BARFRESH FOOD GROUP INC. 10-Q

Item 1. Financial Statements. Barfresh Food Group Inc. Condensed Consolidated Balance Sheets June 30, December 31, 2026 2025 (unaudited) (audited) Assets Current assets: Cash $ 324,000 $ 325,000 Trade accounts receivable, net 1,091,000 1,957,000 Other receivables 32,000 99,000 Inventory, net 2,160,000 1,665,000 Prepaid expenses and other current assets 194,000 182,000 Total current assets 3,801,000 4,228,000 Property, plant and equipment, net of depreciation 8,658,000 8,297,000 Intangible assets, net of amortization 125,000 125,000 Other non-current assets 139,000 180,000 Total assets $ 12,723,000 $ 12,830,000 Liabilities and Stockholders’ Equity Current liabilities: Line of credit $ 167,000 $ 1,124,000 Accounts payable - trade 1,595,000 3,086,000 Accounts payable - construction in progress 1,818,000 2,433,000 Disputed co-manufacturer accounts payable (Note 5) 499,000 499,000 Accrued expenses 349,000 388,000 Accrued payroll and employee related expenses 187,000 173,000 Financing agreements - current 285,000 296,000 Notes payable 441,000 3,031,000 Total current liabilities 5,341,000 11,030,000 Financing agreements 480,000 470,000 Convertible notes 6,986,000 - Total liabilities 12,807,000 11,500,000 Commitments and contingencies - - Stockholders’ (deficit) equity: Preferred stock, $ 0.000001 par value, 400,000 shares authorized, none issued or outstanding - - Common stock, $ 0.000001 par value; 35,000,000 shares authorized; and 16,208,160 and 15,969,281 shares issued and outstanding at June 30, 2026 and December 31, 2025, respectively - - Additional paid in capital 68,753,000 67,645,000 Accumulated deficit ( 68,837,000 ) ( 66,315,000 ) Total stockholders’ (deficit) equity ( 84,000 ) 1,330,000 Total liabilities and stockholders’ (deficit) equity $ 12,723,000 $ 12,830,000 See the accompanying notes to the condensed consolidated financial statements 3 Barfresh Food Group Inc. Condensed Consolidated Statements of Operations For the three and six months ended June 30, 2026 and 2025 (Unaudited) 2026 2025 2026 2025 For the three months ended June 30, For the six months ended June 30, 2026 2025 2026 2025 Revenue $ 4,707,000 $ 1,625,000 $ 10,339,000 $ 4,555,000 Cost of revenue 4,857,000 1,119,000 9,456,000 3,149,000 Gross profit ( 150,000 ) 506,000 883,000 1,406,000 Operating expenses: Selling, marketing and distribution 561,000 634,000 1,258,000 1,458,000 General and administrative 794,000 673,000 1,549,000 1,420,000 Depreciation and amortization 12,000 67,000 29,000 134,000 Total operating expenses 1,367,000 1,374,000 2,836,000 3,012,000 Loss from operations ( 1,517,000 ) ( 868,000 ) ( 1,953,000 ) ( 1,606,000 ) Interest expense 344,000 12,000 569,000 35,000 Net loss $ ( 1,861,000 ) $ ( 880,000 ) $ ( 2,522,000 ) $ ( 1,641,000 ) Per share information - basic and fully diluted: Weighted average shares outstanding 16,152,000 15,664,000 16,098,000 15,664,000 Net loss per share $ ( 0.12 ) $ ( 0.06 ) $ ( 0.16 ) $ ( 0.10 ) See the accompanying notes to the condensed consolidated financial statements 4 Barfresh Food Group Inc. Consolidated Statements of Cash Flows For the six months ended June 30, 2026 and 2025 (Unaudited) 2026 2025 For the six months ended June 30, 2026 2025 Net loss $ ( 2,522,000 ) $ ( 1,641,000 ) Adjustments to reconcile net loss to net cash used in operating activities Stock-based compensation 255,000 297,000 Depreciation and amortization 147,000 149,000 Amortization of financing discounts 118,000 11,000 Changes in assets and liabilities Accounts receivable 866,000 278,000 Other receivables 67,000 33,000 Inventories ( 495,000 ) ( 342,000 ) Prepaid expenses and other assets 29,000 4,000 Accounts payable - trade ( 1,491,000 ) ( 300,000 ) Accrued expenses ( 25,000 ) ( 64,000 ) Net cash used in operating activities ( 3,051,000 ) ( 1,575,000 ) Investing activities Purchase of property and equipment ( 963,000 ) ( 94,000 ) Net cash used in investing activities ( 963,000 ) ( 94,000 ) Financing activities Borrowings under line of credit 5,846,000 782,000 Repayment of line of credit ( 6,821,000 ) ( 1,402,000 ) Issuance of convertible debt and warrants, net of $ 154,000 issuance cost 7,374,000 - Repayment of mortgage note ( 2,170,000 ) - Financing agreement payments ( 161,000 ) ( 47,000 ) Issuance of common stock, net of $ 26,000 issuance cost - 2,974,000 Shares repurchased for income tax withholding under stock compensation program ( 55,000 ) ( 161,000 ) Net cash provided by financing activities 4,013,000 2,146,000 Net (decrease) increase in cash ( 1,000 ) 477,000 Cash, beginning of period 325,000 235,000 Cash, end of period $ 