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, 2022, as filed with the SEC on March 2, 2023, and other reports that we file with the SEC from time to time. References in this Quarterly Report on Form 10-Q to “us”, “we”, “our” and similar terms refer to Barfresh Food Group Inc. Cautionary Note Regarding Forward-Looking Statements This discussion includes forward-looking statements, as that term is defined in the federal securities laws, based upon current expectations that involve risks and uncertainties, such as plans, objectives, expectations, and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors. Words such as “anticipate”, “estimate”, “plan”, “continuing”, “ongoing”, “expect”, “believe”, “intend”, “may”, “will”, “should”, “could” and similar expressions are used to identify forward-looking statements. We caution you that these statements are not guarantees of future performance or events and are subject to a number of uncertainties, risks and other influences, many of which are beyond our control, which may influence the accuracy of the statements and the projections upon which the statements are based. Any one or more of these uncertainties, risks and other influences could materially affect our results of operations and whether forward-looking statements made by us ultimately prove to be accurate. Our actual results, performance and achievements could differ materially from those expressed or implied in these forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statements, whether from new information, future events or otherwise. Critical Accounting Policies Our consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). Results of Operations Results of Operation for Three Months Ended March 31, 2023 as Compared to the Three Months Ended March 31, 2022 Revenue and cost of revenue Revenue decreased $435,000, or 17%, from $2,526,000 in 2022 to $2,091,000 in 2023. The decline in revenue was due to limited supply due to our product withdrawal resulting from the quality complaints with product purchased from the Manufacturer. We anticipate that our revenues will be adversely impacted as a result of the dispute unless and until new sources of reliable supply at sufficient volume can be identified and developed, the timing of which is uncertain. Cost of revenue for 2023 was $1,236,000 as compared to $1,762,000 in 2022. Our gross profit was $855,000 (41%) and $764,000 (30%) for 2023 and 2022, respectively. Cost of revenue declined as a result of the 17% decrease in revenue, partially offset by lower costs relative to revenue on the smoothie carton product, resulting in the 1,100-basis point gross margin improvement. 13 Selling, marketing and distribution expense Our operations were primarily directed towards increasing sales and expanding our distribution network. Three months ended March 31, Three months ended March 31, 2023 2022 Change Percent Sales and marketing $ 356,000 $ 289,000 $ 67,000 23 % Storage and outbound freight 311,000 386,000 (75,000 ) -19 % $ 667,000 $ 675,000 $ (8,000 ) -1 % Selling, marketing and distribution expense decreased approximately $8,000 (1%) from approximately $675,000 in 2022 to $667,000 in 2023. Sales and marketing expense increased approximately $67,000 (23%) from approximately $289,000 in 2022 to $356,000 in 2023. The increase in sales and marketing expense was primarily the result of the retention of outside service providers to assist with sales and initiatives, including, beginning in the third quarter of 2022, brokers specializing in the school market. Additionally, the Company increased its product sampling and advertising in conjunction with the launch of its smoothie carton product. Storage and outbound freight expense decreased approximately $75,000 (19%) from approximately $386,000 in 2022 to $311,000 in 2023. The decrease was the result of the 17% decrease in revenue and distribution efficiencies. General and administrative expense Three months ended March 31, Three months ended March 31, 2023 2022 Change Percent Personnel costs $ 489,000 $ 309,000 $ 180,000 58 % Stock based compensation 209,000 85,000 124,000 146 % Legal, professional and consulting fees 115,000 161,000 (46,000 ) -29 % Director fees paid in cash 25,000 25,000 - 0 % Research and development 21,000 31,000 (10,000 ) -32 % Other general and administrative expenses 135,000 212,000 (77,000 ) -36 % $ 994,000 $ 823,000 $ 171,000 21 % General and administrative expense increased approximately $171,000 (21%) from approximately $823,000 in 2022 to $994,000 in 2023. Personnel cost represents the cost of employees including salaries, bonuses, employee benefits and employment taxes and continues to be our largest cost. Personnel cost increased by approximately $180,000 (58%) from approximately $309,000 to $489,000 and stock-based compensation increased by approximately $124,000 (146%) from $85,000 to $209,000. The increase in personnel cost and stock-based compensation resulted primarily from modification of our 2022 performance stock unit program, with partial cash settlement. Legal, professional, and consulting fees decreased approximately $46,000 (29%) from approximately $161,000 in 2022 to $115,000 in 2023. The decrease was primarily due to a reduction in temporary labor, partially offsetting the increase in personnel costs. Research and development expense decreased approximately $10,000 (32%) from approximately $31,000 in 2022 to $21,000 in 2023 as a result of vendor credits related to development activities. Other expense decreased approximately $77,000 (36%) from approximately $212,000 in 2022 to $135,000 in 2023. In 2022, we incurred approximately $102,000 in one-time costs related to the uplist of our common stock to the NASDAQ Stock Market. In 2023, we incurred approximately $25,000 in inventory disposal costs related to our dispute with the Manufacturer. 14 Net loss We had net losses of approximately $910,000 and $895,000 for the three-month periods ended March 31, 2023 and 2022, respectively. The increase of approximately $15,000, was the result of the aforementioned changes in revenue, cost and expenses. Liquidity and Capital Resources As of March 31, 2023, we had working capital of $1,250,000 compared with $1,801,000 at December 31, 2022. The decrease in working capital is primarily due to the operating loss for the three months ended March 31, 2023. During the three months ended March 31, 2023, we used $1,242,000 in operations. The impact of COVID-19 on the Company is constantly evolving. The direct impact to our operations had begun to take effect at the close of the first quarter ended March 31, 2020. Specifically, our business was impacted by dining bans targeted at restaurants to reduce the size of public gatherings. Such bans precluded our single serve products from being served at those establishments for a number of weeks, and in some instances, resulted in abandoned product launches. Furthermore, many school districts closed regular attendance for a period of time thereby disrupting sales of product into that channel. More recently, we have experienced a disruption in the supply chain for manufacturing our products due to COVID-19. The developments surrounding COVID-19 remain fluid and dynamic, and consequently, will require the Company to continue to monitor news headlines from government and health officials, as well as the business community. On June 1, 2021, the Company completed a private placement of 1,282,051 shares of its common stock at $4.68 per share, resulting in gross proceeds of $6,000,000. In addition, holders of debt converted a total of $399,000 in principal and $234,000 in interest into 133,991 shares of common stock and debt in the amount of $840,000 was retired, leaving the Company with no debt. Our liquidity needs will depend on how quickly we are able to profitably ramp up sales, as well as our ability to control and reduce variable operating expenses, and to continue to control and reduce fixed overhead expense. Our recent business developments with the Manufacturer impact our supply chain and will result in increased legal cost and are expected to have a negative impact on our financial position, results of operations and cash flow. Our operations to date have been financed by the sale of securities, the issuance of convertible debt and the issuance of short-term debt, including related party advances. If we are unable to generate sufficient cash flow from operations with the capital raised we will be required to raise additional funds either in the form of equity or in the form of debt. There are no assurances that we will be able to generate the necessary capital to carry out our current plan of operations. Off-Balance Sheet Arrangements We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expense, results of operations, liquidity, capital expenditures or capital resources that are material to stockholders. Item 3. Quantitative and Qualitative Disclosures About Market Risk. Not required because we are a smaller reporting company.