BARFRESH FOOD GROUP INC. - Quarter Report: 2022 March (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the quarterly period ended March 31, 2022

For the transition period from ________________ to ___________________

Commission File Number: 000-55131

BARFRESH FOOD GROUP INC.

(Exact name of registrant as specified in its charter)

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:

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.

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: 12,919,899 shares as of April 25, 2022.

TABLE OF CONTENTS

Item 1. Financial Statements.

Barfresh Food Group Inc.

Condensed Consolidated Balance Sheets

See the accompanying notes to the condensed consolidated financial statements

Barfresh Food Group Inc.

Condensed Consolidated Statements of Operations

For the three months ended March 31, 2022 and 2021

(Unaudited)

See the accompanying notes to the condensed consolidated financial statements

Barfresh Food Group Inc.

Condensed Consolidated Statements of Cash Flows

For the three months ended March 31, 2022 and 2021

(Unaudited)

See the accompanying notes to the condensed consolidated financial statements

Barfresh Food Group Inc.

Notes to Condensed Consolidated Financial Statements

March 31, 2022

(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 manufacture 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, 2021 included in the Company’s Annual Report on Form 10-K, as filed with the SEC on March 10, 2022. 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.

Reverse Stock Split

Effective December 29, 2021, the Company amended its certificate of incorporation to implement a 1-for-13 reverse stock split of its issued and outstanding shares of common stock. All the share numbers, share prices, exercise prices and other per share information throughout these financial statements have been adjusted, on a retroactive basis, to reflect the 1-for-13 reverse stock split.

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 consolidated 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.

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, 2021, as filed with the SEC on March 10, 2022 that have had a material impact on our condensed consolidated financial statements and related notes.

Fair Value Measurement

Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 820, Fair Value Measurements and Disclosures (“ASC 820”), provides a comprehensive framework for measuring fair value and expands disclosures which are required about fair value measurements. Specifically, ASC 820 sets forth a definition of fair value and establishes a hierarchy prioritizing the inputs to valuation techniques, giving the highest priority to quoted prices in active markets for identical assets and liabilities and the lowest priority to unobservable value inputs. ASC 820 defines the hierarchy as follows:

Level 1 – Quoted prices are available in active markets for identical assets or liabilities as of the reported date. The types of assets and liabilities included in Level 1 are highly liquid and actively traded instruments with quoted prices, such as equities listed on the New York Stock Exchange.

Level 2 – Pricing inputs are other than quoted prices in active markets but are either directly or indirectly observable as of the reported date. The types of assets and liabilities in Level 2 are typically either comparable to actively traded securities or contracts or priced with models using highly observable inputs.

Level 3 – Significant inputs to pricing that are unobservable as of the reporting date. The types of assets and liabilities included in Level 3 are those with inputs requiring significant management judgment or estimation, such as complex and subjective models and forecasts used to determine the fair value.

Our financial instruments consist of cash, accounts receivable, accounts payable, advanced payments, restricted cash, as well as our PPP loan, convertible notes, and derivative liabilities which were settled in 2021. The carrying value of our financial instruments on March 31, 2022, December 31, 2021 and March 31, 2021 approximates their fair values, except for the derivative liability, which was carried at fair value prior to its extinguishment.

Restricted Cash

At March 31, 2022 and December 31, 2021, the Company had approximately $250,000 and $142,000, respectively, in restricted cash related to a co-packing agreement.

Accounts Receivable

As of each of March 31, 2022 and December 31, 2021, the Company’s allowance for doubtful accounts was approximately $121,000. The allowance was estimated based on evaluation of collectability of outstanding accounts receivable.

Other Receivables

Other receivables consist of amounts due from vendors for materials acquired on their behalf for use in manufacturing the Company’s products.

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:

Shipping and Storage Costs

Shipping and handling costs are included in general and administrative expenses. For the three months ending March 31, 2022 and 2021, shipping and handling costs totaled approximately $437,000 and $144,000, respectively.

Research and Development

Expenditures for research activities relating to product development and improvement are charged to expense as incurred. The Company incurred approximately $31,000 and $68,000, in research and development expenses for the three months ending March 31, 2022 and 2021, respectively.

Loss Per Share

At March 31, 2022 and 2021 common stock equivalents have not been included in the calculation of net loss per share as their effect is anti-dilutive as a result of losses incurred.

Recent Pronouncements

From time to time, new accounting pronouncements are issued that we adopt as of the specified effective date. We have not determined if the impact of recently issued standards that are not yet effective will have an impact on our results of operations and financial position.

Note 2. Inventory

Inventory consists of the following:

 Schedule of Inventory

Note 3. Property Plant and Equipment

Property and equipment, net consist of the following:

 Schedule of Property and Equipment

Depreciation expense related to these assets was approximately $145,000 and $131,000 for the three months ended March 31, 2022 and 2021, respectively. Depreciation expense in cost of revenue was approximately $6,000 for three months ended March 31, 2021. There was no depreciation expense in cost of revenue for the three months ended March 31, 2022.

