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 March 31,June 30, 2023
| ☐ | 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 April 21,August 9, 2023.
TABLE OF CONTENTS
Page Number | ||
| PART I - FINANCIAL INFORMATION | ||
| Item 1. | Financial Statements. | 3 |
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations. | |
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk. | |
| Item 4. | Controls and Procedures. | |
| PART II - OTHER INFORMATION | 20 | |
| 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
| March 31, | December 31, | |||||||||||||||
| 2023 | 2022 | June 30, 2023 | December 31, 2022 | |||||||||||||
| (Unaudited) | (Audited) | (unaudited) | (restated) | |||||||||||||
| Assets | ||||||||||||||||
| Current assets: | ||||||||||||||||
| Cash | $ | 1,566,000 | $ | 2,808,000 | $ | 952,000 | $ | 2,808,000 | ||||||||
| Restricted cash | 211,000 | 211,000 | - | 211,000 | ||||||||||||
| Trade accounts receivable, net | 571,000 | 126,000 | 362,000 | 126,000 | ||||||||||||
| Other receivables | 11,000 | 101,000 | 108,000 | 101,000 | ||||||||||||
| Inventory, net | 1,055,000 | 1,048,000 | 970,000 | 1,048,000 | ||||||||||||
| Prepaid expenses and other current assets | 169,000 | 79,000 | 99,000 | 79,000 | ||||||||||||
| Total current assets | 3,583,000 | 4,373,000 | 2,491,000 | 4,373,000 | ||||||||||||
| Property, plant and equipment, net of depreciation | 297,000 | 389,000 | 627,000 | 801,000 | ||||||||||||
| Operating lease right-of-use assets, net | - | 18,000 | - | 18,000 | ||||||||||||
| Intangible assets, net of amortization | 291,000 | 306,000 | 275,000 | 306,000 | ||||||||||||
| Deposits | 7,000 | 7,000 | 7,000 | 7,000 | ||||||||||||
| Total assets | $ | 4,178,000 | $ | 5,093,000 | $ | 3,400,000 | $ | 5,505,000 | ||||||||
| Liabilities and Stockholders’ Equity | ||||||||||||||||
| Current liabilities: | ||||||||||||||||
| Accounts payable | $ | 1,306,000 | $ | 1,534,000 | $ | 775,000 | $ | 1,534,000 | ||||||||
| Disputed co-manufacturer accounts payable (Note 4) | 499,000 | 499,000 | ||||||||||||||
| Disputed co-manufacturer accounts payable (Note 5) | 499,000 | 499,000 | ||||||||||||||
| Accrued expenses | 255,000 | 286,000 | 340,000 | 286,000 | ||||||||||||
| Accrued payroll and employee related | 273,000 | 233,000 | 323,000 | 233,000 | ||||||||||||
| Lease liability | - | 20,000 | - | 20,000 | ||||||||||||
| Total current liabilities | 2,333,000 | 2,572,000 | 1,937,000 | 2,572,000 | ||||||||||||
| Total liabilities | 2,333,000 | 2,572,000 | 1,937,000 | 2,572,000 | ||||||||||||
| Commitments and contingencies (Note 4) | - | - | ||||||||||||||
| 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 March 31, 2023 and December 31, 2022, respectively | - | - | ||||||||||||||
| Common stock, $ par value; shares authorized; and shares issued and outstanding at June 30, 2023 and December 31, 2022, respectively | - | - | ||||||||||||||
| Additional paid in capital | 61,139,000 | 60,905,000 | 61,082,000 | 60,905,000 | ||||||||||||
| Accumulated deficit | (59,294,000 | ) | (58,384,000 | ) | (59,619,000 | ) | (57,972,000 | ) | ||||||||
| Total stockholders’ equity | 1,845,000 | 2,521,000 | 1,463,000 | 2,933,000 | ||||||||||||
| Total liabilities and stockholders’ equity | $ | 4,178,000 | $ | 5,093,000 | $ | 3,400,000 | $ | 5,505,000 | ||||||||
See the accompanying notes to the condensed consolidated financial statements
| 3 |
Barfresh Food Group Inc.
Condensed Consolidated Statements of Operations
For the three and six months ended March 31,June 30, 2023 and 2022
(Unaudited)
| For the three months ended June 30, | For the six months ended June 30, | |||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 (restated) | 2023 | 2022 (restated) | |||||||||||||||||||
| Revenue | $ | 2,091,000 | $ | 2,526,000 | $ | 1,511,000 | $ | 2,799,000 | $ | 3,602,000 | $ | 5,325,000 | ||||||||||||
| Cost of revenue | 1,236,000 | 1,762,000 | 1,037,000 | 1,916,000 | 2,273,000 | 3,678,000 | ||||||||||||||||||
| Gross profit | 855,000 | 764,000 | 474,000 | 883,000 | 1,329,000 | 1,647,000 | ||||||||||||||||||
| Operating expenses: | ||||||||||||||||||||||||
| Selling, marketing and distribution | 667,000 | 675,000 | 625,000 | 701,000 | 1,293,000 | 1,376,000 | ||||||||||||||||||
| General and administrative | 994,000 | 823,000 | 493,000 | 802,000 | 1,487,000 | 1,624,000 | ||||||||||||||||||
| Depreciation and amortization | 104,000 | 161,000 | 98,000 | 96,000 | 196,000 | 236,000 | ||||||||||||||||||
| Total operating expenses | 1,765,000 | 1,659,000 | 1,216,000 | 1,599,000 | 2,976,000 | 3,236,000 | ||||||||||||||||||
| Net loss | $ | (910,000 | ) | $ | (895,000 | ) | $ | (742,000 | ) | $ | (716,000 | ) | $ | (1,647,000 | ) | $ | (1,589,000 | ) | ||||||
| Per share information - basic and fully diluted: | ||||||||||||||||||||||||
| Weighted average shares outstanding | 12,977,000 | 12,909,000 | 13,003,000 | 12,915,000 | 12,990,000 | 12,915,000 | ||||||||||||||||||
| Weighted average shares outstanding - basic | 13,003,000 | 12,915,000 | 12,990,000 | 12,915,000 | ||||||||||||||||||||
| Net loss per share | $ | (0.07 | ) | $ | (0.07 | ) | $ | (0.06 | ) | $ | (0.06 | ) | $ | (0.13 | ) | $ | (0.12 | ) | ||||||
| Net loss per share - Basic | $ | (0.06 | ) | $ | (0.06 | ) | $ | (0.13 | ) | $ | (0.12 | ) | ||||||||||||
See the accompanying notes to the condensed consolidated financial statements
| 4 |
Barfresh Food Group Inc.
