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 the Three Months Ended June 30, 2023 as Compared to the Three Months Ended June 30, 2022 Revenue and cost of revenue Revenue decreased $1,288,000, or 46%, from $2,799,000 in 2022 to $1,511,000 in 2023. The decline in revenue was due to limited supply caused by our product withdrawal resulting from the quality complaints with product purchased from the Manufacturer. We anticipate that our revenues will be adversely impacted as a result of the dispute unless and until new sources of reliable supply at sufficient volume can be identified and developed, the timing of which is uncertain. Cost of revenue for 2023 was $1,037,000 as compared to $1,916,000 in 2022. Our gross profit was $474,000 (31%) and $883,000 (32%) for 2023 and 2022, respectively. Cost of revenue declined as a result of the 46% decrease in revenue as well as a shift in product mix resulting from the limited supply of smoothie bottles, partially offset by additional inventory reserves, resulting from the quality complaints. 15 Selling, marketing and distribution expense Our operations were primarily directed towards increasing sales and expanding our distribution network. Three months ended June 30, 2023 Three months ended June 30, 2022 Change Percent Sales and marketing $ 374,000 $ 382,000 $ (8,000 ) -2 % Storage and outbound freight 251,000 319,000 (68,000 ) -21 % $ 625,000 $ 701,000 $ (76,000 ) -11 % Selling, marketing and distribution expense decreased approximately $76,000 (11%) from approximately $701,000 in 2022 to $625,000 in 2023. Sales and marketing expense decreased approximately $8,000 (2%) from approximately $382,000 in 2022 to $374,000 in 2023. Storage and outbound freight expense decreased approximately $68,000 (21%) from approximately $319,000 in 2022 to $251,000 in 2023. The decrease was the result of the 46% decrease in revenue, offset by higher costs resulting from product mix and inefficiencies due to production transitions. General and administrative expense Three months ended June 30, 2023 Three months ended June 30, 2022 Change Percent Personnel costs $ 244,000 $ 362,000 $ (118,000 ) -33 % Stock based compensation (15,000 ) 114,000 (129,000 ) -113 % Legal, professional and consulting fees 59,000 52,000 7,000 13 % Director fees paid in cash 25,000 25,000 - 0 % Research and development 35,000 96,000 (61,000 ) -64 % Other general and administrative expenses 145,000 153,000 (8,000 ) -5 % $ 493,000 $ 802,000 $ (309,000 ) -39 % General and administrative expense decreased approximately $309,000 (39%) from approximately $802,000 in 2022 to $493,000 in 2023. Personnel cost represents the cost of employees including salaries, bonuses, employee benefits and employment taxes and continues to be our largest cost. Personnel cost decreased by approximately $118,000 (33%) from approximately $362,000 to $244,000 and stock-based compensation decreased by approximately $129,000 (113%) from $114,000 to ($15,000). The decrease in personnel cost and stock-based compensation resulted primarily from the confirmation and recognition of our 2021 COVID-related tax credit, reduction in headcount, and reversal of previously recognized compensation under our 2023 performance stock unit program, as management does not currently expect that performance criteria will be achieved. Research and development expense decreased approximately $61,000 (64%) from approximately $96,000 in 2022 to $35,000 in 2023 as activities were minimized to conserve working capital. 16 Net loss We had net losses of approximately $742,000 and $716,000 for the three-month periods ended June 30, 2023 and 2022, respectively. The increase of approximately $26,000, was the result of the aforementioned changes in revenue, partially offset by reductions in cost and expenses. Results of Operation for the Six Months Ended June 30, 2023 as Compared to the six Months Ended June 30, 2022 Revenue and cost of revenue Revenue decreased $1,723,000, or 32%, from $5,325,000 in 2022 to $3,602,000 in 2023. The decline in revenue was due to limited supply caused by our product withdrawal resulting from quality complaints with product purchased from the Manufacturer. We anticipate that our revenues will be adversely impacted as a result of the dispute unless and until new sources of reliable supply at sufficient volume can be identified and developed, the timing of which is uncertain. Cost of revenue for 2023 was $2,273,000 as compared to $3,678,000 in 2022. Our gross profit was $1,329,000 (37%) and $1,647,000 (31%) for 2023 and 2022, respectively. Cost of revenue declined as a result of the 32% decrease in revenue as well as a shift in product mix resulting from the limited supply of smoothie bottles, partially offset by additional inventory reserves resulting from the quality complaints. Selling, marketing and distribution expense Our operations were primarily directed towards increasing sales and expanding our distribution network. Six months ended June 30, Six months ended June 30, 2023 2022 Change Percent Sales and marketing $ 731,000 $ 608,000 $ 123,000 20 % Storage and outbound freight 562,000 768,000 (206,000 ) -27 % $ 1,293,000 $ 1,376,000 $ (83,000 ) -6 % Selling, marketing and distribution expense decreased approximately $83,000 (6%) from approximately $1,376,000 in 2022 to $1,293,000 in 2023. Sales and marketing expense increased approximately $123,000 (20%) from approximately $608,000 in 2022 to $731,000 in 2023, primarily due to product sampling of smoothie carton products and equipment maintenance incurred to relaunch bulk product sales in locations that had been non-operational as a result of COVID shutdowns and subsequent labor shortages. Storage and outbound freight expense decreased approximately $206,000 (27%) from approximately $768,000 in 2022 to $562,000 in 2023. The decrease was the result of the 32% decrease in revenue, offset by higher costs resulting from product mix and inefficiencies due to production transitions. 