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 March 31,September 30, 2022
| ☐ | 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: 000-55131001-41228
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: shares as of April 25,November 7, 2022.
TABLE OF CONTENTS
| 2 |
Item 1. Financial Statements.
Barfresh Food Group Inc.
Condensed Consolidated Balance Sheets
| March 31, | December 31, | September 30, | December 31, | |||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| (Unaudited) | (Audited) | (Unaudited) | (Audited) | |||||||||||||
| Assets | ||||||||||||||||
| Current assets: | ||||||||||||||||
| Cash | $ | 4,284,168 | $ | 5,532,840 | $ | 2,837,000 | $ | 5,533,000 | ||||||||
| Restricted cash | 250,382 | 142,382 | 211,000 | 142,000 | ||||||||||||
| Trade accounts receivable, net | 1,719,937 | 1,222,476 | 1,142,000 | 1,223,000 | ||||||||||||
| Other receivables | 231,959 | - | 77,000 | - | ||||||||||||
| Inventory, net | 850,802 | 705,349 | 602,000 | 705,000 | ||||||||||||
| Prepaid expenses and other current assets | 101,396 | 63,859 | 137,000 | 64,000 | ||||||||||||
| Total current assets | 7,438,644 | 7,666,906 | 5,006,000 | 7,667,000 | ||||||||||||
| Property, plant and equipment, net of depreciation | 1,456,527 | 1,588,043 | 1,241,000 | 1,588,000 | ||||||||||||
| Operating lease right-of-use assets, net | 70,176 | 87,391 | 36,000 | 87,000 | ||||||||||||
| Intangible assets, net of amortization | 354,173 | 370,278 | 323,000 | 370,000 | ||||||||||||
| Deposits | 6,746 | 6,746 | 7,000 | 7,000 | ||||||||||||
| Total assets | $ | 9,326,266 | $ | 9,719,364 | $ | 6,613,000 | $ | 9,719,000 | ||||||||
| Liabilities and Stockholders’ Equity | ||||||||||||||||
| Current liabilities: | ||||||||||||||||
| Accounts payable | $ | 1,377,590 | $ | 974,218 | $ | 1,802,000 | $ | 974,000 | ||||||||
| Accrued expenses | 202,336 | 228,227 | 315,000 | 228,000 | ||||||||||||
| Accrued payroll and employee related | 223,292 | 212,465 | 231,000 | 212,000 | ||||||||||||
| Lease liability | 76,731 | 81,295 | 39,000 | 81,000 | ||||||||||||
| Total current liabilities | 1,879,949 | 1,496,205 | 2,387,000 | 1,495,000 | ||||||||||||
| Long term liabilities: | ||||||||||||||||
| Accrued interest | 33,600 | 33,600 | - | 34,000 | ||||||||||||
| Lease liability | - | 13,701 | - | 14,000 | ||||||||||||
| Total liabilities | 1,913,549 | 1,543,506 | 2,387,000 | 1,543,000 | ||||||||||||
| Commitments and contingencies (Note 5) | - | - | - | - | ||||||||||||
| Stockholders’ equity: | ||||||||||||||||
| Preferred stock, $ par value, shares authorized, issued or outstanding | - | - | ||||||||||||||
| Common stock, $ par value; shares authorized; and shares issued and outstanding at March 31, 2022 and December 31, 2021, respectively | 13 | 13 | ||||||||||||||
| Preferred stock, $ par value, shares authorized, issued or outstanding | - | - | ||||||||||||||
| Common stock, $ par value; shares authorized; and shares issued and outstanding at September 30, 2022 and December 31, 2021, respectively | - | - | ||||||||||||||
| Additional paid in capital | 60,471,988 | 60,340,620 | 60,730,000 | 60,341,000 | ||||||||||||
| Accumulated deficit | (53,059,284 | ) | (52,164,775 | ) | (56,504,000 | ) | (52,165,000 | ) | ||||||||
| Total stockholders’ equity | 7,412,717 | 8,175,858 | 4,226,000 | 8,176,000 | ||||||||||||
| Total liabilities and stockholders’ equity | $ | 9,326,266 | $ | 9,719,364 | $ | 6,613,000 | $ | 9,719,000 | ||||||||
See the accompanying notes to the condensed consolidated financial statements
| 3 |
Barfresh Food Group Inc.