Condensed Consolidated Statements of Cash Flows
For the threesix months ended March 31,June 30, 2023 and 2022
(Unaudited)
| 2023 | 2022 | 2023 | 2022 (restated) | |||||||||||||
| Net loss | $ | (910,000 | ) | $ | (895,000 | ) | $ | (1,647,000 | ) | $ | (1,589,000 | ) | ||||
| Adjustments to reconcile net loss | ||||||||||||||||
| to net cash used in operating activities | ||||||||||||||||
| Adjustments to reconcile net loss to net cash used in operating activities | ||||||||||||||||
| Depreciation and amortization | 107,000 | 161,000 | 205,000 | 244,000 | ||||||||||||
| Stock-based compensation | 175,000 | 28,000 | 118,000 | 93,000 | ||||||||||||
| Stock and options issued for services | 83,000 | 98,000 | 83,000 | 98,000 | ||||||||||||
| Changes in assets and liabilities | ||||||||||||||||
| Accounts receivable | (445,000 | ) | (497,000 | ) | (236,000 | ) | (22,000 | ) | ||||||||
| Other receivables | 90,000 | (232,000 | ) | (7,000 | ) | (148,000 | ) | |||||||||
| Inventories | (7,000 | ) | (145,000 | ) | 78,000 | (865,000 | ) | |||||||||
| Prepaid expenses and other assets | (92,000 | ) | (39,000 | ) | (22,000 | ) | 11,000 | |||||||||
| Accounts payable | (228,000 | ) | 404,000 | (759,000 | ) | 303,000 | ||||||||||
| Accrued expenses | (15,000 | ) | (15,000 | ) | 120,000 | (48,000 | ) | |||||||||
| Net cash used in operating activities | (1,242,000 | ) | (1,132,000 | ) | (2,067,000 | ) | (1,923,000 | ) | ||||||||
| Investing activities | ||||||||||||||||
| Purchase of property and equipment | - | (14,000 | ) | - | (13,000 | ) | ||||||||||
| Net cash used in investing activities | - | (14,000 | ) | - | (13,000 | ) | ||||||||||
| Financing activities | ||||||||||||||||
| Proceeds from issuance of stock | - | 5,000 | - | 5,000 | ||||||||||||
| Net cash provided by financing activities | - | 5,000 | - | 5,000 | ||||||||||||
| Net decrease in cash and restricted cash | (1,242,000 | ) | (1,141,000 | ) | (2,067,000 | ) | (1,931,000 | ) | ||||||||
| Cash and restricted cash, beginning of period | 3,019,000 | 5,675,000 | 3,019,000 | 5,675,000 | ||||||||||||
| Cash and restricted cash, end of period | $ | 1,777,000 | $ | 4,534,000 | $ | 952,000 | $ | 3,744,000 | ||||||||
| Cash paid during the year for: | ||||||||||||||||
| Amounts included in the measurement of lease liabilities | $ | 20,000 | $ | 20,000 | $ | 20,000 | $ | 20,000 | ||||||||
| Non-cash financing and investing activities: | ||||||||||||||||
| Value of shares relinquished in modification of stock-based compensation awards (Note 5) | $ | 24,000 | $ | - | ||||||||||||
| Value of shares relinquished in modification of stock-based compensation awards (Note 6) | $ | 24,000 | $ | - | ||||||||||||
See the accompanying notes to the condensed consolidated financial statements
| 5 |
Barfresh Food Group Inc.
Notes to Condensed Consolidated Financial Statements
March 31,June 30, 2023
(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 manufacturing and distribution of ready-to-drink and ready-to-blend beverages, particularly, smoothies, shakes and frappes.
Basis of Presentation
The accompanying condensed consolidated financial statements are unaudited. These unaudited interim condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) and applicable rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Certain information and footnote disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. Accordingly, these interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the fiscal year ended December 31, 2022 included in the Company’s Annual Report on Form 10-K, as filed with the SEC on March 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.
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 financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities in the balance sheets and revenues and expenses during the years reported. Actual results may differ from these estimates.
Vendor Concentrations
The Company is exposed to supply risk as a result of concentrations in its vendor base resulting from the use of a limited number of contract manufacturers. Purchases from the Company’s significant contract manufacturers as a percentage of all finished goods purchased were as follows:
Schedule of Company’s Contract Manufacturers of Finished Goods
| For the three months ended March 31, | ||||||||
| 2023 | 2022 | |||||||
| Manufacturer A | 49 | % | 31 | % | ||||
| Manufacturer B | 46 | % | 0 | % | ||||
| Manufacturer C | 0 | % | 59 | % | ||||
| For the three months ended June 30, | For the six months ended June 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Manufacturer A | 50 | % | 25 | % | 49 | % | 27 | % | ||||||||
| Manufacturer B | 34 | % | 0 | % | 41 | % | 0 | % | ||||||||
| Manufacturer C | 16 | % | 4 | % | 10 | % | 6 | % | ||||||||
| Manufacturer D | 0 | % | 59 | % | 0 | % | 59 | % | ||||||||
| Manufacturer E | 0 | % | 12 | % | 0 | % | 8 | % | ||||||||
| 6 |
Summary of Significant Accounting Policies
There have been no changes to our significant accounting policies described in our Annual Report on Form 10-K for the year ended December 31, 2022, as filed with the SEC on March 2, 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”), that requires the valuation of assets and liabilities permitted to be either recorded or disclosed at fair value based on a hierarchy of available inputs as follows:
Level 1 – Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
Level 2 – Quoted prices for similar assets and liabilities in active markets, quoted prices for identical assets and liabilities in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability; and
Level 3 – Prices or valuation techniques that require inputs that are both significant to the fair value and unobservable (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 Company’s financial instruments approximates their fair value.
