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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2024

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ________________ to ___________________

 

Commission File Number: 001-41228

 

BARFRESH FOOD GROUP INC.

(Exact name of registrant as specified in its charter)

 

Delaware   27-1994406

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

     

3600 Wilshire Blvd., Suite 1720,

Los Angeles, California

  90010
(Address of principal executive offices)   (Zip Code)

 

310-598-7113

(Registrant’s telephone number, including area code)

 

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class   Trading Symbol(s)   Name of each exchange on which registered
Common stock, $0.000001 par value   BRFH   The Nasdaq Capital Market

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ☐ Accelerated filer ☐
Non-accelerated filer Smaller reporting company
  Emerging growth company

 

If an emerging growth company, indicate by the check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 14,746,172 shares as of August 12, 2024.

 

 

 

 

 

 

TABLE OF CONTENTS

 

   

Page

Number

PART I - FINANCIAL INFORMATION  
     
Item 1. Financial Statements. 3
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk. 18
Item 4. Controls and Procedures. 18
     
PART II - OTHER INFORMATION 19
     
Item 1. Legal Proceedings. 19
Item 1A. Risk Factors. 19
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. 19
Item 3. Defaults Upon Senior Securities. 19
Item 4. Mine Safety Disclosures. 19
Item 5. Other Information. 19
Item 6. Exhibits. 19
     
SIGNATURES 20

 

 

 

 

Item 1. Financial Statements.

 

Barfresh Food Group Inc.

Condensed Consolidated Balance Sheets

 

   June 30,   December 31, 
   2024   2023 
   (unaudited)   (audited) 
Assets          
Current assets:          
Cash  $383,000   $1,891,000 
Trade accounts receivable, net   671,000    821,000 
Other receivables   19,000    160,000 
Inventory, net   1,534,000    1,214,000 
Prepaid expenses and other current assets   122,000    67,000 
Total current assets   2,729,000    4,153,000 
Property, plant and equipment, net of depreciation   300,000    409,000 
Intangible assets, net of amortization   210,000    241,000 
Other non-current assets   92,000    7,000 
Total assets  $3,331,000   $4,810,000 
           
Liabilities and Stockholders’ Equity          
Current liabilities:          
Accounts payable  $843,000   $1,670,000 
Disputed co-manufacturer accounts payable (Note 4)   499,000    499,000 
Accrued expenses   155,000    85,000 
Accrued payroll and employee related   47,000    53,000 
Total current liabilities   1,544,000    2,307,000 
Other non-current liabilities   111,000    - 
Total liabilities   1,655,000    2,307,000 
           
Commitments and contingencies   -    - 
           
Stockholders’ equity:          
Preferred stock, $0.000001 par value, 400,000 shares authorized, none issued or outstanding   -    - 
Common stock, $0.000001 par value; 23,000,000 shares authorized; 14,723,906 and 14,420,105 shares issued and outstanding at June 30, 2024 and December 31, 2023, respectively   -    - 
Additional paid in capital   63,932,000    63,299,000 
Accumulated deficit   (62,256,000)   (60,796,000)
Total stockholders’ equity   1,676,000    2,503,000 
Total liabilities and stockholders’ equity  $3,331,000   $4,810,000 

 

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, 2024 and 2023

(Unaudited)

 

   2024   2023   2024   2023 
   For the three months
ended June 30,
   For the six months
ended June 30,
 
   2024   2023   2024   2023 
Revenue  $1,464,000   $1,511,000   $4,293,000   $3,602,000 
Cost of revenue   955,000    1,037,000    2,614,000    2,273,000 
Gross profit   509,000    474,000    1,679,000    1,329,000 
Operating expenses:                    
Selling, marketing and distribution   583,000    625,000    1,277,000    1,293,000 
General and administrative   871,000    493,000    1,729,000    1,487,000 
Depreciation and amortization   66,000    98,000    133,000    196,000 
Total operating expenses   1,520,000    1,216,000    3,139,000    2,976,000 
                     
Net loss  $(1,011,000)  $(742,000)  $(1,460,000)  $(1,647,000)
                     
Per share information - basic and fully diluted:                    
Weighted average shares outstanding   14,722,020    13,003,000    14,611,000    12,290,000 
Net loss per share  $(0.07)  $(0.06)  $(0.10)  $(0.13)

 

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, 2024 and 2023

(Unaudited)

 

   2024   2023 
Net loss  $(1,460,000)  $(1,647,000)
Adjustments to reconcile net loss to net cash used in operating activities          
           
Stock-based compensation   517,000    211,000 
Depreciation and amortization   144,000    205,000 
Stock and options issued for services   -    8,000 
Changes in assets and liabilities          
Accounts receivable   150,000    (236,000)
Other receivables   141,000    (7,000)
Inventories   (320,000)   78,000 
Prepaid expenses and other assets   14,000    (22,000)
Accounts payable   (756,000)   (759,000)
Accrued expenses   21,000    120,000 
Net cash used in operating activities   (1,549,000)   (2,049,000)
           
Investing activities          
Purchase of property and equipment   (4,000)   - 
Net cash used in investing activities   (4,000)   - 
           
Financing activities          
Issuance of debt   65,000    - 
Repurchases from stock compensation program   (20,000)   (18,000)
Net cash provided by (used in) financing activities   45,000    (18,000)
Net decrease in cash   (1,508,000)   (2,067,000)
Cash, beginning of period   1,891,000    3,019,000 
Cash, end of period  $383,000   $952,000 
           
Cash paid during the period for:          
Amounts included in the measurement of lease liabilities  $-   $20,000 
           
Non-cash financing and investing activities:          
Convertible notes issued in exchange for trade payables  $71,000   $- 
Conversion of debt and interest to equity  $136,000   $- 
Acquisition of long-term software license in exchange for contract payable  $154,000   $- 
Value of shares relinquished in modification of stock-based compensations awards  $-   $24,000 

 

See the accompanying notes to the condensed consolidated financial statements

 

5

 

 

Barfresh Food Group Inc.

Notes to Condensed Consolidated Financial Statements

June 30, 2024

(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 ready-to-drink and ready-to-blend beverages, particularly, smoothies, shakes and frappes.

 

Basis of Presentation

 

The accompanying condensed consolidated financial statements are unaudited. 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, 2023 included in the Company’s Annual Report on Form 10-K, as filed with the SEC on March 22, 2024. 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. and Barfresh Corporation Inc. (formerly known as Smoothie, 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

 

The Company is exposed to supply risk as a result of concentration in its vendor base resulting from the use of a limited number of contract manufacturers. Purchases from the Company’s significant contract manufacturers as a percentage of all finished goods purchased were as follows:

  

   2024   2023   2024   2023 
   For the three months ended June 30,   For the six months ended June 30, 
   2024   2023   2024   2023 
Manufacturer A   45%   34%   56%   41%
Manufacturer B   49%   50%   41%   49%
Manufacturer C   6%   16%   3%   10%
                     
Concentration risk percentage   100%   100%   100%   100%

 

6

 

 

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, 2023, as filed with the SEC on March 22, 2024 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 and accounts payable. 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, 2024 and December 31, 2023, there was no allowance for credit losses. There was no credit loss expense for the three and six months ended June 30, 2024 and 2023.

 

Other Receivables

 

Other receivables consist of the Company’s 2021 Employer Retention Credit “ERC” claim, which the Company collected in March 2024, amounts due from vendors for materials acquired on their behalf for use in manufacturing the Company’s products, vendor rebates and freight claims.

 

ERC claims can be made in a variety of circumstances with varying degrees of subjectivity and clear authoritative guidance. Paid claims are subject to IRS inspection which may occur prior to expiration of the statute of limitations. The Company’s ERC claim was based on objectively calculated declines in revenue using methods that are clearly defined in the Coronavirus Aid, Relief, and Economic Security Act and various regulations and interpretations thereof.

 

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.

 

7

 

 

  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.

 

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

     
    The Company evaluated the requirement to disaggregate revenue and concluded that substantially all of its revenue comes from a single product, frozen beverages.

 

Storage and Shipping Costs

 

Storage and outbound freight costs are included in selling, marketing and distribution expense. For the three months ending June 30, 2024 and 2023, storage and outbound freight totaled approximately $217,000 and $252,000, respectively. For the six months ended June 30, 2024 and 2023, storage and outbound freight totaled approximately $581,000 and $562,000, respectively.

 

Research and Development

 

Expenditures for research activities relating to product development and improvement are charged to expense as incurred. The Company incurred approximately $17,000 and $35,000 in research and development expense for the three months ended June 30, 2024 and 2023, respectively, and $47,000 and $56,000 for the six months ended June 30, 2024 and 2023, respectively.

 

Loss Per Share

 

For the three and six months ended June 30, 2024 and 2023 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.

 

Reclassifications

 

Certain reclassifications have been made to the 2023 financial statements to conform to the 2024 presentation, namely stock-based compensation paid to the Company’s directors has been reclassified from stock and options issued for services and shares repurchased for employee tax withholding under the Company’s stock compensation program have been reclassified to financing activities in the consolidated statement of cash flows, with corresponding changes reflected in the statement of stockholders’ equity for the six months ended June 30, 2023.

 

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:

 

   June 30,   December 31, 
   2024   2023 
Raw materials  $28,000   $28,000 
Finished goods   1,506,000    1,186,000 
Inventory, net  $1,534,000   $1,214,000 

 

Note 3. Property Plant and Equipment

 

Property and equipment, net consist of the following:

  

   June 30,   December 31, 
   2024   2023 
Manufacturing equipment  $1,546,000   $1,546,000 
Customer equipment   1,408,000    1,410,000 
Property and equipment, gross   2,954,000    2,956,000 
Less: accumulated depreciation   (2,654,000)   (2,547,000)
Property and equipment, net of depreciation  $300,000   $409,000 

 

Depreciation expense related to these assets was approximately $56,000 and $87,000 for the three months ended June 30, 2024 and 2023, respectively, and $113,000 and $174,000 for the six months ended June 30, 2024 and 2023, respectively. Depreciation expense in cost of revenue was $6,000 and $5,000 for the three months ended June 30, 2024 and 2023, respectively, and $13,000 and $10,000 for the six months ended June 30, 2024 and 2023, respectively.

 

Note 4. Commitments and Contingencies

 

Lease Commitments

 

The Company leases office space under a non-cancellable operating lease which expired on March 31, 2023, and was extended in a series of amendments through September 30, 2024. The Company’s periodic lease cost was approximately $20,000 for each of the three months ended June 30, 2024 and 2023 and $40,000 for each of the six months ended June 30, 2024 and 2023.

 

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.

 

9

 

 

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.

 

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.

 

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 the probability of a material unfavorable outcome is remote.

 

Note 5. Convertible Notes

 

From July 2023 to March 2024, the Company 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 the Company’s 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 the Company 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 the Company’s common stock at the Conversion Price.

 

On October 23, 2023, the Company 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, the Company 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 the Company drew down $136,000 in convertible debt and converted the total drawn into 124,208 shares, settling all debt. Debt drawdowns included the non-cash settlement of $30,000 and $71,000 in 2023 and 2024, respectively.

