BARFRESH FOOD GROUP INC. 10-Q

Item 1. Financial Statements. Barfresh Food Group Inc. Condensed Consolidated Balance Sheets September 30, December 31, 2023 2022 (unaudited) (restated) Assets Current assets: Cash $ 1,011,000 $ 2,808,000 Restricted cash - 211,000 Trade accounts receivable, net 1,159,000 126,000 Other receivables 116,000 101,000 Inventory, net 748,000 1,048,000 Prepaid expenses and other current assets 167,000 79,000 Total current assets 3,201,000 4,373,000 Property, plant and equipment, net of depreciation 487,000 801,000 Operating lease right-of-use assets, net - 18,000 Intangible assets, net of amortization 258,000 306,000 Deposits 7,000 7,000 Total assets $ 3,953,000 $ 5,505,000 Liabilities and Stockholders’ Equity Current liabilities: Accounts payable $ 1,692,000 $ 1,534,000 Disputed co-manufacturer accounts payable (Note 5) 499,000 499,000 Accrued expenses 229,000 286,000 Accrued payroll and employee related 240,000 233,000 Lease liability - 20,000 Total current liabilities 2,660,000 2,572,000 Total liabilities 2,660,000 2,572,000 Commitments and contingencies (Note 5) - - 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; 13,104,614 and 12,934,741 shares issued and outstanding at September 30, 2023 and December 31, 2022, respectively - - Additional paid in capital 61,388,000 60,905,000 Accumulated deficit ( 60,095,000 ) ( 57,972,000 ) Total stockholders’ equity 1,293,000 2,933,000 Total liabilities and stockholders’ equity $ 3,953,000 $ 5,505,000 See the accompanying notes to the consolidated financial statements 3 Barfresh Food Group Inc. Condensed Consolidated Statements of Operations For the three and nine months ended September 30, 2023 and 2022 (Unaudited) 2023 2022 (restated) 2023 2022 (restated) For the three months ended September 30, For the nine months ended September 30, 2023 2022 (restated) 2023 2022 (restated) Revenue $ 2,603,000 $ 2,406,000 $ 6,205,000 $ 7,731,000 Cost of revenue 1,690,000 3,129,000 3,963,000 6,807,000 Gross profit 913,000 ( 723,000 ) 2,242,000 924,000 Operating expenses: Selling, marketing and distribution 697,000 860,000 1,990,000 2,236,000 General and administrative 578,000 1,013,000 2,065,000 2,637,000 Depreciation and amortization 114,000 91,000 310,000 327,000 Total operating expenses 1,389,000 1,964,000 4,365,000 5,200,000 Net loss $ ( 476,000 ) $ ( 2,687,000 ) $ ( 2,123,000 ) $ ( 4,276,000 ) Per share information - basic and fully diluted: Weighted average shares outstanding 13,036,000 12,931,000 13,005,000 12,920,000 Net loss per share $ ( 0.04 ) $ ( 0.21 ) $ ( 0.16 ) $ ( 0.33 ) See the accompanying notes to the consolidated financial statements 4 Barfresh Food Group Inc. Consolidated Statements of Cash Flows For the nine months ended September 30, 2023 and 2022 2023 2022 (restated) Net loss $ ( 2,123,000 ) $ ( 4,276,000 ) Adjustments to reconcile net loss to net cash used in operating activities Depreciation and amortization 325,000 344,000 Stock-based compensation 496,000 211,000 Stock and options issued for services 11,000 173,000 Changes in assets and liabilities Accounts receivable ( 1,033,000 ) 81,000 Other receivables ( 15,000 ) ( 77,000 ) Inventories 300,000 103,000 Prepaid expenses and other assets ( 27,000 ) ( 78,000 ) Accounts payable 195,000 828,000 Accrued expenses ( 137,000 ) 72,000 Net cash used in operating activities ( 2,008,000 ) ( 2,619,000 ) Investing activities Purchase of property and equipment - ( 13,000 ) Net cash used in investing activities - ( 13,000 ) Financing activities Proceeds from issuance of stock - 5,000 Net cash provided by financing activities - 5,000 Net decrease in cash and restricted cash ( 2,008,000 ) ( 2,627,000 ) Cash and restricted cash, beginning of period 3,019,000 5,675,000 Cash and restricted cash, end of period $ 1,011,000 $ 3,048,000 Cash paid during the year for: Amounts included in the measurement of lease liabilities $ 20,000 $ 60,000 Non-cash financing and investing activities: Value of shares relinquished in modification of stock-based compensation awards (Note 7) $ 24,000 $ - See the accompanying notes to the consolidated financial statements 5 Barfresh Food Group Inc. Notes to Condensed Consolidated Financial Statements September 30, 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 September 30, For the nine months ended September 30, 2023 2022 2023 2022 Manufacturer A 55 % 0 % 47 % 0 % Manufacturer B 37 % 31 % 44 % 28 % Manufacturer C 8 % 6 % 9 % 6 % Manufacturer D 0 % 54 % 0 % 58 % Manufacturer E 0 % 9 % 0 % 8 % 6 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. Fair Value Measurement and Financial Instruments Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 820, Fair Value Measurements and Disclosures (“ASC 820”), 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 December 31, 2022, the Company had approximately $ 211,000 in restricted cash related to a co-packing agreement. The restrictions were released in June 2023. 