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, 2024, as filed with the SEC on March 27, 2025, 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, 2025 as Compared to the Three Months Ended September 30, 2024 Revenue and cost of revenue Revenue increased $594,000, or 16%, to $4,231,000 in 2025 as compared to $3,637,000 in 2024. Revenue increased as a result of growth in our Twist & Go products and the introduction of Pop & Go in the fourth quarter of 2024. We have been able to expand our capacity on a limited basis at our existing smoothie bottle manufacturer and have been developing an additional manufacturer relationship since the fourth quarter of 2024. With the acquisition of Arps, we expect expanded capacity to become available in the fourth quarter of 2025, subject to the risks and uncertainties associated with early-stage production activities. Cost of revenue increased $302,000, or 13%, to $2,679,000 in 2025 as compared to $2,377,000 in 2024. Cost of revenue increased at a lower rate compared to revenue due to the non-recurrence in 2025 of manufacturing relocation expenses incurred in 2024, partially offset by inventory costs. Our gross profit was $1,552,000 (37%) and $1,260,000 (35%) for 2025 and 2024, respectively. Excluding production relocation costs, our gross profit was $1,386,000 in 2024 (38%). The reduction in gross margin is a result of product mix and inventory costs, partially offset by the non-recurrence of manufacturing relocation costs. 15 Selling, marketing and distribution expense Three months ended September 30, Three months ended September 30, 2025 2024 Change Percent Sales and marketing $ 450,000 $ 510,000 $ (60,000 ) -12 % Storage and outbound freight 491,000 480,000 11,000 2 % $ 941,000 $ 990,000 $ (49,000 ) -5 % Selling, marketing and distribution expense decreased approximately $49,000 (5%) from approximately $990,000 in 2024 to $941,000 in 2025. Sales and marketing expense decreased approximately $60,000 (12%) from approximately $510,000 in 2024 to $450,000 in 2025. Storage and outbound freight expense increased approximately $11,000 (2%) from approximately $480,000 in 2024 to $491,000 in 2025, a slower pace than the 16% increase in revenue, primarily due to efficiencies resulting from larger average shipments. General and administrative expense Three months ended September 30, Three months ended September 30, 2025 2024 Change Percent Personnel costs $ 271,000 $ 312,000 $ (41,000 ) -13 % Stock-based compensation 163,000 179,000 (16,000 ) -9 % Legal, professional and consulting fees 122,000 36,000 86,000 239 % Research and development 33,000 52,000 (19,000 ) -37 % Other general and administrative expenses 255,000 126,000 129,000 102 % $ 844,000 $ 705,000 $ 139,000 20 % General and administrative expenses increased approximately $139,000 (20%) from approximately $705,000 in 2024 to $844,000 in 2025. Personnel cost represents the cost of employees including salaries, bonuses, employee benefits and employment taxes. Personnel cost decreased by approximately $41,000 (13%) from approximately $312,000 in 2024 to $271,000 in 2025. The decrease in personnel cost resulted from a decreased head count. Stock-based compensation decreased by approximately $16,000 from $179,000 in 2024 to $163,000 in 2025 as a result of a reduction in the size of our board of directors. Legal, professional and consulting fees increased by approximately $86,000 (239%) from $36,000 in 2024 to $122,000 in 2025 due to costs incurred in association with the Arps acquisition. Research and development decreased by approximately $19,000 (37%) from $52,000 in 2024 to $33,000 in 2025 due to a decrease in development activities following the introduction of our Pop & Go product, and a decrease in co-manufacturer development activities in anticipation of our acquisition of Arps. Other general and administrative expenses increased by approximately $129,000 (102%) due to costs incurred in association with the acquisition of Arps. 16 Net loss We had net losses of approximately $290,000 and $513,000 for the three-month periods ending September 30, 2025 and 2024, respectively. The decrease in net loss of approximately $223,000 was primarily due to the increase in revenue and gross margin, and the reduction in operating expense exclusive of Arps acquisition expenses. Results of Operation for the Nine months Ended September 30, 2025 as Compared to the Nine months Ended September 30, 2024 Revenue and cost of revenue Revenue increased $857,000, or 11%, to $8,786,000 in 2025 as compared to $7,929,000 in 2024. Cost of revenue increased $837,000, or 17%, to $5,828,000 in 2025 as compared to $4,991,000 in 2024. Cost of revenue increased at a higher rate compared to revenue due to trial costs at our new manufacturer and elevated costs to supply product in a sub-optimal manner while the production process at a new manufacturer is under development. Our