BARFRESH FOOD GROUP INC. 10-K

Item 9A. Controls and Procedures. Management’s Annual Report on Internal Control over Financial Reporting 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 13a-15(e). Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that the Company’s disclosure controls and procedures were not effective as of December 31, 2022, due to inadequate segregation of duties. Management’s Annual Report on Internal Control over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) under the Exchange Act, for the Company. Internal control over financial reporting includes those policies and procedures that: (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of its management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements. Our management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2022. The framework used by management in making that assessment was the criteria set forth in the document entitled “Internal Control – Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in 2013. 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 13a-15(e). Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that the Company’s disclosure controls and procedures were not effective as of December 31, 2022. Management has identified the following material weakness in our internal control over financial reporting: Management has concluded that there is a material weakness due to the control environment. The control environment is impacted due to the Company’s inadequate segregation of duties, including information technology control 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. Management recognizes that there are inherent limitations in the effectiveness of any system of internal control, and accordingly, even effective internal control can provide only reasonable assurance with respect to financial statement preparation and may not prevent or detect material misstatements. In addition, effective internal control at a point in time may become ineffective in future periods because of changes in conditions or due to deterioration in the degree of compliance with our established policies and procedures. 21 In an effort to remediate the identified material weakness and enhance our internal control over financial reporting, we have hired additional financial personnel to help ensure that we are able to properly implement internal control procedures. This report shall not be deemed to be filed for purposes of Section 18 of the Exchange Act, or otherwise subject to the liabilities of that section, and is not incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing. Changes in Internal Control over Financial Reporting None Item 9B. Other Information. None Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections. None 22 PART III Item 10. Directors, Executive Officers and Corporate Governance. Information required by this Item regarding our directors and executive officers, corporate governance, including our audit committee and code of ethics, and compliance with Section 16(a) of the Exchange Act is incorporated by reference to our proxy statement to be filed with the SEC in connection with our 2023 Annual Meeting of Stockholders (the “Proxy Statement”). Item 11. Executive Compensation. Information required by this Item regarding executive compensation is incorporated by reference to our Proxy Statement. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. Information required by this Item regarding executive compensation is incorporated by reference to our Proxy Statement. Information required by this item regarding securities authorized for issuance under our equity compensation plans is incorporated by reference to the information set forth under the caption “Executive Compensation” in our Proxy Statement. Item 13. Certain Relationships and Related Transactions, and Director Independence. Information required by this Item regarding executive compensation is incorporated by reference to our Proxy Statement. Item 14. Principal Accounting Fees and Services. Information required by this Item regarding executive compensation is incorporated by reference to our Proxy Statement. 23 PART IV Item 15. Exhibits and Financial Statements. (a) 1. Financial Statements See Index to Financial Statements in Item 8 of this Annual Report on Form 10-K, which is incorporated herein by reference. 2. Financial Statement Schedules All other financial statement schedules have been omitted because they are either not applicable or the required information is shown in the financial statements or notes thereto. 3. Exhibits See the Exhibit Index, which follows the signature page of this Annual Report on Form 10-K, which is incorporated herein by reference. (b) Exhibits See Item 15(a) (3) above. (c) Financial Statement Schedules See Item 15(a) (2) above. Item 16. Form 10-K Summary. None. 24 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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: March 2, 2023 By: /s/ Riccardo Delle Coste Riccardo Delle Coste Chief Executive Officer (Principal Executive Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Capacity Date /s/ Riccardo Delle Coste Chief Executive Officer and Director March 2, 2023 Riccardo Delle Coste (Principal Executive Officer /s/ Lisa Roger Chief Financial Officer March 2, 2023 Lisa Roger (Principal Financial Officer) /s/ Steven Lang Director March 2, 2023 Steven Lang /s/ Arnold Tinter Director March 2, 2023 Arnold Tinter /s/ Joseph M. Cugine Director March 2, 2023 Joseph M. Cugine /s/ Isabelle Ortiz-Cochet Director March 2, 2023 Isabelle Ortiz-Cochet /s/ Alexander Ware Director March 2, 2023 Alexander Ware /s/ Justin Borus Director March 2, 2023 Justin Borus 25 Exhibit Index