 

10

 

 

Note 6. Stockholders’ Equity

 

The following are changes in stockholders’ equity for the six months ended June 30, 2023 and 2024:

 

    Shares     Amount     Capital     (Deficit)     Total  
          Additional              
    Common Stock     paid in     Accumulated        
    Shares     Amount     Capital     (Deficit)     Total  
                               
Balance December 31, 2022     12,934,741     $ -     $ 60,905,000     $ (57,972,000 )   $ 2,933,000  
Issuance of common stock for equity compensation, net of shares repurchased for income tax withholding     65,779       -       (18,000 )     -       (18,000 )
Equity-based compensation expense     -       -       211,000       -       211,000  
Cash settlement of equity-based compensation     -       -       (24,000 )     -       (24,000 )
Issuance of stock for services     2,083       -       8,000       -       8,000  
Net loss     -       -       -       (1,647,000 )     (1,647,000 )
Balance June 30, 2023     13,002,603     $ -     $ 61,082,000     $ (59,619,000 )   $ 1,463,000  

 

 

           Additional         
   Common Stock   paid in   Accumulated     
   Shares   Amount   Capital   (Deficit)   Total 
Balance December 31, 2023   14,420,105   $-   $63,299,000   $(60,796,000)  $2,503,000 
Issuance of common stock for equity compensation, net of shares repurchased for income tax withholding   179,593    -    (20,000)   -    (20,000)
Equity-based compensation expense   -    -    517,000    -    517,000 
Conversion of debt and interest (Note 5)   124,208    -    136,000    -    136,000 
Net loss   -    -    -    (1,460,000)   (1,460,000)
Balance June 30, 2024   14,723,906   $-   $63,932,000   $(62,256,000)  $1,676,000 

 

Warrants

 

During the six months ended June 30, 2024, 122,739 warrants at a weighted average exercise price of $9.10 per share expired.

 

Equity Incentive Plan

 

Through 2022, the Company issued equity awards under the 2015 Equity Incentive Plan (the “2015 Plan”) and outside the Plan. In June 2023, the Company’s stockholders adopted the 2023 Equity Incentive Plan (the “2023 Plan”), reserving 650,000 shares for future issuance. The Board of Directors discontinued further grants under the 2015 Plan. In March 2024, the Board of Directors amended the 2023 Plan to reserve an additional 650,000 shares for future issuance, bringing the total for the plan to 1,300,000, and to provide an evergreen provision that reserves additional shares depending on future non-plan issuances of common stock.

 

As of June 30, 2024, the Company has $797,000 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 2.5 years.

 

11

 

 

Stock Options

 

The following is a summary of stock option activity for the six months ended June 30, 2024:

 

   Number of Options   Weighted average exercise price per share   Remaining term in years 
Outstanding on December 31, 2023   587,091   $6.50    3.6 
Issued   229,849   $1.97    8.0 
Expired   (71,930)  $7.95      
Outstanding on June 30, 2024   745,010   $4.96    5.5 
                
Exercisable, June 30, 2024   531,540   $6.02    3.9 

 

The fair value of the options issued was calculated using the Black-Scholes option pricing model, based on the following:

 

   2024 
Expected term (in years)   8.0 
Expected volatility   93.5%
Risk-free interest rate   4.2%
Expected dividends  $- 
Weighted average grant date fair value per share  $1.71 

 

Restricted Stock

 

The following is a summary of restricted stock award and restricted stock unit activity for the six months ended June 30, 2024:

  

   Number of shares   Weighted average grant date fair value 
Unvested at January 1, 2024   32,606   $4.82 
Granted   65,000   $1.73 
Vested   (10,733)  $5.58 
Unvested at June 30, 2024   86,873   $2.41 

 

Performance Share Units

 

During 2023 and 2024, the Company issued performance share units (“PSUs”) that represented shares potentially issuable based upon Company and individual performance in the years of issuance.

 

12

 

 

The following table summarizes the activity for the Company’s unvested PSUs for the six months ended June 30, 2024:

  

   Number of shares   Weighted average grant date fair value 
Unvested at January 1, 2024   63,888   $1.70 
Granted   429,844   $1.22 
Vested   (55,217)  $1.15 
Unvested and expected to vest at June 30, 2024   438,515   $1.20 

 

In February 2023, the unvested awards issued and outstanding for individual performance under the 2022 PSU program were modified to cash-settle the original grant-date fair value of approximately $80,000, resulting in incremental compensation of $56,000 after considering the $24,000 fair value of the vested shares at the date of the modification. Additionally, the Company performance targets were modified to allow approximately 71,000 PSUs to vest, with an additional time-based vesting requirement for approximately 26,000 of the PSUs. Because the awards did not vest based on the original terms, the modification was considered a new grant, resulting in $64,000 in compensation expense in the six months ended June 30, 2023.

 

The Company adopted a 2024 PSU program in March 2024, granting approximately 429,000 PSUs at target performance against company-wide and individual performance metrics. The results for the three and six months ended June 30, 2024 include $85,000 and $210,000, respectively, in expense for the 2024 PSU program. Estimates of expense associated with 2024 performance will be reassessed each quarter through the performance period.

 

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, 2024, the estimated effective tax rate for 2024 was zero.

 

There are open statutes of limitations for taxing authorities in federal and state jurisdictions to audit our tax returns from 2018 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 ended June 30, 2024 and 2023, the Company did not incur any interest and penalties associated with tax positions. As of June 30, 2024, the Company did not have any significant unrecognized uncertain tax positions.

