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 September 30, 2024 as Compared to the Three Months Ended September 30, 2023 Revenue and cost of revenue Revenue increased $1,034,000, or 40%, to $3,637,000 in 2024 as compared to $2,603,000 in 2023. Our revenue in 2024 benefited from increased sales of our bottled Twist & Go smoothies due to improved availability resulting from inventory built over the months prior to the commencement of the school year, continued acceptance of Twist & Go smoothies provided in cartons, and improvements in bulk sales due to the reintroduction of our WHIRLZ 100% juice product in the fourth quarter of 2023. We have been able to expand our capacity on a limited basis at our existing smoothie bottle manufacturer and in July 2024 contracted with an additional manufacturer. We expect expanded capacity to become available in the fourth quarter of 2024, subject to the risks and uncertainties associated with pre-production activities. Cost of revenue increased $687,000, or 41%, to $2,377,000 in 2024 as compared to $1,690,000 in 2023. Cost of revenue increased at a slightly higher rate compared to revenue due to $126,000 in cost incurred to relocate our single-serve smoothie pouch production line. Our gross profit was $1,260,000 (35%) and $913,000 (35%) for 2024 and 2023, respectively. Excluding production relocation costs, our gross profit was $1,386,000 in 2024 (38%). 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. 14 Selling, marketing and distribution expense Our operations were primarily directed towards increasing sales and expanding our distribution network. Three months ended September 30, Three months ended September 30, 2024 2023 Change Percent Sales and marketing $ 510,000 $ 327,000 $ 183,000 56 % Storage and outbound freight 480,000 370,000 110,000 30 % $ 990,000 $ 697,000 $ 293,000 42 % Selling, marketing and distribution expense increased approximately $293,000 (42%) from approximately $697,000 in 2023 to $990,000 in 2024. Sales and marketing expense increased approximately $183,000 (56%) from approximately $327,000 in 2023 to $510,000 in 2024. The increase is a result of higher personnel cost, travel and broker commissions due to expansion of the broker network. Storage and outbound freight expense increased approximately $110,000 (30%) from approximately $370,000 in 2023 to $480,000 in 2024, lower than the 40% rate of increase in revenue primarily because of freight efficiencies, and lower storage and inventory management cost in 2024. General and administrative expense Three months ended September 30, Three months ended September 30, 2024 2023 Change Percent Personnel costs $ 312,000 $ 196,000 $ 116,000 59 % Stock-based compensation 179,000 240,000 (61,000 ) -25 % Legal, professional and consulting fees 36,000 61,000 (25,000 ) -41 % Director fees paid in cash - (50,000 ) 50,000 -100 % Research and development 52,000 32,000 20,000 63 % Other general and administrative expenses 126,000 98,000 28,000 29 % $ 705,000 $ 577,000 $ 128,000 22 % General and administrative expenses increased approximately $128,000 (22%) from approximately $577,000 in 2023 to $705,000 in 2024. Personnel cost represents the cost of employees including salaries, bonuses, employee benefits and employment taxes. Personnel cost increased by approximately $116,000 (59%) from approximately $196,000 in 2023 to $312,000 in 2024. The increase in personnel cost resulted from the non-recurrence of the 2023 reversal of cash bonuses in favor of increased performance-based stock compensation in the third quarter, increased head count and higher staff utilization, and resulting deferral of paid time off. Similarly, director fees paid in cash decreased as a result of a shift to stock-based compensation in the third quarter of 2023. Stock-based compensation decreased by approximately $61,000 (25%) from $240,000 in 2023 to $179,000 in 2024 as a result of the aforementioned 2023 third quarter shift to performance-based stock-based compensation, partially offset by stock-based compensation associated with increased headcount. Other general and administrative expenses increased by approximately $28,000 (29%) due to increased information technology costs and the non-recurrence of certain 2023 adjustments to estimates. 15 Net loss We had net losses of approximately $513,000 and $476,000 for the three-month periods ended September 30, 2024 and 2023, respectively. The increase in net loss of approximately $37,000, was primarily the result of operating expense increases of $384,000 due to headcount, and variable freight and broker commission costs, partially offset by increased gross profit of $347,000 from our 40% increase in revenue. Results of Operation for the Nine Months Ended September 30, 2024 as Compared to the Nine Months Ended September 30, 2023 Revenue and cost of revenue Revenue increased $1,724,000, or 28%, to $7,929,000 in 2024 as compared to $6,205,000 in 2023. Our revenue in 2024 benefited from continued acceptance of our carton packaging format, increased sales of our bottled Twist & Go smoothies due to improved availability in the third quarter of 2024, and improvements in bulk sales due to the reintroduction of our WHIRLZ 100% juice product in the fourth quarter of 2023. Cost of revenue increased $1,028,000, or 26%, to $4,991,000 in 2024 as compared to $3,963,000 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, partially offset by $176,000 in cost incurred to relocate our single-serve smoothie pouch production line. Our gross profit was $2,938,000 (37%) and $2,242,000 (36%) for 2024 and 2023, respectively. Excluding production relocation costs, our gross profit was $3,114,000 in 2024 (39%). 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. Selling, marketing and distribution expense Nine months ended September 30, Nine months ended September 30, 2024 2023 Change Percent Sales and marketing $ 1,206,000 $ 1,058,000 $ 148,000 14 % Storage and outbound freight 1,061,000 932,000 129,000 14 % $ 2,267,000 $ 1,990,000 $ 277,000 14 % Selling, marketing and distribution expense increased approximately $277,000 (14%) from approximately $1,990,000 in 2023 to $2,267,000 in 2024. Sales and marketing expense increased approximately $148,000 (14%) from approximately $1,058,000 in 2023 to $1,206,000 in 2024. The increase is a result of higher personnel costs, travel and broker commission due to expansion of the broker network. Advertising and sample expense were lower as a result of non-recurring costs in 2023 associated with the launch of our smoothie carton format offering. Storage and outbound freight expense increased approximately $129,000 (14%) from approximately $932,000 in 2023 to $1,061,000 in 2024, primarily because of the 28% increase in revenue over the same period, partially offset by freight efficiencies, and lower storage and inventory management cost in 2024. 16 General and administrative expense Nine months ended September 30, Nine months ended September 30, 2024 2023 Change Percent Personnel costs $ 916,000 $ 929,000 $ (13,000 ) -1 % Stock based compensation 696,000 431,000 265,000 61 % Legal, professional and consulting fees 250,000 236,000 14,000 6 % Research and development 99,000 88,000 11,000 13 % Other general and administrative expenses 462,000 378,000 84,000 22 % $ 2,423,000 $ 2,062,000 $ 361,000 18 % General and administrative expenses increased approximately $361,000 (18%) from approximately $2,062,000 in 2023 to $2,423,000 in 2024. Personnel cost decreased by approximately $13,000 (1%) from approximately $929,000 in 2023 to $916,000 in 2024. The decrease in personnel cost resulted from a reduction in headcount and cash bonus expense as a result of adopting an equity-only incentive structure in mid-2023, partially offset by the non-recurrence of the recognition of a COVID-19 related Employee Retention Tax Credit in 2023. Stock-based compensation increased by approximately $265,000 (61%) from $431,000 in 2023 to $696,000 in 2024 as a result of the Company adopting an equity-only structure for management incentives and Board of Directors compensation, implemented to conserve cash and to achieve compliance with NASDAQ listing regulations. Increases in management headcount and the issuance of long-term incentive awards also contributed to the increase. Other general and administrative expenses increased by approximately $84,000 (22%) due to recruiting fees incurred to broaden the capabilities of our management team, partially offset by a decrease in patent fees due to targeted renewals in 2024. Net loss We had net losses of approximately $1,973,000 and $2,123,000 for the nine-month periods ended September 30, 2024 and 2023, respectively. The decrease in net loss of approximately $150,000, was primarily the result an increase in gross profit of approximately $696,000, partially offset by increased operating expense of $546,000 due to variable freight and broker commission costs, increased headcount, and the non-recurrence of recognizing ERTC benefits in 2023. Liquidity and Capital Resources On June 1, 2021, we completed a private placement of 1,282,051 shares of our 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 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. 17 During the nine months ended September 30, 2024, we used $1,544,000 in operations. Our net loss adjusted for non-cash operating expenses was a loss of $982,000, while changes in non-cash current assets and liabilities consumed $562,000 primarily because of increased accounts receivable resulting from our 40% increase in revenue compared to the nine months ended September 30, 2024. Additionally, our accounts payable decreased as we improved adherence with vendor terms. These changes were partially offset by a $444,000 reduction in inventory. As of September 30, 2024, we had working capital of $1,371,000 compared with $2,345,000 at December 31, 2023, both excluding disputed accounts payable of $499,000 resulting from our dispute with the Manufacturer. The decrease in working capital is primarily due to losses incurred in the nine months ended September 30, 2024, partially offset by capital raised in the nine months ended September 30, 2024 through the sale of 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 fixed overhead expense. Our current dispute with the Manufacturer and the resulting loss of product supply and legal expense have negatively impacted our financial position, results of operations and cash flow. While the introduction of our carton packaging format in 2023 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 contracted with a co-manufacturer for additional smoothie bottle manufacturing capacity. We expect expanded capacity to become available in the fourth quarter of 2024, subject to the risks and uncertainties associated with 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, obtaining non-recourse litigation financing, and securing receivables financing in the third quarter of 2024. Our operations to date have been financed by the sale of securities, the issuance of convertible debt and the issuance of short-term debt. If we are unable to generate sufficient cash flow from operations with the capital raised we will be required to raise additional funds either in the form of equity or in the form of debt. There are no assurances that we will be able to generate the necessary capital to carry out our current plan of operations. Off-Balance Sheet Arrangements We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expense, results of operations, liquidity, capital expenditures or capital resources that are material to stockholders. Item 3. Quantitative and Qualitative Disclosures About Market Risk. Not required because we are a smaller reporting company.