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 September 30, 2023 and December 31, 2022, there was no allowance for expected credit losses. Other Receivables Other receivables consist of the Company’s 2021 Employer Retention Tax Credit claim, amounts due from vendors for materials acquired on their behalf for use in manufacturing the Company’s products, vendor rebates and freight claims. 7 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. 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. 8 Storage and Shipping Costs Storage and outbound freight costs are included in selling, marketing and distribution expense. For the three months ending September 30, 2023 and 2022, storage and outbound freight totaled approximately $ 370,000 and $ 273,000 , respectively. For the nine months ending September 30, 2023 and 2022, storage and outbound freight totaled approximately $ 932,000 and $ 1,040,000 , respectively. Research and Development Expenditures for research activities relating to product development and improvement are charged to expense as incurred. The Company incurred approximately $ 32,000 and $ 220,000 , in research and development expense for the three months ending September 30, 2023 and 2022, respectively. For the nine months ending September 30, 2023 and 2022, the Company incurred approximately $ 88,000 and $ 347,000 , respectively. Loss Per Share For the three and nine months ended September 30, 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, marketing and distribution expense apart from general and administrative expense in the consolidated statement of operations, the reclassification of materials shipping from selling, marketing and distribution 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. Restatement of Prior Financial Information This Company’s previously filed unaudited statement of operations and cash flow statement and audited balance sheets have been restated to correct errors in calculating depreciation. From a quantitative and qualitative perspective, the Company determined that correcting the previously filed financial statements would not require amendment to its previously filed reports on Form 10-Q and 10-K. The effect of the correction of previously issued financial statements is summarized below: Schedule of Prior Financial Information As Previously Reported Adjustment Restated December 31, 2022 As Previously Reported Adjustment Restated Consolidated Balance Sheet Property, plant and equipment, net of depreciation $ 389,000 $ 412,000 $ 801,000 Total assets $ 5,093,000 $ 412,000 $ 5,505,000 Accumulated deficit $ ( 58,384,000 ) $ 412,000 $ ( 57,972,000 ) Total stockholders’ equity $ 2,521,000 $ 412,000 $ 2,933,000 Total liabilities and stockholders’ equity $ 5,093,000 $ 412,000 $ 5,505,000 9 As Previously Reported Adjustment Restated Three-months ended September 30, 2022 As Previously Reported Adjustment Restated Consolidated Statement of Operations Depreciation and amortization $ 112,000 $ ( 21,000 ) $ 91,000 Total operating expenses $ 1,985,000 $ ( 21,000 ) $ 1,964,000 Net loss $ ( 2,708,000 ) $ 21,000 $ ( 2,687,000 ) As Previously Reported Adjustment Restated Nine-months ended September 30, 2022 As Previously Reported Adjustment Restated Consolidated Statement of Operations Depreciation and amortization $ 390,000 $ ( 63,000 ) $ 327,000 Total operating expenses $ 5,263,000 $ ( 63,000 ) $ 5,200,000 Net loss $ ( 4,339,000 ) $ 63,000 $ ( 4,276,000 ) Consolidated Statement of Cash Flows Net loss $ ( 4,339,000 ) $ 63,000 $ ( 4,276,000 ) Depreciation and amortization $ 407,000 $ ( 63,000 ) $ 344,000 Net cash used in operating activities $ ( 2,619,000 ) $ - $ ( 2,619,000 ) Note 3. Inventory Inventory consists of the following: Schedule of Inventory September 30, 2023 December 31, 2022 Raw materials $ 28,000 $ 65,000 Finished goods 720,000 983,000 Inventory, net $ 748,000 $ 1,048,000 10 Note 4. Property Plant and Equipment Property and equipment, net consist of the following: Schedule of Property and Equipment, Net September 30, 2023 December 31, 2022 Manufacturing equipment $ 1,546,000 $ 1,618,000 Customer equipment 1,410,000 1,417,000 Property and equipment, gross 2,956,000 3,035,000 Less: accumulated depreciation ( 2,469,000 ) ( 2,234,000 ) Property and equipment, net of depreciation $ 487,000 $ 801,000 Depreciation expense related to these assets was approximately $ 102,000 and $ 85,000 each of the three months ended September 30, 2023 and 2022, respectively, and $ 277,000 and $ 297,000 , respectively, for the nine months ended September 30, 2023 and 2022. Depreciation expense in cost of revenue was $ 4,000 and $ 10,000 for the three months ended September 30, 2023 and 2022, respectively, and $ 13,000 and $ 19,000 for the nine months ended September 30, 2023 and 2022, respectively. Note 5. 