BARFRESH FOOD GROUP INC. 10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2024 ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________________ to ___________________ Commission File Number: 001-41228 BARFRESH FOOD GROUP INC. (Exact name of registrant as specified in its charter) Delaware 27-1994406 (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.) 3600 Wilshire Blvd. , Suite 1720 , Los Angeles , California 90010 (Address of principal executive offices) (Zip Code) 310 - 598-7113 (Registrant’s telephone number, including area code) Not Applicable (Former name, former address and former fiscal year, if changed since last report) Securities registered pursuant to Section 12(b) of the Act: Title of each class Trading Symbol(s) Name of each exchange on which registered Common stock, $0.000001 par value BRFH The Nasdaq Capital Market Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐ Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. Large accelerated filer ☐ Accelerated filer ☐ Non-accelerated filer ☐ Smaller reporting company ☒ Emerging growth company ☐ If an emerging growth company, indicate by the check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒ Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 14,719,875 shares as of May 13, 2024. TABLE OF CONTENTS Page Number PART I - FINANCIAL INFORMATION Item 1. Financial Statements. 3 Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. 15 Item 3. Quantitative and Qualitative Disclosures About Market Risk. 18 Item 4. Controls and Procedures. 18 PART II - OTHER INFORMATION 19 Item 1. Legal Proceedings. 19 Item 1A. Risk Factors. 19 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. 19 Item 3. Defaults Upon Senior Securities. 19 Item 4. Mine Safety Disclosures. 19 Item 5. Other Information. 19 Item 6. Exhibits. 19 SIGNATURES 20 Item 1. Financial Statements. Barfresh Food Group Inc. Condensed Consolidated Balance Sheets March 31, December 31, 2024 2023 (unaudited) (audited) Assets Current assets: Cash $ 1,167,000 $ 1,891,000 Trade accounts receivable, net 1,366,000 821,000 Other receivables 20,000 160,000 Inventory, net 1,284,000 1,214,000 Prepaid expenses and other current assets 230,000 67,000 Total current assets 4,067,000 4,153,000 Property, plant and equipment, net of depreciation 350,000 409,000 Intangible assets, net of amortization 226,000 241,000 Other non-current assets 105,000 7,000 Total assets $ 4,748,000 $ 4,810,000 Liabilities and Stockholders’ Equity Current liabilities: Accounts payable $ 1,328,000 $ 1,670,000 Disputed co-manufacturer accounts payable (Note 5) 499,000 499,000 Accrued expenses 225,000 85,000 Accrued payroll and employee related 34,000 53,000 Total current liabilities 2,086,000 2,307,000 Other non-current liabilities 126,000 - Total liabilities 2,212,000 2,307,000 Commitments and contingencies - - 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; 14,719,875 and 14,420,105 shares issued and outstanding at March 31, 2024 and December 31, 2023, respectively - - Additional paid in capital 63,781,000 63,299,000 Accumulated deficit ( 61,245,000 ) ( 60,796,000 ) Total stockholders’ equity 2,536,000 2,503,000 Total liabilities and stockholders’ equity $ 4,748,000 $ 4,810,000 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, 2024 and 2023 (Unaudited) 2024 2023 (restated) Revenue $ 2,829,000 $ 2,091,000 Cost of revenue 1,659,000 1,236,000 Gross profit 1,170,000 855,000 Operating expenses: Selling, marketing and distribution 694,000 667,000 General and administrative 858,000 994,000 Depreciation and amortization 67,000 83,000 Total operating expenses 1,619,000 1,744,000 Net loss $ ( 449,000 ) $ ( 889,000 ) Per share information - basic and fully diluted: Weighted average shares outstanding 14,500,863 12,977,000 Net loss per share $ ( 0.03 ) $ ( 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, 2024 and 2023 (Unaudited) 2024 2023 (restated) Net loss $ ( 449,000 ) $ ( 889,000 ) Adjustments to reconcile net loss to net cash used in operating activities Stock-based compensation 366,000 268,000 Depreciation and amortization 74,000 86,000 Stock and options issued for services - 8,000 Changes in assets and liabilities Accounts receivable ( 545,000 ) ( 445,000 ) Other receivables 140,000 90,000 Inventories ( 70,000 ) ( 7,000 ) Prepaid expenses and other assets ( 107,000 ) ( 92,000 ) Accounts payable ( 271,000 ) ( 228,000 ) Accrued expenses 93,000 ( 15,000 ) Net cash used in operating activities ( 769,000 ) ( 1,224,000 ) Financing activities Issuance of debt (Note 6) 65,000 - Repurchases from stock compensation program ( 20,000 ) ( 18,000 ) Net cash provided by (used in) financing activities 45,000 ( 18,000 ) Net decrease in cash and restricted cash ( 724,000 ) ( 1,242,000 ) Cash, beginning of period 1,891,000 3,019,000 Cash, end of period $ 1,167,000 $ 1,777,000 Cash paid during the period for: Amounts included in the measurement of lease liabilities $ - $ 20,000 Non-cash financing and investing activities: Convertible notes issued in exchange for trade payables $ 71,000 $ - Conversion of debt and interest to equity $ 136,000 $ - Acquisition of long-term software license in exchange for contract payable $ 154,000 $ - Value of shares relinquished in modification of stock-based compensations awards $ - $ 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, 2024 (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, 2023 included in the Company’s Annual Report on Form 10-K, as filed with the SEC on March 22, 2024. 