Exhibit Number Description 3.1 Certificate of Incorporation of Moving Box Inc. dated February 25, 2010 (incorporated by reference to Exhibit 3.1 to Form S-1 (Registration No. 333-168738) as filed August 11, 2010) 3.2 Amended and Restated Bylaws of Barfresh Food Group Inc. (incorporated by reference to Exhibit 3.1 to Current Report on Form 8-K as filed August 4, 2014) 3.3 Certificate of Amendment of Certificate of Incorporation of Moving Box Inc. dated February 13, 2012 (incorporated by reference to Exhibit 3.1 to Current Report on Form 8-K as filed February 17, 2012) 3.4 Certificate of Amendment of Certificate of Incorporation of Smoothie Holdings Inc. dated February 16, 2012 (incorporated by reference to Exhibit 3.2 to Current Report on Form 8-K as filed February 17, 2012) 3.5 Certificate of Amendment of Certificate of Incorporation of Barfresh Food Group Inc. dated December 17, 2021 (incorporated by reference to Exhibit 3.1 to Current Report on Form 8-K as filed December 29, 2021) 3.6 Certificate of Amendment of Certificate of Incorporation of Barfresh Food Group Inc. dated August 1, 2022 (incorporated by reference to Exhibit 3.1 to Current Report on Form 8-K as filed August 2, 2022) 4.1 Description of Securities Registered Under Section 12 of the Securities Exchange Act of 1934, as amended (incorporated by reference to Exhibit 4.20 to Annual Report on Form 10-K for the year ended December 31, 2019, as filed April 13, 2020) 4.2 Form of Series O Warrant (incorporated by reference to Exhibit 4.21 to Annual Report on Form 10-K for the year ended December 31, 2019, as filed April 13, 2020) 10.1 Barfresh Food Group, Inc. 2015 Equity Incentive Plan (incorporated by reference to Exhibit 10.10 to Annual Report Form 10-K filed July 7, 2015)+ 10.2 Executive Employment Agreement by and between Smoothie, Inc. and Riccardo Delle Coste dated April 27, 2015 (incorporated by reference to Exhibit 10.11 to Annual Report Form 10-K filed July 7, 2015)+ 10.3 Form of Securities Purchase Agreement dated March 15, 2020 by and between Barfresh Food Group, Inc. and certain investors (incorporated by reference to Exhibit 10.14 to Annual Report on 10-K for the year ended December 31, 2019, filed April 13, 2020) 21.1 Subsidiaries (incorporated by reference to Exhibit 21.1 to Annual Report on Form 10-K for the year ended December 31, 2019, filed April 13 2020) 23.2 Consent of Independent Registered Public Accounting Firm 31.1 Rule 13a-14(a) Certification of Principal Executive Officer* 31.2 Rule 13a-14(a) Certification of Principal Financial Officer 32.1 Certification Pursuant to 18 U.S.C. Section 1350* 32.2 Certification Pursuant to 18 U.S.C. Section 1350 101.INS XBRL Instance. 101.XSD XBRL Schema. 101.PRE XBRL Presentation. 101.CAL XBRL Calculation. 101.DEF XBRL Definition. 101.LAB 104 XBRL Label. Cover Page Interactive Data File (embedded within the Inline XBRL document) * Filed herewith + Compensatory plan In accordance with SEC Release 33-8238, Exhibit 32.1 is being furnished and not filed. Furnished herewith. 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. 26 Barfresh Food Group Inc. Index to Consolidated Financial Statements Page Report of Independent Registered Public Accounting Firm (Eide Bailly LLP, Denver, Colorado, PCAOB ID 286 ) F-2 Consolidated Balance Sheets as of December 31, 2022 and 2021 F-3 Consolidated Statements of Operations for the Years Ended December 31, 2022 and 2021 F-4 Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2022 and 2021 F-5 Consolidated Statements of Cash Flows for the Years Ended December 31, 2022 and 2021 F-6 Notes to Consolidated Financial Statements F-7 F- 1 Report of Independent Registered Public Accounting Firm To the Board of Directors and Stockholders Barfresh Food Group, Inc. Los Angeles, California Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of Barfresh Food Group, Inc. (the “Company”) as of December 31, 2022 and 2021, and the related consolidated statements of operations , stockholders’ equity, and cash flows for the years then ended, and the related notes (collectively referred to as the “financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Barfresh Food Group, Inc. as of December 31, 2022 and 2021, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to Barfresh Food Group, Inc. in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Barfresh Food Group Inc. is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risk of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which they relate. Estimated Product Return Allowance As discussed in Note 1 to the consolidated financial statements, in 2022 the Company experienced product quality issues stemming from a single co-manufacturer, resulting in customer complaints and product returns. The Company has an estimated product return allowance of $330,000 and total product returns reducing revenue of $493,000, as of and for the year ended December 31, 2022. The determination of the estimated product return allowance requires management to make significant estimates and assumptions related to estimating product returns that will occur in 2023 relating to 2022 product sales. We identified the estimated product return allowance as a critical audit matter. Auditing the judgments and assumptions involves especially challenging auditor judgment due to the nature and extent of audit evidence and effort required to address these matters. The primary procedures we performed to address this critical audit matter included: · We obtained an understanding of management’s process and methodology to develop the estimates. · We obtained an understanding of the internal controls relating to the methodology, reliability and accuracy of the information used in the