gross profit was $2,958,000 (34%) and $2,938,000 (37%) for 2025 and 2024, respectively. Excluding production relocation costs, our gross profit was $3,114,000 in 2024 (39%). The reduction in gross margin is a result of product mix and new manufacturer trial and development costs. Selling, marketing and distribution expense Nine months ended June 30, Nine months ended June 30, 2025 2024 Change Percent Sales and marketing $ 1,242,000 $ 1,206,000 $ 36,000 3 % Storage and outbound freight 1,157,000 1,061,000 96,000 9 % $ 2,399,000 $ 2,267,000 $ 132,000 6 % Selling, marketing and distribution expense increased approximately $132,000 (6%) from approximately $2,267,000 in 2024 to $2,399,000 in 2025. Sales and marketing expense increased approximately $36,000 (3%) from approximately $1,206,000 in 2024 to $1,242,000 in 2025. The increase is a result of broker commissions on increased revenue. Additionally, sample expense increased as a result of the launch of our Pop & Go product. Storage and outbound freight expense increased approximately $96,000 (9%) from approximately $1,061,000 in 2024 to $1,157,000 in 2025, primarily because of the 11% increase in revenue, offset by shipping efficiencies. 17 General and administrative expense Nine months ended June 30, Nine months ended June 30, 2025 2024 Change Percent Personnel costs $ 936,000 $ 916,000 $ 20,000 2 % Stock based compensation 461,000 696,000 (235,000 ) -34 % Legal, professional and consulting fees 233,000 250,000 (17,000 ) -7 % Research and development 82,000 99,000 (17,000 ) -17 % Other general and administrative expenses 552,000 462,000 90,000 19 % $ 2,264,000 $ 2,423,000 $ (159,000 ) -7 % General and administrative expenses decreased approximately $159,000 (7%) from approximately $2,423,000 in 2024 to $2,264,000 in 2025. Personnel cost increased by approximately $20,000 (2%) from approximately $916,000 in 2024 to $936,000 in 2025. Stock-based compensation decreased by approximately $235,000 from $696,000 in 2024 to $461,000 in 2025 as a result of lower expected attainment under our performance stock unit program and a reduction in the size of our board of directors. Legal, professional and consulting fees decreased by approximately $17,000 (7%) from $250,000 in 2024 to $233,000 in 2025 due to funding the Schrieber litigation through non-recourse litigation funding starting in Q3 2024, partially offset by Arps acquisition costs incurred in Q3 2025. Research and development decreased by approximately $17,000 (17%) from $99,000 in 2024 to $82,000 in 2025 due to a decrease in development activities following the introduction of our Pop & Go product, and a decrease in co-manufacturer development activities in anticipation of our acquisition of Arps. Other general and administrative expenses increased by approximately $90,000 (19%) due to costs associated with the acquisition of Arps, partially offset by the non-recurrence of recruitment costs incurred in the second quarter of 2024. Net loss We had net losses of approximately $1,931,000 and $1,973,000 for the nine-month periods ended September 30, 2025 and 2024, respectively, an improvement of $42,000. While revenue increased 11% and operating expenses were reduced by $63,000, these improvements were partially offset by the 3.4 percentage point decrease in gross margin and a $41,000 increase in interest expense. Liquidity and Capital Resources 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. 18 On February 5, 2025, we entered into securities purchase agreements with several investors, pursuant to which we sold an aggregate of 1,052,793 shares of common stock at a price of $2.85 per share in a registered direct offering. During the nine months ended September 30, 2025, we used $2,173,000 in operations. Our net loss adjusted for non-cash operating expenses was a loss of $1,297,000, while changes in current assets and liabilities used $876,000. The increase in revenue resulted in a $1,660,000 increase in accounts receivable, while we reduced our investment in inventory by $426,000. The changes reflect the education channel’s seasonal revenue peak, and the draw down of inventory built over the summer school break to minimize the impact of production capacity constraints. Additionally, accounts payable increased by $529,000 due to timing of material purchases and amounts due for Arps acquisition costs incurred. As of September 30, 2025, we had working capital of $1,626,000 compared with $606,000 at December 31, 2024, both excluding disputed accounts payable of $499,000 resulting from our dispute with the Manufacturer. The increase in working capital is primarily due to capital raised in the nine months ended September 30, 2025 through the sale of common stock, partially offset by losses incurred in the nine months ended September 30, 2025. 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 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.