 

Note 8. Subsequent Event

 

In August 2024, the Company secured a $1,500,000 receivables financing facility which bears interest at prime plus 1.2% per annum on amounts borrowed. The facility has a thirteen-month term that renews annually and is secured by accounts receivable and inventory.

 

Note 9. Liquidity

 

During the six months ended June 30, 2024, the Company used $1,549,000 in operations. As of June 30, 2024, the Company had $1,185,000 of working capital, including $383,000 in cash.

 

The Company has a history of negative cash flow and operating losses, which were expected to improve with growth. As described more fully in Note 4, the dispute and subsequent contract termination with the Manufacturer has resulted in limitations in our ability to procure certain products necessary to achieve our growth projections and in elevated legal costs. To mitigate the impact, the Company has built inventory in anticipation of third quarter seasonal requirements, contributing $320,000 to the cash used in operations in the first half of 2024. The Company expects that the seasonality in its cash flow will ease as additional contracted capacity commences production in the third and fourth quarters of 2024. Additionally, in May 2024, the Company obtained non-recourse litigation financing to allow vigorous pursuit of the complaint against the Manufacturer without further expense to the Company.

 

The financial position at June 30, 2024 and historical results raise substantial doubt about the Company’s ability to continue as a going concern, which has been alleviated. As described, the Company has taken and partially completed steps to mitigate the dispute related issues. Additionally, in August 2024, the Company secured receivables financing of $1,500,000. Management believes that other potential actions are feasible, including raising additional financing and reducing growth-related expenditures. While management cannot predict with certainty whether additional actions would achieve the predicted outcome, the availability of such options, along with the actions already taken, resulted in the alleviation of the substantial doubt about the Company’s ability to continue as a going concern.

 

13

 

 

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 June 30, 2024 as Compared to the Three Months Ended June 30, 2023

 

Revenue and cost of revenue

 

Revenue decreased $47,000, or 3%, to $1,464,000 in 2024 as compared to $1,511,000 in 2023. Our revenue in 2024 benefited from continued acceptance of our carton packaging format and improvements in bulk sales due to the reintroduction of our WHIRLZ 100% juice product in the fourth quarter of 2023. Our revenues in 2023 were positively impacted by adjustments to estimated credits related to the dispute with the Manufacturer. Excluding such adjustments, revenue increased by 6%.

 

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. 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 third quarter of 2024, subject to the risks and uncertainties associated with pre-production activities.

 

Cost of revenue decreased $82,000, or 8%, to $955,000 in 2024 as compared to $1,037,000 in 2023. Cost of revenue decreased at a higher rate compared to revenue due to product mix and slight improvements in raw material and other input costs.

 

14

 

 

Our gross profit was $509,000 (34.8%) and $474,000 (31.4%) for 2024 and 2023, respectively. 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

 

Our operations were primarily directed towards increasing sales and expanding our distribution network.

 

   Three months ended
June 30,
   Three months ended
June 30,
         
   2024   2023   Change   Percent 
Sales and marketing  $366,000   $373,000   $(7,000)   -2%
Storage and outbound freight   217,000    252,000    (35,000)   -14%
   $583,000   $625,000   $(42,000)   -7%

 

Selling, marketing and distribution expense decreased approximately $42,000 (7%) from approximately $625,000 in 2023 to $583,000 in 2024.

 

Sales and marketing expense decreased approximately $7,000 (5%) from approximately $373,000 in 2023 to $366,000 in 2024. The increase is a result of a reduction in compensation expense, partially offset by higher broker commissions due to expansion of the broker network.

 

Storage and outbound freight expense decreased approximately $35,000 (14%) from approximately $252,000 in 2023 to $217,000 in 2024, primarily because of freight efficiencies, and lower storage and inventory management cost in 2024.

 

General and administrative expense

 

  

Three months ended

June 30,

  

Three months ended

June 30,

         
   2024   2023   Change   Percent 
Personnel costs  $341,000   $244,000   $97,000    40%
Stock-based compensation   214,000    (15,000)   229,000    -1527%
Legal, professional and consulting fees   59,000    59,000    -    0%
Director fees paid in cash   -    25,000    (25,000)   -100%
Research and development   17,000    35,000    (18,000)   -51%
Other general and administrative expenses   240,000    145,000    95,000    66%
   $871,000   $493,000   $378,000    77%

 

General and administrative expenses increased approximately $378,000 (77%) from approximately $493,000 in 2023 to $871,000 in 2024.

 

Personnel cost represents the cost of employees including salaries, bonuses, employee benefits and employment taxes. Personnel cost increased by approximately $97,000 (40%) from approximately $244,000 in 2023 to $341,000 in 2024. The increase in personnel cost resulted from the non-recurrence of the recognition of a COVID-19 related Employee Retention Tax Credit in 2023.

 

15

 

 

Stock-based compensation increased by approximately $229,000 from ($15,000) in 2023 to $214,000 in 2024 as a result of the Company adopting an equity-only structure for management incentives Board of Directors compensation, implemented to conserve cash and to achieve compliance with NASDAQ listing regulations.

 

Other general and administrative expenses increased by approximately $95,000 (66%) due to recruiting fees incurred to broaden the capabilities of our management team.

 

Net loss

 

We had net losses of approximately $1,011,000 and $742,000 for the three-month periods ended June 30, 2024 and 2023, respectively. The increase in net loss of approximately $269,000, was primarily the result of a shift to stock-based compensation and the non-recurrence of recognizing ERTC benefits in 2023.