Condensed Consolidated Statements of Operations
For the three and nine months ended March 31,September 30, 2022 and 2021
(Unaudited)
| 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||
| For the three months ended September 30, | For the nine months ended September 30, | |||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||
| Revenue | $ | 2,525,549 | $ | 1,014,851 | $ | 2,406,000 | $ | 1,930,000 | $ | 7,731,000 | $ | 4,246,000 | ||||||||||||
| Cost of revenue | 1,709,873 | 665,532 | 3,129,000 | 1,209,000 | 6,807,000 | 2,614,000 | ||||||||||||||||||
| Gross profit | 815,676 | 349,319 | (723,000 | ) | 721,000 | 924,000 | 1,632,000 | |||||||||||||||||
| Operating expenses: | ||||||||||||||||||||||||
| Selling, marketing and distribution | 815,000 | 480,000 | 2,137,000 | 1,236,000 | ||||||||||||||||||||
| General and administrative | 1,549,039 | 751,601 | 1,058,000 | 586,000 | 2,736,000 | 1,598,000 | ||||||||||||||||||
| Depreciation and amortization | 161,146 | 146,933 | 112,000 | 163,000 | 390,000 | 456,000 | ||||||||||||||||||
| Total operating expenses | 1,710,185 | 898,534 | 1,985,000 | 1,229,000 | 5,263,000 | 3,290,000 | ||||||||||||||||||
| Operating loss | (894,509 | ) | (549,215 | ) | (2,708,000 | ) | (508,000 | ) | (4,339,000 | ) | (1,658,000 | ) | ||||||||||||
| Other (income)/expenses | ||||||||||||||||||||||||
| Gain from derivative liability | - | (16,787 | ) | - | - | - | (16,000 | ) | ||||||||||||||||
| Gain from debt extinguishment - Paycheck Protection Program | - | - | - | (568,000 | ) | |||||||||||||||||||
| Loss on debt extinguishment | - | - | - | 194,000 | ||||||||||||||||||||
| Interest | - | 59,091 | - | - | - | 128,000 | ||||||||||||||||||
| Total other expense | - | 42,304 | - | - | - | (262,000 | ) | |||||||||||||||||
| Net loss | $ | (894,509 | ) | $ | (591,519 | ) | $ | (2,708,000 | ) | $ | (508,000 | ) | $ | (4,339,000 | ) | $ | (1,396,000 | ) | ||||||
| Per share information - basic and fully diluted: | ||||||||||||||||||||||||
| Weighted average shares outstanding | 12,909,204 | 11,471,798 | 12,931,000 | 12,892,000 | 12,920,000 | 12,143,000 | ||||||||||||||||||
| Net loss per share | $ | (0.07 | ) | $ | (0.05 | ) | $ | (0.21 | ) | $ | (0.04 | ) | $ | (0.34 | ) | $ | (0.11 | ) | ||||||
See the accompanying notes to the condensed consolidated financial statements
| 4 |
Barfresh Food Group Inc.
Condensed Consolidated Statements of Cash Flows
For the threenine months ended March 31,September 30, 2022 and 2021
(Unaudited)
| 2022 | 2021 | |||||||||||||||
| 2022 | 2021 | |||||||||||||||
| Net loss | $ | (4,339,000 | ) | $ | (1,396,000 | ) | ||||||||||
Adjustments to reconcile net loss to net cash used in operating activities | ||||||||||||||||
| Depreciation and amortization | 407,000 | 370,000 | ||||||||||||||
| Stock-based compensation | 211,000 | 52,000 | ||||||||||||||
| Stock and options issued for services | 173,000 | 75,000 | ||||||||||||||
| Interest expense related to debt discount | - | 56,000 | ||||||||||||||
| Gain on debt extinguishment - Paycheck Protection Program | - | (568,000 | ) | |||||||||||||
| Gain on derivative | - | (16,000 | ) | |||||||||||||
| Loss on debt extinguishment | - | 194,000 | ||||||||||||||
| Changes in assets and liabilities | ||||||||||||||||
| Accounts receivable | 81,000 | (757,000 | ) | |||||||||||||
| Other receivables | (77,000 | ) | - | |||||||||||||
| Inventories | 103,000 | (308,000 | ) | |||||||||||||
| Prepaid expenses and other assets | (78,000 | ) | (30,000 | ) | ||||||||||||
| Accounts payable | 828,000 | 1,064,000 | ||||||||||||||
| Accrued expenses | 106,000 | 46,000 | ||||||||||||||
| Accrued interest | (34,000 | ) | 72,000 | |||||||||||||
| Net cash used in operating activities | $ | (1,132,148 | ) | $ | (410,574 | ) | (2,619,000 | ) | (1,146,000 | ) | ||||||
| Investing activities | ||||||||||||||||
| Purchase of property and equipment | (13,524 | ) | (4,647 | ) | (13,000 | ) | (137,000 | ) | ||||||||
| Net cash used in investing activities | (13,524 | ) | (4,647 | ) | (13,000 | ) | (137,000 | ) | ||||||||
| Financing activities | ||||||||||||||||
| Proceeds from issuance of stock | 5,000 | - | 5,000 | 6,000,000 | ||||||||||||
| Proceeds from note payable | - | 568,131 | - | 568,000 | ||||||||||||
| Repayment of convertible notes | - | (840,000 | ) | |||||||||||||
| Net cash from financing activities | 5,000 | 568,131 | 5,000 | 5,728,000 | ||||||||||||
| Net change in cash and restricted cash | (1,140,672 | ) | 152,910 | (2,627,000 | ) | 4,445,000 | ||||||||||
| Cash and restricted cash, beginning of period | 5,675,222 | 1,959,269 | 5,675,000 | 1,959,000 | ||||||||||||
| Cash and restricted cash, end of period | $ | 4,534,550 | $ | 2,112,179 | $ | 3,048,000 | $ | 6,404,000 | ||||||||
| Cash paid during the period for: | ||||||||||||||||
| Cash paid for amounts included in the measurement of lease liabilities | $ | 19,648 | $ | 19,076 | ||||||||||||
| Amounts included in the measurement of lease liabilities | $ | 60,000 | $ | 48,000 | ||||||||||||
| Non-cash financing and investing activities: | ||||||||||||||||
| Net carrying value of convertible notes and accrued interest extinguished through issuance of stock | $ | - | $ | 467,000 | ||||||||||||
| Accrued interest paid in stock | $ | - | $ | 151,000 | ||||||||||||
| Equipment included in accounts payable and accrued liability | $ | - | $ | 23,511 | $ | - | $ | 85,000 | ||||||||
| Extinguishment of derivative liability | $ | - | $ | 25,000 | ||||||||||||
See the accompanying notes to the condensed consolidated financial statements
| 5 |
Barfresh Food Group Inc.
