What changed in this filing

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Item 7. Management’s Discussion and Analysis

2025-03-27 compared with 2024-03-22 · 96 added, 116 removed, 92 unchanged (70% of the section changed)

13 unchanged sentences

of this Annual Report.

Company’s products are packaged in three distinct formats.

Company’s products are packaged in four distinct formats.

Company’s ready-to-drink smoothie, Twist & Go™, has initially been focused towards the USDA national school meal program,

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cream), real fruit pieces, juices, and ice – five ounces of water are added before blending.

and international patents and patents pending are owned by Barfresh, as well as related trademarks for all of the single serve products.

Patent rights have been granted in 13 jurisdictions including the United States.

In addition, the Company has purchased all of the trademarks

related to the patented products.

and international patents are owned by Barfresh, as well as related trademarks for all of the single serve products.

Patent rights have been maintained in two jurisdictions including the United States.

The patents expire in 2025.

Company conducts sales through several channels, including National Accounts, Regional Accounts, and Broadline Distributors.

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financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”).

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.

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

The Company applies the following five steps:

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the performance obligation in the contract

obligations promised in a contract are identified based on the goods or 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.

obligations promised in a contract are identified based on the goods or services that will be transferred to the customer.

Company, this consists of the delivery of frozen beverages, which provide immediate benefit to the customer.

the transaction price

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utilizing the most likely amount method.

Provisions for refunds and other adjustments are generally provided for in the period the

related sales are recorded, based on management’s assessment of historical and projected trends.

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.

the transaction price to performance obligations in the contract

our contracts contain a single performance obligation, delivery of frozen beverages, the transaction price is allocated to that single

performance obligation.

the Company’s contracts contain a single performance obligation, delivery of frozen beverages, the transaction price is allocated

to that single performance obligation.

revenue when or as the Company satisfies a performance obligation

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costs and presented in distribution, selling and administrative costs.

that are received before performance obligations are recorded are shown as current liabilities.

Company evaluated the requirement to disaggregate revenue and concluded that substantially all of its revenue comes from a single

product, frozen beverages.

account for share-based employee compensation plans under the fair value recognition and measurement provisions in accordance with applicable

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and cost of revenue

was $8,127,000 in 2023 compared to $9,162,000 in 2022, a decrease of $1,035,000, or 11%.

Revenue in 2022 was negatively impacted by the

$630,000 claims estimate resulting from the market withdrawal of product purchased from the Manufacturer.

Excluding the refund claims

estimate, revenue was $9,655,000 in 2022 and therefore decreased by $1,528,000 in 2023, or 16% based on product shipped.

have been adversely impacted as a result 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.

Further, as discussed in Item 1A, Risk

Factors , we may be adversely affected by a carton shortage currently impacting the beverage industry.

We have identified and are

actively working to develop additional smoothie bottle manufacturing capacity.

We had expected expanded capacity to become available

in early 2024, but were unable to complete the contracting process with the potential partner that had been identified.

We believe we

will expand capacity in 2024, however, there can be no assurances regarding our ability to identify and contract with a suitable partner.

of revenue was $5,243,000 in 2023 compared to $7,722,000 in 2022, a decrease of $2,479,000, or 32%.

Cost of revenue in 2022 was negatively

impacted by the $932,000 inventory write-off related to the product withdrawal.

Excluding the inventory write-off, cost of revenue was

$6,790,000 in 2022, and therefore decreased by $1,547,000 in 2023, or 23% based on product shipped.

Excluding the impact of the product

withdrawal, cost of revenue declined due to lower revenue, and lower product cost due to a shift in product mix resulting from the limited

supply of smoothie bottles.

was $10,717,000 in 2024 compared to $8,127,000 in 2023, an increase of $2,590,000, or 32%.

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.

of revenue was $7,049,000 in 2024 compared to $5,243,000 in 2023, an increase of $1,806,000, or 34%.

Cost of revenue increased at a slightly

higher rate compared to revenue due to $283,000 in cost incurred to relocate our single-serve smoothie pouch production line.

gross profit was $3,668,000 (34%) and $2,884,000 (36%) for 2024 and 2023, respectively.