Restricted Cash
At each of March 31, 2023 and December 31, 2022, the Company had approximately $211,000 in restricted cash related to a co-packing agreement. The restrictions were released in June 2023.
Accounts Receivable and Allowances
Accounts 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 the expected credit and collectability trends for the allowance for credit losses based on our assessment of various factors, including historical experience, the age of the accounts receivable balances, credit quality of our customers, current economic conditions, and other factors that may affect our ability to collect from our customers. Expected credit losses are recorded as general and administrative expenses on our condensed consolidated statements of operations. As of March 31,June 30, 2023 and December 31, 2022, there was no allowance for doubtful accounts.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, 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. The Company applies the following five steps:
| 1) | Identify the contract with a customer | |
| A contract with a customer exists when (I) the Company enters into an enforceable contract with a customer that defines each party’s rights, (ii) the contract has commercial substance and, (iii) the Company determines that collection of substantially all consideration for goods or services that are transferred is probable. For the Company, the contract is the approved sales order, which may also be supplemented by other agreements that formalize various terms and conditions with customers. | ||
| 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 method. Provisions for refunds are generally provided for in the period the related sales are recorded, based on management’s assessment of historical and projected trends. | ||
| 4) | Allocate the transaction price to performance obligations in the contract
Since the Company’s contracts contain a single performance obligation, delivery of frozen beverages, the transaction price is allocated to that single performance obligation. |
| 5) | Recognize revenue when or as the Company satisfies a performance obligation | |
The Company recognizes revenue from the sale of frozen beverages when title and risk of loss passes and the customer accepts the goods, which generally occurs at the time of delivery to a customer warehouse. Customer sales incentives such as volume-based rebates or discounts are treated as a reduction of sales at the time the sale is recognized. Shipping and handling costs are treated as 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 a single product, frozen beverages. |
| 8 |
Storage and Shipping Costs
Storage and outbound freight costs are included in selling, marketing and distribution expense. For the three months ending March 31,June 30, 2023 and 2022, storage and outbound freight totaled approximately $311,000251,000 and $386,000319,000, respectively. For the six months ending June 30, 2023 and 2022, storage and outbound freight totaled approximately $562,000 and $768,000, respectively.
Research and Development
Expenditures for research activities relating to product development and improvement are charged to expense as incurred. The Company incurred approximately $21,00035,000 and $31,00096,000, in research and development expense for the three months ending March 31,June 30, 2023 and 2022, respectively. For the six months ending June 30, 2023 and 2022, the Company incurred approximately $56,000 and $126,000, respectively.
For the three and six months ended March 31,June 30, 2023 and 2022 common stock equivalents have not been included in the calculation of net loss per share as their effect is anti-dilutive as a result of losses incurred.
Reclassifications
Certain reclassifications have been made to the 2022 financial statements to conform to the 2023 presentation, namely the presentation of selling, marketing and marketingdistribution expense apart from general and administrative expense in the consolidated statement of operations, the reclassification of materials shipping from selling, marketing and distribution to cost of revenue, and the presentation of the components of cash used in operations.
Recent Pronouncements
From time to time, new accounting pronouncements are issued that we adopt as of the specified effective date. We have not determined if the impact of recently issued standards that are not yet effective will have an impact on our results of operations and financial position.
Note 2. Restatement of Prior Financial Information
This Company’s previously filed unaudited statement of operations and cash flow statement and audited balance sheets have been restated to correct errors in calculating depreciation. From a quantitative and qualitative perspective, the Company determined that correcting the previously filed financial statements would not require amendment to its previously filed reports on Form 10-Q and 10-K. The effect of the correction of previously issued financial statements is summarized below:
Schedule of Prior Financial Information
| December 31, 2022 | ||||||||||||
| As Previously Reported | Adjustment | Restated | ||||||||||
| Consolidated Balance Sheet | ||||||||||||
| Property, plant and equipment, net of depreciation | $ | 389,000 | $ | 412,000 | $ | 801,000 | ||||||
| Total assets | $ | 5,093,000 | $ | 412,000 | $ | 5,505,000 | ||||||
| Accumulated deficit | $ | (58,384,000 | ) | $ | 412,000 | $ | (57,972,000 | ) | ||||
| Total stockholders’ equity | $ | 2,521,000 | $ | 412,000 | $ | 2,933,000 | ||||||
| Total liabilities and stockholders’ equity | $ | 5,093,000 | $ | 412,000 | $ | 5,505,000 | ||||||
| 9 |
| Three-months ended June 30, 2022 | ||||||||||||
| As Previously Reported | Adjustment | Restated | ||||||||||
| Consolidated Statement of Operations | ||||||||||||
| Depreciation and amortization | $ | 117,000 | $ | (21,000 | ) | $ | 96,000 | |||||
| Total operating expenses | $ | 1,620,000 | $ | (21,000 | ) | $ | 1,599,000 | |||||
| Net loss | $ | (737,000 | ) | $ | 21,000 | $ | (716,000 | ) | ||||
| Six-months ended June 30, 2022 | ||||||||||||