Notes to Condensed Consolidated Financial Statements
March 31,September 30, 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.
Recent Business Developments
The Company’s products are produced to its specifications through several co-manufacturers. One of the Company’s co-manufacturers has provided approximately 58% of the Company’s products in the nine months ended September 30, 2022 under a Supply Agreement that expires in September 2025.
Over the course of 2022, the Company has experienced quality issues with the case packaging utilized by the co-manufacturer. In July of 2022, the Company began receiving customer complaints about the texture of the Company’s smoothie products produced by the same co-manufacturer. In response, subsequent to September 30, 2022, the Company has withdrawn product from the market and destroyed on-hand inventory. The results for the third quarter of 2022 reflect the estimated accounting impact of such actions, including $630,000 in refund and administrative fees due to customers and $932,000 to dispose of unsaleable inventory.
The Company has been attempting to informally resolve the issues. However, on November 4, 2022, in response to a formal proposal of alternate resolutions, the Company received notification from its co-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, claiming that the co-manufacturer has not met its obligations under the Agreement, and seeking economic damages. Due to the uncertainties of litigation, the Company is not able to predict either the outcome or a range of reasonably possible recoveries that could result from its legal action against the co-manufacturer, and no gain contingencies have been recorded. The Company anticipates that the disruption in its supply resulting from the dispute will adversely impact its 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.
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.
| 6 |
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 disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the years reported. Actualreporting period. These estimates are based on information available as of the date of the financial statements; therefore, actual results may differ from these estimates.
Vendor Concentrations
The Company is exposed to supply risk as a result of concentrations in its vendor base resulting from the use of a limited number of contract manufacturers. Purchases from the Company’s contract manufacturers as a percent of all finished goods purchased were as follows:
Schedule of Company’s Contact Manufacturers of Finished Goods
| For the three months ended September 30, | For the nine months ended September 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Manufacturer A | 54 | % | 31 | % | 58 | % | 42 | % | ||||||||
| Manufacturer B | 31 | % | 32 | % | 28 | % | 36 | % | ||||||||
| Manufacturer C | 9 | % | 30 | % | 8 | % | 15 | % | ||||||||
| Manufacturer D | 6 | % | 7 | % | 6 | % | 7 | % | ||||||||
| 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, 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 PPPPaycheck Protection Program (“PPP”) loan, convertible notes, and derivative liabilities which were settled in 2021. The carrying value of our financial instruments on March 31,September 30, 2022, December 31, 2021 and March 31,September 30, 2021 approximates their fair values, except for the derivative liability, which was carried at fair value prior to its extinguishment.
| 7 |
Restricted Cash
At March 31,September 30, 2022 and December 31, 2021, the Company had approximately $250,000211,000 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 Company did not have an allowance wasfor doubtful accounts as of September 30, 2022. The allowance is estimated based on evaluation of collectability of outstanding accounts receivable. Delinquent accounts are written-off when it is determined that the amounts are uncollectible.
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.goods, net of rebates and other marketing allowances. 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 | ||
| 4) | Allocate the transaction price to performance obligations in the contract
Since our 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
Payments that are received before performance obligations are recorded are shown as current liabilities. | ||
| The |
| 8 |
Storage and Shipping and Storage Costs
ShippingStorage and handlingoutbound freight costs are included in generalselling and administrative expenses.marketing expense. For the three months ending March 31,September 30, 2022 and 2021, shippingstorage and handlingoutbound freight totaled approximately $450,000 and $316,000, respectively. For the nine months ending September 30, 2022 and 2021, storage and outbound freight costs totaled approximately $437,0001,208,000 and $144,000717,000, respectively.
Research and Development
Expenditures for research activities relating to product development and improvement are charged to expense as incurred. The Company incurred approximately $31,000220,000 and $68,00034,000, in research and development expensesexpense for the three months ending March 31,September 30, 2022 and 2021, respectively. For the nine months ending September 30, 2022 and 2021, research and development expense totaled approximately $347,000 and $173,000, respectively.
At March 31,September 30, 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.
Reclassifications
Certain reclassifications have been made to the 2021 financial statements to conform to the 2022 presentation, including the presentation of selling and marketing expense apart from general and administrative expense in the condensed consolidated statement of operations, and the presentation of a reconciliation of the components of net cash used in operating activities as well as the inclusion of operating lease payments in operating activities in the condensed consolidated statement of cash flows.
