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, 2025, as filed with the SEC on April 15, 2026, 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, 2026 as Compared to the Three Months Ended March 31, 2025 Revenue and cost of revenue Revenue increased $2,702,000, or 92%, to $5,632,000 in 2026 as compared to $2,930,000 in 2025. Arps Dairy contributed $2,837,000 to revenue, including $2,566,000 in raw and processed milk sales. The acquisition of Arps Dairy gives us the expanded capacity we have sought over the past three years, necessary to service our customer base and expand our sales reach. Cost of revenue increased $2,569,000, or 127%, to $4,599,000 in 2026 as compared to $2,030,000 in 2025. Cost of revenue increased at a higher rate compared to revenue due to the inclusion of the raw and processed milk operations after the Acquisition. Products in this segment are generally commodities with commensurate margins, but provide a strategic milk supply to the business and contribute to fixed overhead costs. Cost of revenue in the frozen beverages and food segment, which consisted primarily of Barfresh legacy products in 2026, increased at the same rate as revenue. 15 Our gross profit was $1,033,000 (18%) and $900,000 (31%) for 2026 and 2025, respectively. Gross profit from frozen beverages and food was $905,000 in 2026 (30%) compared to $900,000 in 2025 (31%). The slight decrease is due to product mix. Gross profit from raw and processed milk was $128,000 in 2026 (5%). Selling, marketing and distribution expense 2026 2025 Change Percent Sales and marketing $ 254,000 $ 433,000 $ (179,000 ) -41 % Storage and outbound freight 443,000 391,000 52,000 13 % $ 697,000 $ 824,000 $ (127,000 ) -15 % Selling, marketing and distribution expense decreased approximately $127,000 (15%) from approximately $824,000 in 2025 to $697,000 in 2026. Sales and marketing expense decreased approximately $179,000 (41%) from approximately $433,000 in 2025 to $254,000 in 2026. The decrease is a result of lower personnel costs as we rely more heavily on our broker network, as well as a decrease in sample expense, which was elevated in 2025 due to the introduction of our Pop & Go freeze pops. Additionally, equipment maintenance expense for machines provided to our customers for use with our bulk products decreased, as single serve products have become more prominent in the school setting. Storage and outbound freight expense increased approximately $52,000 (13%) from approximately $391,000 in 2025 to $443,000 in 2026, primarily due to costs associated with the delivery of processed milk at Arps Dairy. General and administrative expense 2026 2025 Change Percent Personnel costs $ 358,000 $ 372,000 $ (14,000 ) -4 % Stock based compensation 102,000 158,000 (56,000 ) -35 % Legal, professional and consulting fees 107,000 81,000 26,000 32 % Research and development 24,000 19,000 5,000 26 % Other general and administrative expenses 142,000 117,000 25,000 21 % Business acquisition expense 22,000 - 22,000 nm $ 755,000 $ 747,000 $ 8,000 1 % General and administrative expenses increased approximately $8,000 (1%) from approximately $747,000 in 2025 to $755,000 in 2026. Personnel cost represents the cost of employees including salaries, bonuses, employee benefits and employment taxes. Personnel cost decreased by approximately $14,000 (4%) from approximately $372,000 in 2025 to $358,000 in 2026. The decrease in personnel cost resulted from decreased head count, and lower employer payroll taxes due to timing of vesting of stock-based compensation. Stock-based compensation decreased by approximately $56,000 (35%) from $158,000 in 2025 to $102,000 in 2026 as a result of lower expected attainment under our performance stock unit program. Legal, professional and consulting fees increased by approximately $26,000 (32%) from $81,000 in 2025 to $107,000 in 2026 due to costs of temporary personnel associated with integration of Arps Dairy. Other general and administrative expenses increased by approximately $25,000 (21%) due to travel costs associated with the integration of Arps Dairy. 