Adjusted for the product withdrawal, our 2022

gross profit was $2,865,000 (30%).

Adjusted comparative gross margin improvement is a result of favorable product mix, pricing actions,

and a slight improvement in the cost of supply chain components.

Excluding production relocation costs, our gross

profit was $3,951,000 in 2024 (37%).

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.

marketing and distribution expense

Year ended December 31,

Sales and marketing

Storage and outbound freight

marketing and distribution expense decreased approximately $247,000 (-9%) from approximately $2,861,000 in 2022 to $2,614,000 in 2023.

Sales and marketing expense decreased approximately $58,000 (4%) from

approximately $1,394,000 in 2022 to $1,336,000 in 2023.

We reduced labor costs in 2023.

These reductions were partially offset by additional

expense for product sampling of smoothie carton products, equipment maintenance incurred to relaunch bulk product sales in locations that

had been non-operational as a result of COVID shutdowns and subsequent labor shortages, and broker commissions as we engaged numerous

regional K-12 specialists to expand our geographic reach in the third quarter of 2022, and thus incurred a full year of expense in 2023

compared to a partial year in 2022.

and outbound freight expense decreased approximately $189,000 (-13%) from approximately $1,467,000 in 2022 to $1,278,000.

freight cost related to aforementioned product withdrawal credit memos, freight expense was $1,274,000 in 2022.

The volume-related decrease

in expense from the decline in revenue was offset by higher costs resulting from product mix and inefficiencies due to production transitions.

marketing and distribution expense increased approximately $525,000 (20%) from $2,614,000 in 2023 to $3,139,000 in 2024.

and marketing expense increased approximately $330,000 (25%) from approximately $1,336,000 in 2023 to $1,666,000 in 2024.

is a result of higher personnel costs, travel and broker commission due to expansion of the broker network.

and outbound freight expense increased approximately $195,000 (15%) from $1,278,000 in 2023 to $1,473,000 in 2024, primarily because

of the 32% increase in revenue over the same period, partially offset by freight efficiencies, and lower storage and inventory management

cost in 2024.

and administrative expense

Year ended December 31,

Personnel costs

Stock-based compensation and payment for outside services

Stock based compensation

Legal, professional and consulting fees

Director fees paid in cash

Research and development

Other general and administrative expenses

and administrative expense decreased approximately $855,000 (-24%) from approximately $3,549,000 in 2022 to $2,694,000 in 2023.

and administrative expense increased approximately $357,000 (13%) from $2,686,000 in 2023 to $3,043,000 in 2024.

cost represents the cost of employees including salaries, bonuses, employee benefits and employment taxes and continues to be our largest

Personnel cost decreased by approximately $141,000 (-11%) from approximately $1,340,000 in 2022 to $1,199,000 in 2023.

in personnel cost resulted primarily from the confirmation and recognition of our 2021 COVID-related tax credit, partially offset by

bonus expense from the 2023 decision to cash settle a portion of the 2022 performance stock units.

Additionally, salaries were lower

due to a decrease in headcount.

professional and consulting fees decreased by $189,000 (-38%).

We reduced outside services in an effort to conserve working capital.

and development expense decreased approximately $267,000 (-70%) from approximately $382,000 in 2022 to $115,000 in 2023.

elevated in 2022 as we incurred pre-production expense related to the launch of our carton format, while 2023 expense was limited as

activities were minimized to conserve working capital.

director fees previously paid in cash were paid in stock in 2023 in order to conserve working capital.

general and administrative expenses decreased approximately $142,000 (-21%) from approximately $669,000 in 2022 to $527,000 in 2023 primarily

as a result of non-recurring costs related to our uplisting to the NASDAQ stock exchange in 2022, partially offset by licensing and development costs for information technology improvements.

evaluate the recoverability of property and equipment and finite-lived intangible assets for possible impairment whenever events or circumstances

indicate that the carrying amount of such assets may not be recoverable.

The evaluation is performed at the lowest level for which identifiable

cash flows are largely independent of the cash flows of other assets and liabilities.

Recoverability of these assets is measured by a

comparison of the carrying amounts to the future undiscounted cash flows the assets are expected to generate.