 

Results of Operation for the Six Months Ended June 30, 2024 as Compared to the Six Months Ended June 30, 2023

 

Revenue and cost of revenue

 

Revenue increased $691,000, or 19%, to $4,293,000 in 2024 as compared to $3,602,000 in 2023. Our revenue in 2024 benefited from continued acceptance of our carton packaging format 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 $341,000, or 15%, to $2,614,000 in 2024 as compared to $2,273,000 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.

 

Our gross profit was $1,679,000 (39.1%) and $1,329,000 (36.9%) for 2024 and 2023, respectively. 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

 

  

Six months ended

June 30,

  

Six months ended

June 30,

         
   2024   2023   Change   Percent 
Sales and marketing  $696,000   $731,000   $(35,000)   -5%
Storage and outbound freight   581,000    562,000    19,000    3%
   $1,277,000   $1,293,000   $(16,000)   -1%

 

Selling, marketing and distribution expense decreased approximately $16,000 (1%) from approximately $1,293,000 in 2023 to $1,277,000 in 2024.

 

Sales and marketing expense decreased approximately $35,000 (5%) from approximately $731,000 in 2023 to $696,000 in 2024. The decrease is a result of a reduction in compensation expense. 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. These cost reductions were partially offset by higher broker commissions due to expansion of the broker network.

 

Storage and outbound freight expense increased approximately $19,000 (3%) from approximately $562,000 in 2023 to $581,000 in 2024, primarily because of the 19% 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

 

  

Six months ended

June 30,

  

Six months ended

June 30,

         
   2024   2023   Change   Percent 
Personnel costs  $603,000   $733,000   $(130,000)   -18%
Stock based compensation   517,000    191,000    326,000    171%
Legal, professional and consulting fees   215,000    173,000    42,000    24%
Director fees paid in cash   -    50,000    (50,000)   -100%
Research and development   47,000    56,000    (9,000)   -16%
Other general and administrative expenses   347,000    284,000    63,000    22%
   $1,729,000   $1,487,000   $242,000    16%

 

General and administrative expenses increased approximately $242,000 (16%) from approximately $1,487,000 in 2023 to $1,729,000 in 2024.

 

Personnel cost decreased by approximately $130,000 (18%) from approximately $733,000 in 2023 to $603,000 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 $326,000 from $191,000 in 2023 to $517,000 in 2024 as a result of the Company adopting an equity-only structure for management incentives Board of Directors compensation, implemented to conserve cash and to achieve compliance with NASDAQ listing regulations.

 

Other general and administrative expenses increased by approximately $63,000 (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 $1,460,000 and $1,647,000 for the six-month periods ended June 30, 2024 and 2023, respectively. The decrease in net loss of approximately $187,000, was primarily the result an increase in gross profit of approximately $350,000, partially offset by increased operating expense of $163,000 due to the shift to stock-based compensation 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 six months ended June 30, 2024, we used $1,549,000 in operations. Our net loss adjusted for non-cash operating expenses was a loss of $799,000, while changes in non-cash current assets and liabilities consumed $750,000 primarily as a result of increased inventory built at our Twist & Go bottle manufacturer in advance of orders for the 2024/25 academic year to alleviate capacity constraints while we bring up additional locations contracted in the third quarter of 2024. Additionally, our accounts payable decreased with other manufacturing locations as we slowed purchases in anticipation of the summer recess in the education channel.

 

As of June 30, 2024, we had working capital of $1,185,000 compared with $1,846,000 at December 31, 2023. The decrease in working capital is primarily due to losses incurred in the six months ended June 30, 2024, partially offset by capital raised in the six months ended June 30, 2024 through the sale 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 continue to negatively impact our financial position, results of operations and cash flow. 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. We have contracted with a co-manufacturer for additional smoothie bottle manufacturing capacity. We expect expanded capacity to become available in 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, 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.

 

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.

 

Item 4. Controls and Procedures.

 

Evaluation of Disclosure Controls and Procedures

 

Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Securities and Exchange Act of 1934 Rule 13(a)-15(e). Disclosure controls and procedures are designed to provide reasonable assurance that the information required to be disclosed in the reports that we file or submit under the Exchange Act has been appropriately recorded, processed, summarized, and reported on a timely basis and are effective in ensuring that such information is accumulated and communicated to the Company’s management, as appropriate to allow timely decisions regarding required disclosure. Based on the evaluation of our disclosure controls and procedures as of June 30, 2024, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

 

18

 

 

Changes in Internal Control over Financial Reporting

 

Through 2023, we had previously disclosed a material weakness in our internal control over financial reporting related to the control environment, which was impacted by inadequate segregation of duties, including information technology control activities.

 

We took actions to remediate the material weakness relating to our internal control over financial reporting, as described below. The controls and processes we implemented to remediate the identified material weakness included:

 

  Implemented procedures to mitigate the lack of segregation of duties
  Retained additional information technology resources which bolstered control over data access and changes to operating systems

 

As a result of the remediation activities and controls in place as of June 30, 2024 described above, we have remediated this previously disclosed material weakness. However, completion of remediation does not provide assurance that our remediated controls will continue to operate properly or that our financial statements will be free from error.

 

There were no additional changes in our internal control over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

PART II- OTHER INFORMATION

 

Item 1. Legal Proceedings.

 

As described in Note 4, the Company has an on-going dispute with the Manufacturer, the outcome of which cannot be predicted at this time.

 

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.

 

Item 1A. Risk Factors.

 

Not required because we are a smaller reporting company.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

None.

 

Item 3. Defaults Upon Senior Securities.

 

None.

 

Item 4. Mine Safety Disclosures.

 

Not applicable.

 

Item 5. Other Information.

 

None.

 

Item 6. Exhibits.