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 concentration 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 Contract Manufacturers Percentage of Finished Goods 2024 2023 Manufacturer A 63 % 48 % Manufacturer B 36 % 46 % Manufacturer C 1 % 6 % Concentration risk percentage 1 % 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, 2023, as filed with the SEC on March 22, 2024 that have had a material impact on our condensed consolidated financial statements and related notes. 6 Financial Instruments The Company’s financial instruments consist of cash, accounts receivable and accounts payable. The carrying value of the Company’s financial instruments approximates their fair value. 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, 2024 and December 31, 2023, there was no allowance for credit losses. There was no credit loss expense for the three months ended March 31, 2024 and 2023. Other Receivables Other receivables consist of the Company’s 2021 Employer Retention Credit “ERC” claim, which the Company collected in March 2024, amounts due from vendors for materials acquired on their behalf for use in manufacturing the Company’s products, vendor rebates and freight claims. ERC claims can be made in a variety of circumstances with varying degrees of subjectivity and clear authoritative guidance. Paid claims are subject to IRS inspection which may occur prior to expiration of the statute of limitations. The Company’s ERC claim was based on objectively calculated declines in revenue using methods that are clearly defined in the Coronavirus Aid, Relief, and Economic Security Act and various regulations and interpretations thereof. 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. Storage and Shipping Costs Storage and outbound freight costs are included in selling, marketing and distribution expense. For the three months ending March 31, 2024 and 2023, storage and outbound freight totaled approximately $ 364,000 and $ 311,000 , respectively. Research and Development Expenditures for research activities relating to product development and improvement are charged to expense as incurred. The Company incurred approximately $ 30,000 and $ 21,000 , in research and development expense for the three months ending March 31, 2024 and 2023, respectively. Loss Per Share For the three months ended March 31, 2024 and 2023 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. 8 Reclassifications Certain reclassifications have been made to the 2023 financial statements to conform to the 2024 presentation, namely stock-based compensation paid to the Company’s directors has been reclassified from stock and options issued for services and shares repurchased for employee tax withholding under the Company’s stock compensation program have been reclassified to financing activities in the consolidated statement of cash flows, with corresponding changes reflected in the statement of stockholders’ equity for the three months ended March 31, 2023. 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 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 Three-months ended March 31, 2023 As Previously Reported Adjustment Restated Consolidated Statement of Operations Depreciation and amortization $ 104,000 $ ( 21,000 ) $ 83,000 Total operating expenses $ 1,765,000 $ ( 21,000 ) $ 1,744,000 Net loss $ ( 910,000 ) $ 21,000 $ ( 889,000 ) Consolidated Statement of Cash Flows Net loss $ ( 910,000 ) $ 21,000 $ ( 889,000 ) Depreciation and amortization $ 107,000 $ ( 21,000 ) $ 86,000 Net cash used in operating activities $ ( 1,224,000 ) $ - $ ( 1,224,000 ) Note 3. Inventory Inventory consists of the following: Schedule of Inventory March 31, December 31, 2024 2023 Raw materials $ 28,000 $ 28,000 Finished goods 1,256,000 1,186,000 Inventory, net $ 1,284,000 $ 1,214,000 9 Note 4. Property Plant and Equipment Property and equipment, net consist of the following: Schedule of Property and Equipment, Net March 31, December 31, 2024 2023 Manufacturing equipment $ 1,546,000 $ 1,546,000 Customer equipment 1,404,000 1,410,000 Property and equipment, gross 2,950,000 2,956,000 Less: accumulated depreciation ( 2,600,000 ) ( 2,547,000 ) Property and equipment, net of depreciation $ 350,000 $ 409,000 Depreciation expense related to these assets was approximately $ 59,000 and $ 71,000 each of the three months ended March 31, 2024 and 2023. Depreciation expense in cost of revenue was $ 7,000 and $ 4,000 for the three months ended March 31, 2024 and 2023, 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 September 30, 2024. The Company’s periodic lease cost was approximately $ 20,000 for each of the three months ended March 31, 2024 and 2023. 