development | 88,000 | 347,000 | (259,000 | ) | -75 | % | ||||||||||
| Other general and administrative expenses | 381,000 | 543,000 | (162,000 | ) | -30 | % | ||||||||||
| General and administrative expense | $ | 2,065,000 | $ | 2,637,000 | $ | (572,000 | ) | -22 | % | |||||||
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General and administrative expense for the three months ended September 30,decreased approximately $572,000 (-22%) from approximately $2,637,000 in 2022 and 2021:to $2,065,000 in 2023.
| Three months ended September 30, | Three months ended September 30, | |||||||||||||||
| 2022 | 2021 | Change | Percent | |||||||||||||
| Personnel costs | $ | 352,000 | $ | 244,000 | $ | 108,000 | 44 | % | ||||||||
| Stock-based compensation | 118,000 | 42,000 | 76,000 | 181 | % | |||||||||||
| Legal, professional and consulting fees | 98,000 | 67,000 | 31,000 | 46 | % | |||||||||||
| Director fees | 62,000 | 50,000 | 12,000 | 24 | % | |||||||||||
| Research and development | 220,000 | 34,000 | 186,000 | 547 | % | |||||||||||
| Other general and administrative expenses | 208,000 | 149,000 | 59,000 | 40 | % | |||||||||||
| $ | 1,058,000 | $ | 586,000 | $ | 472,000 | 81 | % | |||||||||
Personnel cost represents the cost of employees including salaries, bonuses, employee benefits and employment taxes and continues to be our largest cost. Personnel cost increaseddecreased by approximately $108,000 (44%$77,000 (-8%) from approximately $244,000$1,006,000 to $352,000.$929,000. The increasedecrease in personnel cost wasresulted primarily from the confirmation and recognition of our 2021 COVID-related tax credit, partially offset by bonus expense from the decrease in consulting fees as we choose2023 decision to hire permanent staff as the critical stagescash settle a portion of the COVID-19 pandemic waned, rather than rely on consultants and temporary staff.2022 performance stock units.
Stock basedStock-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 September 30, 2022 was approximately $118,000 compared to $42,000 for the three months ended September 30, 2021 due to the aforementioned increase in staffing as well as the implementation of a performance-based stock compensation program.
Research and development expense increased approximately $186,000 (547%) from approximately $34,000 in 2021 to $220,000 in 2022. The increase is primarily due to materials consumed in pre-production runs at a new co-manufacturer that will provide our Twist & Go™ product in carton format starting in the fourth quarter of 2022.
Other expense increased approximately $59,000 (40%) from approximately $149,000 in 2021 to $208,000 in 2022, primarily related to an increase in maintenance costs on equipment loaned to our bulk product customers, costs related to our annual meeting, and approximately $8,000 in one-time costs related to the uplist of our common stock to the NASDAQ Stock Market.
Operating loss and net loss
We had operating and net losses of approximately $2,708,000 and $508,000 for the three-month periods ended September 30, 2022 and 2021, respectively. The increase of approximately $2,200,000 or 433%, was primarily due to $1,785,000 in charges related to the aforementioned product quality issue and withdrawal.
Results of Operation for Nine Months Ended September 30, 2022 as Compared to the Nine Months Ended September 30, 2021
Revenue and cost of revenue
Revenue increased by approximately $3,485,000 (82%$76,000 (21%) from approximately $4,246,000 in 2021$355,000 to approximately $7,731,000 in 2022. The overall revenue for the nine months ended September 30, 2022 was higher due to growth in “Twist & Go”™ revenue and the gradual return of single serve demand. Revenue in the third quarter of 2022 was adversely impacted by a withdrawal of “Twist & Go”™ product manufactured by one of its co-manufacturers. The withdrawal resulted from quality complaints$431,000 because 2023 directors’ fees that are the subject of a legal dispute that is more fully described in the footnotes of the accompanying financial statements. As a result of the withdrawal, we recorded a reserve for anticipated sales claims and distributor administrative fees of $630,000. The Company anticipates that its revenues will be adversely impacted as a result of the dispute unless and 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.
Cost of revenue for 2022 was approximately $6,807,000 as compared to approximately $2,614,000 in 2021. Cost of revenue in the third quarter of 2022 was adversely impacted by the anticipated disposal of withdrawn inventory, amounting to $932,000 including ancillary costs. Our gross profit was approximately $924,000 (12%) and $1,632,000 (38%) for 2022 and 2021, respectively. Excluding the impact of the product withdrawal on both revenue and cost of revenue, our gross profit in the nine months ended September 30, 2022 was $2,486,000 (30%). Gross margins decreased in the nine months ended September 30, 2022 primarily due to product mix which includes “Twist & Go”™ at slightly lower product margins.