| As Previously Reported | Adjustment | Restated | ||||||||||
| Consolidated Statement of Operations | ||||||||||||
| Depreciation and amortization | $ | 278,000 | $ | (42,000 | ) | $ | 236,000 | |||||
| Total operating expenses | $ | 3,278,000 | $ | (42,000 | ) | $ | 3,236,000 | |||||
| Net loss | $ | (1,631,000 | ) | $ | 42,000 | $ | (1,589,000 | ) | ||||
| Consolidated Statement of Cash Flows | ||||||||||||
| Net loss | $ | (1,631,000 | ) | $ | 42,000 | $ | (1,589,000 | ) | ||||
| Depreciation and amortization | $ | 286,000 | $ | (42,000 | ) | $ | 244,000 | |||||
| Net cash used in operating activities | $ | (1,923,000 | ) | $ | - | $ | (1,923,000 | ) | ||||
Note 3. Inventory
Inventory consists of the following:
Schedule of Inventory
| March 31, | December 31, | |||||||||||||||
| 2023 | 2022 | June 30, 2023 | December 31, 2022 | |||||||||||||
| Raw materials | $ | 49,000 | $ | 65,000 | $ | 25,000 | $ | 65,000 | ||||||||
| Finished goods | 1,006,000 | 983,000 | 945,000 | 983,000 | ||||||||||||
| Inventory, net | $ | 1,055,000 | $ | 1,048,000 | $ | 970,000 | $ | 1,048,000 | ||||||||
| 10 |
Note 3.4. Property Plant and Equipment
Property and equipment, net consist of the following:
Schedule of Property and Equipment, Net
| March 31, | December 31, | June 30, 2023 | December 31, 2022 | |||||||||||||
| 2023 | 2022 | |||||||||||||||
| Manufacturing and customer equipment | $ | 3,637,000 | $ | 3,637,000 | ||||||||||||
| Other property | 69,000 | 69,000 | ||||||||||||||
| June 30, 2023 | December 31, 2022 | |||||||||||||||
| Manufacturing equipment | $ | 1,618,000 | $ | 1,618,000 | ||||||||||||
| Customer equipment | 1,417,000 | 1,417,000 | ||||||||||||||
| Property and equipment, gross | 3,706,000 | 3,706,000 | 3,035,000 | 3,035,000 | ||||||||||||
| Less: accumulated depreciation | (3,409,000 | ) | (3,317,000 | ) | (2,408,000 | ) | (2,234,000 | ) | ||||||||
| Property and equipment, net of depreciation | $ | 297,000 | $ | 389,000 | $ | 627,000 | $ | 801,000 | ||||||||
Depreciation expense related to these assets was approximately $92,00087,000 and $145,00090,000 foreach of the three months ended March 31,June 30, 2023 and 2022, respectively.respectively, and $174,000 and $212,000, respectively, for the six months ended June 30, 2023 and 2022. Depreciation expense in cost of revenue was $4,0005,000 and $10,000 for the three months ended March 31, 2023. There was June 30, 2023 and 2022, respectively, and $no10,000 depreciation expense in costfor each of revenue for the threesix months ended March 31, 2022.June 30, 2023 and 2022, respectively.
Note 4.5. Commitments and Contingencies
Lease Commitments
The Company leases office space under a non-cancellable operating lease which expired on March 31, 2023, and was extended through JuneSeptember 30, 2023. The Company’s periodic lease cost was approximately $20,000 for each of the three months ended March 31,June 30, 2023 and 2022 and $40,000 for each of the six months ended June 30, 2023 and 2022.
Legal Proceedings
Schreiber Dispute
The Company’s products are produced to its specifications through several contract manufacturers. One of the Company’s contract manufacturers (the “Manufacturer”) provided approximately 52% and 42% of the Company’s products in the years ended December 31, 2022 and 2021, respectively, 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 the Supply Agreement. However, on November 4, 2022, in response to a formal proposal of alternate resolutions, the Company received notification from the Manufacturer that it was denying any responsibility for the defective manufacture of the product. In response, on November 10, 2022, the Company filed a complaint in the United States District Court for the Central District of California, Western Division (the “Complaint”), claiming that the Manufacturer had not met its obligations under the Supply Agreement, and seeking economic damages. In response, the Manufacturer terminated the Supply Agreement. On January 20, 2023, the Company filed a voluntary dismissal of the Complaint which allows the parties to reach a potential resolution outside of the court system. However, if the parties are once again unable to come to an agreement, the Company has informed the rightManufacturer that it intends to refilere-file the Complaint in California State Court.Court by the end of August, 2023.
Due to the uncertainties surrounding the claim, the Company is not able to predict either the outcome or a range of reasonably possible recoveries that could result from its actions against the Manufacturer, and no gain contingencies have been recorded. The disruption in its supply resulting from the dispute has and will continue to adversely impact itsthe Company’s results of operations and cash flow until a suitable resolution is reached or new sources of reliable supply at sufficient volume can be identified and developed, the timing of which is uncertain. The Company has partially mitigated the impact of the supply disruption with the introduction of its single-serve smoothie cartons.
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Other legal matters
From time to time, various lawsuits and legal proceedings may arise in the ordinary course of business. However, litigation is subject to inherent uncertainties and an adverse result in these or other matters may arise from time to time that may harm our business. We are currently the defendant in one legal proceeding for an amount less than $100,000.$100,000. Our legal counsel and management believe the probability of a material unfavorable outcome is remote.
Note 5.6. Stockholders’ Equity
The following are changes in stockholders’ equity for the threesix months ended March 31,June 30, 2022 and 2023:
Schedule of Changes in Stockholders' Equity
| Additional | ||||||||||||||||||||
| Common Stock | paid in | Accumulated | ||||||||||||||||||
| Shares | Amount | Capital | (Deficit) | Total | ||||||||||||||||
| Balance December 31, 2021 | 12,905,112 | $ | - | $ | 60,341,000 | $ | (51,838,000 | ) | $ | 8,503,000 | ||||||||||
| Shares issued for warrant exercise | 986 | - | 5,000 | - | 5,000 | |||||||||||||||
| Equity-based compensation | - | - | 93,000 | - | 93,000 | |||||||||||||||
| Issuance of stock and options for services | 13,801 | - | 98,000 | - | 98,000 | |||||||||||||||
| Net loss | - | - | - | (1,589,000 | ) | (1,589,000 | ) | |||||||||||||
| Balance June 30, 2022 | 12,919,899 | $ | - | $ | 60,537,000 | $ | (53,427,000 | ) | $ | 7,110,000 | ||||||||||
| Additional | ||||||||||||||||||||
| Common Stock | paid in | Accumulated | ||||||||||||||||||
| Shares | Amount | Capital | (Deficit) | Total | ||||||||||||||||
| Balance December 31, 2021 | 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 | - | - | 28,000 | - | 28,000 | |||||||||||||||
| Issuance of stock and options for services | 13,801 | - | 98,000 | - | 98,000 | |||||||||||||||
| Cash settlement of equity-based compensation | ||||||||||||||||||||
| Net loss | - | - | - | (895,000 | ) | (895,000 | ) | |||||||||||||
| Balance March 31, 2022 | 12,919,899 | $ | - | $ | 60,472,000 | $ | (53,060,000 | ) | $ | 7,412,000 | ||||||||||
| Additional | Additional | |||||||||||||||||||||||||||||||||||||||
| Common Stock | paid in | Accumulated | Common Stock | paid in | Accumulated | |||||||||||||||||||||||||||||||||||
| Shares | Amount | Capital | (Deficit) | Total | Shares | Amount | Capital | (Deficit) | Total | |||||||||||||||||||||||||||||||
| Balance December 31, 2022 | 12,934,741 | $ | - | $ | 60,905,000 | $ | (58,384,000 | ) | $ | 2,521,000 | 12,934,741 | $ | - | $ | 60,905,000 | $ | (57,972,000 | ) | $ | 2,933,000 | ||||||||||||||||||||
| Beginning balance | 12,934,741 | $ | - | $ | 60,905,000 | $ | (58,384,000 | ) | $ | 2,521,000 | ||||||||||||||||||||||||||||||
| Balance | 12,934,741 | $ | - | $ | 60,905,000 | $ | (57,972,000 | ) | $ | 2,933,000 | ||||||||||||||||||||||||||||||
| Equity-based compensation | 35,659 | - | 175,000 | - | 175,000 | 35,659 | - | 118,000 | - | 118,000 | ||||||||||||||||||||||||||||||
| Cash settlement of equity-based compensation | - | - | (24,000 | ) | - | (24,000 | ) | - | - | (24,000 | ) | - | (24,000 | ) | ||||||||||||||||||||||||||
| Issuance of stock and options for services | 32,203 | - | 83,000 | - | 83,000 | 32,203 | - | 83,000 | - | 83,000 | ||||||||||||||||||||||||||||||
| Net loss | - | - | - | (910,000 | ) | $ | (910,000 | ) | - | - | - | (1,647,000 | ) | (1,647,000 | ) | |||||||||||||||||||||||||
| Balance March 31, 2023 | 13,002,603 | $ | - | $ | 61,139,000 | $ | (59,294,000 | ) | 1,845,000 | |||||||||||||||||||||||||||||||
| Ending balance | 13,002,603 | $ | - | $ | 61,139,000 | $ | (59,294,000 | ) | 1,845,000 | |||||||||||||||||||||||||||||||
| Balance June 30, 2023 | 13,002,603 | $ | - | $ | 61,082,000 | $ | (59,619,000 | ) | $ | 1,463,000 | ||||||||||||||||||||||||||||||
| Balance | 13,002,603 | $ | - | $ | 61,082,000 | $ | (59,619,000 | ) | $ | 1,463,000 | ||||||||||||||||||||||||||||||
Warrants
During the threesix months ended March 31,June 30, 2023, 684,639 warrants at a weighted average exercise price of $5.85 per share 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 MarchJune 2023, the Board of DirectorsCompany’s stockholders adopted the 2023 Equity Incentive Plan (the “2023 Plan”), reserving shares for future issuance, and discontinuingissuance. The Board of Directors discontinued further grants under the 2015 Plan.
As of March 31,June 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 | Number of Options | Weighted average exercise price per share | Remaining term in years | |||||||||||||||||||
| Outstanding on December 31, 2022 | 682,939 | $ | 7.30 | 3.2 | 682,939 | $ | 7.30 | 3.2 | ||||||||||||||||
| Issued | 20,891 | $ | 1.62 | 8.0 | 42,045 | $ | 1.48 | 8.0 | ||||||||||||||||
| Cancelled/expired | (4,000 | ) | $ | 5.65 | (108,871 | ) | $ | 8.38 | ||||||||||||||||
| Outstanding on March 31, 2023 | 699,830 | $ | 7.14 | 3.1 | ||||||||||||||||||||
| Outstanding on June 30, 2023 | 616,113 | $ | 6.71 | 3.6 | ||||||||||||||||||||
| Exercisable, March 31, 2023 | 638,110 | $ | 7.26 | 2.8 | ||||||||||||||||||||
| Exercisable, June 30, 2023 | 554,902 | $ | 6.96 | 2.8 | ||||||||||||||||||||
Summary of Fair Value of Options Using Black-Sholes Option Pricing Model
| 2023 | 2023 | |||||||
| Expected term (in years) | ||||||||
| Expected volatility | % | % | ||||||
| Risk-free interest rate | % | % | ||||||
| Expected dividends | $ | - | $ | - | ||||
| Weighted average grant date fair value per share | $ | 1.31 | $ | 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, 2023 | 41,923 | $ | 4.92 | |||||
| Granted | 5,000 | $ | 1.25 | |||||
| Vested | (4,386 | ) | $ | 5.06 | ||||
| Forfeited | (4,054 | ) | $ | 5.39 | ||||
| Unvested at March 31, 2023 | 38,483 | $ | 4.37 | |||||
| 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 June 30, 2023 | 32,606 | $ | 4.82 | |||||
Performance Stock Units
During 2022 and 2023, the Company issued performance share units (“PSUs”) that represented shares potentially issuable based upon Company and individual performance in 2022.the years of issuance.
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Summary of Performance Stock Unit Activity
| Number of shares | Weighted average grant date fair value | Number of shares | Weighted average grant date fair value | |||||||||||||
| Unvested at January 1, 2023 | 17,678 | $ | 4.50 | 17,678 | $ | 4.50 | ||||||||||
| Cash settled | (17,678 | ) | $ | 4.50 | (17,678 | ) | $ | 4.50 | ||||||||
| Granted | 71,265 | $ | 1.36 | 281,934 | $ | 1.58 | ||||||||||
| Vested | (45,251 | ) | $ | 1.36 | (45,251 | ) | $ | 1.36 | ||||||||
| Unvested at March 31, 2023 | 26,014 | $ | 1.36 | |||||||||||||
| Unvested at June 30, 2023 | 236,683 | $ | 1.63 | |||||||||||||
In February 2023, the unvested awards issued for individual performance and outstanding at January 1, 2023 were modified to cash-settle the original grant-date fair value of approximately $, 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 PSU to vest, with an additional time-based vesting requirement for approximately of the PSU. 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 three-monthssix-months ended March 31,June 30, 2023.
The Company adopted a 2023 PSU program in April 2023, granting approximately PSUs at target performance. The results for the three-month period ended March 31,June 30, 2023 include the reversal of $ in stock-based compensation expense recorded in the three months ended March 31, 2023, as management determineddoes not anticipate at this time that 2023 performance will be achieved. The results of operations for the service inception date precededsix months ended June 30, 2023 includes expense for the grant date.2023 PSU program. Estimates of expense associated with 2023 performance will be reassessed each quarter through the performance period.
Note 6.7. Income Taxes
ASC 740 requires a valuation allowance to reduce the deferred tax assets reported if, based on the weight of evidence, it is more than likely than not that some portion or all the deferred tax assets will not be recognized. Accordingly, at this time the Company has placed a valuation allowance on all tax assets. As of March 31,June 30, 2023, the estimated effective tax rate for the 2023 was zero.
There are open statutes of limitations for taxing authorities in federal and state jurisdictions to audit our tax returns from 2018 through the current period. Our policy is to account for income tax related interest and penalties in income tax expense in the statement of operations.
For the three and six months ended March 31,June 30, 2023 and 2022, the Company did not incur any interest and penalties associated with tax positions. As of March 31,June 30, 2023, the Company did not have any significant unrecognized uncertain tax positions.
Note 7.8. LiquiditySubsequent Event
In August 2023, the Company received subscriptions of approximately $1,130,000 of a $2,000,000 privately placed convertible debt offering. The debt may be drawn in 25% increments, matures on the anniversary of the draw, bears interest at 10% per annum for the term, regardless of earlier payment or conversion, and is mandatorily convertible as to principal and interest into shares of the Company’s common stock at any time prior to maturity at the greater of $1.20 or 85% of the volume-weighted average price of the common stock for the ten trading days immediately preceding the written notice of the conversion (the “Conversion Price”). If the Company has not exercised the mandatory conversion, the holder of the debt has the option after six months and on up to four occasions to convert all or any portion of the principal and interest into shares of the Company’s common stock at the Conversion Price.
Note 9. Liquidity
During the threesix months ended March 31,June 30, 2023, the Company used cash for operations of $1,242,0002,067,000. The Company has a history of operating losses and negative cash flow, which were expected to improve with growth, offset by working capital required to achieve such growth. As described more fully in Note 4,5, the dispute and subsequent contract termination with the Manufacturer has resulted in uncertainty around our ability to procure product, which in turn may inhibit our ability to achieve positive cash flow. Additionally, management has considered that dispute resolution, including litigation, is costly and will require the outlay of cash.
However, as of March 31,June 30, 2023, the Company has $1,777,000952,000 of cash and restricted cash andin August 2023, obtained a funding commitment of approximately $1,130,000 as more fully described in Note 8. As such, even though management has identified certain indicators, these indicators do not raise substantial doubt regarding the Company’s ability to continue as a going concern. However, management cannot predict, with certainty, the outcome of its potential actions to generate liquidity, including the availability of additional financing, or whether such actions would generate the expected liquidity as planned.
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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, 2022, as filed with the SEC on March 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
Our consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”).
Results of Operations
Results of Operation for the Three Months Ended March 31,June 30, 2023 as Compared to the Three Months Ended March 31,June 30, 2022
Revenue and cost of revenue
Revenue decreased $435,000,$1,288,000, or 17%46%, from $2,526,000$2,799,000 in 2022 to $2,091,000$1,511,000 in 2023. The decline in revenue was due to limited supply due tocaused by our product withdrawal resulting from the quality complaints with product purchased from the Manufacturer. We anticipate that our revenues will be adversely impacted as a result of the dispute unless and until new sources of reliable supply at sufficient volume can be identified and developed, the timing of which is uncertain.
Cost of revenue for 2023 was $1,236,000$1,037,000 as compared to $1,762,000$1,916,000 in 2022. Our gross profit was $855,000 (41%$474,000 (31%) and $764,000 (30%$883,000 (32%) for 2023 and 2022, respectively. Cost of revenue declined as a result of the 17%46% decrease in revenue as well as a shift in product mix resulting from the limited supply of smoothie bottles, partially offset by lower costs relative to revenue onadditional inventory reserves, resulting from the smoothie carton product, resulting in the 1,100-basis point gross margin improvement.quality complaints.
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Selling, marketing and distribution expense
Our operations were primarily directed towards increasing sales and expanding our distribution network.
Three months ended March 31, | Three months ended March 31, | |||||||||||||||||||||||||||||||
| 2023 | 2022 | Change | Percent | Three months ended June 30, 2023 | Three months ended June 30, 2022 | Change | Percent | |||||||||||||||||||||||||
| Sales and marketing | $ | 356,000 | $ | 289,000 | $ | 67,000 | 23 | % | $ | 374,000 | $ | 382,000 | $ | (8,000 | ) | -2 | % | |||||||||||||||
| Storage and outbound freight | 311,000 | 386,000 | (75,000 | ) | -19 | % | 251,000 | 319,000 | (68,000 | ) | -21 | % | ||||||||||||||||||||
| $ | 667,000 | $ | 675,000 | $ | (8,000 | ) | -1 | % | $ | 625,000 | $ | 701,000 | $ | (76,000 | ) | -11 | % | |||||||||||||||
Selling, marketing and distribution expense decreased approximately $8,000 (1%$76,000 (11%) from approximately $675,000$701,000 in 2022 to $667,000$625,000 in 2023.
Sales and marketing expense decreased approximately $8,000 (2%) from approximately $382,000 in 2022 to $374,000 in 2023.
Storage and outbound freight expense decreased approximately $68,000 (21%) from approximately $319,000 in 2022 to $251,000 in 2023. The decrease was the result of the 46% decrease in revenue, offset by higher costs resulting from product mix and inefficiencies due to production transitions.