324,000 $ 712,000 Cash paid for interest $ 249,000 $ 24,000 Non-cash financing and investing activities: Conversion of notes payable to equity $ 420,000 $ - Financed acquisition of long-term assets $ 160,000 $ - Issuance of warrants to brokers in convertible debt and warrant offering $ 4,000 $ - See the accompanying notes to the condensed consolidated financial statements 5 Barfresh Food Group Inc. Notes to Condensed Consolidated Financial Statements June 30, 2026 (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 frozen beverages and food, including ready-to-drink and ready-to-blend smoothies, shakes, frappes and ice cream mix, and raw and processed milk. Basis of Presentation The accompanying condensed consolidated financial statements are unaudited, except for the condensed balance sheet as of December 31, 2025. 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, 2025 included in the Company’s Annual Report on Form 10-K, as filed with the SEC on April 15, 2026. 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., Barfresh Corporation Inc. (formerly known as Smoothie, Inc.), and Arps Dairy, 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 Since the Acquisition, Arps Dairy has commenced production of virtually all of the Company’s legacy product lines. Historically, the Company was exposed to supply risk as a result of concentration in its vendor base resulting from the use of a limited number of contract manufacturers. A comparison of production of legacy product lines by source is summarized in the table below: Schedule of Contract Manufacturers Percentage of Finished Goods 2026 2025 2026 2025 Three months ended June 30, For the six months ended June 30, 2026 2025 2026 2025 Owned production facility 53 % - % 53 % - % Co-manufactured: Manufacturer A - % 44 % 9 % 48 % Manufacturer B - % 44 % - % 41 % Manufacturer C 42 % 11 % 34 % 10 % Manufacturer D 5 % 1 % 4 % 1 % Concentration risk, percentage 5 % 1 % 4 % 1 % 6 Manufacturer A gave notice that it would not renew the contract with the Company when it concluded in February 2026. Additionally, in December 2025, Manufacturer B discontinued manufacturing our products. The commencement of production at Arps Dairy is a significant step towards mitigating the impact of these contract losses, and the potential adverse effect on the Company’s business, financial condition and results of operations. 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, 2025, as filed with the SEC on April 15, 2026 that have had a material impact on our condensed consolidated financial statements and related notes. Financial Instruments The Company’s financial instruments consist of cash, accounts receivable, accounts payable, the line of credit, financing agreements, notes payable and convertible notes. 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 June 30, 2026 and December 31, 2025, there was no allowance for credit losses. There was no credit loss expense for the three and six months ended June 30, 2026 and 2025. Government Grant The Company has been awarded a $ 2,400,000 government grant (the “USDA Grant”) to fund 50% of equipment purchases for the New Facility. As of June 30, 2026, there have been no assets acquired that are eligible for reimbursement under the grant. Funding is dependent on meeting specific criteria in the grant agreement, including completion of all funded phases by December 31, 2026, and may require repayment if costs are disallowed due to partial completion. The Company expects to early adopt the Financial Accounting Standards Board’s Accounting Standards Update 2025-10, Government Grants. Grant proceeds will reduce the value of the assets acquired and the resulting depreciation expense over the estimated useful lives of the assets acquired. Derivative Liability The Company evaluates its convertible instruments, options, warrants or other contracts to determine if those contracts or embedded components of those contracts qualify as derivatives to be separately accounted for under ASC 815, Derivatives and Hedging. The Company determined that its convertible instruments issued in 2026 did not include embedded derivatives that required bifurcation due to the scope exception in ASC 815. 