Selling, marketing and distribution expense
| Nine months ended September 30, | Nine months ended September 30, | |||||||||||||||
| 2022 | 2021 | Change | Percent | |||||||||||||
| Sales and marketing | $ | 929,000 | $ | 519,000 | $ | 410,000 | 79 | % | ||||||||
| Storage and outbound freight | 1,208,000 | 717,000 | 491,000 | 68 | % | |||||||||||
| $ | 2,137,000 | $ | 1,236,000 | $ | 901,000 | 73 | % | |||||||||
Sales and marketing expense increased approximately $410,000 (79%) from approximately $519,000 in 2021 to $929,000 in 2022. The increase in sales and marketing expense was primarily the result of the retention of new employees and outside service providers to assist with sales and initiatives, including, beginning in the third quarter of 2022, brokers specializing in the school market. Additionally, the Company increased its participation in education nutrition trade shows in 2022.
Storage and outbound freight expense increased approximately $491,000 (68%) from approximately $717,000 in 2021 to $1,208,000 in 2022. The increase was primarily a result of the 82% increase in revenue, tempered by logistics efficiencies from the increased volume in core markets served.
General and administrative expense
Our general and administrative expense increased by 71%, or approximately $1,138,000, from approximately $1,598,000 in 2021 to approximately $2,736,000 in 2022, primarily driven by personnel, including non-cash stock-based compensation, other general and administrative expense, and research and development. The following is a breakdown of our general and administrative expense for the nine months ended September 30, 2022, and 2021:
| Nine months ended September 30, | Nine months ended September 30, | |||||||||||||||
| 2022 | 2021 | Change | Percent | |||||||||||||
| Personnel costs | $ | 1,036,000 | $ | 637,000 | $ | 399,000 | 63 | % | ||||||||
| Stock-based compensation | 211,000 | 52,000 | 159,000 | 306 | % | |||||||||||
| Legal, professional and consulting fees | 342,000 | 244,000 | 98,000 | 40 | % | |||||||||||
| Director fees | 187,000 | 200,000 | (13,000 | ) | -7 | % | ||||||||||
| Research and development | 347,000 | 173,000 | 174,000 | 101 | % | |||||||||||
| Other general and administrative expenses | 613,000 | 292,000 | 321,000 | 110 | % | |||||||||||
| $ | 2,736,000 | $ | 1,598,000 | $ | 1,138,000 | 71 | % | |||||||||
Personnel cost represents the cost of employees including salaries, bonuses, employee benefits and employment taxes and continueswere expected to be our largest cost. Personnel cost increased by approximately $399,000 (63%) from approximately $637,000paid in cash were converted to $1,036,000. 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 nine months ended September 30, 2022 was approximately $211,000 compared to $52,000 for the nine months ended September 30, 2021 due to the aforementioned increase in staffing, and the institution of our performance-based stock compensation program in the third quarter of 2022. Stock-based compensation in 2021 benefited from forfeiture credits due to the departure of two key employees.stock-based compensation.
Legal, professional and consulting fees increased approximately $98,000 (40%decreased by $75,000 (-24%) from approximately $244,000. We reduced outside services in 2021an effort to $342,000 in 2022. The increase was primarily due to corporate development activities.conserve working capital.
Research and development expense increaseddecreased approximately $174,000 (101%$259,000 (-75%) from approximately $173,000 in 2021 to $347,000 in 2022. The increase is primarily due2022 to materials consumed$88,000 in 2023. Expense was elevated in 2022 as we incurred pre-production runs at a new co-manufacturer that will provideexpense related to the launch of ourTwist & Go™ product in carton format, starting in the fourth quarter of 2022.while 2023 expense was limited as activities were minimized to conserve working capital.
Other expense increasedgeneral and administrative expenses decreased approximately $321,000 (110%$162,000 (-30%) from approximately $292,000$543,000 in 20212022 to $613,000$381,000 in 2022. In 2022, we incurred approximately $175,000 in one-time2023 primarily as a result of non-recurring costs related to the uplist of our common stockuplisting to the NASDAQ Stock Market. Additionally, we experienced maintenance cost increasesstock exchange in 2022, partially offset by legal costs related to equipment loaned toby our bulk product customers, and an increase in annual meeting costs.
Operating loss
We had operating losses of approximately $4,339,000 and $1,658,000 fordispute with the nine-month periods ended September 30, 2022 and 2021, respectively. The increase of approximately $2,681,000 or 162%, was primarily due to $1,785,000 in charges related to the aforementioned product quality issue and withdrawal and increases in operating expense.
Other income 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 nine months ended September 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, which resulted in an extinguishment loss of $194,000.