calculation and management’s review and approval for the transactions. · We examined communications with distributors. · We tested product returns in 2022. · We evaluated the completeness and accuracy of the information provided and reasonableness of the inputs and assumptions used by management in developing the estimate. · We evaluated the adequacy of the disclosures related to the estimate. /s/ Eide Bailly LLP We have served as Barfresh Food Group Inc.’s auditor since 2012. Denver, Colorado March 2, 2023 F- 2 Barfresh Food Group Inc. Consolidated Balance Sheets December 31, December 31, 2022 2021 Assets Current assets: Cash $ 2,808,000 $ 5,533,000 Restricted cash 211,000 142,000 Trade accounts receivable, net 126,000 1,223,000 Other receivables 101,000 - Inventory, net 1,048,000 705,000 Prepaid expenses and other current assets 79,000 64,000 Total current assets 4,373,000 7,667,000 Property, plant and equipment, net of depreciation 389,000 1,588,000 Operating lease right-of-use assets, net 18,000 87,000 Intangible assets, net of amortization 306,000 370,000 Deposits 7,000 7,000 Total assets $ 5,093,000 $ 9,719,000 Liabilities and Stockholders’ Equity Current liabilities: Accounts payable $ 1,534,000 $ 974,000 Disputed co-manufacturer accounts payable (Notes 1, 9) 499,000 - Accrued expenses 286,000 228,000 Accrued payroll and employee related 233,000 212,000 Lease liability 20,000 81,000 Total current liabilities 2,572,000 1,495,000 Long term liabilities: Accrued interest - 34,000 Lease liability, net of current portion - 14,000 Total liabilities 2,572,000 1,543,000 Commitments and contingencies (Note 9) - Stockholders’ equity: Preferred stock, $ 0.000001 par value, 400,000 shares authorized, none issued or outstanding - - Common stock, $ 0.000001 par value; 23,000,000 shares authorized; 12,934,741 and 12,905,112 shares issued and outstanding at December 31, 2022 and December 31, 2021, respectively - - Additional paid in capital 60,905,000 60,341,000 Accumulated deficit ( 58,384,000 ) ( 52,165,000 ) Total stockholders’ equity 2,521,000 8,176,000 Total liabilities and stockholders’ equity $ 5,093,000 $ 9,719,000 See the accompanying notes to the consolidated financial statements F- 3 Barfresh Food Group Inc. Consolidated Statements of Operations For the years ended December 31, 2022 and 2021 2022 2021 Revenue $ 9,162,000 $ 6,700,000 Cost of revenue 7,722,000 4,193,000 Gross profit 1,440,000 2,507,000 Operating expenses: Selling, marketing and distribution 2,861,000 1,810,000 General and administrative 3,549,000 2,170,000 Depreciation and amortization 503,000 622,000 Impairment of long-lived assets 746,000 - Total operating expenses 7,659,000 4,602,000 Operating loss ( 6,219,000 ) ( 2,095,000 ) Other (income)/expenses Gain from derivative liability - ( 16,000 ) Gain from debt extinguishment - Paycheck Protection Program - ( 1,136,000 ) Loss on debt extinguishment - 194,000 Interest - 128,000 Total other income - ( 830,000 ) Net loss $ ( 6,219,000 ) $ ( 1,265,000 ) Per share information - basic and fully diluted: Weighted average shares outstanding 12,924,000 12,070,000 Net loss per share $ ( 0.48 ) $ ( 0.10 ) See the accompanying notes to the consolidated financial statements F- 4 Barfresh Food Group Inc. Consolidated Statements of Stockholders’ Equity For the years ended December 31, 2022 and 2021 Shares Amount Capital (Deficit) Total Additional Common Stock paid in Accumulated Shares Amount Capital (Deficit) Total Balance December 31, 2020 11,471,797 $ - $ 53,224,000 $ ( 50,900,000 ) $ 2,324,000 Issuance of stock for capital raise 1,282,051 - 6,000,000 - 6,000,000 Conversion of debt and accrued interest 114,614 - 685,000 - 685,000 Interest paid in shares 19,377 - 151,000 - 151,000 Issuance of stock and options for services 17,273 - 189,000 - 189,000 Equity based compensation - - 92,000 - 92,000 Net loss - - - ( 1,265,000 ) ( 1,265,000 ) 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 5,000 - 386,000 - 386,000 Issuance of stock and options for services 23,643 - 173,000 - 173,000 Net loss - - - ( 6,219,000 ) ( 6,219,000 ) Balance December 31, 2022 12,934,741 $ - $ 60,905,000 $ ( 58,384,000 ) $ 2,521,000 See the accompanying notes to the consolidated financial statements. F- 5 Barfresh Food Group Inc. Consolidated Statements of Cash Flows For the years ended December 31 2022 and 2021 2022 2021 Net loss $ ( 6,219,000 ) $ ( 1,265,000 ) Adjustments to reconcile net loss to net cash used in operating activities Asset impairment 746,000 - Depreciation and amortization 529,000 639,000 Stock-based compensation 386,000 92,000 Stock and options issued for services 173,000 188,000 Loss on debt extinguishment - 194,000 Interest expense related to debt discount - 56,000 Gain on debt extinguishment - Paycheck Protection Program - ( 1,136,000 ) Gain on derivative - ( 16,000 ) Changes in assets and liabilities Accounts receivable 1,097,000 ( 798,000 ) Other receivables ( 101,000 ) - Inventories ( 343,000 ) 165,000 Prepaid expenses and other assets ( 20,000 ) ( 17,000 ) Accounts payable 560,000 585,000 Disputed accounts payable 499,000 - Accrued expenses 79,000 ( 219,000 ) Advanced payments - ( 401,000 ) Accrued interest ( 34,000 ) 72,000 Net cash used in operating activities ( 2,648,000 ) ( 1,861,000 ) Investing activities Purchase of property and equipment ( 13,000 ) ( 151,000 ) Net cash used in investing activities ( 13,000 ) ( 151,000 ) Financing activities Proceeds from issuance of stock 5,000 6,000,000 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 ( 2,656,000 ) 3,716,000 Cash and restricted cash, beginning of year 5,675,000 1,959,000 Cash and restricted cash, end of year $ 3,019,000 $ 5,675,000 See the accompanying notes to the consolidated financial statements. F- 6 Barfresh food Group Inc. Notes to Consolidated Financial Statements Note 1. 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. Recent Business Developments The Company’s products are produced to its specifications through several contract manufacturers. One of the Company’s contract manufacturers (the “Manufacturer”) has 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 results reflect the estimated accounting impact of such actions, including an estimated product return allowance of $ 330,000 and total product returns reducing revenue by $ 493,000 as of and for the year ended December 31, 2022, and $ 932,000 in cost of revenue to dispose of unsaleable inventory. 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 has not met its obligations under the Supply Agreement, and seeking economic damages. In response, the Manufacturer terminated the Supply Agreement. On January 20, 2023, the Company filed a voluntary dismissal of the Complaint which allows the parties to reach a potential resolution outside of the court system. However, if the parties are once again unable to come to an agreement, the Company has the right to refile the Complaint in California State Court. Due to the uncertainties surrounding the claim, the Company is not able to predict either the outcome or a range of 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 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 consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). 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. F- 7 Concentration of Credit Risk The amount of cash on deposit with financial institutions exceeds the $ 250,000 federally insured limit at December 31, 2022 and 2021. However, we believe that cash on deposit that exceeds $ 250,000 in the financial institutions is financially sound and the risk of loss is minimal. The following customers accounted for 10% or more of the Company’s accounts receivable balance at December 31: Schedule of Concentration of Credit Risk for Accounts Receivable 2022 2021 Customer A 31 % 36 % Customer B 24 % 11 % Customer C 23 % 5 % Customer D 3 % 11 % Restricted Cash At December 31, 2022 and 2021, the Company had $ 211,000 and $ 142,000 , respectively, in restricted cash related to a contract manufacturing agreement. Fair Value Measurement 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 definition 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 priority to unobservable value inputs. ASC 820 defines the hierarchy as follows: Level 1 – Quoted prices are available in active markets for identical 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. Level 2 – Pricing inputs are other than quoted prices in active markets but are either directly or indirectly observable as of the reported date. The types of assets 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 – Significant inputs to pricing that are unobservable as of the reporting date. The types of assets and liabilities included in Level 3 are those with inputs requiring significant management judgment or estimation, such as complex and subjective models and forecasts used to determine the fair value of financial transmission rights. Our financial instruments consist of cash, restricted cash, accounts receivable and accounts payable. The carrying value of our financial instruments approximates their fair value. Accounts Receivable Accounts receivable from customers are typically unsecured. The Company’s credit policy calls for payment generally within 30 days. The credit worthiness of a customer is evaluated prior to a sale. Accounts receivable totaled $ 126,000 , $ 1,223,000 and $ 425,000 as of December 31, 2022, 2021 and 2020, respectively. There was no allowance for doubtful accounts as of December 31, 2022. As of December 31, 2021, the Company’s allowance for doubtful accounts was $ 121,000 . There was no bad debt expense for the year ended December 31, 2022, and ($ 7,000 ) of bad debt recoveries recorded for the year ended December 31, 2021. The allowance was applied to certain receivable accounts which are over 95 days. F- 8 Inventory Inventory consists of finished goods and is carried at the lower of cost or net realizable value on a first in first out basis. The Company monitors the remaining useful life of its inventory and establishes a reserve of obsolescence where appropriate. Intangible Assets Intangible assets are comprised of patents, net of amortization and trademarks. The patent costs are being amortized over the life of the patent, which is twenty years from the date of filing the patent application. In accordance with ASC Topic 350 Intangibles – Goodwill and Other (“ASC 350”), the costs of internally developing other intangible assets, such as patents, are expensed as incurred. However, as allowed by ASC 350, costs associated with the acquisition of patents from third parties, legal fees and similar costs relating to patents have been capitalized. In accordance with ASC 350 legal costs related to trademarks have been capitalized. We have determined that trademarks have an indeterminable life and therefore are not being amortized. Long-Lived Assets and Other Acquired Intangible Assets We evaluate the recoverability of property and equipment and finite-lived intangible assets for possible impairment whenever events or circumstances indicate that the carrying amount of such assets may not be recoverable. The evaluation is performed at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. Recoverability of these assets is measured by a comparison of the carrying amounts to the future undiscounted cash flows the assets are expected to generate. If such review indicates that the carrying