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. Storage and Shipping Costs Storage and outbound freight costs are included in selling, marketing and distribution expense. For the three months ending June 30, 2026 and 2025, storage and outbound freight totaled approximately $ 305,000 and $ 276,000 , respectively. For the six months ended June 30, 2026 and 2025, storage and outbound freight totaled approximately $ 748,000 and $ 667,000 , respectively. Research and Development Expenditures for research activities relating to product development and improvement are charged to expense as incurred. The Company incurred approximately $ 37,000 and $ 31,000 in research and development expense for the three months ended June 30, 2026 and 2025, respectively. For the six months ended June 30, 2026 and 2025, research and development expense totaled approximately $ 61,000 and $ 49,000 , respectively. Loss Per Share For the three and six months ended June 30, 2026 and 2025, 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. 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. 8 Note 2. Inventory Inventory consists of the following: Schedule of Inventory June 30, December 31, 2026 2025 Raw materials and packaging $ 1,165,000 $ 684,000 Finished goods 995,000 981,000 Inventory, net $ 2,160,000 $ 1,665,000 Note 3. Property Plant and Equipment Property and equipment, net consist of the following: Schedule of Property and Equipment June 30, December, 31 2026 2025 Land $ 357,000 $ 357,000 Building 1,834,000 1,834,000 Manufacturing equipment 3,074,000 2,335,000 Customer equipment 1,426,000 1,426,000 Construction in progress 4,908,000 5,139,000 Property and equipment, gross 11,599,000 11,091,000 Less: accumulated depreciation ( 2,941,000 ) ( 2,794,000 ) Property and equipment, net of depreciation $ 8,658,000 $ 8,297,000 Depreciation expense related to these assets was approximately $ 75,000 and $ 54,000 for the three months ended June 30, 2026 and 2025, respectively, and $ 147,000 and $ 107,000 for the six months ended June 30, 2026 and 2025, respectively. Depreciation expense in cost of revenue was $ 62,000 and $ 9,000 for the three months ended June 30, 2026 and 2025, respectively, and $ 117,000 and $ 16,000 for the six months ended June 30, 2026 and 2025, respectively. Assets subject to financing leases consist of the following: Schedule of Assets Subject to Finance Leases June 30, December, 31 2026 2025 Manufacturing equipment $ 560,000 $ 106,000 Customer equipment 33,000 33,000 Construction in progress 560,000 704,000 Property and equipment, gross 1,153,000 843,000 Less: accumulated depreciation ( 28,000 ) ( 15,000 ) Property and equipment, net of depreciation $ 1,125,000 $ 828,000 Depreciation expense related to leased assets amounted to $ 8,000 and $ 2,000 for the three-month periods ending June 30, 2026 and 2025, respectively. Depreciation expense related to leased assets amounted to $ 13,000 and $ 4,000 for the six-month periods ending June 30, 2026 and 2025, respectively. Note 4. Debt Line of Credit In August 2024, the Company secured receivables financing of $ 1,500,000 (the “Barfresh Facility”), and amended the facility in September 2025 to increase the available financing to $ 2,500,000 . In October 2025, the Company secured receivables financing of $ 1,250,000 for Arps Dairy (together with the Barfresh Facility, the “Credit Facilities”). Under the Credit Facilities, the Company may borrow up to 90% of eligible customer account balances. Amounts outstanding bear interest at a rate based on the prime rate plus collateral fees, and are secured by accounts receivable and inventory. The weighted average rate was 8.0% and 8.4% as of June 30, 2026 and December 31, 2025, respectively. The Credit Facilities expire in September and October 2026, and renew automatically, unless notice is given or received. As of June 30, 2026, there was $ 174,000 drawn under the Credit Facilities, and $ 3,576,000 was available to borrow, subject to available collateral. Unamortized deferred financing discount amounted to $ 7,000 as of June 30, 2026. 9 Financing Agreements The Company has entered into financing agreements to purchase equipment and software as a service, with a weighted average imputed or stated interest of 21 %. Amounts due under the agreements are due over a weighted average period of 31 months, with maturities as follows as of June 30, 2026: Schedule of Financing Agreements 2026 (6 months) $ 238,000 2027 431,000 2028 118,000 2029 168,000 2030 48,000 Total payments due 1,003,000 Less: interest ( 238,000 ) Financing agreements 765,000 Less: current portion ( 285,000 ) Financing agreements $ 480,000 Notes Payable Schedule Of Notes Payable June 30, December 31, 2026 2025 Manager note $ 41,000 $ 61,000 Advances from Arps Dairy former stockholders 400,000 800,000 Mortgage Note payable to bank in monthly installments of $ 22,000 including interest at 6.85 % with a balloon payment due January 1, 2026; secured by real property and personal guarantees of Arps’ former