We recorded a gain on extinguishment of covid-19 related Paycheck Protection Program (“PPP”) loan of $568,000 in the nine months ended September 30, 2021.
Interest expense was approximately $128,000 for the nine months ended September 30, 2021. Interest related to convertible debt that was converted and repaid in 2021. We did not incur any interest expense for the nine months ended September 30, 2022.Manufacturer.
Net loss
We had net losses of approximately $4,339,000$2,123,000 and $1,396,000 in$4,276,000 for the nine-month periods ended September 30, 2023 and 2022, respectively. The decrease in net loss of approximately $2,153,000, was the result of the non-recurrence of the estimated refund claims and 2021, respectively,inventory disposal costs associated with the primary changeproduct withdrawal, improved margins, and a reduction of approximately $835,000 in operating expenses due to cost saving measures, reduced volume of product shipped, and the $568,000 gain on forgivenessrecognition of the PPP loan in 2021.our COVID-related tax credit.
Liquidity and Capital Resources
As of September 30, 2022,2023, we had working capital of approximately $2,619,000 as$541,000 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 nine months ended September 30, 2022.2023 as adjusted for non-cash depreciation, amortization and stock-based compensation.
During the nine months ended September 30, 2022,2023, we used cash$2,008,000 in operations.
The impact of approximately $2,619,000COVID-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 operations,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.
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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 $13,000$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.
From July to October 2023, the Company executed subscription agreements for $1,880,000 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 purchaseterm, regardless of equipment, partially offset by $5,000 fromearlier payment or conversion, and is mandatorily convertible as to principal and interest into shares of the issuanceCompany’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. On October 23, 2023, the Company issued $1,390,000 of convertible notes pursuant to an outstanding warrant.the subscription agreements, and immediately converted $1,207,000 of principal and interest into approximately 820,000 shares of common stock.
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 expense,expenses, and to continue to control and reduce fixed overhead expense. Our current dispute with the Manufacturer and the resulting loss of product supply and legal expense continue to negatively impact our financial position, results of operations and cash flow. While the introduction of our carton packaging format has mitigated the loss of supply, the product offering has not been accepted by some customers or as a substitute for the bottle product in all use cases. We have identified and are actively working to develop additional smoothie bottle manufacturing capacity. We expect expanded capacity to become available in early 2024, subject to the risks and uncertainties associated with contracting and pre-production activities.
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 September 30, 2022 are approximately $40,000.
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 expense, results of operations, liquidity, capital expenditures or capital resources that are material to stockholders.
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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 September 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 second quarter of 2022. The control environment is impacted due to the company’s inadequate segregation of duties.
In an effort to remediate the identified material weakness and enhance our internalduties, including information technology 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.activities.
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.
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 September 30, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.None
| 22 |
PART II- OTHER INFORMATION
Item 1. Legal Proceedings.
As more fully discloseddescribed in Note 1, Description of the Business, Basis of Presentation, and Summary of Significant Accounting Policies - Recent Business Developments5, the Company filed suit against Schreiber Foods, Inc. regarding a disputed product quality issue.has an on-going dispute with the Manufacturer, the outcome of which cannot be predicted at this time.
WeFrom time to time, various lawsuits and legal proceedings may bearise in the ordinary course of business. However, litigation is 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
During the quarter ended September 30, 2022,2023, the Company issued 9,842102,011 shares of common stock for services valued at $50,000.$178,000. The Company relied upon the exemption from registration contained in Rule 506(b) and Section 4(a)(2) of the Securities Act, and corresponding provisions of state securities laws, on the basis that (i) offers were made to a limited number of persons, (ii) each offer was made through direct communication with the offerees by the Company, (iii) each of the offerees, which included an officer and two directors of the Company, had the requisite sophistication and financial ability to bear risks of investing in the Company’s common stock, (iv) the Company provided disclosure to the offerees, and (v) there was no general solicitation and no commission or remuneration was paid in connection with the offers.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
None.From July to October 2023, the Company executed subscription agreements for $1,880,000 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. On October 23, 2023, the Company issued $1,390,000 of convertible notes pursuant to the subscription agreements, and immediately converted $1,207,000 of principal and interest into approximately 820,000 shares of common stock.
Item 6. Exhibits.
| Exhibit No. | Description | |
| 10.1 | Form of Securities Purchase Agreement together with form of Convertible Promissory Note | |
| 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. |
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: | By: | /s/ Riccardo Delle Coste |
Riccardo Delle Coste | ||
| Chief Executive Officer | ||
| (Principal Executive Officer) | ||
| Date: | By: | /s/ Lisa Roger |
Chief Financial Officer | ||
| (Principal Financial Officer) | ||