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 and continues to progress through the court system. 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. 10 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 Notes From July 2023 to March 2024, the Company executed subscription agreements for substantially all of a $ 2,000,000 privately placed convertible debt offering. The debt was available to be drawn in 25% increments, maturing on the anniversary of the draw, bearing interest at 10% per annum for the term, regardless of earlier payment or conversion, and was 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 had not exercised the mandatory conversion, the holder of the debt had 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. On October 23, 2023, the Company 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, the Company 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. Finally, on March 27 and 29, 2024 the Company drew down $ 136,000 in convertible debt and converted the total drawn into 124,208 shares, settling all debt. Debt drawdowns included the non-cash settlement of $ 30,000 and $ 71,000 in accounts payable in the year ended December 31, 2023 and the three months ended March 31, 2024, respectively. Note 7. Stockholders’ Equity The following are changes in stockholders’ equity for the three months ended March 31, 2023 and 2024: Schedule of Changes in Stockholders' Equity 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 Issuance of common stock for equity compensation, net of shares repurchased for income tax withholding 65,779 - ( 18,000 ) - ( 18,000 ) Equity-based compensation expense - - 268,000 - 268,000 Cash settlement of equity-based compensation - - ( 24,000 ) - ( 24,000 ) Conversion of debt and interest (Note 6) 124,208 Issuance of stock for services 2,083 - 8,000 - 8,000 Net loss - - - ( 889,000 ) ( 889,000 ) Balance March 31, 2023 13,002,603 $ - $ 61,139,000 $ ( 58,861,000 ) $ 2,278,000 Additional Common Stock paid in Accumulated Shares Amount Capital (Deficit) Total Balance December 31, 2023 14,420,105 $ - $ 63,299,000 $ ( 60,796,000 ) $ 2,503,000 Balance 14,420,105 $ - $ 63,299,000 $ ( 60,796,000 ) $ 2,503,000 Issuance of common stock for equity compensation, net of shares repurchased for income tax withholding 175,562 - ( 20,000 ) - ( 20,000 ) Equity-based compensation expense - - 366,000 - 366,000 Conversion of debt and interest (Note 6) 124,208 - 136,000 - 136,000 Net loss - - - ( 449,000 ) ( 449,000 ) Balance March 31, 2024 14,719,875 $ - $ 63,781,000 $ ( 61,245,000 ) $ 2,536,000 Balance 14,719,875 $ - $ 63,781,000 $ ( 61,245,000 ) $ 2,536,000 11 Warrants During the three months ended March 31, 2024, 122,739 warrants at a weighted average exercise price of $ 9.10 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. In March 2024, the Board of Directors amended the 2023 Plan to reserve an additional 650,000 shares for future issuance, bringing the total for the plan to 1,300,000 , and to provide an evergreen provision that reserves additional shares depending on future non-plan issuances of common stock. As of March 31, 2024, the Company has $ 77,000 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 1.1 years. Stock Options The following is a summary of stock option activity for the three months ended March 31, 2024: Schedule of Stock Options Activity Number of Options Weighted average exercise price per share Remaining term in years Outstanding on December 31, 2023 587,091 $ 6.50 3.6 Issued 43,695 $ 1.50 8.0 Outstanding on March 31, 2024 630,786 $ 6.15 3.8 Exercisable, March 31, 2024 582,316 $ 6.31 3.6 The fair value of the options issued was calculated using the Black-Scholes option pricing model, based on the following: Schedule of Fair Value of Options Using Black-Sholes Option Pricing Model 2024 Expected term (in years) 8.0 Expected volatility 84.4 % Risk-free interest rate 3.9 % Expected dividends $ - Weighted average grant date fair value per share $ 1.15 12 Restricted Stock The following is a summary of restricted stock award and restricted stock unit activity for the three months ended March 31, 2024: Schedule of Restricted Stock Award and Restricted Stock Unit Activity Number of shares Weighted average grant date fair value Unvested at January 1, 2024 32,606 $ 4.82 Granted 5,000 $ 1.20 Vested ( 10,233 ) $ 5.26 Unvested at