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 in a series of amendments through March 31, 2024 . The Company’s periodic lease cost was approximately $ 20,000 for each of the three months ended September 30, 2023 and 2022 and $ 60,000 for each of the nine months ended September 30, 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 allowed the parties to reach a potential resolution outside of the court system. However, as the parties were once again unable to come to an agreement, the Company re-filed the Complaint in California State Court in August 2023. 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 the Company’s 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. The Company has mitigated the impact of the supply disruption with the introduction of its single-serve smoothie cartons; however the product format has not been accepted by some customers or as a substitute for the bottle product in all use cases. 11 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 6. Convertible Debt Subscriptions From July to October of 2023, the Company executed subscription agreements for $ 1,880,000 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. The Company made its initial drawdown on the convertible debt on October 23, 2023, as described in Note 10. Note 7. Stockholders’ Equity The following are changes in stockholders’ equity for the nine months ended September 30, 2022 and 2023: Schedule of Changes in Stockholders' Equity Shares Amount Capital (Deficit) Total Additional Common Stock paid in Accumulated Shares Amount Capital (Deficit) Total Balance December 31, 2021 12,905,112 $ - $ 60,341,000 $ ( 51,838,000 ) $ 8,503,000 Shares issued for warrant exercise 986 - 5,000 - 5,000 Equity-based compensation 5,000 - 211,000 - 211,000 Cash settlement of equity-based compensation Issuance of stock and options for services 23,643 - 173,000 - 173,000 Net loss - - - ( 4,276,000 ) ( 4,276,000 ) Balance September 30, 2022 12,934,741 $ - $ 60,730,000 $ ( 56,114,000 ) $ 4,616,000 Additional Common Stock paid in Accumulated Shares Amount Capital (Deficit) Total Balance December 31, 2022 12,934,741 $ - $ 60,905,000 $ ( 57,972,000 ) $ 2,933,000 Balance 12,934,741 $ - $ 60,905,000 $ ( 57,972,000 ) $ 2,933,000 Equity-based compensation 165,779 - 496,000 - 496,000 Cash settlement of equity-based compensation - - ( 24,000 ) - ( 24,000 ) Issuance of stock and options for services 4,094 - 11,000 - 11,000 Net loss - - - ( 2,123,000 ) ( 2,123,000 ) Balance September 30, 2023 13,104,614 $ - $ 61,388,000 $ ( 60,095,000 ) $ 1,293,000 Balance 13,104,614 $ - $ 61,388,000 $ ( 60,095,000 ) $ 1,293,000 Warrants During the nine months ended September 30, 2023, 936,375 warrants at a weighted average exercise price of $ 6.00 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 June 2023, the Company’s stockholders adopted the 2023 Equity Incentive Plan (the “2023 Plan”), reserving 650,000 shares for future issuance. The Board of Directors discontinued further grants under the 2015 Plan. As of September 30, 2023, the Company has $ 153,000 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 1.5 years. 12 Stock Options The following is a summary of stock option activity for the nine months ended September 30, 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 63,545 $ 1.50 8.0 Cancelled/expired ( 109,388 ) $ 8.48 Outstanding on September 30, 2023 637,096 $ 6.54 3.6 Exercisable, September 30, 2023 576,393 $ 6.75 3.2 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 3.6 % Expected dividends $ - Weighted average grant date fair value per share $ 1.19 Restricted Stock The following is a summary of restricted stock award and restricted stock unit activity for the nine months ended September 30, 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 ( 9,931 ) $ 3.33 Unvested at September 30, 2023 32,606 $ 4.82 Performance Share Units During 2022 and 2023, the Company issued performance share units (“PSUs”) that represented shares potentially issuable based upon Company and individual performance in the years of issuance. 13 The following table summarizes the activity for the Company’s unvested PSUs for the nine months ended September 30, 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 357,689 $ 1.64 Vested ( 45,251 ) $ 1.36 Unvested at September 30, 2023 312,438 $ 1.68 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 PSUs to vest, with an additional time-based vesting requirement for approximately 26,000 of the PSUs. 