 

Exhibit No.   Description
     
31.1   Certification of Principal Executive Officer pursuant to Rule 13a-14(a) (filed herewith)
     
31.2   Certification of Principal Financial Officer pursuant to Rule 13a-14(a) (filed herewith)
     
32.1   Certification pursuant to 18 U.S.C. Section 1350 (furnished herewith)
     
101.INS   Inline XBRL Instance Document*
101.SCH   Inline XBRL Taxonomy Extension Schema Document*
101.CAL   Inline XBRL Taxonomy Extension Calculation Linkbase Document*
101.DEF   Inline XBRL Taxonomy Extension Definition Linkbase Document*
101.LAB   Inline XBRL Taxonomy Extension Label Linkbase Document*
101.PRE   Inline XBRL Taxonomy Extension Presentation Linkbase Document*
104   Cover Page Interactive Data File (embedded within the Inline XBRL document)
     
    *XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.
     
    In accordance with SEC Release 33-8238, Exhibit 32.1 is furnished and not filed.

 

19

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

  BARFRESH FOOD GROUP INC.
     
Date: August 14, 2024 By: /s/ Riccardo Delle Coste
    Riccardo Delle Coste
    Chief Executive Officer
    (Principal Executive Officer)
     
Date: August 14, 2024 By: /s/ Lisa Roger
    Chief Financial Officer
    (Principal Financial Officer)

 

20

 

Exhibit 31.1

 

RULE 13a-14(a) CERTIFICATION

 

I, Riccardo Delle Coste, certify that:

 

1. I have reviewed this quarterly report on Form 10-Q of Barfresh Food Group Inc., a Delaware corporation;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

August 14, 2024

 

By: /s/ Riccardo Delle Coste  
Name: Riccardo Delle Coste  
Title: Principal Executive Officer  

 

 

 

Exhibit 31.2

 

RULE 13a-14(a) CERTIFICATION

 

I, Lisa Roger, certify that:

 

1. I have reviewed this quarterly report on Form 10-Q of Barfresh Food Group Inc., a Delaware corporation;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

August 14, 2024

 

By: /s/ Lisa Roger  
Name: Lisa Roger  
Title: Principal Financial Officer  

 

 

 

 

Exhibit 32.1

 

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350

 

The undersigned hereby certify, pursuant to the requirements set forth in Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended, and in accordance with 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, in their capacities as officers of Barfresh Food Group Inc. (the “Company”), that, to their knowledge, the Quarterly Report on Form 10-Q of the Company for the quarter ended June 30, 2024 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and that the information contained in such report fairly represents, in all material respects, the financial condition and results of operations of the Company as of the dates and for the periods presented in the financial statements included in such report.

 

Date: August 14, 2024

 

By: /s/ Riccardo Delle Coste  

Name:

Title:

Riccardo Delle Coste

Chief Executive Officer

 
  (Principal Executive Officer)  
     
By: /s/ Lisa Roger  
Name: Lisa Roger  
Title: Chief Financial Officer  
  (Principal Financial Officer)  

 

 

 

v3.24.2.u1
Cover - shares
6 Months Ended
Jun. 30, 2024
Aug. 12, 2024
Cover [Abstract]    
Document Type 10-Q  
Amendment Flag false  
Document Quarterly Report true  
Document Transition Report false  
Document Period End Date Jun. 30, 2024  
Document Fiscal Period Focus Q2  
Document Fiscal Year Focus 2024  
Current Fiscal Year End Date --12-31  
Entity File Number 001-41228  
Entity Registrant Name BARFRESH FOOD GROUP INC.  
Entity Central Index Key 0001487197  
Entity Tax Identification Number 27-1994406  
Entity Incorporation, State or Country Code DE  
Entity Address, Address Line One 3600 Wilshire Blvd.  
Entity Address, Address Line Two Suite 1720  
Entity Address, City or Town Los Angeles  
Entity Address, State or Province CA  
Entity Address, Postal Zip Code 90010  
City Area Code 310  
Local Phone Number 598-7113  
Title of 12(b) Security Common stock, $0.000001 par value  
Trading Symbol BRFH  
Security Exchange Name NASDAQ  
Entity Current Reporting Status Yes  
Entity Interactive Data Current Yes  
Entity Filer Category Non-accelerated Filer  
Entity Small Business true  
Entity Emerging Growth Company false  
Entity Shell Company false  
Entity Common Stock, Shares Outstanding   14,746,172
Entity Information, Former Legal or Registered Name Not Applicable  
v3.24.2.u1
Condensed Consolidated Balance Sheets - USD ($)
Jun. 30, 2024
Dec. 31, 2023
Current assets:    
Cash $ 383,000 $ 1,891,000
Trade accounts receivable, net 671,000 821,000
Other receivables 19,000 160,000
Inventory, net 1,534,000 1,214,000
Prepaid expenses and other current assets 122,000 67,000
Total current assets 2,729,000 4,153,000
Property, plant and equipment, net of depreciation 300,000 409,000
Intangible assets, net of amortization 210,000 241,000
Other non-current assets 92,000 7,000
Total assets 3,331,000 4,810,000
Current liabilities:    
Accounts payable 843,000 1,670,000
Disputed co-manufacturer accounts payable (Note 4) 499,000 499,000
Accrued expenses 155,000 85,000
Accrued payroll and employee related 47,000 53,000
Total current liabilities 1,544,000 2,307,000
Other non-current liabilities 111,000
Total liabilities 1,655,000 2,307,000
Commitments and contingencies
Stockholders’ equity:    
Preferred stock, $0.000001 par value, 400,000 shares authorized, none issued or outstanding
Common stock, $0.000001 par value; 23,000,000 shares authorized; 14,723,906 and 14,420,105 shares issued and outstanding at June 30, 2024 and December 31, 2023, respectively
Additional paid in capital 63,932,000 63,299,000
Accumulated deficit (62,256,000) (60,796,000)
Total stockholders’ equity 1,676,000 2,503,000
Total liabilities and stockholders’ equity $ 3,331,000 $ 4,810,000
v3.24.2.u1
Condensed Consolidated Balance Sheets (Parenthetical) - $ / shares
Jun. 30, 2024
Dec. 31, 2023
Statement of Financial Position [Abstract]    
Preferred stock, par value $ 0.000001 $ 0.000001
Preferred stock, shares authorized 400,000 400,000
Preferred stock, shares issued 0 0
Preferred stock, shares outstanding 0 0
Common stock, par value $ 0.000001 $ 0.000001
Common stock, shares authorized 23,000,000 23,000,000
Common stock, shares issued 14,723,906 14,420,105
Common stock, shares outstanding 14,723,906 14,420,105
v3.24.2.u1
Condensed Consolidated Statements of Operations (Unaudited) - USD ($)
3 Months Ended 6 Months Ended
Jun. 30, 2024
Jun. 30, 2023
Jun. 30, 2024
Jun. 30, 2023
Income Statement [Abstract]        
Revenue $ 1,464,000 $ 1,511,000 $ 4,293,000 $ 3,602,000
Cost of revenue 955,000 1,037,000 2,614,000 2,273,000
Gross profit 509,000 474,000 1,679,000 1,329,000
Operating expenses:        
Selling, marketing and distribution 583,000 625,000 1,277,000 1,293,000
General and administrative 871,000 493,000 1,729,000 1,487,000
Depreciation and amortization 66,000 98,000 133,000 196,000
Total operating expenses 1,520,000 1,216,000 3,139,000 2,976,000
Net loss $ (1,011,000) $ (742,000) $ (1,460,000) $ (1,647,000)
v3.24.2.u1
Condensed Consolidated Statements of Operations - $ / shares
3 Months Ended 6 Months Ended
Jun. 30, 2024
Jun. 30, 2023
Jun. 30, 2024
Jun. 30, 2023
Income Statement [Abstract]        
Weighted average shares outstanding - basic 14,722,020 13,003,000 14,611,000 12,290,000
Weighted average shares outstanding - diluted 14,722,020 13,003,000 14,611,000 12,290,000
Net loss per share - basic $ (0.07) $ (0.06) $ (0.10) $ (0.13)
Net loss per share - diluted $ (0.07) $ (0.06) $ (0.10) $ (0.13)
v3.24.2.u1
Consolidated Statements of Cash Flows (Unaudited) - USD ($)
6 Months Ended
Jun. 30, 2024
Jun. 30, 2023
Statement of Cash Flows [Abstract]    
Net loss $ (1,460,000) $ (1,647,000)
Adjustments to reconcile net loss to net cash used in operating activities    
Stock-based compensation 517,000 211,000
Depreciation and amortization 144,000 205,000
Stock and options issued for services 8,000
Changes in assets and liabilities    
Accounts receivable 150,000 (236,000)
Other receivables 141,000 (7,000)
Inventories (320,000) 78,000
Prepaid expenses and other assets 14,000 (22,000)
Accounts payable (756,000) (759,000)
Accrued expenses 21,000 120,000
Net cash used in operating activities (1,549,000) (2,049,000)
Investing activities    
Purchase of property and equipment (4,000)
Net cash used in investing activities (4,000)
Financing activities    
Issuance of debt 65,000
Repurchases from stock compensation program (20,000) (18,000)
Net cash provided by (used in) financing activities 45,000 (18,000)
Net decrease in cash (1,508,000) (2,067,000)
Cash, beginning of period 1,891,000 3,019,000
Cash, end of period 383,000 952,000
Cash paid during the period for:    
Amounts included in the measurement of lease liabilities 20,000
Non-cash financing and investing activities:    
Convertible notes issued in exchange for trade payables 71,000
Conversion of debt and interest to equity 136,000
Acquisition of long-term software license in exchange for contract payable 154,000
Value of shares relinquished in modification of stock-based compensations awards $ 24,000
v3.24.2.u1
Description of the Business, Basis of Presentation, and Summary of Significant Accounting Policies
6 Months Ended
Jun. 30, 2024
Accounting Policies [Abstract]  
Description of the Business, Basis of Presentation, and Summary of Significant Accounting Policies

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 ready-to-drink and ready-to-blend beverages, particularly, smoothies, shakes and frappes.

 

Basis of Presentation

 

The accompanying condensed consolidated financial statements are unaudited. 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, 2023 included in the Company’s Annual Report on Form 10-K, as filed with the SEC on March 22, 2024. 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. and Barfresh Corporation Inc. (formerly known as Smoothie, 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

 

The Company is exposed to supply risk as a result of concentration in its vendor base resulting from the use of a limited number of contract manufacturers. Purchases from the Company’s significant contract manufacturers as a percentage of all finished goods purchased were as follows:

  

   2024   2023   2024   2023 
   For the three months ended June 30,   For the six months ended June 30, 
   2024   2023   2024   2023 
Manufacturer A   45%   34%   56%   41%
Manufacturer B   49%   50%   41%   49%
Manufacturer C   6%   16%   3%   10%
                     
Concentration risk percentage   100%   100%   100%   100%

 

 

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, 2023, as filed with the SEC on March 22, 2024 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 and accounts payable. 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, 2024 and December 31, 2023, there was no allowance for credit losses. There was no credit loss expense for the three and six months ended June 30, 2024 and 2023.

 

Other Receivables

 

Other receivables consist of the Company’s 2021 Employer Retention Credit “ERC” claim, which the Company collected in March 2024, amounts due from vendors for materials acquired on their behalf for use in manufacturing the Company’s products, vendor rebates and freight claims.

 

ERC claims can be made in a variety of circumstances with varying degrees of subjectivity and clear authoritative guidance. Paid claims are subject to IRS inspection which may occur prior to expiration of the statute of limitations. The Company’s ERC claim was based on objectively calculated declines in revenue using methods that are clearly defined in the Coronavirus Aid, Relief, and Economic Security Act and various regulations and interpretations thereof.

 

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.

 

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

     
    The Company evaluated the requirement to disaggregate revenue and concluded that substantially all of its revenue comes from a single product, frozen beverages.

 

Storage and Shipping Costs

 

Storage and outbound freight costs are included in selling, marketing and distribution expense. For the three months ending June 30, 2024 and 2023, storage and outbound freight totaled approximately $217,000 and $252,000, respectively. For the six months ended June 30, 2024 and 2023, storage and outbound freight totaled approximately $581,000 and $562,000, respectively.

 

Research and Development

 

Expenditures for research activities relating to product development and improvement are charged to expense as incurred. The Company incurred approximately $17,000 and $35,000 in research and development expense for the three months ended June 30, 2024 and 2023, respectively, and $47,000 and $56,000 for the six months ended June 30, 2024 and 2023, respectively.

 

Loss Per Share

 

For the three and six months ended June 30, 2024 and 2023 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.

 

Reclassifications

 

Certain reclassifications have been made to the 2023 financial statements to conform to the 2024 presentation, namely stock-based compensation paid to the Company’s directors has been reclassified from stock and options issued for services and shares repurchased for employee tax withholding under the Company’s stock compensation program have been reclassified to financing activities in the consolidated statement of cash flows, with corresponding changes reflected in the statement of stockholders’ equity for the six months ended June 30, 2023.

 

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.

 

 

v3.24.2.u1
Inventory
6 Months Ended
Jun. 30, 2024
Inventory Disclosure [Abstract]  
Inventory

Note 2. Inventory

 

Inventory consists of the following:

 

   June 30,   December 31, 
   2024   2023 
Raw materials  $28,000   $28,000 
Finished goods   1,506,000    1,186,000 
Inventory, net  $1,534,000   $1,214,000 

 

v3.24.2.u1
Property Plant and Equipment
6 Months Ended
Jun. 30, 2024
Property, Plant and Equipment [Abstract]  
Property Plant and Equipment

Note 3. Property Plant and Equipment

 

Property and equipment, net consist of the following:

  

   June 30,   December 31, 
   2024   2023 
Manufacturing equipment  $1,546,000   $1,546,000 
Customer equipment   1,408,000    1,410,000 
Property and equipment, gross   2,954,000    2,956,000 
Less: accumulated depreciation   (2,654,000)   (2,547,000)
Property and equipment, net of depreciation  $300,000   $409,000 

 

Depreciation expense related to these assets was approximately $56,000 and $87,000 for the three months ended June 30, 2024 and 2023, respectively, and $113,000 and $174,000 for the six months ended June 30, 2024 and 2023, respectively. Depreciation expense in cost of revenue was $6,000 and $5,000 for the three months ended June 30, 2024 and 2023, respectively, and $13,000 and $10,000 for the six months ended June 30, 2024 and 2023, respectively.

 

v3.24.2.u1
Commitments and Contingencies
6 Months Ended
Jun. 30, 2024
Commitments and Contingencies Disclosure [Abstract]  
Commitments and Contingencies

Note 4. Commitments and Contingencies

 

Lease Commitments

 

The Company leases office space under a non-cancellable operating lease which expired on March 31, 2023, and was extended in a series of amendments through September 30, 2024. The Company’s periodic lease cost was approximately $20,000 for each of the three months ended June 30, 2024 and 2023 and $40,000 for each of the six months ended June 30, 2024 and 2023.

 

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.

 

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.

 

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 the probability of a material unfavorable outcome is remote.

 

v3.24.2.u1
Convertible Notes
6 Months Ended
Jun. 30, 2024
Debt Disclosure [Abstract]  
Convertible Notes

Note 5. Convertible Notes

 

From July 2023 to March 2024, the Company 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 the Company’s 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 the Company 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 the Company’s common stock at the Conversion Price.

 

On October 23, 2023, the Company 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, the Company 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 the Company drew down $136,000 in convertible debt and converted the total drawn into 124,208 shares, settling all debt. Debt drawdowns included the non-cash settlement of $30,000 and $71,000 in 2023 and 2024, respectively.

 

 

v3.24.2.u1
Stockholders’ Equity
6 Months Ended
Jun. 30, 2024
Equity [Abstract]  
Stockholders’ Equity

Note 6. Stockholders’ Equity

 

The following are changes in stockholders’ equity for the six months ended June 30, 2023 and 2024:

 

    Shares     Amount     Capital     (Deficit)     Total  
          Additional              
    Common Stock     paid in     Accumulated        
    Shares     Amount     Capital     (Deficit)     Total  
                               
Balance December 31, 2022     12,934,741     $ -     $ 60,905,000     $ (57,972,000 )   $ 2,933,000  
Issuance of common stock for equity compensation, net of shares repurchased for income tax withholding     65,779       -       (18,000 )     -       (18,000 )
Equity-based compensation expense     -       -       211,000