amount of property and equipment and intangible assets is not recoverable, the carrying amount of such assets is reduced to fair value. We recorded impairment charges of $ 746,000 related to idle equipment resulting from overcapacity for single-serve products and equipment that is held at the Manufacturer in 2022. There was no impairment in 2021. Property, Plant, and Equipment Property, plant, and equipment is stated at cost less accumulated depreciation and accumulated impairment loss, if any. Depreciation is calculated on a straight-line basis over the estimated useful lives of the assets. Leasehold improvements are being amortized over the shorter of the useful life of the asset or the lease term that includes any expected renewal periods that are deemed to be reasonably assured. The estimated useful lives used for financial statement purposes are: Summary of Estimated Useful Lives of Assets Furniture and fixtures 5 years Manufacturing equipment and customer equipment 3 years to 7 years Vehicles 5 years 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. F- 9 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. Research and Development Expenditures for research activities relating to product development and improvement are charged to expense as incurred. The Company incurred $ 382,000 and $ 245,000 , in research and development expenses for the years ended December 31, 2022 and 2021, respectively. Storage and Shipping Costs Storage and outbound freight costs are included in selling, marketing and distribution expense. For the years ended December 31, 2022 and 2021, storage and outbound freight amounted to $ 1,467,000 and $ 1,054,000 , respectively. Leases We determine if an arrangement is a lease upon inception. A contract is or contains a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. The right to control the use of an asset includes the right to obtain substantially all of the economic benefits of the underlying asset and the right to direct how and for what purpose the asset is used. Operating lease right-of-use assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. Lease expense is recognized on a straight-line basis over the lease term. As a lessee, the Company leases office space. Income Taxes The provision for income taxes is determined in accordance with the provisions of ASC Topic 740, Accounting for Income Taxes (“ASC 740”). Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted income tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Any effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. F- 10 ASC 740 prescribes a comprehensive model for how companies should recognize, measure, present, and disclose in their financial statements, uncertain tax positions taken or expected to be taken on a tax return. Under ASC 740, tax positions must initially be recognized in the financial statements when it is more likely than not the position will be sustained upon examination by the tax authorities. Such tax positions must initially and subsequently be measured as the largest amount of tax benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the tax authority assuming full knowledge of the position and relevant facts. 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 of the deferred tax assets will not be recognized. For the years ended December 31, 2022 and 2021 we did not have any interest and penalties or any significant unrecognized uncertain tax positions. Derivative Liability The Company evaluates its convertible instruments, options, warrants or other contracts to determine if those contracts or embedded components of those contracts qualify as derivatives to be separately accounted for under ASC Topic 815, “Derivatives and Hedging.” The result of this accounting treatment is that the fair value of any derivative is marked-to-market each balance sheet date and recorded as a liability. In the event that the fair value is recorded as a liability, the change in fair value is recorded in the statement of operations as gain/loss from derivative liability. Upon conversion or exercise of a derivative instrument, the instrument is marked to fair value at the conversion date and then that fair value is reclassified to equity. We analyzed the derivative financial instruments in accordance with ASC 815. The objective is to provide guidance for determining whether an equity-linked financial instrument is indexed to an entity’s own stock. This determination is needed for a scope exception which would enable a derivative instrument to be accounted for under the accrual method. The classification of a non-derivative instrument that falls within the scope of ASC 815-40-05 “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock” also hinges on whether the instrument is indexed to an entity’s own stock. A non-derivative instrument that is not indexed to an entity’s own stock cannot be classified as equity and must be accounted for as a liability. There is a two-step approach in determining whether an instrument or embedded feature is indexed to an entity’s own stock. First, the instrument’s contingent exercise provisions, if any, must be evaluated, followed by an evaluation of the instrument’s settlement provisions. The Company utilized the fair value standard set forth by the Financial Accounting Standards Board, defined as the amount at which the assets (or liability) could be bought (or incurred) or sold (or settled) in a current transaction between willing parties, that is, other than in a forced or liquidation sale. The Company’s derivative instruments were settled in 2021, and there were no outstanding derivatives as of December 31, 2021 or 2022. Earnings per Share We calculate net loss per share in accordance with ASC Topic 260, Earnings per Share . Basic net loss per share is computed by dividing net loss by the weighted average number of shares of common stock outstanding for the period, and diluted earnings per share is computed by including common stock equivalents outstanding for the period in the denominator. At December 31, 2022 and 2021 any equivalents would have been anti-dilutive as we had losses for the years then ended. Debt Extinguishment The Company evaluates its convertible instruments in accordance with ASC 470-50, “Debt Modifications and Extinguishments.” For all extinguishments of debt, ASC 470-50 requires the difference between the reacquisition price (including any premium) and the net carrying amount of the debt being extinguished (including any deferred debt issuance costs) to be recognized as a gain or loss when the debt is extinguished. Accordingly, the Company recorded a net loss of $ 194,000 on extinguishment of debt in its statement of operations for the year ended December 31, 2021. There were no debt extinguishments in the year ended December 31, 2022. Stock Based Compensation The Company calculates stock compensation in accordance with ASC Topic 718, Compensation-Stock Based Compensation (“ASC 718”). ASC 718 requires that the cost resulting from all share-based payment transactions be recognized in the financial statements and establishes fair value as the measurement objective in accounting for share-based payment arrangements and requires all entities to apply a fair-value-based measurement method in accounting for share-based payment transactions with employees. F- 11 Reclassifications Certain reclassifications have been made to the 2021 financial statements to conform to the 2022 presentation, namely the presentation of selling and marketing expense apart from general and administrative expense in the consolidated statement of 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. Subsequent events None. Note 2. Inventory Inventory consists of the following at December 31: Schedule of Inventory 2022 2021 Raw materials $ 65,000 $ 105,000 Finished goods 983,000 600,000 Inventory, net $ 1,048,000 $ 705,000 Note 3. Property Plant and Equipment Major classes of property and equipment consist of the following at December 31: Schedule of Major Classes of Property and Equipment 2022 2021 Manufacturing and customer equipment $ 3,637,000 $ 3,800,000 Other property 69,000 36,000 Property and equipment, gross 3,706,000 3,836,000 Less: accumulated depreciation ( 3,317,000 ) ( 2,894,000 ) Property and equipment 389,000 942,000 Equipment not yet placed in service - 646,000 Property and equipment, net of depreciation $ 389,000 $ 1,588,000 We recorded depreciation expense related to these assets of $ 467,000 and $ 557,000 for the years ended December 31, 2022 and 2021, respectively. Depreciation expense in cost of revenue was $ 29,000 and $ 18,000 for the years ended December 31, 2022 and 2021 respectively. Note 4. Intangible Assets Intangible assets consist of the following at December 31: Schedule of Intangible Assets 2022 2021 Patent costs, subject to amortization $ 768,000 $ 768,000 Less: accumulated amortization ( 586,000 ) ( 522,000 ) Patent costs, net 182,000 246,000 Trademarks, not subject to amortization 124,000 124,000 Total $ 306,000 $ 370,000 F- 12 The amounts carried on the balance sheet represent cost to acquire, legal fees and similar costs relating to the patents incurred by the Company. Amortization is calculated through the expiration date of the patent. The amount charged to expenses for amortization of the patent costs was $ 64,000 for each of the years ended December 31, 2022 and 2021, respectively. Estimated future amortization expense related to patents as of December 31, 2022, is as follows: Schedule of Estimated Future Amortization Expense Related to Intangible Property Total Amortization Years ending December 31, 2023 $ 64,000 2024 64,000 2025 49,000 2026 5,000 Intangible asset, net of amortization $ 182,000 Note 5. Related Parties Members of management and directors invested in the Company’s convertible notes (Note 7). Note 6. Paycheck Protection Program (PPP) Loan The PPP was established to provide federally guaranteed, uncollateralized loans to assist businesses during the Covid-10 pandemic. PPP loans are administered by a Small Business Administration (SBA) approved partners. On May 7, 2020 the Company was granted a $ 568,000 loan which was to mature in two years . On January 27, 2021, the Company was granted a second $ 568,000 loan which was to mature in five years . The Company was eligible for loan forgiveness of up to 100% of the loans, upon meeting certain requirements. On May 20, 2021 and December 22, 2021, respectively, the loans were legally released and forgiven by the SBA. Loan forgiveness income of $ 1,136,000 has been recorded for the year ended December 31, 2021. Note 7. Convertible Notes (Related and Unrelated Party) In 2018, the Company issued Milestone I and Milestone II Convertible Notes. During the year ended December 31, 2021, the Company settled all remaining Milestone I Convertible Notes by issuing 89,173 shares of common stock in exchange for $ 231,000 ($ 30,000 related party) and $ 193,000 ($ 38,000 related party) in principal and interest, respectively, and repaying $ 840,000 ($ 180,000 related party) in cash. Additionally, the Company settled all remaining amounts due under Milestone II Convertible Notes by issuing 44,818 shares of common stock in exchange for $ 168,000 and $ 42,000 of principal and interest, respectively. In accordance with ASC 470-50, the Company recorded a loss of $ 194,000 upon extinguishment of the Milestone I and Milestone II Convertible Notes. Note 8. Derivative Liabilities Milestone II Convertible Notes (Note 7) contained variable conversion provisions based on the future price of the Company’s common stock, resulting in the potential issuance of an indeterminate number of shares of common stock upon conversion. The Company measured the fair value of the derivative resulting from the variable conversion provisions each reporting period. The change in fair value was recorded in the accompanying consolidated statements of operations. On May 26, 2021, the Milestone II Convertible Notes were settled. Upon extinguishment, the derivative liability was revalued to $ 25,000 , which resulted in a gain of $ 16,000 for the year ended December 31, 2021. F- 13 The fair value of the derivative liabilities for Milestone II Convertible Notes was calculated using the Black-Scholes model using the following assumptions: Schedule of Fair Value of Derivative Liability 26-May-21 31-Dec-20 Expected life 0.46 0.92 Volatility (based on comparable company) 101.32 % 120.38 % Risk free interest rate 0.04 % 0.1 % Dividend yield - - The following table provides a reconciliation of the beginning and ending balances for the Company’s derivative liabilities measured at fair value on a recurring basis using Level 3 inputs: Schedule of Derivative Liability Measured at Fair Value on a Recurring Basis Fair value, December 31, 2020 $ 41,000 Extinguishment of derivative upon debt settlement ( 25,000 ) Net gain from change in fair value ( 16,000 ) Fair value, December 31, 2021 $ - Note 9. Commitments and Contingencies Lease Commitments The Company leases office space under a non-cancelable operating lease which expires on March 31, 2023 . The Company incurred lease expense of $ 80,000 for the years ended December 31, 2022 and 2021, respectively. As of December 31, 2022, the right of use asset and related liability were $ 18,000 and $ 20,000 , respectively. In determining the present value of our operating lease right-of-use asset and liability, we used a 10 % discount rate (which approximates our borrowing rate). The remaining term on the lease is 0.25 years. The Company expects to extend the lease on a short-term basis. Legal Proceedings As described in Note 1, 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. Note 10. Stockholders’ Equity 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 2021, holders of debt converted a total of $ 399,000 in principal and $ 234,410 in interest into 133,991 shares of common stock, and debt in the amount of $ 840,000 was retired (Note 7). In 2021, the Company issued 17,273 shares of common stock, valued between $ 4.94 - $ 10.15 per share, for services rendered. In 2021, the Company issued a warrant to purchase 10,550 shares of common stock at exercise prices ranging from $ 3.25 - $ 5.46 (weighted average $ 4.15 ) in exchange for services rendered. In 2022, the Company issued 23,643 shares of common stock, valued between $ 5.00 - $ 5.16 per share, for services rendered. Additionally, 5,000 fully vested shares of common stock were granted and issued for equity-based compensation at a value of $ 4.50 per share. In 2022, the Company issued 986 shares of common stock due to the exercise of a warrant at an exercise price of $ 5.07 . F- 14 Warrants The following is a summary of changes in warrants outstanding for the years ended December 31, 2022 and 2021: Summary of Changes in Warrants Outstanding Number of warrants Outstanding at December 31,2020 2,204,303 Issued 10,550 Expired ( 927,449 ) Outstanding at December 31, 2021 1,287,404 Exercised ( 986 ) Expired ( 106,228 ) Outstanding at December 31, 2022 1,180,190 The following is a summary of all outstanding warrants as of December 31, 2022: Summary of Outstanding Warrants Warrant issuance event Number of warrants Weighted average exercise price Exercise price per share Remaining term in years Intrinsic value at date of grant Private placements of common stock 818,683 $ 6.03 $ 5.85 – 6.89 0.28 $ - Private placement of notes 117,692 $ 5.85 $ 5.85 0.22 $ - Settlement of deferred compensation 243,815 $ 6.32 $ 3.51 - 9.10 1.74 $ - 1,180,190 $ 6.07 $ 3.51 - 9.10 0.58 $ - Equity Incentive Plan Under the 2015 Equity Incentive Plan (the “2015 Plan”), the Company has reserved 1,153,846 shares for equity incentive awards for issuance to employees, members of the board of directors and other service providers. Awards may take the form of options, restricted stock, restricted stock units, performance shares and stock appreciation rights. The Company has issued options with no intrinsic value, stock awards and stock units through December 31, 2022, and issues new shares upon exercise of options or vesting of stock awards and stock units. As of December 31, 2022, there were 354,000 shares available for the issuance of awards under the 2015 Plan. The Company has reserved approximately 30,000 shares for equity awards issued outside of the 2015 Plan. Stock-Based Compensation The total amount of equity-based compensation included in general and administrative expense in the accompanying consolidated statements of operations was $ 386,000 and $ 92,000 for the years ended December 31, 2022 and 2021. As of December 31, 2022, the Company has $ 281,000 of total unrecognized share-based compensation expense related to unvested options, stock awards and stock units, which is expected to be amortized over the remaining weighted average period of 1.9 years. F- 15 Stock Options The following is a summary of stock option activity: Summary of Stock Options Activity Number of Options Weighted average exercise price per share Remaining term in years Outstanding on December 31, 2020 614,271 $ 7.61 3.8 Issued 65,805 $ 5.63 Cancelled/expired ( 44,187 ) $ 5.08 Outstanding on December 31, 2021 635,889 $ 7.41 3.8 Issued 64,672 $ 5.72 Cancelled/expired ( 17,622 ) $ 5.08 Outstanding on December 31, 2022 682,939 $ 7.30 3.2 Exercisable, December 31, 2022 595,829 $ 7.54 2.7 The fair value of the options issued was calculated using the Black-Sholes option pricing model, based on the criteria shown below: Summary of Fair Value of Options Using Black-Sholes Option Pricing Model 2022 2021 Expected term (in years) 5.5 - 8 5.5 - 8 Expected volatility 82.8 % - 85.7 % 85.0 % - 89.4 % Risk-free interest rate 1.5 % - 3.9 % 0.7 % - 1.3 % Expected dividends $ - $ - Weighted average grant date fair value per share $ 4.53 $ 4.04 Restricted Stock The following is a summary of restricted stock award and restricted stock unit activity: Summary of Restricted Stock Award and Restricted Stock Unit Activity Number of shares Weighted average grant date fair value Unvested at January 1, 2021 - $ - Unvested at January 1, 2022 - $ - Granted 46,554 $ 4.96 Forfeited ( 4,631 ) $ 5.38 Unvested at December 31, 2022 41,923 $ 4.91 Performance Stock Units During 2022, the Company issued performance share units (“PSUs”) that represent shares potentially issuable based upon achievement of Company and individual performance targets in 2022. The grantees have the ability to earn 0 % - 200 % of the PSU target award. The awards also included a time-based service requirement through March 2023. F- 16 The following is a summary of PSU activity: Summary of Performance Stock Unit Activity Number of shares Weighted average grant date fair value Unvested at January 1, 2022 - $ - Granted 123,512 $ 4.50 Forfeited ( 105,834 ) $ 4.50 Unvested at December 31, 2022 17,678 $ 4.50 In February 2023, the awards were modified to pay the original grant-date fair value of the shares expected to vest in cash. Additionally, the Company performance targets were modified to allow approximately 77,000 shares to vest that would have otherwise been forfeited. As a result of the modifications, the Company expects to record an additional $ 218,000 in compensation expense, primarily in 2023. Note 11. Income Taxes Income tax provision (benefit) for the years ended December 31, 2022 and 2021 is summarized below: Summary of Income Tax Provision (Benefit) 2022 2021 Current: Federal $ - $ - State - - Total - - Deferred: Federal ( 956,000 ) ( 1,002,000 ) State ( 323,000 ) ( 322,000 ) Change in valuation allowance 1,279,000 1,324,000 Total - - Provision for income taxes $ - $ - The provision for income taxes differs from the amount computed by applying the statutory federal income tax rate before provision for income taxes. The sources and tax effect of the differences are as follows: Summary of Statutory Federal Income Tax Rate Before Provision for Income Taxes 2022 2021 Statutory federal income tax rate 21 % 21 % State tax 7 7 Permanent differences - ( 15 ) Change in valuation allowance ( 28 ) ( 13 ) Total Income tax - % - % Components of the net deferred income tax assets at December 31, 2022 and 2021 were as follows: Schedule of Components of Net Deferred Income Tax Assets 2022 2021 Net operating loss carryover $ 13,948,000 $ 12,669,000 Valuation allowance ( 13,948,000 ) ( 12,669,000 ) Deferred tax assets, net $ - $ - F- 17 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 of the deferred tax assets will not be recognized. After consideration of all the evidence, both positive and negative, management has determined that a $ 13,948,000 and $ 12,669,000 allowance at December 31, 2022 and 2021, respectively, is necessary to reduce the deferred tax assets to the amount that will more likely than not be realized. The increase in the valuation allowance for the current period is $ 1,279,000 resulting for current year tax losses. As of December 31, 2022, the Company has a net operating loss carry forward to offset future taxable income of approximately $ 49,843,000 , $ 28,482,000 of which begins to expire in 2033. Net operating loss carry forwards of $ 21,361,000 may be carried forward indefinitely. The Company may have experienced an ownership change that could limit its ability to utilize its operating loss carryforward to offset taxable income in future years. An analysis will be required to determine whether such change has occurred, the outcome of which could impact the Company’s operating results and cash flow if and when it achieves profitability in taxable jurisdictions. Note 12. Business Segments and Customer Concentrations The Company operates in one business segment. Sales to the following customers represented more than 10% of total sales for the years ended December 31, 2022 and 2021: Schedule of Revenue by Major Customers by Reporting Segments 2022 2021 Customer A 20 % 21 % Customer B 20 % 9 % Customer C 16 % 20 % Note 13. Supplemental Cash Flow Information Supplemental cash flow information is as follows: Schedule of Cash Flow Supplemental Information 2022 2021 Cash paid during the year for: Amounts included in the measurement of lease liabilities $ 78,000 $ 78,000 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 $ - $ 90,000 Extinguishment of derivative liability $ - $ 25,000 Note 14. Liquidity During the years ended December 31, 2022 and 2021, the Company used cash for operations of $ 2,648,000 and $ 1,861,000 , 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, the litigation against 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 December 31, 2022, we have $ 3,019,000 of cash and restricted cash and even though we have identified certain indicators, these indicators do not raise substantial doubt regarding the Company’s ability to continue as a going concern. However, we 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. F- 18