March 31, 2024 27,373 $ 3.99 Performance Share Units During 2023 and 2024, the Company issued performance share units (“PSUs”) that represented shares potentially issuable based upon Company and individual performance in the years of issuance. The following table summarizes the activity for the Company’s unvested PSUs for the three months ended March 31, 2024: Schedule of Performance Stock Unit Activity Number of shares Weighted average grant date fair value Unvested at January 1, 2024 63,888 $ 1.70 Granted 445,000 $ 1.20 Vested ( 48,932 ) $ 1.15 Forfeited ( 2,548 ) $ 1.15 Unvested and expected to vest at March 31, 2024 457,408 $ 1.20 In February 2023, the unvested awards issued and outstanding for individual performance under the 2022 PSU program 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 three-months ended March 31, 2023. The Company adopted a 2024 PSU program in March 2024, granting approximately 445,000 PSUs at target performance against company-wide metrics. The results for the three months ended March 31, 2024 include $ 125,000 in expense for the 2024 PSU program. Estimates of expense associated with 2024 performance will be reassessed each quarter through the performance period. 13 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 March 31, 2024, the estimated effective tax rate for 2024 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, 2024 and 2023, the Company did not incur any interest and penalties associated with tax positions. As of March 31, 2024, the Company did not have any significant unrecognized uncertain tax positions. Note 9. Liquidity During the three months ended March 31, 2024, the Company used cash for operations of $ 769,000 . 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 March 31, 2024, the Company has $ 1,167,000 of cash. 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 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, 2023, as filed with the SEC on March 22, 2024, 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 March 31, 2024 as Compared to the Three Months Ended March 31, 2023 Revenue and cost of revenue Revenue increased $738,000, or 35%, to $2,829,000 in 2024 as compared to $2,091,000 in 2023. Our revenue in 2024 benefited from continued acceptance of our carton packaging format and improvements in bulk sales, including our WHIRLZ 100% juice product that was reintroduced in the fourth quarter of 2023, as the impact of venue closures and labor shortages resulting from the pandemic had substantially resolved. Our revenues in 2023 were adversely impacted because 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. We have been able to expand our capacity on a limited basis at our existing smoothie bottle manufacturer and are actively working to develop additional manufacturing capacity. We expect expanded capacity to become available in 2024, subject to the risks and uncertainties associated with contracting and pre-production activities. Cost of revenue increased $423,000, or 34%, to $1,659,000 in 2024 as compared to $1,236,000 in 2023. Cost of revenue increased at a lower rate compared to revenue due to product mix and slight improvements in raw material and other input costs. Our gross profit was $1,170,000 (41.4%) and $855,000 (40.9%) for 2024 and 2023, respectively. The improvement in gross margin is a result of favorable product mix, pricing actions, and a slight improvement in the cost of supply chain components. 15 Selling, marketing and distribution expense Our operations were primarily directed towards increasing sales and expanding our distribution network. Three months ended March 31, 2024 Three months ended March 31, 2023 Change Percent Sales and marketing $ 330,000 $ 356,000 $ (26,000 ) -7 % Storage and outbound freight 364,000 311,000 53,000 17 % Sales, marketing and distribution expense $ 694,000 $ 667,000 $ 27,000 4 % Selling, marketing and distribution expense increased approximately $27,000 (4%) from approximately $667,000 in 2023 to $694,000 in 2024. Sales and marketing expense decreased approximately $26,000 (-7%) from approximately $356,000 in 2023 to $330,000 in 2024. The decrease is a result of headcount reductions and lower advertising expense, partially offset by higher broker commissions due to expansion of the broker network and the increase in revenue. Storage and outbound freight expense increased approximately $53,000 (17%) from approximately $311,000 in 2023 to $364,000 in 2024, primarily because of the 35% increase in revenue, freight efficiencies, and lower storage and inventory management cost in 2024 because of inventory disposals following the dispute with the Manufacturer. General and administrative expense Three months ended March 31, Three months ended March 31, 2024 2023 Change Percent Personnel costs $ 262,000 $ 489,000 $ (227,000 ) -46 % Stock-based compensation 303,000 209,000 94,000 45 % Legal, professional and consulting fees 157,000 115,000 42,000 37 % Director fees paid in cash - 25,000 (25,000 ) -100 % Research and development 30,000 21,000 9,000 43 % Other general and administrative expenses 106,000 135,000 (29,000 ) -21 % $ 858,000 $ 994,000 $ (136,000 ) -14 % General and administrative expense decreased approximately $136,000 (-14%) from approximately $994,000 in 2023 to $858,000 in 2024. Personnel cost represents the cost of employees including salaries, bonuses, employee benefits and employment taxes. Personnel cost decreased by approximately $227,000 (-46%) from approximately $489,000 to $262,000 and stock-based compensation increased by approximately $94,000 (45%) from $209,000 to $303,000. The decrease in personnel cost resulted from a reduction in headcount and the decision to issue stock-based compensation in lieu of cash bonuses. Additionally, approximately $54,000 in officer salaries and vacation pay were settled in our stock and classified as stock-based compensation in the three months ended March 31, 2024. Further, directors’ fees previously paid in cash were instead paid in our stock. The actions surrounding cash bonuses, conversion of other cash compensation and directors’ fees as well as the first quarter performance in 2024 against annual operating plan targets resulted in a $94,000 increase in stock-based compensation in 2024 compared to 2023. Legal, professional, and consulting fees increased by $42,000 (37%) as a result of legal spend in pursuit of our claim against the Manufacturer. Other general and administrative expenses decreased by approximately $29,000 (-21%) due to a reduction in operating costs associated with the product withdrawal. 16 Net loss We had net losses of approximately $449,000 and $889,000 for the three-month periods ended March 31, 2024 and 2023, respectively. The decrease in net loss of approximately $440,000, was the result of improved revenue and margins, and a reduction of approximately $125,000 in operating expenses due to cost-saving measures. Liquidity and Capital Resources On June 1, 2021, we 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. From July 2023 to March 2024, we executed subscription agreements for substantially all of a $2,000,000 privately placed convertible debt offering. The debt was available to be drawn in 25% increments, maturing on the anniversary of the draw, bearing interest at 10% per annum for the term, regardless of earlier payment or conversion, and was mandatorily convertible as to principal and interest into shares of our 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 we had not exercised the mandatory conversion, the holder of the debt had 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 our common stock at the Conversion Price. On October 23, 2023, we issued $1,390,000 of convertible notes pursuant to the subscription agreements, and immediately converted $1,207,000 of principal and interest into approximately 820,000 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. Finally, on March 27 and 29, 2024 we drew down $136,000 in convertible debt and converted the total drawn into 124,208 shares, settling all debt. During the three months ended March 31, 2024, we used $769,000 in operations. Our net loss adjusted for non-cash operating expenses was essentially breakeven, while changes in non-cash current assets and liabilities consumed $760,000 primarily as a result of increased accounts receivable due to the $907,000 increase in revenue compared to the fourth quarter of 2023 and to a lesser extent due to timing of inventory purchases and resulting payments to vendors. As of March 31, 2024, we had working capital of $1,981,000 compared with $1,846,000 at December 31, 2023. The increase in working capital is primarily due to capital raised in the three months ended March 31, 2024 through the sale convertible notes and the conversion of those notes and other current liabilities to equity. 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 current dispute with the Manufacturer and the resulting loss of product supply and legal expense continue to negatively impact our financial position, results of operations and cash flow. 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. We have identified and are actively working to develop additional smoothie bottle manufacturing capacity. We expect expanded capacity to become available in 2024, subject to the risks and uncertainties associated with contracting and pre-production activities. Additionally, we have taken other measures to reduce our liquidity requirements, including compensating our directors and employees with equity to reduce cash compensation requirements. 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. 17 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. Item 4 . Controls and Procedures. Evaluation of Disclosure Controls and Procedures Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Securities and Exchange Act of 1934 Rule 13(a)-15(e). Disclosure controls and procedures are designed to provide reasonable assurance that the information required to be disclosed in the reports that we file or submit under the Exchange Act has been appropriately recorded, processed, summarized, and reported on a timely basis and are effective in ensuring that such information is accumulated and communicated to the Company’s management, as appropriate to allow timely decisions regarding required disclosure. Based on the evaluation of our disclosure controls and procedures as of March 31, 2024, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level. Changes in Internal Control over Financial Reporting Through 2023, we had previously disclosed a material weakness in our internal control over financial reporting related to the control environment, which was impacted by inadequate segregation of duties, including information technology control activities. We took actions to remediate the material weakness relating to our internal control over financial reporting, as described below. The controls and processes we implemented to remediate the identified material weakness included: ● Implemented procedures to mitigate the lack of segregation of duties ● Retained additional information technology resources which bolstered control over data access and changes to operating systems As a result of the mediation activities and controls in place as of March 31, 2024 described above, we have remediated this previously disclosed material weakness. However, completion of remediation does not provide assurance that our remediated controls will continue to operate properly or that our financial statements will be free from error. Other than the remediation steps taken above, there were no additional changes in our internal control over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. 18 PART II- OTHER INFORMATION Item 1. Legal Proceedings. As described in Note 5, the Company has an on-going dispute with the Manufacturer, the outcome of which cannot be predicted at this time. 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 a material unfavorable outcome to be remote. Item 1A. Risk Factors. Not required because we are a smaller reporting company. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds During the quarter ended March 31, 2024, the Company issued 51,723 shares of common stock for services valued at $75,000. On March 27 and 29, 2024, the Company drew down $71,000 and $65,000, respectively, in convertible debt and immediately converted a total of $136,000 of principal into 124,208 shares of common stock. The Company relied upon the exemption from registration contained in Rule 506(b) and Section 4(a)(2) of the Securities Act, and corresponding provisions of state securities laws, on the basis that (i) offers were made to a limited number of persons, including prospective investors and existing debt holders, (ii) each offer was made through direct communication with the offerees by the Company, (iii) each of the offerees, which included three directors of the Company, had the requisite sophistication and financial ability to bear risks of investing in the Company’s common stock, (iv) the Company provided disclosure to the offerees, and (v) there was no general solicitation and no commission or remuneration was paid in connection with the offers. Item 3. Defaults Upon Senior Securities. None. Item 4. Mine Safety Disclosures. Not applicable. Item 5. Other Information. None. Item 6. Exhibits. Exhibit No. Description 31.1 Certification of Principal Executive Officer pursuant to Rule 13a-14(a) (filed herewith) 31.2 Certification of Principal Financial Officer pursuant to Rule 13a-14(a) (filed herewith) 32.1 Certification pursuant to 18 U.S.C. Section 1350 (furnished herewith) 101.INS Inline XBRL Instance Document* 101.SCH Inline XBRL Taxonomy Extension Schema Document* 101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document* 101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document* 101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document* 101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document* 104 Cover Page Interactive Data File (embedded within the Inline XBRL document) *XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections. In accordance with SEC Release 33-8238, Exhibit 32.1 is furnished and not filed. 19 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. BARFRESH FOOD GROUP INC. Date: May 15, 2024 By: /s/ Riccardo Delle Coste Riccardo Delle Coste Chief Executive Officer (Principal Executive Officer) Date: May 15, 2024 By: /s/ Lisa Roger Chief Financial Officer (Principal Financial Officer) 20