BARFRESH FOOD GROUP INC. 10-Q

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, as filed with the SEC on March 10, 2022, 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 condensed consolidated financial statements and related notes. Recent Accounting Pronouncements See Note 1 to the accompanying notes to unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for further details regarding this topic. 13 Results of Operations Results of Operation for Three Months Ended June 30, 2022 as Compared to the Three Months Ended June 30, 2021 Revenue and cost of revenue Revenue increased by approximately $1,498,000 (115%) from approximately $1,301,000 in 2021 to approximately $2,799,000 in 2022. The overall revenue for the second quarter 2022 was higher due to growth in “Twist & Go”™ revenue and the gradual return of single serve demand. Cost of revenue for 2022 was approximately $1,916,000 as compared to approximately $739,000 in 2021. Our gross profit was approximately $883,000 (32%) and $562,000 (43%) for 2022 and 2021, respectively. Gross margins decreased in the second quarter primarily due to product mix which includes “Twist & Go”™ at slightly lower product margins. Selling and marketing expenses Our operations were primarily directed towards increasing sales and expanding our distribution network. Three months ended June 30, Three months ended June 30, 2022 2021 Change Percent Sales and marketing 319,000 186,000 133,000 72 % Storage and outbound freight 371,000 257,000 114,000 44 % 690,000 443,000 247,000 56 % Sales and marketing expenses increased approximately $133,000 (72%) from approximately $186,000 in 2021 to $319,000 in 2022. The increase in sales and marketing expenses was primarily the result of the retention of new employees and outside service providers to assist with sales and initiatives, as well as participation in education nutrition trade shows in 2022. Storage and outbound freight expense increased approximately $114,000 (44%) from approximately $257,000 in 2021 to $371,000 in 2022. The increase was primarily a result of the 115% increase in revenue, tempered by logistics efficiencies from the increased volume in core markets served. General and administrative expenses Our general and administrative expenses increased by 41%, or approximately $237,000, from approximately $575,000 in 2021 to approximately $813,000 in 2022, primarily driven by personnel, including non-cash stock-based compensation, and other general and administrative expenses. The following is a breakdown of our general and administrative expenses for the three months ended June 30, 2022, and 2021: Three months ended June 30, Three months ended June 30, 2022 2021 Change Percent Personnel costs 358,000 210,000 148,000 70 % Stock-based compensation 64,000 45,000 19,000 42 % Legal, professional and consulting fees 64,000 101,000 (37,000 ) -37 % Director fees 62,000 73,000 (11,000 ) -15 % Research and development 97,000 70,000 27,000 39 % Other general and administrative expenses 168,000 76,000 92,000 121 % 813,000 575,000 238,000 41 % 14 Personnel cost represents the cost of employees including salaries, bonuses, employee benefits and employment taxes and continues to be our largest cost. Personnel cost increased by approximately $148,000 (70%) from approximately $210,000 to $358,000. 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 restricted stock units and options granted to employees and non-employees. Stock based compensation for the three months ended June 30, 2022 was approximately $64,000 compared to $45,000 for the three months ended June 30, 2021 due to the aforementioned increase in staffing. Research and development expenses increased approximately $27,000 (39%) from approximately $70,000 in 2021 to $96,000 in 2022. The increase is primarily due to material consumption and expiration, partially offset by a reduction in labor hours for our development consulting team. Other expenses increased approximately $93,000 (122%) from approximately $76,000 in 2021 to $169,000 in 2022. In 2022, we incurred approximately $65,000 in one-time costs related to the uplist of our common stock to the NASDAQ Stock Market. Additionally, 2021 benefited from the results of vendor payables reconciliation resulting in the reduction of vendor liabilities. Operating loss We had operating losses of approximately $737,000 and $602,000 for the three-month periods ended June 30, 2022 and 2021, respectively. The increase of approximately $135,000 or 22%, was primarily due to the increase in operating expenses, partially offset by the increase in gross profit. Other income and expense Interest expense was approximately $69,000 and loss on debt extinguishment was approximately $194,000 for the three months ended June 30, 2021. Interest related to convertible debt that was converted and repaid in 2021. We did not incur any interest expense for the three months ended June 30, 2022. We also recognized gain of $568,000 from the forgiveness of our PPP loan in 2021 Net loss We had net losses of approximately $737,000 and $297,000 in the three-month periods ended June 30, 2022 and 2021, respectively, with the primary change due to the $568,000 gain on the forgiveness of the PPP loan in 2021. 