17 General and administrative expense Six months ended June 30, 2023 Six months ended June 30, 2022 Change Percent Personnel costs $ 733,000 $ 670,000 $ 63,000 9 % Stock based compensation 191,000 199,000 (8,000 ) -4 % Legal, professional and consulting fees 173,000 213,000 (40,000 ) -19 % Director fees paid in cash 50,000 50,000 - 0 % Research and development 56,000 126,000 (70,000 ) -56 % Other general and administrative expenses 284,000 366,000 (82,000 ) -22 % $ 1,487,000 $ 1,624,000 $ (137,000 ) -8 % General and administrative expense decreased approximately $137,000 (8%) from approximately $1,624,000 in 2022 to $1,487,000 in 2023. Personnel cost represents the cost of employees including salaries, bonuses, employee benefits and employment taxes and continues to be our largest cost. Personnel cost increased by approximately $63,000 (9%) from approximately $670,000 to $733,000. The increase in personnel cost resulted primarily from an increase in headcount during the first quarter of 2023, partially offset by the confirmation and recognition of our 2021 COVID-related tax credit, and a reduction in headcount in the second quarter of 2023. Research and development expense decreased approximately $70,000 (56%) from approximately $126,000 in 2022 to $56,000 in 2023 as activities were minimized to conserve working capital. Other general and administrative expenses decreased approximately $82,000 (22%) from approximately $366,000 in 2022 to $284,000 in 2023 primarily as a result of non-recurring costs related to our uplisting to the NASDAQ stock exchange in 2022, partially offset by costs related by our dispute with the Manufacturer. Net loss We had net losses of approximately $1,647,000 and $1,589,000 for the six-month periods ended June 30, 2023 and 2022, respectively. The increase of approximately $58,000, was the result of the aforementioned changes in revenue, partially offset by reductions in cost and expenses. Liquidity and Capital Resources As of June 30, 2023, we had working capital of $554,000 compared with $1,801,000 at December 31, 2022. The decrease in working capital is primarily due to the operating loss for the six months ended June 30, 2023. During the six months ended June 30, 2023, we used $2,067,000 in operations. The impact of COVID-19 on the Company is constantly evolving. The direct impact to our operations had begun to take effect at the close of the first quarter ended March 31, 2020. Specifically, our business was impacted by dining bans targeted at restaurants to reduce the size of public gatherings. Such bans precluded our single serve products from being served at those establishments for a number of weeks, and in some instances, resulted in abandoned product launches. Furthermore, many school districts closed regular attendance for a period of time thereby disrupting sales of product into that channel. More recently, we have experienced a disruption in the supply chain for manufacturing our products due to COVID-19. While further developments surrounding COVID-19 may arise, the business climate appears to have stabilized in 2023. On June 1, 2021, the Company completed a private placement of 1,282,051 shares of its common stock at $4.68 per share, resulting in gross proceeds of $6,000,000. In addition, holders of debt converted a total of $399,000 in principal and $234,000 in interest into 133,991 shares of common stock and debt in the amount of $840,000 was retired, leaving the Company with no debt. 18 In August 2023, the Company received subscriptions of approximately $1,130,000 of a $2,000,000 privately placed convertible debt offering. The debt may be drawn in 25% increments, matures on the anniversary of the draw, bears interest at 10% per annum for the term, regardless of earlier payment or conversion, and is mandatorily convertible as to principal and interest into shares of the Company’s common stock at any time prior to maturity at the greater of $1.20 or 85% of the volume-weighted average price of the common stock for the ten trading days immediately preceding the written notice of the conversion (the “Conversion Price”). If the Company has not exercised the mandatory conversion, the holder of the debt has the option after six months and on up to four occasions to convert all or any portion of the principal and interest into shares of the Company’s common stock at the Conversion Price. Our liquidity needs will depend on how quickly we are able to profitably ramp up sales, as well as our ability to control and reduce variable operating expenses, and to continue to control and reduce fixed overhead expense. Our recent business developments with the Manufacturer impact our supply chain and will result in increased legal cost and are expected to have a negative impact on our financial position, results of operations and cash flow. Our operations to date have been financed by the sale of securities, the issuance of convertible debt and the issuance of short-term debt, including related party advances. If we are unable to generate sufficient cash flow from operations with the capital raised we will be required to raise additional funds either in the form of equity or in the form of debt. There are no assurances that we will be able to generate the necessary capital to carry out our current plan of operations. Off-Balance Sheet Arrangements We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expense, results of operations, liquidity, capital expenditures or capital resources that are material to stockholders. Item 3. Quantitative and Qualitative Disclosures About Market Risk. Not required because we are a smaller reporting company.