BARFRESH FOOD GROUP INC. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. The following discussion should be read in conjunction with the financial information included elsewhere in this Quarterly Report on Form 10-Q (this “Report”), including our unaudited condensed consolidated financial statements and the related notes and with our audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 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.