BARFRESH FOOD GROUP INC. 10-Q

Item 1. Financial Statements. Barfresh Food Group Inc. Condensed Consolidated Balance Sheets March 31, December 31, 2023 2022 (Unaudited) (Audited) Assets Current assets: Cash $ 1,566,000 $ 2,808,000 Restricted cash 211,000 211,000 Trade accounts receivable, net 571,000 126,000 Other receivables 11,000 101,000 Inventory, net 1,055,000 1,048,000 Prepaid expenses and other current assets 169,000 79,000 Total current assets 3,583,000 4,373,000 Property, plant and equipment, net of depreciation 297,000 389,000 Operating lease right-of-use assets, net - 18,000 Intangible assets, net of amortization 291,000 306,000 Deposits 7,000 7,000 Total assets $ 4,178,000 $ 5,093,000 Liabilities and Stockholders’ Equity Current liabilities: Accounts payable $ 1,306,000 $ 1,534,000 Disputed co-manufacturer accounts payable (Note 4) 499,000 499,000 Accrued expenses 255,000 286,000 Accrued payroll and employee related 273,000 233,000 Lease liability - 20,000 Total current liabilities 2,333,000 2,572,000 Total liabilities 2,333,000 2,572,000 Commitments and contingencies (Note 4) - - 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; 13,002,603 and 12,934,741 shares issued and outstanding at March 31, 2023 and December 31, 2022, respectively - - Additional paid in capital 61,139,000 60,905,000 Accumulated deficit ( 59,294,000 ) ( 58,384,000 ) Total stockholders’ equity 1,845,000 2,521,000 Total liabilities and stockholders’ equity $ 4,178,000 $ 5,093,000 See the accompanying notes to the condensed consolidated financial statements 3 Barfresh Food Group Inc. Condensed Consolidated Statements of Operations For the three months ended March 31, 2023 and 2022 (Unaudited) 2023 2022 Revenue $ 2,091,000 $ 2,526,000 Cost of revenue 1,236,000 1,762,000 Gross profit 855,000 764,000 Operating expenses: Selling, marketing and distribution 667,000 675,000 General and administrative 994,000 823,000 Depreciation and amortization 104,000 161,000 Total operating expenses 1,765,000 1,659,000 Net loss $ ( 910,000 ) $ ( 895,000 ) Per share information - basic and fully diluted: Weighted average shares outstanding 12,977,000 12,909,000 Net loss per share $ ( 0.07 ) $ ( 0.07 ) See the accompanying notes to the condensed consolidated financial statements 4 Barfresh Food Group Inc. Condensed Consolidated Statements of Cash Flows For the three months ended March 31, 2023 and 2022 (Unaudited) 2023 2022 Net loss $ ( 910,000 ) $ ( 895,000 ) Adjustments to reconcile net loss to net cash used in operating activities Depreciation and amortization 107,000 161,000 Stock-based compensation 175,000 28,000 Stock and options issued for services 83,000 98,000 Changes in assets and liabilities Accounts receivable ( 445,000 ) ( 497,000 ) Other receivables 90,000 ( 232,000 ) Inventories ( 7,000 ) ( 145,000 ) Prepaid expenses and other assets ( 92,000 ) ( 39,000 ) Accounts payable ( 228,000 ) 404,000 Accrued expenses ( 15,000 ) ( 15,000 ) Net cash used in operating activities ( 1,242,000 ) ( 1,132,000 ) Investing activities Purchase of property and equipment - ( 14,000 ) Net cash used in investing activities - ( 14,000 ) Financing activities Proceeds from issuance of stock - 5,000 Net cash provided by financing activities - 5,000 Net decrease in cash and restricted cash ( 1,242,000 ) ( 1,141,000 ) Cash and restricted cash, beginning of period 3,019,000 5,675,000 Cash and restricted cash, end of period $ 1,777,000 $ 4,534,000 Cash paid during the year for: Amounts included in the measurement of lease liabilities $ 20,000 $ 20,000 Non-cash financing and investing activities: Value of shares relinquished in modification of stock-based compensation awards (Note 5) $ 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, 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 % 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. 6 Fair Value Measurement and Financial Instruments Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 820, Fair Value Measurements and Disclosures (“ASC 820”), 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. 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, 2023 and December 31, 2022, there was no allowance for doubtful accounts. Other Receivables Other receivables consist of amounts due from vendors for materials acquired on their behalf for use in manufacturing the Company’s products, vendor rebates and freight claims. 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. 7 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. Storage and Shipping Costs Storage and outbound freight costs are included in selling, marketing and distribution expense. For the three months ending March 31, 2023 and 2022, storage and outbound freight totaled approximately $ 311,000 and $ 386,000 , respectively. Research and Development Expenditures for research activities relating to product development and improvement are charged to expense as incurred. The Company incurred approximately $ 21,000 and $ 31,000 , in research and development expense for the three months ending March 31, 2023 and 2022, respectively. Loss Per Share For the three months ended March 31, 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 and marketing expense apart from general and administrative expense in the consolidated statement of operations, the reclassification of materials shipping 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. Inventory Inventory consists of the following: Schedule of Inventory March 31, December 31, 2023 2022 Raw materials $ 49,000 $ 65,000 Finished goods 1,006,000 983,000 Inventory, net $ 1,055,000 $ 1,048,000 8 Note 3. Property Plant and Equipment Property and equipment, net consist of the following: Schedule of Property and Equipment, Net March 31, December 31, 2023 2022 Manufacturing and customer equipment $ 3,637,000 $ 3,637,000 Other property 69,000 69,000 Property and equipment, gross 3,706,000 3,706,000 Less: accumulated depreciation ( 3,409,000 ) ( 3,317,000 ) Property and equipment, net of depreciation $ 297,000 $ 389,000 Depreciation expense related to these assets was approximately $ 92,000 and $ 145,000 for the three months ended March 31, 2023 and 2022, respectively. Depreciation expense in cost of revenue was $ 4,000 for the three months ended March 31, 2023. There was no depreciation expense in cost of revenue for the three months ended March 31, 2022. Note 4. 