stockholders. - 2,170,000 Total payments due 441,000 3,031,000 Less: current portion ( 441,000 ) ( 3,031,000 ) Long-term portion $ - $ - On February 10, 2026, the Company elected to convert $ 400,000 of the Advances from Arps Dairy former stockholders and $ 20,000 of the manager note into 129,032 and 6,540 of the Company’s common stock, respectively. See Note 6. On March 5, 2026, the maturity date of the New Advances was extended to the earlier of October 1, 2026 or the receipt of financing secured by real estate owned by the Company. Additionally, the amendments provide that holder may elect to have interest paid in cash or shares valued at a 10 % discount to the volume-weighted average price of the common stock over the ten trading days immediately preceding the payment. The Mortgage Note was repaid in March 2026 with the proceeds of the convertible note and warrant issuance. Convertible Notes and Warrants Beginning on March 5, 2026 and through March 23, 2026, the Company obtained subscriptions for unsecured senior convertible promissory notes in the aggregate amount of $ 7,528,000 (the “Notes”) from accredited investors, including $ 230,000 ( 3.1 %) sold to related parties. Net proceeds amounted to $ 7,374,000 , after cash issuance costs of $ 154,000 . The Notes bear interest at 10% per annum for the first 12 months of the 24-month term, regardless of earlier payment or conversion (the “Minimum Interest”), and are mandatorily convertible as to principal and interest into shares of the Company’s common stock at any time prior to maturity at the conversion price of $ 2.90 per share (the “Conversion Price”), if the common stock of the Company trades at $ 4.35 per share (150% of the Conversion Price) for 20 out of the preceding 30 consecutive trading days. The holders of the Notes have the option on up to 10 occasions to convert all or any portion of the principal and interest into shares of the Company’s common stock at the Conversion Price. The Company may prepay the Notes at any time prior to maturity, subject to payment of the Minimum Interest, any other accrued but unpaid interest, and a prepayment penalty of 5% if the amount of the Note principal that is prepaid does not exceed 50% or a prepayment penalty of 10% if the amount of the Note principal that is prepaid exceeds 50%. Interest is to be paid quarterly in arrears beginning April 1, 2026 and can be paid in either cash or shares of the Company’s common stock at the election of the Company. If paid in stock, the shares must be registered and valued at a 10% discount to the 10-day volume-weighted average price. 10 Purchasers of the Notes were issued 2,352,500 detachable warrants to purchase common stock (the “Warrants’) at a price of $ 3.20 per share (the “Exercise Price”) for a 4-year term from date of issuance in an amount equal to 100% of their investment amounts. The Company may call the Warrants (the “Call”) if the common stock of the Company trades at or above $ 4.80 per share (150% of the Exercise Price) for 20 out of the preceding 30 consecutive trading days. Additionally, 22,655 broker warrants were issued at an exercise price of $3.48 per share for a 3-year term, expiring March 10, 2029. Should the Company sell any of its securities in a capital-raising transaction at a price lower than the Conversion Price while any Notes are outstanding, the Conversion Price will adjust to that lower price. The Warrant Exercise Price will adjust to a 10% premium to the new Note conversion price. The warrants are legally detachable, separately exercisable and accounted for as equity. Additionally, the conversion feature meets the scope exception of ASC 815 and was not bifurcated from the debt host contract. At issuance, the Company allocated $ 484,000 of the net proceeds to the warrants using the relative fair value method. The warrants were valued using the Black-Scholes option pricing model, based on the difference between two options, representing the value of the warrant excluding the value derived from appreciation of the Company’s common stock in excess of the strike price of the Call, with the following Level 3 inputs: Schedule of Black-scholes Option Pricing Model Warrant Call Risk-free interest rate 3.5 % 3.5 % Expected volatility 90 % 90 % Expected term (years) 4 4 Expected dividends $ - $ - Stock price $ 2.76 $ 2.76 Exercise price $ 3.20 $ 4.80 The allocation resulted in a corresponding debt discount of $ 642,000 , inclusive of $ 148,000 in transaction costs, which is being amortized to interest expense over the term of the note using the effective interest method, resulting in $ 77,000 and $ 100,000 in interest expense for the three and six months ended June 30, 2026, respectively. Note 5. Commitments and Contingencies Lease Commitments, Construction and Demolition The Company leased headquarters office space under a non-cancelable operating lease which expired on March 31, 2023 and had been extended multiple times, most recently through March 31, 2026 . The lease was not extended on March 31, 2026, and new commitments for headquarters facilities are leased on a month-to-month basis at a nominal cost. The Company’s periodic lease cost was none and approximately $ 20,000 for the three-month periods ending June 30, 2026 and 2025, respectively, and $ 20,000 and $ 40,000 for each of the six-month periods ending June 30, 2026 and 2025, respectively. During 2023, the Arps Dairy sold its manufacturing facility (the “Existing Facility”) and purchased a different facility, executing both transactions with the same counterparty. Following the exchange, Arps Dairy commenced to expand the acquired property to provide 44,000 square feet of production and office space (the “New Facility”). Arps Dairy continues to operate at the Existing Facility under a leasing arrangement. The initial lease term was 18 months, and the lease was classified as an operating lease. Additionally, the counterparty leases space at the New Facility. Neither party pays rent for the space that it occupies. 11 In connection with the Acquisition, the lease on the Existing Facility was extended until September 30, 2026 to permit the completion of the New Facility. The Company is subject to penalties of $ 1,000 per day if it has not vacated and demolished the Existing Facility by September 30, 2026, subject to limitations if delays are caused by a force majeure event or construction-related delays that are beyond the Company’s reasonable control. As of June 30, 2026, the New Facility expansion is expected to cost $ 9,700,000 , net of USDA Grant funding. The Company, including Arps Dairy prior to the Acquisition, has incurred $ 4,896,000 , including $ 1,818,000 in Accounts Payable – Construction in Progress. Other than amounts included in Accounts Payable – Construction in Progress, there are no firm commitments for capital expenditures. However, the Company would face significant uncertainty about its ability to supply product if it is unable to complete the New Facility, which would in turn have a material impact on its financial position, operating results, and cash flows. Expected capital expenditures for 2026, including settlement of Accounts Payable – Construction in Progress, amount to $ 6,622,000 (the “Construction Obligations”). The USDA Grant is subject to uncertainty and possible repayment associated with the requirement to complete all funded phases of the project by December 31, 2026. This uncertainty could increase the Construction Obligation to $ 9,062,000 . The Company expects to finance the Construction Obligations from mortgage and equipment loans, as well as equity financing. There can be no assurance that sources of financing will be available to satisfy the Construction Obligations. Accounts Payable – Construction in Progress is primarily owed to the construction contractor for work performed in the first half of 2025. In conjunction with the Acquisition, the contractor agreed to forebear from filing a mechanics lien against the building through December 2, 2025. Additionally, the agreement with the contractor stipulates that if any portion of the balance remains outstanding after December 31, 2025, it will accrue interest at 8 % per annum from day sixty-one until repayment is received, subject to rate adjustment for scope modifications. The Company is liable for the demolition of the Existing Facility, once it has vacated the premises. The Company has been awarded a $ 100,000 grant to pay for the demolition, which expires on December 31, 2026 . No liability is currently recorded for the demolition as management believes the grant is sufficient to cover the liability and the demolition will be completed before the grant expires. 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. In May 2024, the Company entered into a non-recourse litigation financing arrangement which is expected to be adequate to pursue the Complaint to conclusion. 12 In 2025, the California State Court heard on the merits of fraud claims included in the complaint and determined that there was sufficient evidence to allow the claims to be heard. A trial date has been set for April 2027. 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. Additionally, the Company acquired Arps Dairy in the fourth quarter of 2025 and is ramping up production of its products at Arps. 