Note 4. Convertible Notes and Derivative Liability (Related and Unrelated Party)

In 2018, the Company issued Milestone I and Milestone II Convertible Notes, which were repaid and converted in the second quarter of 2021.

The Milestone II Convertible Notes contained variable conversion provisions based on the future price of the Company’s common stock, resulting in the potential issuance of an indeterminate number of shares of common stock upon conversion. The Company measured the fair value of the derivative resulting from the variable conversion provisions each reporting period. The fair value was reported as a derivative liability and the change in value of $16,787 was recorded as a gain in the accompanying condensed consolidated statement of operations for the three months ended March 31, 2021.

Note 5. Commitments and Contingencies

The Company leases office space under a non-cancelable operating lease which expires on March 31, 2023. Our periodic lease cost was approximately $20,000 for each of the three months ended March 31, 2022 and 2021, respectively. As of March 31, 2022, our right of use asset was $70,176.

The following table presents the future operating lease payment as of March 31, 2022.

 Schedule of Estimate Future Maturities of Lease Liabilities

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. The Company is currently the defendant in one legal proceeding for an amount less than $100,000. Our legal counsel and management believe a material unfavorable outcome to be remote.

Note 6. Stockholders’ Equity

The following are changes in stockholders’ equity for the three months ended March 31, 2021 and March 31, 2022:

 Schedule of Changes in Stockholders' Equity

Warrants

During the three months ended March 31, 2022, 96,664 warrants at an exercise price of $9.10 per share expired, and 986 warrants at an exercise price of $5.07 per share were exercised for proceeds of approximately $5,000.

Equity Incentive Plan

The following is a summary of stock option activity for the three months ended March 31, 2022:

Summary of Stock Options Activity 

The fair value of the options issued (approximately $105,000, in the aggregate) was calculated using the Black-Sholes option pricing model, based on the following:

Summary of Fair Value of Options Using Black-Sholes Option Pricing Model 

As of March 31, 2022, the Company has approximately $189,000 of unrecognized share-based compensation expense related to unvested options, which is expected to be recognized over the remaining weighted average period of 2.2 years.

The following is a summary of restricted stock award and restricted stock unit activity for the three months ended March 31, 2022:

 Summary of Restricted Stock Award and Restricted Stock Unit Activity

As of March 31, 2022, the Company has approximately $202,000 of unrecognized share-based compensation expense related to restricted stock awards and restricted stock units, which is expected to be recognized over the remaining weighted average period of 2.6 years.

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 March 31, 2022, the estimated effective tax rate for the year was zero.

There are open statutes of limitations for taxing authorities in federal and state jurisdictions to audit our tax returns from 2017 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 months ended March 31, 2022 and 2021, the Company did not incur any interest and penalties associated with tax positions. As of March 31, 2022, the Company did not have any significant unrecognized uncertain tax positions.

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, 2021, as filed with the SEC on March 10, 2022, 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

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, 2021, as filed with the SEC on March 10, 2022, that have a material impact on our condensed consolidated financial statements and related notes.

Recent Accounting Pronouncements

See Note 1 to the accompanying notes to unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for further details regarding this topic.

Results of Operations

Results of Operation for Three Months Ended March 31, 2022 as Compared to the Three Months Ended March 31, 2021

Revenue and cost of revenue

Revenue increased by approximately $1,511,000 (149%) from approximately $1,015,000 in 2021 to approximately $2,526,000 in 2022. The overall revenue for the first quarter 2022 was higher due to growth in “Twist & Go”™ revenue and the gradual return of single serve demand.

Cost of revenue for 2022 was approximately $1,710,000 as compared to approximately $666,000 in 2021. Our gross profit was approximately $816,000 (32%) and $349,000 (34%) for 2022 and 2021, respectively. Gross margins decreased in the first quarter primarily due to product mix which includes “Twist & Go”™ at slightly lower product margins.

Operating expenses

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

Our general and administrative expenses increased by 106%, or approximately $797,000, from approximately $752,000 in 2021 to approximately $1,549,000 in 2022, primarily driven by personnel, including non-cash stock-based compensation, shipping and storage and other general and administrative expenses. The following is a breakdown of our general and administrative expenses for the three months ended March 31, 2022, and 2021:

Personnel cost represents the cost of employees including salaries, bonuses, employee benefits and employment taxes and continues to be our largest cost. Personnel cost increased by approximately $188,000 (60%) from approximately $312,000 to $500,000. We had eleven full time equivalent employees in the first quarter of 2021, compared with fifteen in the first quarter of 2022.

Stock based compensation is used as an incentive to attract new employees and to compensate existing employees. Stock based compensation includes stock issued and options granted to employees and non-employees. Stock based compensation for the three months ended March 31, 2022 was approximately $28,000 compared to ($35,000) for the three months ended March 31, 2021 due to the departure of two key employees and the forfeiture of their unvested options in 2021.