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
| March 31, | December 31, | September 30, | December 31, | |||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Raw materials | $ | 102,768 | $ | 105,355 | $ | 40,000 | $ | 105,000 | ||||||||
| Finished goods | 748,035 | 599,994 | 562,000 | 600,000 | ||||||||||||
| Inventory, net | $ | 850,802 | $ | 705,349 | $ | 602,000 | $ | 705,000 | ||||||||
| 9 |
Note 3. Property Plant and Equipment
Property and equipment, net consist of the following:
Schedule of Major Classes of Property and Equipment
| March 31, | December 31, | September 30, | December 31, | |||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Furniture and fixtures | $ | 1,524 | $ | 1,524 | ||||||||||||
| Manufacturing equipment and customer equipment | 3,813,763 | 3,800,238 | ||||||||||||||
| Leasehold improvements | 4,886 | 4,886 | ||||||||||||||
| Vehicles | 29,696 | 29,696 | ||||||||||||||
| Manufacturing and customer equipment | $ | 3,815,000 | $ | 3,800,000 | ||||||||||||
| Other property | 36,000 | 36,000 | ||||||||||||||
| Property and equipment, gross | 3,849,869 | 3,836,344 | 3,851,000 | 3,836,000 | ||||||||||||
| Less: accumulated depreciation | (3,039,673 | ) | (2,894,632 | ) | (3,256,000 | ) | (2,894,000 | ) | ||||||||
| Property and equipment | 810,196 | 941,712 | 595,000 | 942,000 | ||||||||||||
| Equipment not yet placed in service | 646,331 | 646,331 | 646,000 | 646,000 | ||||||||||||
| Property and equipment, net of depreciation | $ | 1,456,527 | $ | 1,588,043 | $ | 1,241,000 | $ | 1,588,000 | ||||||||
Depreciation expense related to these assets was approximately $145,000105,000 and $131,000147,000 for the three months ended March 31,September 30, 2022 and 2021, respectively, and $360,000 and $407,000 for the nine months ended September 30, 2022 and 2021, respectively. Depreciation expense in cost of revenue was approximately $6,00010,000 and $18,000 for threethe nine months ended March 31, 2021.September 30, 2022 and 2021, respectively. There was 0no depreciation expense included in cost of revenue for the three months ended March 31, 2022.September 30, 2022 or 2021.
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
Upon debt extinguishment the Company’s derivative liability andwas revalued at approximately $25,000, resulting in a gain of approximately $16,000 for the change innine months ended September 30, 2021. The derivative value of $16,787 25,000was recorded as a gainincluded in the accompanying condensed consolidated statement of operations fordetermining the three months ended March 31, 2021.loss on debt extinguishment.
Note 5. Commitments and Contingencies
Lease Commitments
The Company leases office space under a non-cancelablenon-cancellable operating lease which expires on March 31, 2023. OurThe Company’s periodic lease cost was approximately $20,000 for each of the three months ended March 31,September 30, 2022 and 2021, respectively, and $60,000 for each of the nine months ended September 30, 2022 and 2021, respectively. As of March 31,September 30, 2022, our right of use asset was approximately $70,17636,000.
The following table presents the future operating lease payment as of March 31, 2022.September 30, 2022:
Schedule of Estimate Future Maturities of Lease Liabilities
| 2022 (three months remaining) | $ | 20,000 | ||
| 2023 | 20,000 | |||
| Total lease payments | 40,000 | |||
| Less: imputed interest | (1,000 | ) | ||
| Total lease liability | $ | 39,000 |
Legal Proceedings
| 2022 (nine months remaining) | $ | 60,713 | ||
| 2023 | 20,238 | |||
| Total lease payments | 80,951 | |||
| Less: imputed interest | (4,220 | ) | ||
| Total lease liability | $ | 76,731 |
As described in Note 1, the Company has filed a lawsuit against its co-manufacturer, Schreiber Foods, Inc., 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, litigationLitigation 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.
| 10 |
Note 6. Stockholders’ Equity
The following are changes in stockholders’ equity for the threenine months ended March 31,September 30, 2021 and March 31,September 30, 2022:
Barfresh Food Group, Inc.
Condensed Consolidated Statements of Stockholders’ Equity
Schedule of Changes in Stockholders' Equity
| Additional | ||||||||||||||||||||
| Common Stock | paid in | Accumulated | ||||||||||||||||||
| Shares | Amount | Capital | (Deficit) | Total | ||||||||||||||||
| Balance December 31, 2020 | 11,471,797 | $ | 12 | $ | 53,223,803 | $ | (50,899,629 | ) | $ | 2,324,186 | ||||||||||
| Shares issued for warrant exercise | - | - | ||||||||||||||||||
| Equity based compensation | - | - | (34,585 | ) | - | (34,585 | ) | |||||||||||||
| Issuance of stock for services | - | - | ||||||||||||||||||
| Net loss | - | - | - | (591,519 | ) | (591,519 | ) | |||||||||||||
| Balance March 31, 2021 | 11,471,797 | $ | 12 | $ | 53,189,218 | $ | (51,491,148 | ) | $ | 1,698,082 | ||||||||||
| Additional | ||||||||||||||||||||
| Common Stock | paid in | Accumulated | ||||||||||||||||||
| Shares | Amount | Capital | (Deficit) | Total | ||||||||||||||||
| Balance December 31, 2020 | 11,471,797 | $ | - | $ | 53,224,000 | $ | (50,900,000 | ) | $ | 2,324,000 | ||||||||||
| Issuance of stock for capital raise | 1,282,051 | - | 6,000,000 | - | 6,000,000 | |||||||||||||||