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 June 30, 2023 . The Company’s periodic lease cost was approximately $ 20,000 for each of the three months ended March 31, 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 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 has and will continue to 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. 9 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 . Our legal counsel and management believe the probability of a material unfavorable outcome is remote. Note 5. Stockholders’ Equity The following are changes in stockholders’ equity for the three months ended March 31, 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 $ ( 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 Common Stock paid in Accumulated Shares Amount Capital (Deficit) Total Balance December 31, 2022 12,934,741 $ - $ 60,905,000 $ ( 58,384,000 ) $ 2,521,000 Beginning balance 12,934,741 $ - $ 60,905,000 $ ( 58,384,000 ) $ 2,521,000 Equity-based compensation 35,659 - 175,000 - 175,000 Cash settlement of equity-based compensation - - ( 24,000 ) - ( 24,000 ) Issuance of stock and options for services 32,203 - 83,000 - 83,000 Net loss - - - ( 910,000 ) $ ( 910,000 ) 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 Warrants During the three months ended March 31, 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 March 2023, the Board of Directors adopted the 2023 Equity Incentive Plan (the “2023 Plan”), reserving 650,000 shares for future issuance, and discontinuing further grants under the 2015 Plan. As of March 31, 2023, the Company has $ 227,000 of total unrecognized share-based compensation expense relative to unvested options, stock awards and stock units, which is expected to be recognized over the remaining weighted average period of 1.8 years. 10 Stock Options The following is a summary of stock option activity for the three months ended March 31, 2023: Summary of Stock Options Activity Number of Options Weighted average exercise price per share Remaining term in years Outstanding on December 31, 2022 682,939 $ 7.30 3.2 Issued 20,891 $ 1.62 8.0 Cancelled/expired ( 4,000 ) $ 5.65 Outstanding on March 31, 2023 699,830 $ 7.14 3.1 Exercisable, March 31, 2023 638,110 $ 7.26 2.8 The fair value of the options issued was calculated using the Black-Scholes option pricing model, based on the following: Summary of Fair Value of Options Using Black-Sholes Option Pricing Model 2023 Expected term (in years) 8.0 Expected volatility 84.4 % Risk-free interest rate 3.5 % Expected dividends $ - Weighted average grant date fair value per share $ 1.31 Restricted Stock The following is a summary of restricted stock award and restricted stock unit activity for the three months ended March 31, 2023: 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 11 Performance Stock Units During 2022, the Company issued performance share units (“PSUs”) that represented shares potentially issuable based upon Company and individual performance in 2022. The following table summarizes the activity for the Company’s unvested PSUs for the three months ended March 31, 2023: Summary of Performance Stock Unit Activity Number of shares Weighted average grant date fair value Unvested at January 1, 2023 17,678 $ 4.50 Cash settled ( 17,678 ) $ 4.50 Granted 71,265 $ 1.36 Vested ( 45,251 ) $ 1.36 Unvested at March 31, 2023 26,014 $ 1.36 In February 2023, the unvested awards issued for individual performance and outstanding at January 1, 2023 were modified to cash-settle the original grant-date fair value of approximately $ 80,000 , resulting in incremental compensation of $ 56,000 after considering the $ 24,000 fair value of the vested shares at the date of the modification. Additionally, the Company performance targets were modified to allow approximately 71,000 PSU to vest, with an additional time-based vesting requirement for approximately 26,000 of the PSU. Because the awards did not vest based on the original terms, the modification was considered a new grant, resulting in $ 64,000 in compensation expense in the three-months ended March 31, 2023. The Company adopted a 2023 PSU program in April 2023, granting approximately 172,000 PSUs at target performance. The results for the three-month period ended March 31, 2023 include $ 67,000 in stock-based compensation expense as management determined that the service inception date preceded the grant date. Note 6. 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, 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 months ended March 31, 2023 and 2022, the Company did not incur any interest and penalties associated with tax positions. As of March 31, 2023, the Company did not have any significant unrecognized uncertain tax positions. Note 7. Liquidity During the three months ended March 31, 2023, the Company used cash for operations of $ 1,242,000 . 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, 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, 2023, the Company has $ 1,777,000 of cash and restricted cash and 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. 12