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 nine-months ended September 30, 2023. The Company adopted a 2023 PSU program in April 2023, granting approximately 211,000 PSUs at target performance against company-wide metrics. An additional 76,000 PSUs were granted in September 2023 for performance against individual goals, replacing the Company’s cash bonus program. The results for the three and nine months ended September 30, 2023 include $ 84,000 in expense for the 2023 PSU program. Estimates of expense associated with 2023 performance will be reassessed each quarter through the performance period. Note 8. 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 September 30, 2023, the estimated effective tax rate for 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 and nine months ended September 30, 2023 and 2022, the Company did not incur any interest and penalties associated with tax positions. As of September 30, 2023, the Company did not have any significant unrecognized uncertain tax positions. Note 9. Liquidity During the nine months ended September 30, 2023, the Company used cash for operations of $ 2,008,000 . 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 5, the dispute and subsequent contract termination with the Manufacturer has resulted in limitations in our ability to procure certain products, which has and may continue to inhibit our ability to achieve positive cash flow until we are able to expand our manufacturing capacity. Additionally, management has considered that dispute resolution, including litigation, is costly and will require the outlay of cash. However, as of September 30, 2023, the Company has $ 1,011,000 of cash and funding commitments of approximately $ 1,880,000 , as more fully described in Note 6. As such, 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. 14 Note 10. Subsequent Event – Nasdaq Compliance On May 5, 2023, the Company received a notice letter from the Listing Qualifications Staff of The Nasdaq Stock Market, LLC (“Nasdaq”) notifying the Company that it was not in compliance with the Listing Rule 5550(b) (the “Rule”), which requires listed companies to maintain a minimum $ 2,500,000 stockholders’ equity, $ 35,000,000 market value of listed securities, or $ 500,000 net income from continuing operations. In its quarterly report for the period ended March 31, 2023, the Company reported stockholders’ equity of $ 1,845,000 , and as a result, did not satisfy the Rule. On June 14, 2023, the Company received a letter from Nasdaq granting the Company an extension through October 30, 2023 to regain compliance with the Rule. On October 23, 2023, the Company issued convertible notes in the amount of $ 1,390,000 pursuant to the subscription agreements described in Note 6. Note balances of $ 1,207,000 were immediately converted into approximately 820,000 shares of common stock. A pro-forma balance sheet giving effect to the transactions is presented below: Schedule of Pro-forma Balance Sheet September 30, 2023 (unaudited) Convertible Debt Drawdown Conversion of Debt to Equity September 30, 2023 (proforma, unaudited) Assets Current assets: Cash $ 1,011,000 $ 1,390,000 $ - $ 2,401,000 Trade accounts receivable, net 1,159,000 1,159,000 Other receivables 116,000 116,000 Inventory, net 748,000 748,000 Prepaid expenses and other current assets 167,000 167,000 Total current assets 3,201,000 1,390,000 - 4,591,000 Property, plant and equipment, net of depreciation 487,000 487,000 Intangible assets, net of amortization 258,000 258,000 Deposits 7,000 7,000 Total assets $ 3,953,000 $ 1,390,000 $ - $ 5,343,000 Liabilities and Stockholders’ Equity Current liabilities: Accounts payable $ 1,692,000 $ - $ - $ 1,692,000 Disputed co-manufacturer accounts payable 499,000 499,000 Accrued expenses 229,000 229,000 Accrued payroll and employee related 240,000 240,000 Convertible notes payable - 1,390,000 ( 1,207,000 ) 183,000 Total current liabilities 2,660,000 1,390,000 ( 1,207,000 ) 2,843,000 Total liabilities 2,660,000 1,390,000 ( 1,207,000 ) 2,843,000 Stockholders’ equity: Common stock - - Additional paid in capital 61,388,000 61,388,000 Accumulated deficit ( 60,095,000 ) 1,207,000 ( 58,888,000 ) Total stockholders’ equity 1,293,000 - 1,207,000 2,500,000 Total liabilities and stockholders’ equity $ 3,953,000 $ 1,390,000 $ - $ 5,343,000 Management believes that taking into consideration the October 23, 2023 note issuance and conversion, the Company satisfies the stockholders’ equity requirement on a pro-forma basis as of September 30, 2023 and as of October 26, 2023. Nasdaq will continue to monitor the Company’s ongoing compliance with the Rule and, if at the time of its next periodic report the Company does not evidence compliance, it may be subject to delisting. 15