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 a material unfavorable outcome to be remote. Note 6. Stockholders’ (Deficit) Equity The following are changes in stockholders’ (deficit) equity for the six months ended June 30, 2026 and 2025: Schedule of Changes in Stockholders’ Equity Shares Amount Capital (Deficit) Total Common Stock Additional paid in Accumulated Shares Amount Capital (Deficit) Total Balance December 31, 2024 14,746,172 $ - $ 64,199,000 $ ( 63,621,000 ) $ 578,000 Issuance of common stock for equity compensation, net of shares repurchased for income tax withholding 141,296 - ( 161,000 ) - ( 161,000 ) Shares issued in settlement of former Arps shareholder and manager notes - - - - - Issuance of detachable warrants - - - - - Equity-based compensation expense - - 297,000 - 297,000 Registered issuance of common stock 1,052,793 - 2,974,000 - 2,974,000 Net loss - - - ( 1,641,000 ) ( 1,641,000 ) Balance June 30, 2025 15,940,261 $ - $ 67,309,000 $ ( 65,262,000 ) $ 2,047,000 Common Stock Additional paid in Accumulated Shares Amount Capital (Deficit) Total Balance December 31, 2025 15,969,281 $ - $ 67,645,000 $ ( 66,315,000 ) $ 1,330,000 Issuance of common stock for equity compensation, net of shares repurchased for income tax withholding 103,307 - ( 55,000 ) - ( 55,000 ) Equity-based compensation expense - - 256,000 - 256,000 Shares issued in settlement of former Arps shareholder and manager notes 135,572 - 420,000 - 420,000 Issuance of detachable warrants - - 487,000 487,000 Net loss - - - ( 2,522,000 ) ( 2,522,000 ) Balance June 30, 2026 16,208,160 $ - $ 68,753,000 $ ( 68,837,000 ) $ ( 84,000 ) Warrants In association with the issuance of convertible notes (Note 4), 2,375,155 warrants were issued at a weighted average exercise price of $ 3.20 per share and remain outstanding as of June 30, 2026. The weighted average remaining term of the warrants is 3.7 years as of June 30, 2026. 13 Equity Incentive Plan As of June 30, 2026, the Company has $ 371,000 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 2.6 years. Stock Options The following is a summary of stock option activity for the six months ended June 30, 2026: Schedule of Stock Options Activity Number of Options Weighted average exercise price per share Remaining term in years Outstanding on December 31, 2025 763,002 $ 4.60 5.3 Granted 29,030 $ 2.62 8.0 Forfeited ( 22,831 ) $ 2.53 Outstanding on June 30, 2026 769,201 $ 4.59 4.8 Exercisable, June 30, 2026 616,932 $ 5.06 3.9 The fair value of the options issued was calculated using the Black-Scholes option pricing model, based on the following: Summary of Fair Value of Options Using Black-Sholes Option Pricing Model 2026 Expected term (in years) 8.0 Expected volatility 99.8 % Risk-free interest rate 4.2 % Expected dividends $ - Weighted average grant date fair value per share $ 2.37 Restricted Stock The following is a summary of restricted stock award and restricted stock unit activity for the six months ended June 30, 2026: Schedule of Restricted Stock Award and Restricted Stock Unit Activity Number of shares Weighted average grant date fair value Unvested at December 31, 2025 148,554 $ 2.75 Granted 24,251 $ 2.41 Vested ( 67,622 ) $ 2.49 Forfeited - $ - Unvested at June 30, 2026 105,183 $ 2.84 Performance Share Units From 2023 to 2025, the Company issued performance share units (“PSUs”) that represented shares potentially issuable based upon Company and individual performance in the years of issuance. 14 The following table summarizes the activity for the Company’s unvested PSUs for the six months ended June 30, 2026: Schedule of Performance Stock Unit Activity Number of shares Weighted average grant date fair value Unvested at December 31, 2025 66,743 $ 2.70 Vested ( 55,211 ) $ 2.63 Unvested June 30, 2026 11,532 $ 1.20 Note 7. 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 June 30, 2026, the estimated effective tax rate for 2026 was zero . There are open statutes of limitations for taxing authorities in federal and state jurisdictions to audit our tax returns from 2019 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- and six-months ending June 30, 2026 and 2025, the Company did not incur any interest and penalties associated with tax positions. As of June 30, 2026, the Company did not have any significant unrecognized uncertain tax positions. Note 8. Business Combination On October 3, 2025, the Company acquired all of the outstanding stock of Arps Dairy, a dairy processing company, in a stock purchase accounted for as a business combination (the “Acquisition”). Arps results of operations have been included in the consolidated statement of operations since October 4, 2025. The following unaudited pro forma information presents the consolidated results of operations as if the acquisition had occurred on January 1, 2025: Schedule of Unaudited Pro Forma Information Presenting Consolidated Results of Operations 2026 2025 2026 2025 For the three months ended June 30, For the six months ended June 30, 2026 2025 2026 2025 Pro forma revenue $ 4,707,000 $ 5,938,000 $ 10,339,000 $ 13,523,000 Pro forma net loss $ ( 1,861,000 ) $ ( 975,000 ) $ ( 2,522,000 ) $ ( 2,198,000 ) Pro forma net loss per share, basic and fully diluted $ ( 0.12 ) $ ( 0.06 ) $ ( 0.16 ) $ ( 0.14 ) This pro forma data is presented for informational purposes only and does not purport to be indicative of the results of future operations or of the results that would have occurred had the acquisition taken place in the periods noted above. 15 Note 9. Business Segments As a result of the Acquisition, the Company operates in two business segments. The Chief Executive Officer is the chief operating decision maker (“CODM”) who assesses performance and allocates resources based on actual and projected operating results. The CODM reviews revenue and gross profit in evaluating the efficiency of strategies within each segment, ensuring that financial and operational resources are optimized and aligned with the Company’s overall strategic objectives. The tables below present selected segment data: Schedule of Business Combination Reportable Segment 2026 2025 2026 2025 Three months ended June 30, Six months ended June 30, 2026 2025 2026 2025 Revenue Frozen beverages and food $ 1,764,000 $ 1,625,000 $ 4,830,000 $ 4,555,000 Raw and processed milk 2,943,000 - 5,509,000 - Revenue $ 4,707,000 $ 1,625,000 $ 10,339,000 $ 4,555,000 Gross profit Frozen beverages and food $ ( 209,000 ) $ 506,000 $ 696,000 1,406,000 Raw and processed milk 59,000 - 187,000 - Gross (loss) profit ( 150,000 ) 506,000 883,000 1,406,000 Unallocated: Total operating expenses ( 1,367,000 ) ( 1,374,000 ) ( 2,836,000 ) ( 3,012,000 ) Interest expense ( 344,000 ) ( 12,000 ) ( 569,000 ) ( 35,000 ) Net loss $ ( 1,861,000 ) $ ( 880,000 ) $ ( 2,522,000 ) $ ( 1,641,000 ) Note 10. Liquidity During the six months ended June 30, 2026, the Company used cash for operations of $ 3,051,000 . As of June 30, 2026, the Company had $ 324,000 cash and net current assets of $ 777,000 , exclusive of disputed co-manufacturer accounts payable (Note 5) and accounts payable - construction in progress that the Company anticipates settling with a new mortgage note on unencumbered real estate that it owns. The Company has a history of operating losses and negative cash flow, which are expected to improve with growth. As described more fully in Note 5, the dispute and subsequent contract termination with the Manufacturer has resulted in limitations in the Company’s ability to procure certain products necessary to achieve our growth projections and in elevated legal costs that were incurred before the Company obtained non-recourse litigation financing in 2025. The Acquisition is expected to alleviate the supply constraints. However, bring-up costs and lower than anticipated productivity at the Existing Facility have contributed to further losses in the first half of 2026. The Company increased its receivables-based line of credit in September 2025 to $ 2,500,000 . In October 2025, Arps Dairy secured a receivables-based line of credit of $ 1,250,000 . In February 2026, $ 420,000 of notes payable were converted to equity in accordance with the terms of the note agreements. In March 2026, the Company raised $ 7,528,000 through the sale of convertible promissory notes with a two-year term. The proceeds were used to retire the Mortgage Note, and $ 532,000 in Construction Obligations incurred, as well fund working capital requirements. The Company plans to complete construction of the New Facility and pursue long-term real estate and equipment lease financing for the remaining Construction Obligations. Although alleviated, the Company’s financial position at June 30, 2026 and historical results raise substantial doubt about its ability to continue as a going concern. As described, the Company has completed and anticipates steps to improve liquidity. If the anticipated financing is unavailable, the Company will be required to pursue other options, including reducing its operating expenses. The actions taken and anticipated alleviate the substantial doubt about the Company’s ability to continue as a going concern. 16