| Conversion of debt and accrued interest | 114,614 | - | 685,000 | - | 685,000 | |||||||||||||||
| Interest paid in shares | 19,377 | - | 151,000 | - | 151,000 | |||||||||||||||
| Issuance of stock for services | 4,579 | - | 75,000 | - | 75,000 | |||||||||||||||
| Equity based compensation | - | - | 52,000 | - | 52,000 | |||||||||||||||
| Shares issued for warrant exercise | ||||||||||||||||||||
| Shares issued for warrant exercise, shares | ||||||||||||||||||||
| Net loss | - | - | - | (1,396,000 | ) | (1,396,000 | ) | |||||||||||||
| Balance September 30, 2021 | 12,892,418 | $ | - | $ | 60,187,000 | $ | (52,296,000 | ) | $ | 7,891,000 | ||||||||||
| Additional | Additional | |||||||||||||||||||||||||||||||||||||||
| Common Stock | paid in | Accumulated | Common Stock | paid in | Accumulated | |||||||||||||||||||||||||||||||||||
| Shares | Amount | Capital | (Deficit) | Total | Shares | Amount | Capital | (Deficit) | Total | |||||||||||||||||||||||||||||||
| Balance December 31, 2021 | 12,905,112 | $ | 13 | $ | 60,340,620 | $ | (52,164,775 | ) | $ | 8,175,858 | 12,905,112 | $ | - | $ | 60,341,000 | $ | (52,165,000 | ) | $ | 8,176,000 | ||||||||||||||||||||
| Beginning balance | 12,905,112 | $ | - | $ | 60,341,000 | $ | (52,165,000 | ) | $ | 8,176,000 | ||||||||||||||||||||||||||||||
| Shares issued for warrant exercise | 986 | 5,000 | - | 5,000 | 986 | - | 5,000 | - | 5,000 | |||||||||||||||||||||||||||||||
| Equity based compensation | - | - | 28,036 | - | 28,036 | 5,000 | - | 211,000 | - | 211,000 | ||||||||||||||||||||||||||||||
| Issuance of stock for services | 13,801 | 98,332 | - | 98,332 | 23,643 | - | 173,000 | - | 173,000 | |||||||||||||||||||||||||||||||
| Net loss | - | - | - | (894,509 | ) | (894,509 | ) | - | - | - | (4,339,000 | ) | (4,339,000 | ) | ||||||||||||||||||||||||||
| Balance March 31, 2022 | 12,919,899 | $ | 13 | $ | 60,471,988 | $ | (53,059,284 | ) | $ | 7,412,717 | ||||||||||||||||||||||||||||||
| Balance September 30, 2022 | 12,934,741 | $ | - | $ | 60,730,000 | $ | (56,504,000 | ) | $ | 4,226,000 | ||||||||||||||||||||||||||||||
| Ending balance | 12,934,741 | $ | - | $ | 60,730,000 | $ | (56,504,000 | ) | $ | 4,226,000 | ||||||||||||||||||||||||||||||
Warrants
During the threenine months ended March 31,September 30, 2022, 96,664102,852 warrants at ana weighted average exercise price of $9.108.82 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
Stock Options
Summary of Stock Options Activity
| Number of Options | Weighted average exercise price per share | Remaining term in years | Number of Options | Weighted average exercise price per share | Remaining term in years | |||||||||||||||||||
| Outstanding on December 31, 2021 | 625,016 | $ | 7.55 | 3.8 | 625,016 | $ | 7.55 | 3.8 | ||||||||||||||||
| Issued | 25,385 | $ | 5.58 | 56,980 | $ | 5.90 | ||||||||||||||||||
| Cancelled/expired | (11,541 | ) | $ | 4.94 | (17,644 | ) | $ | 5.08 | ||||||||||||||||
| Outstanding on March 31, 2022 | 638,860 | $ | 7.52 | 3.5 | ||||||||||||||||||||
| Outstanding on September 30, 2022 | 664,352 | $ | 7.38 | 3.2 | ||||||||||||||||||||
| Exercisable, March 31, 2022 | 539,345 | $ | 7.92 | 3.0 | ||||||||||||||||||||
| Exercisable, September 30, 2022 | 577,242 | $ | 7.64 | 2.7 | ||||||||||||||||||||
| 11 |
Summary of Fair Value of Options Using Black-Sholes Option Pricing Model
| 2021 | 2022 | |||||||
| Expected term (in years) | - | |||||||
| Expected volatility | % | |||||||
| Risk-free interest rate | - | % | ||||||
| Weighted average expected volatility | % | |||||||
| Weighted average risk-free interest rate | % | |||||||
| Expected dividends | $ | - | $ | - | ||||
| Weighted average grant date fair value per share | $ | 4.15 | $ | 4.53 | ||||
As of March 31,September 30, 2022, the Company has approximately $ of unrecognized share-based compensation expense related to unvested options, which is expected to be recognized over the remaining weighted average period of years.
Restricted Stock
Summary of Restricted Stock Award and Restricted Stock Unit Activity
| Number of shares | Weighted average grant date fair value | Number of shares | Weighted average grant date fair value | |||||||||||||
| Unvested at January 1, 2022 | - | $ | - | - | $ | - | ||||||||||
| Granted | 40,554 | $ | 5.36 | 41,554 | $ | 5.27 | ||||||||||
| Unvested at March 31, 2022 | 40,554 | $ | 5.36 | |||||||||||||
| Forfeited | (4,631 | ) | $ | 5.38 | ||||||||||||
| Unvested at September 30, 2022 | 36,923 | $ | 5.25 | |||||||||||||
As of March 31,September 30, 2022, the Company has approximately $ 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 years.
Performance Stock Units
During the nine months ended September 30, 2022, the Company issued performance share units (“PSUs”) that represent shares potentially issuable in the future. Issuance is based upon Company and individual performance over the remainder of 2022. The PSUs vest only upon the achievement of the applicable performance goals and depending on the particular grantee and achievement on the performance goals, the grantee may earn between % and % of the target PSUs. The fair value of PSUs is calculated based on the stock price on the date of grant.