General and administrative expense
| Three months ended June 30, 2023 | Three months ended June 30, 2022 | Change | Percent | |||||||||||||
| Personnel costs | $ | 244,000 | $ | 362,000 | $ | (118,000 | ) | -33 | % | |||||||
| Stock based compensation | (15,000 | ) | 114,000 | (129,000 | ) | -113 | % | |||||||||
| Legal, professional and consulting fees | 59,000 | 52,000 | 7,000 | 13 | % | |||||||||||
| Director fees paid in cash | 25,000 | 25,000 | - | 0 | % | |||||||||||
| Research and development | 35,000 | 96,000 | (61,000 | ) | -64 | % | ||||||||||
| Other general and administrative expenses | 145,000 | 153,000 | (8,000 | ) | -5 | % | ||||||||||
| $ | 493,000 | $ | 802,000 | $ | (309,000 | ) | -39 | % | ||||||||
General and administrative expense decreased approximately $309,000 (39%) from approximately $802,000 in 2022 to $493,000 in 2023.
Personnel cost represents the cost of employees including salaries, bonuses, employee benefits and employment taxes and continues to be our largest cost. Personnel cost decreased by approximately $118,000 (33%) from approximately $362,000 to $244,000 and stock-based compensation decreased by approximately $129,000 (113%) from $114,000 to ($15,000). The decrease in personnel cost and stock-based compensation resulted primarily from the confirmation and recognition of our 2021 COVID-related tax credit, reduction in headcount, and reversal of previously recognized compensation under our 2023 performance stock unit program, as management does not currently expect that performance criteria will be achieved.
Research and development expense decreased approximately $61,000 (64%) from approximately $96,000 in 2022 to $35,000 in 2023 as activities were minimized to conserve working capital.
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Net loss
We had net losses of approximately $742,000 and $716,000 for the three-month periods ended June 30, 2023 and 2022, respectively. The increase of approximately $26,000, was the result of the aforementioned changes in revenue, partially offset by reductions in cost and expenses.
Results of Operation for the Six Months Ended June 30, 2023 as Compared to the six Months Ended June 30, 2022
Revenue and cost of revenue
Revenue decreased $1,723,000, or 32%, from $5,325,000 in 2022 to $3,602,000 in 2023. The decline in revenue was due to limited supply caused by our product withdrawal resulting from quality complaints with product purchased from the Manufacturer. We anticipate that our revenues will be adversely impacted as a result of the dispute unless and until new sources of reliable supply at sufficient volume can be identified and developed, the timing of which is uncertain.
Cost of revenue for 2023 was $2,273,000 as compared to $3,678,000 in 2022. Our gross profit was $1,329,000 (37%) and $1,647,000 (31%) for 2023 and 2022, respectively. Cost of revenue declined as a result of the 32% decrease in revenue as well as a shift in product mix resulting from the limited supply of smoothie bottles, partially offset by additional inventory reserves resulting from the quality complaints.
Selling, marketing and distribution expense
Our operations were primarily directed towards increasing sales and expanding our distribution network.
| Six months ended June 30, | Six months ended June 30, | |||||||||||||||
| 2023 | 2022 | Change | Percent | |||||||||||||
| Sales and marketing | $ | 731,000 | $ | 608,000 | $ | 123,000 | 20 | % | ||||||||
| Storage and outbound freight | 562,000 | 768,000 | (206,000 | ) | -27 | % | ||||||||||
| $ | 1,293,000 | $ | 1,376,000 | $ | (83,000 | ) | -6 | % | ||||||||
Selling, marketing and distribution expense decreased approximately $83,000 (6%) from approximately $1,376,000 in 2022 to $1,293,000 in 2023.
Sales and marketing expense increased approximately $67,000 (23%$123,000 (20%) from approximately $289,000$608,000 in 2022 to $356,000$731,000 in 2023. The increase2023, primarily due to product sampling of smoothie carton products and equipment maintenance incurred to relaunch bulk product sales in sales and marketing expense was primarily thelocations that had been non-operational as a result of the retention of outside service providers to assist with salesCOVID shutdowns and initiatives, including, beginning in the third quarter of 2022, brokers specializing in the school market. Additionally, the Company increased its product sampling and advertising in conjunction with the launch of its smoothie carton product.subsequent labor shortages.
Storage and outbound freight expense decreased approximately $75,000 (19%$206,000 (27%) from approximately $386,000$768,000 in 2022 to $311,000$562,000 in 2023. The decrease was the result of the 17%32% decrease in revenue, offset by higher costs resulting from product mix and distribution efficiencies.inefficiencies due to production transitions.
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General and administrative expense
| Three months ended March 31, | Three months ended March 31, | |||||||||||||||
| 2023 | 2022 | Change | Percent | |||||||||||||
| Personnel costs | $ | 489,000 | $ | 309,000 | $ | 180,000 | 58 | % | ||||||||
| Stock based compensation | 209,000 | 85,000 | 124,000 | 146 | % | |||||||||||
| Legal, professional and consulting fees | 115,000 | 161,000 | (46,000 | ) | -29 | % | ||||||||||
| Director fees paid in cash | 25,000 | 25,000 | - | 0 | % | |||||||||||
| Research and development | 21,000 | 31,000 | (10,000 | ) | -32 | % | ||||||||||
| Other general and administrative expenses | 135,000 | 212,000 | (77,000 | ) | -36 | % | ||||||||||
| $ | 994,000 | $ | 823,000 | $ | 171,000 | 21 | % | |||||||||
| Six months ended June 30, 2023 | Six months | Change | Percent | |||||||||||||
| Personnel costs | $ | 733,000 | $ | 670,000 | $ | 63,000 | 9 | % | ||||||||
| Stock based compensation | 191,000 | 199,000 | (8,000 | ) | -4 | % | ||||||||||
| Legal, professional and consulting fees | 173,000 | 213,000 | (40,000 | ) | -19 | % | ||||||||||
| Director fees paid in cash | 50,000 | 50,000 | - | 0 | % | |||||||||||
| Research and development | 56,000 | 126,000 | (70,000 | ) | -56 | % | ||||||||||
| Other general and administrative expenses | 284,000 | 366,000 | (82,000 | ) | -22 | % | ||||||||||
| $ | 1,487,000 | $ | 1,624,000 | $ | (137,000 | ) | -8 | % | ||||||||
General and administrative expense increaseddecreased approximately $171,000 (21%$137,000 (8%) from approximately $823,000$1,624,000 in 2022 to $994,000$1,487,000 in 2023.
Personnel cost represents the cost of employees including salaries, bonuses, employee benefits and employment taxes and continues to be our largest cost. Personnel cost increased by approximately $180,000 (58%$63,000 (9%) from approximately $309,000$670,000 to $489,000 and stock-based compensation increased by approximately $124,000 (146%) from $85,000 to $209,000.$733,000. The increase in personnel cost and stock-based compensation resulted primarily from modificationan increase in headcount during the first quarter of 2023, partially offset by the confirmation and recognition of our 2022 performance stock unit program, with partial cash settlement.
Legal, professional,2021 COVID-related tax credit, and consulting fees decreased approximately $46,000 (29%) from approximately $161,000 in 2022 to $115,000 in 2023. The decrease was primarily due to a reduction in temporary labor, partially offsettingheadcount in the increase in personnel costs.second quarter of 2023.
Research and development expense decreased approximately $10,000 (32%$70,000 (56%) from approximately $31,000$126,000 in 2022 to $21,000$56,000 in 2023 as activities were minimized to conserve working capital.
Other general and administrative expenses decreased approximately $82,000 (22%) from approximately $366,000 in 2022 to $284,000 in 2023 primarily as a result of vendor credits related to development activities.
Other expense decreased approximately $77,000 (36%) from approximately $212,000 in 2022 to $135,000 in 2023. In 2022, we incurred approximately $102,000 in one-time costs related to the uplist of our common stock to the NASDAQ Stock Market. In 2023, we incurred approximately $25,000 in inventory disposalnon-recurring costs related to our uplisting to the NASDAQ stock exchange in 2022, partially offset by costs related by our dispute with the Manufacturer.
Net loss
We had net losses of approximately $910,000$1,647,000 and $895,000$1,589,000 for the three-monthsix-month periods ended March 31,June 30, 2023 and 2022, respectively. The increase of approximately $15,000,$58,000, was the result of the aforementioned changes in revenue, partially offset by reductions in cost and expenses.
Liquidity and Capital Resources
As of March 31,June 30, 2023, we had working capital of $1,250,000$554,000 compared with $1,801,000 at December 31, 2022. The decrease in working capital is primarily due to the operating loss for the threesix months ended March 31,June 30, 2023.
During the threesix months ended March 31,June 30, 2023, we used $1,242,000$2,067,000 in operations.
The impact of COVID-19 on the Company is constantly evolving. The direct impact to our operations had begun to take effect at the close of the first quarter ended March 31, 2020. Specifically, our business was impacted by dining bans targeted at restaurants to reduce the size of public gatherings. Such bans precluded our single serve products from being served at those establishments for a number of weeks, and in some instances, resulted in abandoned product launches. Furthermore, many school districts closed regular attendance for a period of time thereby disrupting sales of product into that channel. More recently, we have experienced a disruption in the supply chain for manufacturing our products due to COVID-19. TheWhile further developments surrounding COVID-19 remain fluid and dynamic, and consequently, will require the Company to continue to monitor news headlines from government and health officials, as well asmay arise, the business community.climate appears to have stabilized in 2023.
On June 1, 2021, the Company completed a private placement of 1,282,051 shares of its common stock at $4.68 per share, resulting in gross proceeds of $6,000,000. In addition, holders of debt converted a total of $399,000 in principal and $234,000 in interest into 133,991 shares of common stock and debt in the amount of $840,000 was retired, leaving the Company with no debt.
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In August 2023, the Company received subscriptions of approximately $1,130,000 of a $2,000,000 privately placed convertible debt offering. The debt may be drawn in 25% increments, matures on the anniversary of the draw, bears interest at 10% per annum for the term, regardless of earlier payment or conversion, and is mandatorily convertible as to principal and interest into shares of the Company’s common stock at any time prior to maturity at the greater of $1.20 or 85% of the volume-weighted average price of the common stock for the ten trading days immediately preceding the written notice of the conversion (the “Conversion Price”). If the Company has not exercised the mandatory conversion, the holder of the debt has the option after six months and on up to four occasions to convert all or any portion of the principal and interest into shares of the Company’s common stock at the Conversion Price.
Our liquidity needs will depend on how quickly we are able to profitably ramp up sales, as well as our ability to control and reduce variable operating expenses, and to continue to control and reduce fixed overhead expense. Our recent business developments with the Manufacturer impact our supply chain and will result in increased legal cost and are expected to have a negative impact on our financial position, results of operations and cash flow.
Our operations to date have been financed by the sale of securities, the issuance of convertible debt and the issuance of short-term debt, including related party advances. If we are unable to generate sufficient cash flow from operations with the capital raised we will be required to raise additional funds either in the form of equity or in the form of debt. There are no assurances that we will be able to generate the necessary capital to carry out our current plan of operations.
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.
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 March 31,June 30, 2023, our disclosure controls and procedures are not effective.
Management has identified the following material weaknesses in our internal control over financial reporting:
Management has concluded that there is a material weakness due to the control environment.environment which led to a restatement in the current quarter. The control environment is impacted due to the company’s inadequate segregation of duties, including information technology control activities.
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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
None
PART II- OTHER INFORMATION
Item 1. Legal Proceedings.
As described in Note 4,5, the Company has an on-going dispute with the Manufacturer, the outcome of which cannot be predicted at this time.
From time to time, various lawsuits and legal proceedings may arise in the ordinary course of business. However, litigation is subject to inherent uncertainties and an adverse result in these or other matters may arise from time to time that may harm our business. We are currently 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 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 March 31, 2023, the Company issued 32,203 shares of common stock for services valued at $83,000. 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.None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
None.
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Item 6. Exhibits.
| Exhibit No. | Description | |
| 31.1 | Certification of Principal Executive Officer pursuant to Rule 13a-14(a) (filed herewith) | |
| 31.2 | Certification of Principal Financial Officer pursuant to Rule 13a-14(a) (filed herewith) | |
| 32.1 | Certification pursuant to 18 U.S.C. Section 1350 (furnished herewith) | |
| 101.INS | Inline XBRL Instance Document* | |
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document* | |
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document* | |
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document* | |
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document* | |
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document* | |
| 104 | Cover Page Interactive Data File (embedded within the Inline XBRL document) | |
| *XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections. | ||
| In accordance with SEC Release 33-8238, Exhibit 32.1 is furnished and not filed. |
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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) | ||
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