16 Interest Expense Interest expense was $225,000 in 2026 compared to $23,000 in 2025. The increase of $202,000 is a result of mortgage debt, notes and lease financing related to the Acquisition and the purchase of equipment required for the New Facility, as well as the issuance of $7,528,000 of convertible notes in March 2026. Net loss We had net losses of approximately $661,000 and $761,000 for the three-month periods ending March 31, 2026 and 2025, respectively. The decrease in net loss of approximately $100,000 was primarily due to a decrease in the loss from operations of $302,000, offset by an increase of $202,000 in interest expense incurred related to the acquisition of Arps Dairy and the build out of the New Facility. Liquidity and Capital Resources On February 5, 2025, we entered into securities purchase agreements with several investors, pursuant to which the Company sold an aggregate of 1,052,793 shares of common stock at a price of $2.85 per share in a registered direct offering, raising $2,974,000. Our continuing dispute with the Manufacturer and the resulting loss of product supply in 2022 negatively impacted our financial position, results of operations and cash flow. Subsequently, we contracted with a co-manufacturer for additional smoothie bottle manufacturing capacity. While expanded capacity became available from manufacturer C in the fourth quarter of 2024, we were notified in 2025 that manufacturers A and B elected to discontinue production of smoothie bottles and smoothie cartons in January 2026 and December 2025, respectively. The Acquisition was undertaken to resolve constrained capacity experienced since 2022 under the co-manufacturing business model. In order to consummate the Acquisition, we paid $1,223,000, net of cash acquired, to purchase 100% of Arps Dairy stock. Additionally, we incurred $518,000 in acquisition costs in 2025. In order to finance the Acquisition, we increased our receivables-based line of credit in September 2025 to $2,500,000. As a result of the Acquisition, $5,251,000 of mortgage debt, construction related payables and advances from former shareholders payable by Arps Dairy became short-term financial commitments of the Company. The Acquisition was structured to allow us to take control of Arps Dairy manufacturing operations ahead of completing all necessary long-term financing activities. Following the Acquisition, Arps Dairy secured a receivables-based line of credit of $1,250,000. We acquired $823,000 of equipment through leasing transactions in 2025 and the first three months of 2026. In December 2025, we were granted $2,400,000 to fund up to 50% of the cost of new equipment purchases and installation for the New Facility. In February 2026, $400,000 of Arps selling shareholder advances were converted into shares of our common stock. In March 2026, we raised $7,528,000 through the sale of convertible promissory notes. The proceeds were used to retire $2,541,000 in mortgage debt and construction payables, and are expected to be used to repay remaining construction related payables as well as complete construction of the New Facility in 2026. During the quarter ended March 31, 2026, we used $2,382,000 in operations. Our net loss adjusted for non-cash operating expenses was a loss of $455,000, while changes in current assets and liabilities used $1,927,000 primarily because of settlements of amounts due to co-manufacturers who discontinued providing product in December 2025 and January 2026. 17 As of March 31, 2026, we had net current assets of $903,000, including $1,861,000 of construction payables, compared with net current liabilities of $6,303,000 on December 31, 2025. Disputed accounts payable due to the Manufacturer of $499,000 are excluded from both March 31, 2026 and December 31, 2025 amounts. Our operations to date have been financed by the sale of securities, the issuance of convertible and short-term debt and equipment leasing. Our liquidity needs will depend on careful management of the construction of the New Facility, as well as how quickly we are able to profitably ramp up sales, achieve manufacturing cost synergies anticipated as a result of the Acquisition, control and reduce variable operating expenses, and control fixed overhead expense. There are no assurances that the grant received in December 2025 and the proceeds from the sale of convertible promissory notes in March 2026 will be sufficient to carry out our current plan of operations. We anticipate that we will have additional sources of liquidity, if required, through mortgage financing supported by the guarantee of the United States Department of Agriculture, and equipment lease financing, among other options. However, there are no assurances that these funds will be available. If we are unable to generate sufficient cash flow from operations, control construction costs, or raise additional capital through debt issuances, we may be required to raise additional funds in the form of equity. 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.