Summary of Performance Stock Unit Activity
Number of shares | Weighted average grant date fair value | |||||||
| Unvested at January 1, 2022 | - | $ | - | |||||
| Granted | 123,512 | $ | 4.50 | |||||
| Forfeited | (1,889 | ) | $ | 4.50 | ||||
| Unvested at September 30, 2022 | 121,623 | $ | 4.50 | |||||
The stock-based compensation expense recognized each period is dependent upon the Company’s estimate of the number of shares that will ultimately vest based on the achievement of certain performance conditions. Future stock-based compensation for unvested performance-based awards could reach a maximum of $, in 2022 assuming achievement at the maximum level.
| 12 |
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,September 30, 2022, the estimated effective tax rate for the year2022 was 0.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 and nine months ended March 31,September 30, 2022 and 2021, the Company did not incur any interest and penalties associated with tax positions. As of March 31,September 30, 2022, the Company did not have any significant unrecognized uncertain tax positions.
Note 8. Liquidity
During the nine months ended September 30, 2022 and 2021, the Company used cash for operations of $2,619,000 and $1,146,000, respectively. The Company has a history of operating losses and negative cash flow, which were expected to improve with growth, offset by working capital required to achieve such growth. As described more fully in Note 1, our litigation against co-manufacturer has resulted in uncertainty around our ability to procure product, which in turn may inhibit our ability to achieve positive cash flow. Additionally, management has considered that litigation is costly and will require the outlay of cash. However as of September 30, 2022, we have $3,048,000 of cash and restricted cash and even though we have identified certain indicators, these indicators do not raise substantial doubt regarding the Company’s ability to continue as a going concern. However, the Company cannot predict, with certainty, the outcome of its potential actions to generate liquidity, including the availability of additional financing, or whether such actions would generate the expected liquidity as planned.
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.
| 13 |
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,September 30, 2022 as Compared to the Three Months Ended March 31,September 30, 2021
Revenue and cost of revenue
Revenue increased by approximately $1,511,000 (149%$476,000 (25%) from approximately $1,015,000$1,930,000 in 2021 to approximately $2,526,000$2,406,000 in 2022. The overall revenue for the firstthird quarter 2022 was higher due to growth in “Twist & Go”™ revenue and the gradual return of single serve demand. Revenue in the third quarter of 2022 was adversely impacted by a withdrawal of “Twist & Go”™ product manufactured by one of its co-manufacturers. The withdrawal resulted from quality complaints that are the subject of a legal dispute that is more fully described in the footnotes of the accompanying financial statements. As a result of the withdrawal, we recorded a reserve for anticipated sales claims and distributor administrative fees of $630,000. The Company anticipates that its revenues will be adversely impacted as a result of the dispute unless and 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.
Cost of revenue for 2022 was approximately $1,710,000$3,129,000 as compared to approximately $666,000$1,209,000 in 2021. Cost of revenue in the third quarter of 2022 was adversely impacted by the anticipated disposal of withdrawn inventory, amounting to $932,000 including ancillary costs. Our gross profit was approximately $816,000 (32%($723,000) (-30%) and $349,000 (34%$721,000 (37%) for 2022 and 2021, respectively. Gross margins decreasedExcluding the impact of the product withdrawal on both revenue and cost of revenue, our gross profit in the firstthird quarter was $839,000 (28%). The decrease in the third quarter is primarily due to product mix which includes a higher proportion of “Twist & Go”™at slightly lower product margins.
Operating expensesSelling, marketing and distribution expense
Our operations were primarily directed towards increasing sales and expanding our distribution network.
| Three months ended September 30, | Three months ended September 30, | |||||||||||||||
| 2022 | 2021 | Change | Percent | |||||||||||||
| Sales and marketing | $ | 365,000 | $ | 164,000 | $ | 201,000 | 123 | % | ||||||||
| Storage and outbound freight | 450,000 | 316,000 | 134,000 | 42 | % | |||||||||||
| $ | 815,000 | $ | 480,000 | $ | 335,000 | 70 | % | |||||||||
Sales and marketing expense increased approximately $201,000 (123%) from approximately $164,000 in 2021 to $365,000 in 2022. The increase in sales and marketing expense was primarily the result of the retention of new employees and outside service providers to assist with sales and initiatives, including, beginning in the third quarter of 2022, brokers specializing in the school market. Additionally, the Company increased its participation in education nutrition trade shows in 2022.
| 14 |
Storage and outbound freight expense increased approximately $134,000 (42%) from approximately $316,000 in 2021 to $450,000 in 2022. The increase was primarily a result of the 25% increase in revenue and the additional shipments that were ultimately not recognized as revenue due to the aforementioned product withdrawal.
General and administrative expense
Our general and administrative expensesexpense increased by 106%81%, or approximately $797,000,$472,000, from approximately $752,000$586,000 in 2021 to approximately $1,549,000$1,058,000 in 2022, primarily driven by research and development, personnel, including non-cash stock-based compensation, shipping and storage and other general and administrative expenses.expense. The following is a breakdown of our general and administrative expensesexpense for the three months ended March 31,September 30, 2022, and 2021:
Three months ended March 31, | Three months ended March 31, | Three months ended September 30, | Three months ended September 30, | |||||||||||||||||||||||||||||
| 2022 | 2021 | Change | Percent | 2022 | 2021 | Change | Percent | |||||||||||||||||||||||||
| Personnel costs | 499,658 | 311,556 | 188,102 | 60 | % | $ | 352,000 | $ | 244,000 | $ | 108,000 | 44 | % | |||||||||||||||||||
| Stock-based compensation | 28,036 | (34,585 | ) | 62,621 | 181 | % | 118,000 | 42,000 | 76,000 | 181 | % | |||||||||||||||||||||
| Shipping and storage | 437,434 | 143,735 | 293,699 | 204 | % | |||||||||||||||||||||||||||
| Legal, professional and consulting fees | 179,922 | 76,172 | 103,750 | 136 | % | 98,000 | 67,000 | 31,000 | 46 | % | ||||||||||||||||||||||
| Marketing and selling | 75,502 | 42,955 | 32,547 | 76 | % | |||||||||||||||||||||||||||
| Director fees | 62,500 | 77,130 | (14,630 | ) | -19 | % | 62,000 | 50,000 | 12,000 | 24 | % | |||||||||||||||||||||
| Research and development | 30,644 | 68,141 | (37,498 | ) | -55 | % | 220,000 | 34,000 | 186,000 | 547 | % | |||||||||||||||||||||
| Other general and administrative expenses | 235,343 | 66,497 | 168,845 | 254 | % | 208,000 | 149,000 | 59,000 | 40 | % | ||||||||||||||||||||||
| 1,549,039 | 751,601 | 797,438 | 106 | % | $ | 1,058,000 | $ | 586,000 | $ | 472,000 | 81 | % | ||||||||||||||||||||
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%$108,000 (44%) from approximately $312,000$244,000 to $500,000. We had eleven full time equivalent$352,000. The increase in personnel cost was partially offset by the decrease in consulting fees as we choose to hire permanent staff as the critical stages of the COVID-19 pandemic waned, rather than rely on consultants and temporary staff.