15 Results of Operation for Six Months Ended June 30, 2022 as Compared to the Six Months Ended June 30, 2021 Revenue and cost of revenue Revenue increased by approximately $3,009,000 (130%) from approximately $2,316,000 in 2021 to approximately $5,325,000 in 2022. The overall revenue for the six months ended June 30, 2022 was higher due to growth in “Twist & Go”™ revenue and the gradual return of single serve demand. Cost of revenue for 2022 was approximately $3,678,000 as compared to approximately $1,405,000 in 2021. Our gross profit was approximately $1,647,000 (31%) and $911,000 (39%) for 2022 and 2021, respectively. Gross margins decreased in the six months ended June 30, 2022 primarily due to product mix which includes “Twist & Go”™ at slightly lower product margins. Selling and marketing expenses Six months ended June 30, Six months ended June 30, 2022 2021 Change Percent Sales and marketing 565,000 355,000 210,000 59 % Storage and outbound freight 757,000 401,000 356,000 89 % 1,322,000 756,000 566,000 75 % Sales and marketing expenses increased approximately $210,000 (59%) from approximately $355,000 in 2021 to $565,000 in 2022. The increase in sales and marketing expenses was primarily the result of the retention of new employees and outside service providers to assist with sales initiatives, as well as participation in education nutrition trade shows in 2022. Storage and outbound freight expense increased approximately $356,000 (89%) from approximately $401,000 in 2021 to $757,000 in 2022. The increase was primarily a result of the 130% increase in revenue, tempered by logistics efficiencies from the increased volume in core markets served. General and administrative expenses Our general and administrative expenses increased by 66%, or approximately $665,000, from approximately $1,013,000 in 2021 to approximately $1,677,000 in 2022, primarily driven by personnel, including non-cash stock-based compensation, shipping and storage and other general and administrative expenses. The following is a breakdown of our general and administrative expenses for the six months ended June 30, 2022, and 2021: Six months ended June 30, Six months ended June 30, 2022 2021 Change Percent Personnel costs 684,000 395,000 289,000 73 % Stock-based compensation 93,000 10,000 83,000 830 % Legal, professional and consulting fees 244,000 178,000 66,000 37 % Director fees 125,000 150,000 (25,000 ) -17 % Research and development 127,000 138,000 (11,000 ) -8 % Other general and administrative expenses 405,000 142,000 263,000 185 % 1,678,000 1,013,000 665,000 66 % 16 Personnel cost represents the cost of employees including salaries, bonuses, employee benefits and employment taxes and continues to be our largest cost. Personnel cost increased by approximately $289,000 (73%) from approximately $395,000 to $684,000. The increase in personnel cost was partially offset by the decrease in consulting fees as we choose to hire permanent staff as the critical stages of the COVID-19 pandemic waned, rather than rely on consultants and temporary staff. Stock based compensation is used as an incentive to attract new employees and to compensate existing employees. Stock based compensation includes stock issued and options granted to employees and non-employees. Stock based compensation for the six months ended June 30, 2022 was approximately $93,000 compared to $10,000 for the six months ended June 30, 2021 due to the aforementioned increase in staffing coupled with the departure of two key employees and the forfeiture of their unvested options in 2021. Legal, professional, and consulting fees increased approximately $66,000 (37%) from approximately $178,000 in 2021 to $244,000 in 2022. The increase was primarily due to corporate development activities. Research and development expenses decreased approximately $11,000 (8%) from approximately $138,000 in 2021 to $127,000 in 2022. The reduction is primarily due to a reduction in labor hours for our development consulting team. Other expenses increased approximately $263,000 (185%) from approximately $142,000 in 2021 to $405,000 in 2022. In 2022, we incurred approximately $168,000 in one-time costs related to the uplist of our common stock to the NASDAQ Stock Market. Additionally, 2021 benefited from the results of vendor payables reconciliation resulting in the reduction of vendor liabilities. Operating loss We had operating losses of approximately $1,631,000 and $1,151,000 for the six-month periods ended June 30, 2022 and 2021, respectively. The increase of approximately $480,000 or 42%, was primarily due to the increase in operating expenses, partially offset by the increase in gross profit. 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 six months ended June 30, 2021 was a result of the change in components of the Black-Scholes model. The derivative liability was settled upon conversion and repayment of the convertible notes in the second quarter of 2021. Interest expense was approximately $128,000 for the six months ended June 30, 2021. Interest related to convertible debt that was converted and repaid in 2021. We did not incur any interest expense for the six months ended June 30, 2022. Net loss We had net losses of approximately $1,631,000 and $889,000 in the six-month periods ended June 30, 2022 and 2021, respectively, with the primary change due to the $568,000 gain on forgiveness of the PPP loan in 2021. Liquidity and Capital Resources As of June 30, 2022, we had working capital of approximately $4,996,000 as compared with approximately $6,172,000 at December 31, 2021. The decrease in working capital surplus is primarily due to operating loss for the six months ended June 30, 2022. During the six months ended June 30, 2022, we used cash of approximately $1,923,000 in operations, and $13,000 for the purchase of equipment, partially offset by $5,000 from the issuance of stock pursuant to an outstanding warrant. 17 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 fixed overhead expense. 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 debt. There are no assurances that we will be able to generate the necessary capital to carry out our current plan of operations. We have entered into a direct lease for premises covering the period April 1, 2019 to March 31, 2023. The aggregate minimum lease payments under the non-cancellable direct lease as of June 30, 2022 are approximately $60,000. Off-Balance Sheet Arrangements We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, 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.