Shipping and storage expense increased approximately $294,000 (204%) from approximately $144,000 in 2021 to $437,000 in 2022. The increase was primarily a result of the 149% increase in revenue, as well as increased supply chain costs resulting from the COVID-19 pandemic and other geopolitical events.

Legal, professional, and consulting fees increased approximately $104,000 (136%) from approximately $76,000 in 2021 to $180,000 in 2022. The increase was primarily due to corporate development activities.

Marketing and selling expenses increased approximately $33,000 (76%) from approximately $43,000 in 2021 to $76,000 in 2022. The increase in marketing and selling expenses was primarily the result of the retention of outside service providers to assist with sales initiatives.

Director fees decreased approximately $15,000 from approximately $76,000 in 2021 to $63,000 in 2022. Annual director fees are anticipated at $50,000 per non-employee director.

Research and development expenses decreased approximately $37,000 (55%) from approximately $68,000 in 2021 to $31,000 in 2022. The reduction is primarily due to the non-recurrence of material consumption and expiration as well as a reduction in labor hours for our development consulting team.

Other expenses increased approximately $169,000 (254%) from approximately $66,000 in 2021 to $235,000 in 2022. In 2022, we incurred approximately $102,000 in one-time costs related to the uplist of our common stock to the NASDAQ Stock Market. Additionally, 2021 benefited from the results of vendor payables reconciliation resulting in the reduction of vendor liabilities.

We had operating losses of approximately $895,000 and $549,000 for the three-month periods ended March 31, 2022 and 2021, respectively. The increase of approximately $346,000 or 63%, was primarily due to the increase in general and administrative expenses, partially offset by the increase in gross profit.

The change in the value of the derivative liability is based upon the Black-Scholes model from one period to another. The gain of approximately $17,000 for the three months ended March 31, 2021 was a result of the change in components of the Black-Scholes model.

Interest expense was approximately $59,000 for the three months ended March 31, 2021. Interest related to convertible debt that was converted and repaid in 2021. We did not incur any interest expense for the three months ended March 31, 2022.

We had net losses of approximately $895,000 and $592,000 in the three-month periods ended March 31, 2022 and 2021, respectively.

Liquidity and Capital Resources

As of March 31, 2022, we had working capital of approximately $5,559,000 as compared with approximately $6,171,000 at December 31, 2021. The decrease in working capital surplus is primarily due to operating loss for the three months ended March 31, 2022.

During the three months ended March 31, 2022, we used cash of approximately $1,132,000 in operations, and $14,000 for the purchase of equipment, partially offset by $5,000 from the issuance of stock pursuant to an outstanding warrant.

Our liquidity needs will depend on how quickly we are able to profitably ramp up sales, as well as our ability to control and reduce variable operating expenses, and to continue to control fixed overhead expense.

Our operations to date have been financed by the sale of securities, the issuance of convertible debt and the issuance of short-term debt, 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 debt. There are no assurances that we will be able to generate the necessary capital to carry out our current plan of operations.

We have entered into a direct lease for premises covering the period April 1, 2019 to March 31, 2023. The aggregate minimum lease payments under the non-cancellable direct lease as of March 31, 2022 are approximately $81,000.

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 expenses, 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 this evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that as of March 31, 2022, our disclosure controls and procedures are not effective.

Management has identified the following material weaknesses in our internal control over financial reporting:

Management has concluded that there is a material weakness due to the control environment. The control environment is impacted due to the company’s inadequate segregation of duties.

In an effort to remediate the identified material weakness and enhance our internal control over financial reporting, we have hired additional personnel and are reassigning control responsibilities to help ensure that we are able to properly implement internal control procedures.

Since the assessment of the effectiveness of our internal control over financial reporting did identify material weaknesses, management considers its internal control over financial reporting to be ineffective.

Management believes that the material weakness set forth above did not have an effect on our financial results.

Changes in Internal Control over Financial Reporting

There have been no changes in the Company’s internal control over financial reporting during the three months ended March 31, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II-OTHER INFORMATION

Item 1. Legal Proceedings.

Neither the Company nor its subsidiaries are party to or have property that is the subject of any material pending legal proceedings. We may be subject to ordinary legal proceedings incidental to our business from time to time that are not required to be disclosed under this Item 1.

Item 1A. Risk Factors.

Not required because we are a smaller reporting company.

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

During the quarter ended March 31, 2022, the Company sold 986 shares of common stock for $5,000 pursuant to the exercise of warrants, and issued 13,801 shares of common stock for services valued at $98,333. The Company relied upon the exemption from registration contained in Rule 506(b) and Section 4(a)(2) of the Securities Act, and corresponding provisions of state securities laws, on the basis that (i) offers were made to a limited number of persons, (ii) each offer was made through direct communication with the offerees by the Company, (iii) each of the offerees, which included an officer and two directors of the Company, had the requisite sophistication and financial ability to bear risks of investing in the Company’s common stock, (iv) the Company provided disclosure to the offerees, and (v) there was no general solicitation and no commission or remuneration was paid in connection with the offers.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

None.

Item 6. Exhibits.

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.