Stock based compensation is used as an incentive to attract new employees and to compensate existing employees. Stock based compensation includes stock issued and restricted stock units and options granted to employees and non-employees. Stock based compensation for the three months ended September 30, 2022 was approximately $118,000 compared to $42,000 for the three months ended September 30, 2021 due to the aforementioned increase in staffing as well as the implementation of a performance-based stock compensation program.
Research and development expense increased approximately $186,000 (547%) from approximately $34,000 in 2021 to $220,000 in 2022. The increase is primarily due to materials consumed in pre-production runs at a new co-manufacturer that will provide our Twist & Go™ product in carton format starting in the first quarter of 2021, compared with fifteen in the firstfourth quarter of 2022.
Other expense increased approximately $59,000 (40%) from approximately $149,000 in 2021 to $208,000 in 2022, primarily related to an increase in maintenance costs on equipment loaned to our bulk product customers, costs related to our annual meeting, and approximately $8,000 in one-time costs related to the uplist of our common stock to the NASDAQ Stock Market.
Operating loss and net loss
We had operating and net losses of approximately $2,708,000 and $508,000 for the three-month periods ended September 30, 2022 and 2021, respectively. The increase of approximately $2,200,000 or 433%, was primarily due to $1,785,000 in charges related to the aforementioned product quality issue and withdrawal.
| 15 |
Results of Operation for Nine Months Ended September 30, 2022 as Compared to the Nine Months Ended September 30, 2021
Revenue and cost of revenue
Revenue increased by approximately $3,485,000 (82%) from approximately $4,246,000 in 2021 to approximately $7,731,000 in 2022. The overall revenue for the nine months ended September 30, 2022 was higher due to growth in “Twist & Go”™ revenue and the gradual return of single serve demand. Revenue in the third quarter of 2022 was adversely impacted by a withdrawal of “Twist & Go”™ product manufactured by one of its co-manufacturers. The withdrawal resulted from quality complaints that are the subject of a legal dispute that is more fully described in the footnotes of the accompanying financial statements. As a result of the withdrawal, we recorded a reserve for anticipated sales claims and distributor administrative fees of $630,000. The Company anticipates that its revenues will be adversely impacted as a result of the dispute unless and 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.
Cost of revenue for 2022 was approximately $6,807,000 as compared to approximately $2,614,000 in 2021. Cost of revenue in the third quarter of 2022 was adversely impacted by the anticipated disposal of withdrawn inventory, amounting to $932,000 including ancillary costs. Our gross profit was approximately $924,000 (12%) and $1,632,000 (38%) for 2022 and 2021, respectively. Excluding the impact of the product withdrawal on both revenue and cost of revenue, our gross profit in the nine months ended September 30, 2022 was $2,486,000 (30%). Gross margins decreased in the nine months ended September 30, 2022 primarily due to product mix which includes “Twist & Go”™ at slightly lower product margins.
Selling, marketing and distribution expense
| Nine months ended September 30, | Nine months ended September 30, | |||||||||||||||
| 2022 | 2021 | Change | Percent | |||||||||||||
| Sales and marketing | $ | 929,000 | $ | 519,000 | $ | 410,000 | 79 | % | ||||||||
| Storage and outbound freight | 1,208,000 | 717,000 | 491,000 | 68 | % | |||||||||||
| $ | 2,137,000 | $ | 1,236,000 | $ | 901,000 | 73 | % | |||||||||
Sales and marketing expense increased approximately $410,000 (79%) from approximately $519,000 in 2021 to $929,000 in 2022. The increase in sales and marketing expense was primarily the result of the retention of new employees and outside service providers to assist with sales and initiatives, including, beginning in the third quarter of 2022, brokers specializing in the school market. Additionally, the Company increased its participation in education nutrition trade shows in 2022.
Storage and outbound freight expense increased approximately $491,000 (68%) from approximately $717,000 in 2021 to $1,208,000 in 2022. The increase was primarily a result of the 82% increase in revenue, tempered by logistics efficiencies from the increased volume in core markets served.
| 16 |
General and administrative expense
Our general and administrative expense increased by 71%, or approximately $1,138,000, from approximately $1,598,000 in 2021 to approximately $2,736,000 in 2022, primarily driven by personnel, including non-cash stock-based compensation, other general and administrative expense, and research and development. The following is a breakdown of our general and administrative expense for the nine months ended September 30, 2022, and 2021:
| Nine months ended September 30, | Nine months ended September 30, | |||||||||||||||
| 2022 | 2021 | Change | Percent | |||||||||||||
| Personnel costs | $ | 1,036,000 | $ | 637,000 | $ | 399,000 | 63 | % | ||||||||
| Stock-based compensation | 211,000 | 52,000 | 159,000 | 306 | % | |||||||||||
| Legal, professional and consulting fees | 342,000 | 244,000 | 98,000 | 40 | % | |||||||||||
| Director fees | 187,000 | 200,000 | (13,000 | ) | -7 | % | ||||||||||
| Research and development | 347,000 | 173,000 | 174,000 | 101 | % | |||||||||||
| Other general and administrative expenses | 613,000 | 292,000 | 321,000 | 110 | % | |||||||||||
| $ | 2,736,000 | $ | 1,598,000 | $ | 1,138,000 | 71 | % | |||||||||
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 $399,000 (63%) from approximately $637,000 to $1,036,000. The increase in personnel cost was partially offset by the decrease in consulting fees as we choose to hire permanent staff as the critical stages of the COVID-19 pandemic waned, rather than rely on consultants and temporary staff.
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 threenine months ended March 31,September 30, 2022 was approximately $28,000$211,000 compared to ($35,000)$52,000 for the threenine months ended March 31,September 30, 2021 due to the aforementioned increase in staffing, and the institution of our performance-based stock compensation program in the third quarter of 2022. Stock-based compensation in 2021 benefited from forfeiture credits 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.employees.
Legal, professional, and consulting fees increased approximately $104,000 (136%$98,000 (40%) from approximately $76,000$244,000 in 2021 to $180,000$342,000 in 2022. The increase was primarily due to corporate development activities.
MarketingResearch and selling expensesdevelopment expense increased approximately $33,000 (76%$174,000 (101%) from approximately $43,000$173,000 in 2021 to $76,000$347,000 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 materials consumed in pre-production runs at a new co-manufacturer that will provide our Twist & Go™ product in carton format starting in the non-recurrencefourth quarter of material consumption and expiration as well as a reduction in labor hours for our development consulting team.2022.
Other expensesexpense increased approximately $169,000 (254%$321,000 (110%) from approximately $66,000$292,000 in 2021 to $235,000$613,000 in 2022. In 2022, we incurred approximately $102,000$175,000 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 resultingwe experienced maintenance cost increases related to equipment loaned to our bulk product customers, and an increase in the reduction of vendor liabilities.annual meeting costs.
Operating loss
We had operating losses of approximately $895,000$4,339,000 and $549,000$1,658,000 for the three-monthnine-month periods ended March 31,September 30, 2022 and 2021, respectively. The increase of approximately $346,000$2,681,000 or 63%162%, was primarily due to $1,785,000 in charges related to the increaseaforementioned product quality issue and withdrawal and increases in generaloperating expense.
Other income and administrative expenses, partially offset by the increase in gross profit.expense
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$16,000 for the threenine months ended March 31,September 30, 2021 was a result of the change in components of the Black-Scholes model. The derivative liability was settled upon conversion and repayment of the convertible notes in the second quarter of 2021, which resulted in an extinguishment loss of $194,000.
We recorded a gain on extinguishment of covid-19 related Paycheck Protection Program (“PPP”) loan of $568,000 in the nine months ended September 30, 2021.
| 17 |
Interest expense was approximately $59,000$128,000 for the threenine months ended March 31,September 30, 2021. Interest related to convertible debt that was converted and repaid in 2021. We did not incur any interest expense for the threenine months ended March 31,September 30, 2022.
Net loss
We had net losses of approximately $895,000$4,339,000 and $592,000$1,396,000 in the three-monthnine-month periods ended March 31,September 30, 2022 and 2021, respectively.respectively, with the primary change due to the $568,000 gain on forgiveness of the PPP loan in 2021.
Liquidity and Capital Resources
As of March 31,September 30, 2022, we had working capital of approximately $5,559,000$2,619,000 as compared with approximately $6,171,000$6,172,000 at December 31, 2021. The decrease in working capital surplus is primarily due to operating loss for the threenine months ended March 31,September 30, 2022.
During the threenine months ended March 31,September 30, 2022, we used cash of approximately $1,132,000$2,619,000 in operations, and $14,000$13,000 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,expense, 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,September 30, 2022 are approximately $81,000.$40,000.
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,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 this evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that as of March 31,September 30, 2022, our disclosure controls and procedures are not effective.
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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 in conjunction with the implementation of a new enterprise resource planning system. We believe that we are taking the steps necessary 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,September 30, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II-OTHERII- OTHER INFORMATION
Item 1. Legal Proceedings.
NeitherAs more fully disclosed in Note 1, Description of the Business, Basis of Presentation, and Summary of Significant Accounting Policies - Recent Business Developments the Company nor its subsidiaries are party to or have property that is the subject of any material pending legal proceedings. filed suit against Schreiber Foods, Inc. regarding a disputed product quality issue.
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,September 30, 2022, the Company sold 986 shares of common stock for $5,000 pursuant to the exercise of warrants, and issued 13,8019,842 shares of common stock for services valued at $98,333. $50,000. 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.
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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. |
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: | By: | /s/ Riccardo Delle Coste |
Riccardo Delle Coste Chief Executive Officer (Principal Executive Officer) | ||
| Date: | By: | /s/ Lisa Roger |
Chief Financial Officer (Principal Financial Officer) | ||