If such review indicates

that the carrying amount of property and equipment and intangible assets is not recoverable, the carrying amount of such assets is reduced

to fair value.

In 2022, we recorded impairment charges of $746,000 related to idle equipment resulting from overcapacity for single-serve

products and equipment that is held at the Manufacturer.

No impairment charges were recorded in 2023.

Personnel cost increased by approximately $51,000 (4%) from $1,199,000 in 2023 to $1,250,000 in 2024.

The increase in personnel

cost resulted primarily from the non-recurring confirmation and recognition of our 2021 COVID-related tax credit in 2023, partially offset

by a reduction in cash bonus expense.

compensation increased by approximately $241,000 (44%) from $543,000 in 2023 to $784,000 in 2024.

The increase is due to higher attainment

under performance awards and the modification of expiring options issued to our board of directors to extend the term through December

professional and consulting fees decreased by approximately $28,000 (-9%).

We reduced outside services and obtained non-recourse litigation

financing to conserve working capital.

and development expense increased by approximately $17,000 (15%) from $115,000 in 2023 to $132,000 in 2024.

Expense related to optimization

of our carton format and the re-launch of our bulk concentrate products in 2023, and the launch of our Pop & Go product in 2024,

as well as reformulations to meet specific market or manufacturing requirements.

general and administrative expenses increased approximately $76,000 (15%) from $519,000 in 2023 to $595,000 in 2024 primarily due to

recruiting fees incurred to broaden the capabilities of our management team.

expense was $52,000 in 2024 compared to $8,000 in 2023.

The increase of $44,000 is a result of securing a receivables-based line of credit

in 2024, as well as equipment and software financing.

had net losses of approximately $2,825,000 and $2,824,000 for the years ended December 31, 2024 and 2023, respectively.

in net loss of approximately $3,296,000, was the result of the non-recurrence of the estimated refund claims and inventory disposal costs

associated with the product withdrawal, improved margins, and a reduction of approximately $1,106,000 in operating expenses due to cost

saving measures, reduced volume of product shipped, and the recognition of our COVID-related tax credit and the non-recurrence of the

$746,000 asset impairment.

and Capital Resources

October 23, 2023, we drew down $1,390,000 in convertible debt and converted a total of $1,207,000 of principal into 820,160 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, settling all debt.

Debt drawdowns included the non-cash settlement

of $30,000 in accounts payable.

July 2023 to March 2024, we executed subscription agreements for substantially all of a $2,000,000 privately placed convertible debt

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.

the year ended December 31, 2024, we used $2,229,000 in operations.

As of December 31, 2023, we had working capital of $1,846,000

compared with $1,801,000 at December 31, 2022.

Cash received from our debt issuance of $1,830,000 offset our operating loss of

$1,848,000, net of $990,000 in non-cash expenses.

Our cash balance declined by $1,128,000 as receivables rebounded to reflect the

34% increase in revenue for the quarter ended December 31, 2023 compared to the same period of 2022, in addition to the settlement

of credit memo reserves resulting from the 2022 product withdrawal.

Additionally, we settled accrued payroll, with the repayment

reinvested by management in our debt offering, and reduced liabilities for cash director fees and franchise taxes associated with

our 2021 reverse split.

We intend to compensate directors in stock or options until our liquidity and financial position

Our net loss adjusted for non-cash operating expenses was a loss

of $1,752,000, while changes in non-cash current assets and liabilities consumed $477,000 primarily because we invested in inventory

for production trials and ramp, and our accounts payable decreased as we improved adherence with vendor terms.

of December 31, 2024, we had working capital of $606,000 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 2024, partially offset by borrowing under our receivables-based line of credit.

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 recent business developments with the Manufacturer

impact our supply chain and will result in increased legal cost and are expected to have a negative impact on our financial position,

results of operations and cash flow.

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.

Expanded capacity became available in the fourth quarter of 2024, and we expect that capacity to increase and

become more efficient in 2025, subject to the risks and uncertainties associated with 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, securing receivables financing in the third quarter of 2024, and the sale

of an aggregate of 1,052,793 shares of common stock to raise $3,000,000 in February 2025.

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.

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.

Sheet Arrangements

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis