What changed in this filing

/stocks — the workspaceLOADING

Item 7. Management’s Discussion and Analysis

2024-03-22 compared with 2023-03-02 · 85 added, 135 removed, 123 unchanged (64% of the section changed)

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Company conducts sales through several channels, including National Accounts, Regional Accounts, and Broadline Distributors.

October 26, 2015, Barfresh signed a five-year agreement with PepsiCo North America Beverages, a division of PepsiCo, to become its

exclusive sales representative within the food service channel to present the Barfresh line of ready-to-blend smoothies and frozen

beverages throughout the United States and Canada.

In February 2023, Barfresh terminated the agreement.

Such termination is not anticipated to have a significant impact on sales.

we have 10 employees and 3 consultants.

utilizes contract manufacturers to manufacture all of the products in the United States.

products are produced to specifications through several contract manufacturers.

One of our contract manufacturers (the “Manufacturer”)

has provided approximately 52% and 42% of our products in the years ended December 31, 2022 and 2021, respectively, under a Supply Agreement

with an initial term through September 2025.

the course of 2022, we experienced numerous quality issues with the case packaging utilized by the Manufacturer.

In addition, in

July of 2022, we began receiving customer complaints about the texture of our smoothie products produced by the Manufacturer.

response, we 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.

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, we received notification from the Manufacturer that it denied any responsibility

for the defective manufacture of the product.

In response, on November 10, 2022, we 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, we 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, we have the right to refile the Complaint

in California State Court.

to the uncertainties surrounding the claim, we are 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 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.

Accounting Policies

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utilizing the most likely amount method.

Provisions for refunds and other adjustments are generally provided for in the period the related sales are recorded,

based on management’s assessment of historical and projected trends.

Provisions for refunds and other adjustments are generally provided for in the period the

related sales are recorded, based on management’s assessment of historical and projected trends.

the transaction price to performance obligations in the contract

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and cost of revenue

increased $2,462,000, or 37%, from $6,700,000 in 2021 to $9,162,000 in 2022.

The overall revenue for 2022 was significantly higher due

to growing Twist & Go™ revenue prior

to our product withdrawal resulting from the quality complaints with product purchased from the Manufacturer.

As a result of the withdrawal,

we recorded a reserve for anticipated sales claims and administrative fees of $493,000.

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.

of revenue for 2022 was $7,722,000 as compared to $4,193,000 in 2021.

Our gross profit was $1,440,000 (16%) and $2,507,000 (37%) for

2022 and 2021, respectively.

Cost of revenue was adversely impacted by the completed and anticipated disposals of Twist

& Go™ product purchased from the Manufacturer, resulting in a charge of $932,000.

Depreciation from manufacturing equipment

was $29,000 and $18,000 for December 31, 2022 and 2021, respectively.

was $8,127,000 in 2023 compared to $9,162,000 in 2022, a decrease of $1,035,000, or 11%.

Revenue in 2022 was negatively impacted by the

$630,000 claims estimate resulting from the market withdrawal of product purchased from the Manufacturer.

Excluding the refund claims

estimate, revenue was $9,655,000 in 2022 and therefore decreased by $1,528,000 in 2023, or 16% based on product shipped.

have been adversely impacted as a result of lost customers and supply constraints resulting from the product issues and related dispute

with the Manufacturer.

While the introduction of our carton packaging format has mitigated the loss of supply, the product offering has

not been accepted by some customers or as a substitute for the bottle product in all use cases.

Further, as discussed in Item 1A, Risk

Factors , we may be adversely affected by a carton shortage currently impacting the beverage industry.

We have identified and are

actively working to develop additional smoothie bottle manufacturing capacity.

We had expected expanded capacity to become available

in early 2024, but were unable to complete the contracting process with the potential partner that had been identified.

We believe we

will expand capacity in 2024, however, there can be no assurances regarding our ability to identify and contract with a suitable partner.

of revenue was $5,243,000 in 2023 compared to $7,722,000 in 2022, a decrease of $2,479,000, or 32%.

Cost of revenue in 2022 was negatively

impacted by the $932,000 inventory write-off related to the product withdrawal.

Excluding the inventory write-off, cost of revenue was

$6,790,000 in 2022, and therefore decreased by $1,547,000 in 2023, or 23% based on product shipped.

Excluding the impact of the product

withdrawal, cost of revenue declined due to lower revenue, and lower product cost due to a shift in product mix resulting from the limited

supply of smoothie bottles.

gross profit was $2,884,000 (36%) and $1,440,000 (16%) for 2023 and 2022, respectively.

Adjusted for the product withdrawal, our 2022

gross profit was $2,865,000 (30%).

Adjusted comparative gross margin improvement is a result of favorable product mix, pricing actions,

and a slight improvement in the cost of supply chain components.

marketing and distribution expense

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Storage and outbound freight

marketing and distribution expense increased approximately $1,051,000 (58%) from approximately $1,810,000 in 2021 to $2,861,000 in 2022.

and marketing expense increased approximately $638,000 (84%) from approximately $756,000 in 2021 to $1,394,000 in 2022.

in sales and marketing expense was primarily the result of the retention of new employees and 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 participation in education nutrition trade shows in 2022.

and outbound freight expense increased approximately $413,000 (39%) from approximately $1,054,000 in 2021 to $1,467,000 in 2022.

increase was primarily a result of the 37% increase in revenue.

marketing and distribution expense decreased approximately $247,000 (-9%) from approximately $2,861,000 in 2022 to $2,614,000 in 2023.

Sales and marketing expense decreased approximately $58,000 (4%) from

approximately $1,394,000 in 2022 to $1,336,000 in 2023.

We reduced labor costs in 2023.

These reductions were partially offset by additional

expense for product sampling of smoothie carton products, 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, and broker commissions as we engaged numerous

regional K-12 specialists to expand our geographic reach in the third quarter of 2022, and thus incurred a full year of expense in 2023

compared to a partial year in 2022.

and outbound freight expense decreased approximately $189,000 (-13%) from approximately $1,467,000 in 2022 to $1,278,000.

freight cost related to aforementioned product withdrawal credit memos, freight expense was $1,274,000 in 2022.

The volume-related decrease

in expense from the decline in revenue was offset by higher costs resulting from product mix and inefficiencies due to production transitions.

and administrative expense

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Other general and administrative expenses

and administrative expense increased approximately $1,379,000 (64%) from approximately $2,170,000 in 2021 to $3,549,000 in 2022.

and administrative expense decreased approximately $855,000 (-24%) from approximately $3,549,000 in 2022 to $2,694,000 in 2023.

cost represents the cost of employees including salaries, bonuses, employee benefits and employment taxes and continues to be our largest

Personnel cost increased by approximately $510,000 (61%) from approximately $830,000 to $1,340,000.

The increase in personnel cost

was partially offset by the decrease in consulting fees as we choose to hire permanent staff as the critical stages of the COVID-19 pandemic

waned, rather than rely on consultants and temporary staff.

compensation is used as an incentive to attract and compensate employees and other service providers.

Stock-based compensation includes

stock issued and options granted to employees and non-employees.

Stock-based compensation for the year ended December 31, 2022 was approximately

$559,000 compared to $281,000 for the year ended December 31, 2021 due to the aforementioned increase in staffing, and the institution

of our performance-based stock compensation program in the third quarter of 2022.

Stock-based compensation in 2021 benefited from forfeiture

credits due to the departure of two key employees.

professional, and consulting fees increased approximately $103,000 (26%) from approximately $396,000 in 2021 to $499,000 in 2022.

increase was primarily due to the dispute and litigation with the Manufacturer and corporate development activities.

and development expense increased approximately $137,000 (56%) from approximately $245,000 in 2021 to $382,000 in 2022.

is primarily due to materials consumed in pre-production runs at a new contract manufacturer that provided our Twist

& Go™ product in carton format starting in the fourth quarter of 2022 .

Additionally, we incurred costs investigating the quality issue that occurred with the Manufacturer.

expense increased approximately $351,000 (110%) from approximately $318,000 in 2021 to $669,000 in 2022.

In 2022, we incurred approximately

$175,000 in one-time costs related to the uplist of our common stock to the NASDAQ Stock Market.

Additionally, we experienced maintenance

cost increases related to equipment loaned to our bulk product customers, and an increase in annual meeting costs.

Personnel cost decreased by approximately $141,000 (-11%) from approximately $1,340,000 in 2022 to $1,199,000 in 2023.

in personnel cost resulted primarily from the confirmation and recognition of our 2021 COVID-related tax credit, partially offset by

bonus expense from the 2023 decision to cash settle a portion of the 2022 performance stock units.

Additionally, salaries were lower

due to a decrease in headcount.

professional and consulting fees decreased by $189,000 (-38%).

We reduced outside services in an effort to conserve working capital.

and development expense decreased approximately $267,000 (-70%) from approximately $382,000 in 2022 to $115,000 in 2023.

elevated in 2022 as we incurred pre-production expense related to the launch of our carton format, while 2023 expense was limited as

activities were minimized to conserve working capital.

director fees previously paid in cash were paid in stock in 2023 in order to conserve working capital.

general and administrative expenses decreased approximately $142,000 (-21%) from approximately $669,000 in 2022 to $527,000 in 2023 primarily

as a result of non-recurring costs related to our uplisting to the NASDAQ stock exchange in 2022, partially offset by licensing and development costs for information technology improvements.

evaluate the recoverability of property and equipment and finite-lived intangible assets for possible impairment whenever events or circumstances

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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.

had operating losses of approximately $6,219,000 and $2,095,000 for the years ended December 31, 2022 and 2021, respectively.

of approximately $4,124,000 or 196%, was primarily due to $1,425,000 in charges related to the aforementioned product quality issue and

withdrawal, the asset impairment of $746,000 and other increases in operating expense.

income and expense

change in the value of the derivative liability is based upon the Black-Scholes model from one period to another.

The gain of approximately

$16,000 for the year ended December 31, 2021 was a result of the change in components of the Black-Scholes model.

The derivative liability

was settled upon conversion and repayment of the convertible notes in the second quarter of 2021, which resulted in an extinguishment

loss of $194,000.

recorded a gain on extinguishment of Covid-19 related Paycheck Protection Program (“PPP”) loan of $1,136,000 in the year

ended December 31, 2021.

expense was approximately $128,000 for the year ended December 31, 2021.

Interest related to convertible debt that was converted and

repaid in 2021.

We did not incur any interest expense for the year ended December 31, 2022.

had net losses of approximately $6,219,000 and $1,265,000 in the years ended December 31, 2022 and 2021, respectively, an increase of

$4,954,000 due primarily to the $1,425,000 charges related to the product withdrawal and the asset impairment of $746,000 in 2022, increases

in operating expense and the $1,136,000 gain on forgiveness of the PPP loan in 2021.

In 2022, 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.

No impairment charges were recorded in 2023.

had net losses of approximately $2,824,000 and $6,134,000 for the years ended December 31, 2023 and 2022, respectively.

in net loss of approximately $3,296,000, was the result of the non-recurrence of the estimated refund claims and inventory disposal costs

associated with the product withdrawal, improved margins, and a reduction of approximately $1,106,000 in operating expenses due to cost

saving measures, reduced volume of product shipped, and the recognition of our COVID-related tax credit and the non-recurrence of the

$746,000 asset impairment.

and Capital Resources

of December 31, 2022, we had working capital of $1,801,000 compared with $6,172,000 at December 31, 2021.

The decrease in working capital

is primarily due to the operating loss of $6,219,000, partially offset by non-cash expenses of $1,834,000.

the year ended December 31, 2022, we used $2,648,000 in operations and $13,000 for the purchase of equipment.

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.

each of the years ended December 31, 2021 and 2020, the Company was granted a $568,000 loan under the PPP administered by a Small Business

Administration (SBA) approved partner.

The loans were forgiven, and the Company recorded a gain of $1,136,000 upon being legally released

from the loan obligations during the year ended December 31, 2021.

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.

have entered into a direct lease covering the period April 1, 2019 to March 31, 2023.

The aggregate minimum requirements under the

non-cancellable direct lease as of December 31, 2022 is approximately $20,000.

The Company extended its lease through June 2023

while management evaluates options for renewal or relocation.

October 23, 2023, we drew down $1,390,000 in convertible debt and converted a total of $1,207,000 of principal into 820,160 shares of

common stock.

Additionally, on December 19, 2023, we drew down $470,000 in convertible debt and converted a total of $653,000 of principal

and $4,000 of accrued interest into 495,331 shares of common stock, settling all debt.

Debt drawdowns included the non-cash settlement

of $30,000 in accounts payable.

the year ended December 31, 2023, we used $2,958,000 in operations.

As of December 31, 2023, we had working capital of $1,846,000

compared with $1,801,000 at December 31, 2022.

Cash received from our debt issuance of $1,830,000 offset our operating loss of

$1,848,000, net of $990,000 in non-cash expenses.

Our cash balance declined by $1,128,000 as receivables rebounded to reflect the

34% increase in revenue for the quarter ended December 31, 2023 compared to the same period of 2022, in addition to the settlement

of credit memo reserves resulting from the 2022 product withdrawal.

Additionally, we settled accrued payroll, with the repayment

reinvested by management in our debt offering, and reduced liabilities for cash director fees and franchise taxes associated with

our 2021 reverse split.

We intend to compensate directors in stock or options until our liquidity and financial position

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

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis