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SEC Form 10-K filed by Barfresh Food Group Inc.

$BRFH
Packaged Foods
Consumer Staples
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

(Mark One)

 

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

 

For the fiscal year ended December 31, 2024

 

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

 

For the transition period from _____________ to ______________

 

Commission File Number: 001-41228

 

BARFRESH FOOD GROUP INC.

(Exact name of registrant as specified in its charter)

 

Delaware   27-1994406

(State or other jurisdiction of

incorporation or organization)

  

(I.R.S. Employer

Identification No.)

 

3600 Wilshire Boulevard Suite 1720

Los Angeles, California

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

 

Registrant’s telephone number, including area code 310-598-7113

 

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   Nasdaq Capital Market

 

Securities registered pursuant to Section 12(g) of the Act: None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒

 

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 (§ 232.405 of this chapter) 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, 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 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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act by the registered public accounting firm that prepared or issued its audit report. ☐

 

If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐

 

Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐

 

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

 

The aggregate market value of the voting and non-voting common equity held by non-affiliates (excluding voting shares held by officers and directors) as of June 30, 2024 was $28,770,790.

 

As of March 24, 2025, there were 15,810,080 outstanding shares of common stock of the registrant.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Certain information required by Part III of this Annual Report on Form 10-K is incorporated by reference from portions of the registrant’s definitive proxy statement relating to its 2025 annual meeting of stockholders to be filed pursuant to Regulation 14A within 120 days of December 31, 2024. Other items incorporated by reference are listed in the Exhibit Index of this Annual Report on Form 10-K.

 

 

 

 

 

 

BARFRESH FOOD GROUP INC.

 

FORM 10-K

 

TABLE OF CONTENTS

 

    Page
     
PART I
     
Item 1. Business 4
Item 1A. Risk Factors 6
Item 1B. Unresolved Staff Comments 14
Item 1C. Cybersecurity 14
Item 2. Properties 15
Item 3. Legal Proceedings 15
Item 4. Mine Safety Disclosures. 15
     
PART II
     
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 15
Item 6. [Reserved] 16
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 16
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 20
Item 8. Financial Statements and Supplementary Data 20
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 20
Item 9A. Controls and Procedures 21
Item 9B. Other Information 21
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspection 21
     
PART III
     
Item 10. Directors, Executive Officers and Corporate Governance 22
Item 11. Executive Compensation 22
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 22
Item 13. Certain Relationships and Related Transactions, and Director Independence 22
Item 14. Principal Accountant Fees and Services 22
     
PART IV
     
Item 15. Exhibits and Financial Statement Schedules 22
Item 16. Form 10-K Summary 22

 

2

 

 

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS AND INFORMATION

 

This Annual Report on Form 10-K (“Annual Report”), the other reports, statements, and information that we have previously filed or that we may subsequently file with the Securities and Exchange Commission (“SEC”) and public announcements that we have previously made or may subsequently make include, may include, incorporate by reference or may incorporate by reference certain statements that may be deemed to be forward-looking statements. The forward-looking statements included or incorporated by reference in this Annual Report and those reports, statements, information and announcements address activities, events or developments that Barfresh Food Group Inc., a Delaware corporation (hereinafter referred to as “we”. “us”, “our”, “Company” or “Barfresh”), expects or anticipates will or may occur in the future. Any statements in this document about expectations, beliefs, plans, objectives, assumptions or future events or performance are not historical facts and are forward-looking statements. These statements are often, but not always, made through the use of words or phrases such as “may”, “should”, “could”, “predict”, “potential”, “believe”, “will likely result”, “expect”, “will continue”, “anticipate”, “seek”, “estimate”, “intend”, “plan”, “projection”, “would”, “outlook” and similar expressions. Accordingly, these statements involve estimates, assumptions and uncertainties, which could cause actual results to differ materially from those expressed in them. Any forward-looking statements are qualified in their entirety by reference to the factors discussed throughout this document. All forward-looking statements concerning economic conditions, rates of growth, rates of income or values as may be included in this document are based on information available to us on the dates noted, and we assume no obligation to update any such forward-looking statements.

 

Management cautions that forward-looking statements are qualified by their terms and/or important factors, many of which are outside of our control, involve a number of risks, uncertainties and other factors that could cause actual results and events to differ materially from the statements made, including, but not limited to, the following risk factors. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, or achievements.

 

Certain risks and uncertainties could cause actual results or outcomes to differ materially from those expressed in any forward-looking statements made by us, and you should not place undue reliance on any such forward-looking statements. Actual results or outcomes may differ materially from those expressed in any forward-looking statements made by us, and you should not place undue reliance on any such forward-looking statements. Any forward-looking statement speaks only as of the date on which it is made and we do not undertake any obligation to update any forward-looking statement or statements to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time, and it is not possible for us to predict which will arise. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. See “Risk Factors” set forth in Item 1A.

 

AVAILABLE INFORMATION

 

We are subject to the information reporting requirements of the Securities Exchange Act of 1934, as amended, and we file quarterly reports on Form 10-Q, Annual Reports on Form 10-K, Current Reports on Form 8-K, proxy statements and other required information and reports with the SEC.

 

You can read our SEC filings, including the registration statement, over the Internet at the SEC’s website at www.sec.gov at no cost. You may also request a copy of these filings, at no cost, by writing us at 3600 Wilshire Boulevard, Suite 1720, Los Angeles, 90010 or calling us at (310) 598-7113.

 

We also maintain a website at www.barfresh.com/us/, at which you may access these materials free of charge as soon as reasonably practicable after they are electronically filed with, or furnished to, the SEC. Information contained on or accessible through our website is not a part of this report, and the inclusion of our website address in this report is an inactive textual reference only.

 

3

 

 

PART I

 

Item 1. Business.

 

Corporate History and Background

 

The Company is engaged in the manufacturing and distribution of ready-to-drink and ready-to-blend frozen beverages, including smoothies, shakes and frappes. The current operation was established following a 2012 reverse merger into an inactive Delaware corporation, formed on February 25, 2010. We have two direct subsidiaries: Barfresh Corporation, Inc. (formerly known as Smoothie, Inc.) and Barfresh, Inc. Our corporate office is located at 3600 Wilshire Boulevard Suite 1720, Los Angeles, 90010. Our telephone number is (310) 598-7113 and our website is www.barfresh.com.

 

Business Overview

 

Barfresh is a leader in the creation, manufacturing and distribution of ready-to-drink and ready-to-blend frozen beverages. The current portfolio of products includes smoothies, shakes and frappes.

 

Some of the key benefits of the products for the end consumers that drink the products include:

 

  ● From as little as 125-130 calories (per serving)
     
  ● Real fruit in every smoothie
     
  ● Dairy free options
     
  ● Kosher approved
     
  ● Gluten Free

 

Products

 

Products are packaged in four distinct formats.

 

The Company’s ready-to-drink smoothie, “Twist & Go”™, has initially been focused towards the USDA national school meal program, including the School Breakfast Program, the National School Lunch Program and Smart Snacks in Schools Program. This sweet fruit and creamy yogurt smoothie contains four ounces of yogurt and a half-cup of fruit/fruit juice and comes in three different flavors: strawberry banana, peach, and mango pineapple. The product was originally launched in a bottled packaging format. The Company introduced Twist & Go™ cartons in 2022. Twist & Go™ contains no added sugars, preservatives, artificial flavors or colors. At only 125 -130 calories and with 5 grams of protein, it makes the perfect start to any day or on-the-go snack.

 

The Company’s bulk “Easy Pour” format, which contains all the ingredients necessary to make the beverage, is packaged in gallon containers in a concentrated formula that is mixed in beverage dispensing equipment 1:1 with water. The Company has a “no sugar added” version of the bulk “Easy Pour” format that is specifically targeted for the aforementioned USDA national school meal programs. In addition, the Company received approval from the United States Defense Logistics Agency (“DLA”) to sell its smoothie products into all branches of the U.S. Armed Forces and is currently in contract with and selling its bulk Easy Pour products into over one hundred military bases in the United States and abroad. Additionally, the Company offers WHIRLZ 100% Juice concentrate, which is sold at ambient temperatures and mixed in beverage dispensing equipment on a 5:1 ratio.

 

The Company’s single-serve format features portion controlled and ready-to-blend beverage ingredient packs or “beverage packs”. The beverage packs contain all the ingredients necessary to make the beverage, including the base (either sorbet, frozen yogurt, or ice cream), real fruit pieces, juices, and ice – five ounces of water are added before blending.

 

In 2024, the Company introduced its ready-to-eat juice pop, “Pop & Go” ™, with initial shipments in the fourth quarter of 2024. The product will initially be focused towards the National School Lunch and Smart Snacks in Schools Programs. Pop & Go ™ contains 4 oz of juice, no added sugars, preservatives or artificial flavors or colors, and comes in five flavors.

 

4

 

 

Distribution

 

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

 

Manufacturing

 

Barfresh utilizes contract manufacturers to manufacture all of its products in the United States.

 

Research and Development

 

The Company incurred approximately $132,000 and $115,000 in research and development expenses for the years ended December 31, 2024 and 2023, respectively.

 

Competition

 

There is significant competition in the smoothie market at both the institutional and consumer purchasing level.

 

The Company distributes products to institutional customers primarily through distributors to school districts. The Company has recently launched its Twist & Go ready-to-drink smoothie as well as a “no sugar added” version of the bulk “Easy Pour” format, WHIRLZ 100% Juice Concentrates, both of which are specifically targeted for the USDA national school meal program, including the School Breakfast Program, the National School Lunch Program, and Smart Snacks in Schools Program. At the institutional level, the Company competes with other food and beverage manufacturers, many of which have significantly greater financial resources and distribution reach.

 

The competition at the consumer level is primarily between specialized juice bars (e.g. Jamba Juice) and major fast casual and fast-food restaurant chains (such as McDonalds). Barfresh does not compete specifically at this level but intends to supply its product to customers that fall within these segments to enable them to compete for consumer demand. The Company believes that its single serve products afford a very significant competitive advantage based on ease of use, portion control, premium quality, and minimal capital investment required to enable a customer to begin to carry Barfresh beverage products. The Company also believes that its bulk “Easy Pour” product represents an attractive alternative delivery method for customers that serve high volume locations, where speed of service over extended periods is a critical requirement.

 

There may also be new entrants to the smoothie market that may alter the current competitor landscape.

 

Intellectual Property

 

Barfresh owns the domestic and international property rights to its products’ sealed pack of ingredients used in its single serve products. Patents in the United States and Australia are in effect through 2025.

 

Governmental Approval and Regulation

 

While the Company is not aware of the need for any governmental approvals to manufacture or distribute its products, manufacturing products which meet the criteria of the USDA’S national school meal program and USDLA is critical to the Company’s business plan.

 

The Company utilizes contract manufacturers. Before entering into any manufacturing contracts, the Company determines that the manufacturer meets all government requirements.

 

Environmental Laws

 

The Company does not believe that it is subject to any environmental laws, either state or federal. Compliance with any laws concerning manufacturing is the responsibility of the contract manufacturer.

 

Employees

 

As of March 24, 2025, the Company has 11 employees and 3 consultants.

 

5

 

 

Item 1A. Risk Factors

 

An investment in the Company’s securities involves significant risks, including the risks described below. The risks included below are not the only ones that the Company faces. Additional risks presently unknown to us or that we currently consider immaterial or unlikely to occur could also impair our operations. If any of the risks or uncertainties described below or any such additional risks and uncertainties actually occur, our business, prospects, financial condition or results of operations could be negatively affected.

 

Beginning in March 2020, the COVID-19 pandemic had a significant impact on the Company. Specifically, our business was impacted by dining bans targeted at restaurants to reduce the size of public gatherings. Such bans precluded our single-serve products from being served at those establishments and in some instances, resulted in abandoned product launches. Furthermore, many school districts closed regular attendance for a period of time thereby disrupting sales of product into that channel. In 2022 and 2023, we experienced supply chain interruptions and inflation for component and transportation costs. We believe that the impact of the pandemic has substantially abated, but will continue to monitor and assess developments.

 

Risks Related to Our Business

 

We have a history of operating losses.

 

We have a history of operating losses and may not achieve or sustain profitability. These operating losses have been generated while we market to potential customers. We cannot guarantee that we will become profitable. Even if we achieve profitability, given the competitive and evolving nature of the industry in which we operate, we may be unable to sustain or increase profitability and our failure to do so would adversely affect the Company’s business, including our ability to raise additional funds.

 

If we continue to suffer losses from operations, our working capital may be insufficient to support our ability to expand our business operations as rapidly as we would deem necessary at any time, unless we are able to obtain additional financing. There can be no assurance that we will be able to obtain such financing on acceptable terms, or at all. If adequate funds are not available or are not available on acceptable terms, we may not be able to pursue our business objectives and would be required to reduce our level of operations, including reducing infrastructure, promotions, sales and marketing programs, personnel and other operating expenses. These events could adversely affect our business, results of operations and financial condition. If adequate funds are not available or if they are not available on acceptable terms, our ability to fund the growth of our operations, take advantage of opportunities, develop products or services or otherwise respond to competitive pressures, could be significantly limited.

 

Issues with a manufacturer have resulted in significant losses, as well as other negative impacts.

 

As described more fully in Item 7, we experienced product quality issues with a contract manufacturer (the “Manufacturer”) that provided approximately 52% of our products in the year ended December 31, 2022. Complaints from customers led us to withdraw product from the market and destroy existing inventory.

 

In addition to the financial damage from the product withdrawal, we must obtain suitable replacement contract manufacturers and regain the confidence of our customers and investing public, all while seeking a resolution with the Manufacturer. These tasks have required substantial amounts of personnel and capital resources in 2023 and 2024, including production trial and other start-up costs, with ongoing activities expected in 2025.

 

We may need additional financing in the future, which may not be available when needed or may be costly and dilutive.

 

We may require additional financing to support our working capital needs in the future. The amount of additional capital we may require, the timing of our capital needs and the availability of financing to fund those needs will depend on a number of factors, including our strategic initiatives and operating plans, the performance of our business and the market conditions for debt or equity financing. Additionally, the amount of capital required will depend on our ability to meet our case sales goals and otherwise successfully execute our operating plan. We believe it is imperative to meet these sales objectives in order to lessen our reliance on external financing in the future. Although we believe various debt and equity financing alternatives will be available to us to support our working capital needs, financing arrangements on acceptable terms may not be available to us when needed. Additionally, these alternatives may require significant cash payments for interest and other costs or could be highly dilutive to our existing shareholders. Any such financing alternatives may not provide us with sufficient funds to meet our long-term capital requirements. If necessary, we may explore strategic transactions that we consider to be in the best interest of the Company and our shareholders, which may include, without limitation, public or private offerings of debt or equity securities, and other strategic alternatives; however, these options may not ultimately be available or feasible.

 

6

 

 

A worsening of economic conditions or a decrease in consumer spending may adversely impact our ability to implement our business strategy.

 

Our success depends largely on government funding of school nutrition programs, which is influenced by government policy, and to a lesser extent on discretionary consumer spending, which is influenced by general economic conditions and the availability of discretionary income. There is no certainty regarding economic conditions in the United States, and credit and financial markets and confidence in economic conditions could deteriorate at any time. Accordingly, we may experience declines in revenue during economic turmoil or during periods of uncertainty including uncertainty resulting from war, terrorism or contagious disease.

 

The challenges of competing with the many food services businesses may result in reductions in our revenue and operating margins.

 

We compete with many well-established companies, food service and otherwise, on the basis of taste, quality and price of product offered, customer service, and overall experience. Our success depends, in part, upon the popularity of our products and our ability to develop new menu items that appeal to consumers across all four day parts. Shifts in consumer preferences away from our products, our inability to develop new menu items that appeal to consumers across all day parts, or changes in our menu that eliminate items popular with some consumers could harm our business. We compete primarily with other food manufacturers that participate in the K-12 market. Many of our competitors or potential competitors have substantially greater financial and other resources than we do, which may allow them to react to changes in the market quicker than we can. In addition, aggressive pricing by our competitors or the entrance of new competitors into our markets, could reduce our revenue and operating margins. We also compete with other employers in our markets for workers and may become subject to higher labor costs as a result of such competition.

 

It is difficult to predict the timing and amount of our sales because our distributors and national accounts may not be required to place minimum orders with us.

 

Our distributors are not required to place minimum monthly or annual orders for our products. Accordingly, we cannot predict the timing or quantity of purchases by any of our independent distributors or whether any of our distributors will continue to purchase products from us in the same frequencies and volumes as they may have done in the past. Additionally, our larger distributors and partners may make orders that are larger than we have historically been required to fill. Shortages in inventory levels, supply of raw materials or other key supplies could negatively affect us.

 

Disruption within our supply chain, contract manufacturing or distribution channels could have an adverse effect on our business, financial condition and results of operations.

 

Our ability, through our suppliers, business partners, contract manufacturers, independent distributors and retailers, to produce, transport, distribute and sell products is critical to our success.

 

Damage or disruption to our suppliers or to manufacturing or distribution capabilities due to weather, natural disaster, fire or explosion, terrorism, pandemics such as COVD-19 and influenza, labor strikes or other reasons, could impair the manufacture, distribution and sale of our products. Many of these events are outside of our control. Failure to take adequate steps to protect against or mitigate the likelihood or potential impact of such events, or to effectively manage such events if they occur, could adversely affect our business, financial condition and results of operations.

 

7

 

 

Our experience with the Manufacturer demonstrates how our reliance on a limited number of manufacturers and suppliers further increases this risk. Most of our suppliers and manufacturers produce similar products for other companies, and our products may represent a small portion of their businesses. Further, it takes a newly engaged manufacturer typically up to nine months of retrofitting/ preparation before it can begin producing our products. In 2023 and 2024 we did not have contracts in place to produce sufficient units to meet projected demand. If one of our manufacturers fails to perform, we would be faced with a significant interruption in our supply chain. If one of our manufacturers or suppliers fails to perform or deliver products, for any reason, our sales and results of operations could be adversely affected. Furthermore, if we are unable to meet our customers’ demands due to a disruption in our supply chain, we may lose that customer which could adversely affect our business, financial condition and results of operations.

 

Our dependence on independent contract manufacturers could make management of our manufacturing and distribution efforts inefficient or unprofitable.

 

We are expected to arrange for our contract manufacturing needs sufficiently in advance of anticipated requirements, which is customary in the contract manufacturing industry for comparably sized companies. Based on the cost structure and forecasted demand for the particular geographic area where our contract manufacturers are located, we continually evaluate which of our contract manufacturers to use. To the extent demand for our products exceeds available inventory or the production capacity of our contract manufacturing arrangements, or orders are not submitted on a timely basis, we will be unable to fulfill distributor orders on demand. Conversely, we may produce more product inventory than warranted by the actual demand for it, resulting in higher storage costs and the potential risk of inventory spoilage. Our failure to accurately predict and manage our contract manufacturing requirements and our inventory levels may impair relationships with our independent distributors and key accounts, which, in turn, would likely have a material adverse effect on our ability to maintain effective relationships with those distributors and key accounts. At present, we must replace the Manufacturer with one or more new contract manufacturers and/or arrange for increased production from our existing contract manufacturers, all of which require several months to implement.

 

If we do not adequately manage our inventory levels, our operating results could be adversely affected.

 

We need to maintain adequate inventory levels to be able to deliver products to distributors on a timely basis. Our inventory supply depends on our ability to correctly estimate demand for our products. Our ability to estimate demand for our products is imprecise, particularly for new products, seasonal promotions and new markets. If we materially underestimate demand for our products or are unable to maintain sufficient inventory, we might not be able to satisfy demand on a short-term basis. If we overestimate distributor or retailer demand for our products, we may end up with too much inventory, resulting in increased working capital requirements, higher storage costs, increased trade spending and the risk of inventory spoilage. If we fail to manage our inventory to meet demand, we could damage our relationships with our distributors and retailers and could delay or lose sales opportunities, which would unfavorably impact our future sales and adversely affect our operating results. In addition, if the inventory of our products held by our distributors and retailers is too high, they will not place orders for additional products, which would also unfavorably impact our sales and adversely affect our operating results.

 

Increases in costs of packaging, ingredients and contract manufacturing tolling fees may have an adverse impact on our gross margin.

 

Packaging costs such as paper and aluminum cans have experienced industry-wide price increases in the past and there is always the risk that the Company’s contract manufacturers increase their toll rates based on increases in their fixed and variable costs. If the Company is unable to pass on these costs, the gross margin will be significantly impacted.

 

Fluctuations in various food and supply costs, particularly fruit and dairy, could adversely affect our operating results.

 

Supplies and prices of the various ingredients that we are going to use can be affected by a variety of factors, such as weather, seasonal fluctuations, demand, politics and economics in the producing countries.

 

These factors subject us to shortages or interruptions in product supplies, which could adversely affect our revenue and profits. In addition, the prices of fruit and dairy, which are the main ingredients in our products, can be highly volatile. The fruit of the quality we seek tends to trade on a negotiated basis, depending on supply and demand at the time of the purchase. An increase in pricing of any fruit that we are going to use in our products could have a significant adverse effect on our profitability. We cannot assure you that we will be able to secure our fruit supply.

 

8

 

 

As an increasing portion of our sales is coming from school districts, our business is becoming more seasonal, which presents certain challenges with respect to cash flow.

 

With sales to school districts representing an increasing percentage of our total sales, we require a significant amount of working capital to fund the production of inventory during the third calendar quarter. Revenues from sales to school districts generally are reflected in our first quarter and third quarter results. We continue efforts to have less fluctuation with respect to working capital – for example by developing a frozen juice pop product which we expect to be more popular during warmer months of the year – but such efforts require time to be accepted in the marketplace.

 

Our business depends substantially on the continuing efforts of our senior management and other key personnel, and our business may be severely disrupted if we lose their services.

 

Our future success heavily depends on the continued service of our senior management and other key employees. If one or more of our senior executives is unable or unwilling to continue to work for us in his or her present position, we may have to spend a considerable amount of time and resources searching, recruiting, and integrating a replacement into our operations, which would substantially divert management’s attention from our business and severely disrupt our business. This may also adversely affect our ability to execute our business strategy.

 

We may be unable to attract and retain qualified, experienced, highly skilled personnel, which could adversely affect the implementation of our business plan.

 

Our success depends to a significant degree upon our ability to attract, retain and motivate skilled and qualified personnel. As we become a more mature company in the future, we may find recruiting and retention efforts more challenging. If we do not succeed in attracting, hiring and integrating excellent personnel, or retaining and motivating existing personnel, we may be unable to grow effectively. Our inability to attract highly skilled personnel with sufficient experience in our industries could harm our business.

 

Product liability exposure may expose us to significant liability.

 

We may face an inherent business risk of exposure to product liability and other claims and lawsuits in the event that the development or use of our technology or prospective products is alleged to have resulted in adverse effects. We may not be able to avoid significant liability exposure. Although we believe our insurance coverage to be adequate, we may not have sufficient insurance coverage, and we may not be able to obtain sufficient coverage at a reasonable cost. An inability to obtain product liability insurance at acceptable cost or to otherwise protect against potential product liability claims could prevent or inhibit the commercialization of our products. A product liability claim could hurt our financial performance. Even if we ultimately avoid financial liability for this type of exposure, we may incur significant costs in defending ourselves that could hurt our financial performance and condition.

 

Litigation or legal proceedings could expose us to significant liabilities and damage our reputation.

 

We may become party to litigation claims and legal proceedings. Litigation involves significant risks, uncertainties and costs, including distraction of management attention away from our business operations. We evaluate litigation claims and legal proceedings to assess the likelihood of unfavorable outcomes and to estimate, if possible, the amount of potential losses. Based on these assessments and estimates, we establish reserves and disclose the relevant litigation claims or legal proceedings, as appropriate. These assessments and estimates are based on the information available to management at the time and involve a significant amount of management judgment. Actual outcomes or losses may differ materially from those envisioned by our current assessments and estimates. Our policies and procedures require strict compliance by our employees and agents with all U.S. and local laws and regulations applicable to our business operations, including those prohibiting improper payments to government officials. Nonetheless, our policies and procedures may not ensure full compliance by our employees and agents with all applicable legal requirements. Improper conduct by our employees or agents could damage our reputation or lead to litigation or legal proceedings that could result in civil or criminal penalties, including substantial monetary fines, as well as disgorgement of profits.

 

9

 

 

Our litigation with the Manufacturer was voluntarily withdrawn from the court system in January 2023 and refiled in August 2023, as we were unable to reach a suitable resolution. While we believe that that our claims have merit, there is no assurance of a favorable outcome to this case. In 2024, we obtained litigation financing to pursue our claims without risk to our financial position or operating results.

 

Our inability to protect our intellectual property rights may force us to incur unanticipated costs.

 

Our success may depend, in part, on our ability to obtain and maintain protection in the United States and internationally for certain intellectual property incorporated into our products. Our intellectual property rights may be challenged, narrowed, invalidated or circumvented, which could limit our ability to prevent competitors from marketing similar solutions that limit the effectiveness of our patent protection and force us to incur unanticipated costs. In addition, existing laws of some countries in which we may provide services or solutions may offer only limited protection of our intellectual property rights.

 

Our products may infringe the intellectual property rights of third parties, and third parties may infringe our proprietary rights, either of which may result in lawsuits, distraction of management and the impairment of our business.

 

As the number of patents, copyrights, trademarks and other intellectual property rights in our industry increases, products based on our technology may increasingly become the subject of infringement claims. Third parties could assert infringement claims against us in the future. Infringement claims with or without merit could be time consuming, result in costly litigation, cause product shipment delays or require us to enter into royalty or licensing agreements. Royalty or licensing agreements, if required, might not be available on terms acceptable to us, or at all. We may initiate claims or litigation against third parties for infringement of our proprietary rights or to establish the validity of our proprietary rights. Litigation to determine the validity of any claims, whether or not the litigation is resolved in our favor, could result in significant expense to us and divert the efforts of our technical and management personnel from productive tasks. If there is an adverse ruling against us in any litigation, we may be required to pay substantial damages, discontinue the use and sale of infringing products and expend significant resources to develop non-infringing technology or obtain licenses to infringing technology. Our failure to develop or license a substitute technology could prevent us from selling our products.

 

We will continue to incur increased costs as a result of operating as a public company, and our management will be required to devote substantial time to compliance initiatives and corporate governance practices.

 

As a public company, we will continue to incur significant legal, accounting and other expenses. The Sarbanes-Oxley Act of 2002, the Dodd-Frank Wall Street Reform and Consumer Protection Act and other applicable securities rules and regulations impose various requirements on public companies, including establishment and maintenance of effective disclosure and financial controls and corporate governance practices. Our management and other personnel will need to continue to devote a substantial amount of time to these compliance initiatives. Moreover, these rules and regulations will increase our legal and financial compliance costs and make some activities more time-consuming and costly.

 

We cannot predict or estimate the amount of additional costs we may incur to continue to operate as a public company, nor can we predict the timing of such costs. These rules and regulations are often subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies which could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices.

 

10

 

 

Failure to maintain effective disclosure controls and procedures and internal control over financial reporting could result in material misstatements in our financial statements and a failure to meet our reporting and financial obligations, each of which could have a material adverse effect on our financial condition and the trading price of our common stock.

 

Our management is responsible for establishing and maintaining effective internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act of 2002, as amended. Internal control over financial reporting is a process to provide reasonable assurance regarding the reliability of financial reporting for external purposes in accordance with generally accepted accounting principles in the United States (“GAAP”). Because of its inherent limitations, internal control over financial reporting is not intended to provide absolute assurance that we would prevent or detect a misstatement of our financial statements or fraud. Any failure to maintain an effective system of internal control over financial reporting could limit our ability to report our financial results accurately and timely or to detect and prevent fraud. The identification of a material weakness could indicate a lack of controls adequate to generate accurate financial statements that, in turn, could cause a loss of investor confidence and a decline in the market price of our common stock. We cannot assure you that we will be able to timely remediate any material weaknesses that may be identified in future periods or maintain all of the controls necessary for continued compliance. Likewise, we cannot assure you that we will be able to retain sufficient skilled finance and accounting personnel, especially in light of the increased demand for such personnel among publicly traded companies.

 

Failure to comply with the United States Foreign Corrupt Practices Act could subject us to penalties and other adverse consequences.

 

As a Delaware corporation, we are subject to the United States Foreign Corrupt Practices Act, which generally prohibits United States companies from engaging in bribery or other prohibited payments to foreign officials for the purpose of obtaining or retaining business. Some foreign companies, including some that may compete with our Company, may not be subject to these prohibitions. Corruption, extortion, bribery, pay-offs, theft and other fraudulent practices may occur from time to time in countries in which we conduct our business. However, our employees or other agents may engage in conduct for which we might be held responsible. If our employees or other agents are found to have engaged in such practices, we could suffer severe penalties and other consequences that may have a material adverse effect on our business, financial condition and results of operations.

 

Our use of information technology and third-party service providers exposes us to cybersecurity breaches and other business disruptions.

 

We use information technology and third-party service providers to support our business processes and activities, including supporting critical business operations such as manufacturing and distribution; communicating with our suppliers, customers and employees; maintaining effective accounting processes and financial and disclosure controls; executing corporate transactions; conducting research and development activities; and meeting regulatory, legal and tax requirements. Shared service centers managed by third parties provide an increasing number of services important to conduct our business, including accounting, internal control, human resources and computing functions.

 

Continuity of business applications and services has been, and may in the future be, disrupted by events such as infection by viruses or malware; other cybersecurity attacks; issues with or errors in systems’ maintenance or security; power outages; hardware or software failures; denial of service attacks; telecommunication failures; natural disasters; terrorist attacks; and other catastrophic occurrences. Our use of new and emerging technologies such as cloud-based services and mobile applications continues to evolve, presenting new and additional risks in managing access to our data, relying on third parties to manage and safeguard data, ensuring access to our systems and availability of third-party systems. In addition, we are experiencing new and more frequent attempts by third parties to gain access to our systems, such as through increased email phishing of our workforce

 

We leverage third parties for various technology and business services who may experience cybersecurity breaches, whether from circumvention of security systems, denial-of-service attacks or other cyberattacks such as hacking, phishing attacks, computer viruses, ransomware or malware, cyber extortion, employee or insider error, malfeasance, social engineering, physical breaches or other actions or attempts to exploit vulnerabilities may cause confidential information or Personally Identifiable Information belonging to us or our employees, customers, consumers, partners, suppliers, or governmental or regulatory authorities to be misused or breached. These risks could be magnified since the number of employees, contractors and others working outside of offices increased since the COVID-19 pandemic. Additionally, continued geopolitical turmoil, including the ongoing wars in Ukraine and Israel, has heightened the risk of cyberattacks. When risks such as these materialize, the need for us to coordinate with various third-party service providers and for third-party service providers to coordinate amongst themselves might increase challenges and costs to resolve related issues. Our information security program includes capabilities designed to evaluate and mitigate cyber risks arising from third-party service providers. Cyber threats to externally hosted technology and business services are beyond our control. Additionally, new initiatives, such as those related to digital commerce and direct sales, that increase the amount of confidential information that we process and maintain increase our potential exposure to a cybersecurity breach. Furthermore, the rapid evolution and increased adoption of artificial intelligence technologies may intensify our cybersecurity risks. If our controls, disaster recovery and business continuity plans or those of our third-party providers do not effectively respond to or resolve the issues related to any such disruptions in a timely manner, our product sales, financial condition, results of operations and stock price may be materially and adversely affected, and we might experience delays in reporting our financial results, loss of intellectual property and damage to our reputation or brands.

 

11

 

 

Risks Related to Ownership of Our Common Stock

 

If we are unable to adequately fund our operations, we may be forced to voluntarily file for deregistration of our common stock with the SEC.

 

Compliance with the periodic reporting requirements required by the SEC consumes a considerable amount of both internal, as well external, resources and represents a significant cost for us. If we are unable to continue to devote adequate funding and the resources needed to maintain such compliance, while continuing our operations, we could be forced to deregister with the SEC. After the deregistration process, our common stock would only be tradable on the “Pink Sheets” and could suffer a decrease in or absence of liquidity.

 

We may not be able to continue to comply with Nasdaq listing standards.

 

Nasdaq Listing Rule 5550 requires companies that list on The Nasdaq Stock Market to maintain certain financial metrics. In May 2023, we received a letter from Nasdaq indicating that we were not in compliance with Nasdaq Listing Rule 5550(b), which requires companies listed on The Nasdaq Stock Market with a history of losses to maintain either a minimum market value of listed securities of $35,000,000 or a minimum of $2,500,000 in stockholders’ equity. While we regained compliance with this Rule in 2023, our stockholders’ equity at December 31, 2024 was only $578,000. We have instead maintained compliance based on the $35,000,000 minimum market value requirement. Unless and until we are able to achieve and maintain annual net income from continuing operations of $500,000, fluctuations in the market value of our listed securities may cause us to fail to meet Nasdaq listing standards and result in our common stock only being tradable in the over-the-counter markets.

 

If securities or industry analysts do not publish research, or publish inaccurate or unfavorable research, about our business, our share price and trading volume could decline.

 

The trading market for our common stock may be impacted, in part, by research and reports that securities or industry analysts publish about our business or us. There can be no assurance that analysts will cover us, continue to cover us or provide favorable coverage. If one or more analysts downgrade our stock or change their opinion of our stock, our share price may decline. In addition, if one or more analysts cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which could cause our share price or trading volume to decline.

 

Because we became public by means of a “reverse merger”, we may not be able to attract the attention of major brokerage firms.

 

Additional risks may exist since we became public through a “reverse merger”. Securities analysts of major brokerage firms may not provide coverage of us since there is little incentive to brokerage firms to recommend the purchase of our common stock. We cannot assure you that brokerage firms will want to conduct any secondary offerings on behalf of our Company in the future.

 

Future sales of our common stock in the public market could lower the price of our common stock and impair our ability to raise funds in future securities offerings.

 

Future sales of a substantial number of shares of our common stock in the public market, or the perception that such sales may occur, could adversely affect the then prevailing market price of our common stock and could make it more difficult for us to raise funds in the future through a public offering of our securities.

 

12

 

 

Our common stock is subject to price volatility unrelated to our operations.

 

The market price of our common stock could fluctuate substantially due to a variety of factors, including market perception of our ability to achieve our planned growth, quarterly operating results of other companies in the same industry, trading volume in our common stock, changes in general conditions in the economy and the financial markets or other developments affecting the Company’s competitors or the Company itself.

 

Because we do not intend to pay dividends, shareholders will benefit from an investment in our common stock only if it appreciates in value.

 

We have never declared or paid any cash dividends on our preferred stock or common stock. For the foreseeable future, it is expected that earnings, if any, generated from our operations will be used to finance the growth of our business, and that no dividends will be paid to holders of the Company’s common stock. As a result, the success of an investment in our common stock will depend upon any future appreciation in its value. There can be no guarantee that our common stock will appreciate in value.

 

The price of our common stock may become volatile, which could lead to losses by investors and costly securities litigation.

 

The trading price of our common stock is likely to be highly volatile and could fluctuate in response to factors such as:

 

  ● actual or anticipated variations in our operating results;
     
  ● announcements of developments by us or our competitors;
     
  ● announcements by us or our competitors of significant acquisitions, strategic partnerships, joint ventures or capital commitments;
     
  ● adoption of new accounting standards affecting our industry;
     
  ● additions or departures of key personnel;
     
  ● introduction of new products by us or our competitors;
     
  ● sales of our common stock or other securities in the open market; and
     
  ● other events or factors, many of which are beyond our control.

 

The stock market is subject to significant price and volume fluctuations. In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been initiated against such a company. Litigation initiated against us, whether or not successful, could result in substantial costs and diversion of our management’s attention and Company resources, which could harm our business and financial condition.

 

Investors may experience dilution of their ownership interests because of future issuances of additional shares of our common stock.

 

We may be required to seek financing through the issuance of equity or convertible securities to fund our operations. We may also issue additional shares of our common stock or other securities that are convertible into or exercisable for our common stock in connection with hiring or retaining employees, future acquisitions or for other business purposes. The future issuance of any such additional shares of common stock will result in dilution to our shareholders and may create downward pressure on the trading price of our common stock.

 

13

 

 

Provisions in our Company charter documents and under Delaware law could make an acquisition of our company, which may be beneficial to our stockholders, more difficult and may prevent attempts by our stockholders to replace or remove our current management.

 

Provisions in our certificate of incorporation and our bylaws may discourage, delay or prevent a merger, acquisition or other change in control of our Company that stockholders may consider favorable, including transactions in which they might otherwise receive a premium for their shares. These provisions could also limit the price that investors might be willing to pay in the future for shares of our common stock, thereby depressing the market price of our common stock. In addition, because our board of directors is responsible for appointing the members of our management team, these provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors. In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which prohibits a person who owns in excess of 15% of our outstanding voting stock from merging or combining with us for a period of three years after the date of the transaction in which the person acquired in excess of 15% of our outstanding voting stock, unless the merger or combination is approved in a prescribed manner.

 

Our board of directors controls the majority of the outstanding shares of voting stock.

 

At present, members of our board of directors and/or their affiliated entities control over 50% of the outstanding shares of voting stock, and therefore have the power to control all matters requiring the approval of our stockholders, including the election of directors and the approval of mergers and other significant corporate transactions.

 

Item 1B. Unresolved Staff Comments.

 

Not applicable.

 

Item 1C. Cybersecurity.

 

We are committed to our goal to protect sensitive business-related and personal information, as well as our information systems. Although the size and scope of our operations is limited compared to larger global operations, we are subject to numerous and evolving cybersecurity risks that could adversely and materially affect our business, financial condition and results of operations. In that regard, we have increased our investment in information systems by upgrading outsourced services and technology platforms previously utilized.

 

Our Management Leadership Team, with oversight from the Board of Directors, has implemented a comprehensive cybersecurity program, including incident response process, aligned with the National Institute of Standards and Technology (NIST) Cybersecurity Framework and NIST Computer Security Incident Handling Guide (NIST SP 800-61) to assess, identify, address and manage risks from cybersecurity threats that may result in material adverse effects on the confidentiality, integrity and availability of our business and information systems.

 

Our Chief Financial Officer has operational responsibility for oversight of our outsourced information technology services, our information security programs, protections, and efforts, along with leading efforts for implementing, monitoring, and maintaining cybersecurity and data security strategy, policy, standards, architecture, and practices across our business. We anticipate that our outsourced services will update the Chief Financial Officer and Chief Executive Officer on these matters and work closely with these Senior Executives to oversee compliance with legal, regulatory, and contractual security requirements with the guidance of outside counsel.

 

Our Board, in coordination with the Audit Committee, will oversee the Company’s enterprise risks arising from cybersecurity threats and will periodically review the measures we have implemented to identify and mitigate data protection and cybersecurity risks. We have a Cybersecurity Incident Response Plan (“CSIRP”) to provide the organizational and operational structure, processes, and procedures for investigating, containing, documenting and mitigating cybersecurity incidents. We have implemented a risk-based approach to identifying, preventing and mitigating cybersecurity threats and incidents, while also implementing controls and procedures that provide for the prompt escalation of certain cybersecurity incidents so that decisions regarding the public disclosure and reporting of such incidents can be made by management in a timely manner.

 

14

 

 

We also rely on information technology and third-party vendors to support our operations, including our secure processing of personal, confidential, sensitive, proprietary and other types of information. Despite ongoing efforts to continuously improve our and our vendors’ ability to protect against cyber incidents, we may not be able to protect all information systems, and such incidents may lead to reputational harm, revenue and customer loss, legal actions, statutory penalties, among other consequences. While we have not experienced any material cybersecurity threats or incidents in recent years, there can be no guarantee that we will not be the subject of future threats or incidents. Additional information on cybersecurity risks we face can be found in Item 1A, Risk Factors, which should be read in conjunction with the foregoing information.

 

Item 2. Properties.

 

Our principal executive offices are located at 3600 Wilshire Boulevard Suite 1720, Los Angeles, 90010. Beginning in April 2019, we leased this office space pursuant to a direct lease for approximately $80,000 annually through March 31, 2023. The Company extended its lease multiple times, most recently through March 2025, while management evaluates options for renewal or relocation.

 

Item 3. Legal Proceedings

 

As described in Note 6, the Company has an on-going dispute with the Manufacturer, the outcome of which cannot be predicted at this time.

 

From time to time, various lawsuits and legal proceedings may arise in the ordinary course of business. However, litigation is subject to inherent uncertainties and an adverse result in these, or other matters may arise from time to time that may harm our business. We are currently the defendant in one legal proceeding for an amount less than $100,000. Our legal counsel and management believe a material unfavorable outcome to be remote.

 

Item 4. Mine Safety Disclosures.

 

Not applicable.

 

PART II

 

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

 

Market Information

 

Our common stock is currently traded on the Nasdaq’s Capital Market under the symbol “BRFH”. Our common stock had been quoted on the Nasdaq’s Capital Market since January 20, 2022.

 

Holders

 

On March 24, 2025, there were 15,810,080 shares of our common stock outstanding. Our shares of common stock are held by 85 stockholders of record. The number of record holders was determined from the records of our transfer agent and does not include beneficial owners of common stock whose shares are held in the names of various security brokers, dealers and registered clearing agencies.

 

Recent Sales of Unregistered Securities

 

None.

 

Purchases of Equity Securities by the Company

 

There were no purchases of equity securities made by the Company in the period covered by this report.

 

15

 

 

Securities Authorized for Issuance Under Equity Compensation Plans

 

For equity compensation plan information, refer to Item 12. Security Ownership of Certain Beneficial Owners and Related Stockholder Matters of this Annual Report on Form 10-K.

 

Transfer Agent

 

Our transfer agent, Securities Transfer Corporation, is located at 2901 N. Dallas Parkway, Suite 380, Plano, Texas 75093, and its telephone number is (469) 633-0101.

 

Item 6. [Reserved]

 

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

The information and financial data discussed below is derived from the audited financial statements of Barfresh for its fiscal years ended December 31, 2024 and 2023. The financial statements of Barfresh were prepared and presented in accordance with generally accepted accounting principles in the United States. The information and financial data discussed below is only a summary and should be read in conjunction with the historical financial statements and related notes of Barfresh contained elsewhere in this Annual Report. This discussion and analysis may contain forward-looking statements based on assumptions about our future business. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors. See “Cautionary Note Regarding Forward Looking Statements” above for a discussion of forward-looking statements and the significance of such statements in the context of this Annual Report.

 

Overview

 

The Company’s products are packaged in four distinct formats.

 

The Company’s ready-to-drink smoothie, Twist & Go™, has initially been focused towards the USDA national school meal program, including the School Breakfast Program, the National School Lunch Program and Smart Snacks in Schools Program. This sweet fruit and creamy yogurt smoothie contains four ounces of yogurt and a half-cup of fruit/fruit juice and comes in three different flavors: strawberry banana, peach, and mango pineapple. “Twist & Go”™ contains no added sugars, preservatives, artificial flavors or colors. At only 125 -130 calories and with 5 grams of protein, it makes the perfect start to any day or on-the-go snack.

 

The Company’s bulk “Easy Pour” format, which contains all the ingredients necessary to make the beverage, is packaged in gallon containers in a concentrated formula that is mixed 1:1 with water. The Company has a “no sugar added” version of the bulk “Easy Pour” format that is specifically targeted for the aforementioned USDA national school meal programs. In addition, the Company received approval from the United States Defense Logistics Agency (“DLA”) to sell its smoothie products into all branches of the U.S. Armed Forces and is currently in contract with and selling its bulk Easy Pour products into over one hundred military bases in the United States and abroad.

 

The Company’s single-serve format features portion controlled and ready-to-blend beverage ingredient packs or “beverage packs”. The beverage packs contain all the ingredients necessary to make the beverage, including the base (either sorbet, frozen yogurt, or ice cream), real fruit pieces, juices, and ice – five ounces of water are added before blending.

 

Domestic and international patents are owned by Barfresh, as well as related trademarks for all of the single serve products. Patent rights have been maintained in two jurisdictions including the United States. The patents expire in 2025.

 

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

 

Currently we have 10 employees and 3 consultants.

 

Barfresh utilizes contract manufacturers to manufacture all of the products in the United States.

 

16

 

 

Critical Accounting Policies

 

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

 

Revenue Recognition

 

Revenue Recognition

 

In accordance with ASC 606, Revenue from Contracts with Customers, revenue is recognized when a customer obtains ownership of promised goods. The amount of revenue recognized reflects the consideration to which the Company expects to be entitled to receive in exchange for these goods. The Company applies the following five steps:

 

  1) Identify the contract with a customer
     
    A contract with a customer exists when (i) the Company enters into an enforceable contract with a customer that defines each party’s rights, (ii) the contract has commercial substance and, (iii) the Company determines that collection of substantially all consideration for goods or services that are transferred is probable. For the Company, the contract is the approved sales order, which may also be supplemented by other agreements that formalize various terms and conditions with customers.

 

  2) Identify the performance obligation in the contract
     
    Performance obligations promised in a contract are identified based on the goods or services that will be transferred to the customer. For the Company, this consists of the delivery of frozen beverages, which provide immediate benefit to the customer.
     
  3) Determine the transaction price
     
    The transaction price is determined based on the consideration to which the Company will be entitled in exchange for transferring goods and is generally stated on the approved sales order. Variable consideration, which typically includes rebates or discounts, are estimated utilizing the most likely amount method. Provisions for refunds are generally provided for in the period the related sales are recorded, based on management’s assessment of historical and projected trends.

 

  4)

Allocate the transaction price to performance obligations in the contract

 

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

     
  5) Recognize revenue when or as the Company satisfies a performance obligation
     
   

The Company recognizes revenue from the sale of frozen beverages when title and risk of loss passes and the customer accepts the goods, which generally occurs at the time of delivery to a customer warehouse. Customer sales incentives such as volume-based rebates or discounts are treated as a reduction of sales at the time the sale is recognized. Shipping and handling costs are treated as fulfilment costs and presented in distribution, selling and administrative costs.

 

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

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

 

17

 

 

Stock-based Compensation

 

We account for share-based employee compensation plans under the fair value recognition and measurement provisions in accordance with applicable accounting standards, which require all share-based payments to employees, including grants of stock options and restricted stock units (RSUs) and performance stock units (PSUs), to be measured based on the grant date fair value of the awards, with the resulting expense generally recognized on a straight-line basis over the period during which the employee is required to perform service in exchange for the award. Expense for PSUs is recognized based on expected performance against targets.

 

Results of Operations

 

Revenue and cost of revenue

 

Revenue was $10,717,000 in 2024 compared to $8,127,000 in 2023, an increase of $2,590,000, or 32%. Our revenue in 2024 benefited from increased sales of our bottled Twist & Go smoothies due to improved availability resulting from inventory built over the months prior to the commencement of the school year, continued acceptance of Twist & Go smoothies provided in cartons, and improvements in bulk sales due to the reintroduction of our WHIRLZ 100% juice product in the fourth quarter of 2023.

 

Cost of revenue was $7,049,000 in 2024 compared to $5,243,000 in 2023, an increase of $1,806,000, or 34%. Cost of revenue increased at a slightly higher rate compared to revenue due to $283,000 in cost incurred to relocate our single-serve smoothie pouch production line.

 

Our gross profit was $3,668,000 (34%) and $2,884,000 (36%) for 2024 and 2023, respectively. Excluding production relocation costs, our gross profit was $3,951,000 in 2024 (37%). The improvement in gross margin is a result of favorable product mix, pricing actions, and a slight improvement in the cost of supply chain components.

 

Selling, marketing and distribution expense

 

   Year ended December 31,         
   2024   2023   Change   Percent 
Sales and marketing  $1,666,000   $1,336,000   $330,000    25%
Storage and outbound freight   1,473,000    1,278,000    195,000    15%
   $3,139,000   $2,614,000   $525,000    20%

 

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

 

Sales and marketing expense increased approximately $330,000 (25%) from approximately $1,336,000 in 2023 to $1,666,000 in 2024. The increase is a result of higher personnel costs, travel and broker commission due to expansion of the broker network.

 

Storage and outbound freight expense increased approximately $195,000 (15%) from $1,278,000 in 2023 to $1,473,000 in 2024, primarily because of the 32% increase in revenue over the same period, partially offset by freight efficiencies, and lower storage and inventory management cost in 2024.

 

18

 

 

General and administrative expense

 

   Year ended December 31,         
   2024   2023   Change   Percent 
Personnel costs  $1,250,000   $1,199,000   $51,000    4%
Stock based compensation   784,000    543,000    241,000    44%
Legal, professional and consulting fees   282,000    310,000    (28,000)   -9%
Research and development   132,000    115,000    17,000    15%
Other general and administrative expenses   595,000    519,000    76,000    15%
   $3,043,000   $2,686,000   $357,000    13%

 

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

 

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 $51,000 (4%) from $1,199,000 in 2023 to $1,250,000 in 2024. The increase in personnel cost resulted primarily from the non-recurring confirmation and recognition of our 2021 COVID-related tax credit in 2023, partially offset by a reduction in cash bonus expense.

 

Stock-based compensation increased by approximately $241,000 (44%) from $543,000 in 2023 to $784,000 in 2024. The increase is due to higher attainment under performance awards and the modification of expiring options issued to our board of directors to extend the term through December 2026.

 

Legal, professional and consulting fees decreased by approximately $28,000 (-9%). We reduced outside services and obtained non-recourse litigation financing to conserve working capital.

 

Research and development expense increased by approximately $17,000 (15%) from $115,000 in 2023 to $132,000 in 2024. Expense related to optimization of our carton format and the re-launch of our bulk concentrate products in 2023, and the launch of our Pop & Go product in 2024, as well as reformulations to meet specific market or manufacturing requirements.

 

Other general and administrative expenses increased approximately $76,000 (15%) from $519,000 in 2023 to $595,000 in 2024 primarily due to recruiting fees incurred to broaden the capabilities of our management team.

 

Interest expense

 

Interest expense was $52,000 in 2024 compared to $8,000 in 2023. The increase of $44,000 is a result of securing a receivables-based line of credit in 2024, as well as equipment and software financing.

 

Net loss

 

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

 

Liquidity and Capital Resources

 

From July 2023 to March 2024, we executed subscription agreements for substantially all of a $2,000,000 privately placed convertible debt offering. The debt was available to be drawn in 25% increments, maturing on the anniversary of the draw, bearing interest at 10% per annum for the term, regardless of earlier payment or conversion, and was mandatorily convertible as to principal and interest into shares of our common stock at any time prior to maturity at the greater of $1.20 or 85% of the volume-weighted average price of the common stock for the ten trading days immediately preceding the written notice of the conversion (the “Conversion Price”). If we had not exercised the mandatory conversion, the holder of the debt had the option after six months and on up to four occasions to convert all or any portion of the principal and interest into shares of our common stock at the Conversion Price. On October 23, 2023, we issued $1,390,000 of convertible notes pursuant to the subscription agreements, and immediately converted $1,207,000 of principal and interest into approximately 820,000 shares of common stock. Additionally, on December 19, 2023, we drew down $470,000 in convertible debt and converted a total of $653,000 of principal and $4,000 of accrued interest into 495,331 shares of common stock. Finally, on March 27 and 29, 2024, we drew down $136,000 in convertible debt and converted the total drawn into 124,208 shares, settling all debt.

 

19

 

 

During the year ended December 31, 2024, we used $2,229,000 in operations. Our net loss adjusted for non-cash operating expenses was a loss of $1,752,000, while changes in non-cash current assets and liabilities consumed $477,000 primarily because we invested in inventory for production trials and ramp, and our accounts payable decreased as we improved adherence with vendor terms.

 

As of December 31, 2024, we had working capital of $606,000 compared with $2,345,000 at December 31, 2023, both excluding disputed accounts payable of $499,000 resulting from our dispute with the Manufacturer. The decrease in working capital is primarily due to losses incurred in 2024, partially offset by borrowing under our receivables-based line of credit.

 

Our liquidity needs will depend on how quickly we are able to profitably ramp up sales, as well as our ability to control and reduce variable operating expenses, and to continue to control fixed overhead expense. Our current dispute with the Manufacturer and the resulting loss of product supply and legal expense have negatively impacted our financial position, results of operations and cash flow. While the introduction of our carton packaging format in 2023 has mitigated the loss of supply, the product offering has not been accepted by some customers or as a substitute for the bottle product in all use cases. We have contracted with a co-manufacturer for additional smoothie bottle manufacturing capacity. Expanded capacity became available in the fourth quarter of 2024, and we expect that capacity to increase and become more efficient in 2025, subject to the risks and uncertainties associated with production activities. Additionally, we have taken other measures to reduce our liquidity requirements, including compensating our directors and employees with equity to reduce cash compensation requirements, obtaining non-recourse litigation financing, securing receivables financing in the third quarter of 2024, and the sale of an aggregate of 1,052,793 shares of common stock to raise $3,000,000 in February 2025.

 

Our operations to date have been financed by the sale of securities, the issuance of convertible debt and the issuance of short-term debt. If we are unable to generate sufficient cash flow from operations with the capital raised we will be required to raise additional funds either in the form of equity or in the form of debt. There are no assurances that we will be able to generate the necessary capital to carry out our current plan of operations.

 

Off-Balance Sheet Arrangements

 

We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to stockholders.

 

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

 

Not applicable because we are a smaller reporting company.

 

Item 8. Financial Statements and Supplementary Data.

 

Our consolidated financial statements are included beginning immediately following the signature page to this report. See Item 15 for a list of the consolidated financial statements included herein.

 

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

 

None.

 

20

 

 

Item 9A. Controls and Procedures.

 

Management’s Annual Report on Internal Control over Financial Reporting

 

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 13a-15(e). Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of December 31, 2024.

 

Management’s Annual Report on Internal Control over Financial Reporting

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) under the Exchange Act, for the Company.

 

Internal control over financial reporting includes those policies and procedures that: (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of its management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

 

Our management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2024. The framework used by management in making that assessment was the criteria set forth in the document entitled “Internal Control – Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in 2013.

 

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 13a-15(e). Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of December 31, 2024.

 

This report shall not be deemed to be filed for purposes of Section 18 of the Exchange Act, or otherwise subject to the liabilities of that section, and is not incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing.

 

Changes in Internal Control over Financial Reporting

 

None

 

Item 9B. Other Information.

 

None

 

Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.

 

None

 

21

 

 

PART III

 

Item 10. Directors, Executive Officers and Corporate Governance.

 

Information required by this Item regarding our directors and executive officers, corporate governance, including our audit committee and code of ethics, and compliance with Section 16(a) of the Exchange Act is incorporated by reference to our proxy statement to be filed with the SEC in connection with our 2024 Annual Meeting of Stockholders (the “Proxy Statement”).

 

Item 11. Executive Compensation.

 

Information required by this Item regarding executive compensation is incorporated by reference to our Proxy Statement.

 

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

 

Information required by this Item regarding executive compensation is incorporated by reference to our Proxy Statement.

 

Information required by this item regarding securities authorized for issuance under our equity compensation plans is incorporated by reference to the information set forth under the caption “Executive Compensation” in our Proxy Statement.

 

Item 13. Certain Relationships and Related Transactions, and Director Independence.

 

Information required by this Item regarding executive compensation is incorporated by reference to our Proxy Statement.

 

Item 14. Principal Accounting Fees and Services.

 

Information required by this Item regarding executive compensation is incorporated by reference to our Proxy Statement.

 

PART IV

 

Item 15. Exhibits and Financial Statements.

 

(a) 1. Financial Statements

 

See Index to Financial Statements in Item 8 of this Annual Report on Form 10-K, which is incorporated herein by reference.

 

2. Financial Statement Schedules

 

All other financial statement schedules have been omitted because they are either not applicable or the required information is shown in the financial statements or notes thereto.

 

3. Exhibits

 

See the Exhibit Index, which follows the signature page of this Annual Report on Form 10-K, which is incorporated herein by reference.

 

(b) Exhibits

 

See Item 15(a) (3) above.

 

(c) Financial Statement Schedules

 

See Item 15(a) (2) above.

 

Item 16. Form 10-K Summary.

 

None.

 

22

 

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) 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: March 27, 2025 By: /s/ Riccardo Delle Coste
    Riccardo Delle Coste
    Chief Executive Officer
    (Principal Executive Officer)

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

Signature   Capacity   Date
         
/s/ Riccardo Delle Coste   Chief Executive Officer and Director   March 27, 2025
Riccardo Delle Coste   (Principal Executive Officer    
         
/s/ Lisa Roger   Chief Financial Officer   March 27, 2025
Lisa Roger   (Principal Financial Officer)    
         
/s/ Steven Lang   Director   March 27, 2025
Steven Lang        
         
/s/ Joseph M. Cugine   Director   March 27, 2025
Joseph M. Cugine        
         
/s/ Isabelle Ortiz-Cochet   Director   March 27, 2025
Isabelle Ortiz-Cochet        
         
/s/ Alexander Ware   Director   March 27, 2025
Alexander Ware        
         
/s/ Justin Borus   Director   March 27, 2025
Justin Borus        

 

23

 

 

Exhibit Index

 

Exhibit
Number		   Description
     
3.1   Certificate of Incorporation of Moving Box Inc. dated February 25, 2010 (incorporated by reference to Exhibit 3.1 to Form S-1 (Registration No. 333-168738) as filed August 11, 2010)
     
3.2   Amended and Restated Bylaws of Barfresh Food Group Inc. (incorporated by reference to Exhibit 3.1 to Current Report on Form 8-K as filed August 4, 2014)
     
3.3   Certificate of Amendment of Certificate of Incorporation of Moving Box Inc. dated February 13, 2012 (incorporated by reference to Exhibit 3.1 to Current Report on Form 8-K as filed February 17, 2012)
     
3.4   Certificate of Amendment of Certificate of Incorporation of Smoothie Holdings Inc. dated February 16, 2012 (incorporated by reference to Exhibit 3.2 to Current Report on Form 8-K as filed February 17, 2012)
     
3.5   Certificate of Amendment of Certificate of Incorporation of Barfresh Food Group Inc. dated December 17, 2021 (incorporated by reference to Exhibit 3.1 to Current Report on Form 8-K as filed December 29, 2021)
     
3.6   Certificate of Amendment of Certificate of Incorporation of Barfresh Food Group Inc. dated August 1, 2022 (incorporated by reference to Exhibit 3.1 to Current Report on Form 8-K as filed August 2, 2022)
     
4.1   Description of Securities Registered Under Section 12 of the Securities Exchange Act of 1934, as amended (incorporated by reference to Exhibit 4.20 to Annual Report on Form 10-K for the year ended December 31, 2019, as filed April 13, 2020)
     
10.1   Barfresh Food Group, Inc. 2015 Equity Incentive Plan (incorporated by reference to Exhibit 10.10 to Annual Report Form 10-K filed July 7, 2015)+
     
10.2   Barfresh Food Group, Inc. First Amended and Restated 2023 Equity Incentive Plan (incorporated by reference to Exhibit 4.5 to Registration Statement on Form S-8 filed August 14, 2024)+
     
10.3   Executive Employment Agreement by and between Smoothie, Inc. and Riccardo Delle Coste dated April 27, 2015 (incorporated by reference to Exhibit 10.11 to Annual Report Form 10-K filed July 7, 2015)+
     
10.4  

Form of Securities Purchase Agreement together with form of Convertible Promissory Note (incorporated by reference to Exhibit 10.1 from the Quarterly Report on Form 10-Q filed October 26, 2023)

 

10.5   Barfresh Food Group Inc. 2024 Employee Stock Purchase Plan (incorporated by reference to Exhibit 4.9 to Registration Statement on Form S-8 filed August 14, 2024)+
     
10.6   Form of Securities Purchase Agreement (incorporated by reference to Exhibit 10.1 from the Current Report on Form 8-K filed February 6, 2025)
     
21.1   Subsidiaries (incorporated by reference to Exhibit 21.1 to Annual Report on Form 10-K for the year ended December 31, 2019, filed April 13, 2020)
     
23.2   Consent of Independent Registered Public Accounting Firm*
     
31.1   Rule 13a-14(a) Certification of Principal Executive Officer*
     
31.2   Rule 13a-14(a) Certification of Principal Financial Officer*
     
32.1   Certification Pursuant to 18 U.S.C. Section 1350*
     
32.2   Certification Pursuant to 18 U.S.C. Section 1350*
     
97.1   Compensation Recovery Policy (incorporated by reference to Exhibit 97.1 to Annual Report on Form 10-K for the year ended December 31, 2023, filed March 22, 2024)
     
101.INS   Inline XBRL Instance.
101.XSD   Inline XBRL Schema.
101.PRE   Inline XBRL Presentation.
101.CAL   Inline XBRL Calculation.
101.DEF   Inline XBRL Definition.
101.LAB   Inline XBRL Label.
104   Cover Page Interactive Data File (embedded within the Inline XBRL document)

 

*   Filed herewith
+   Compensatory plan

 

In accordance with SEC Release 33-8238, Exhibit 32.1 is being furnished and not filed.

 

Furnished herewith. 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.

 

24

 

 

Barfresh Food Group Inc.

 

Index to Consolidated Financial Statements

 

    Page
Report of Independent Registered Public Accounting Firm (Eide Bailly LLP, Denver, Colorado, PCAOB ID 286)   F-2
     
Consolidated Balance Sheets as of December 31, 2024 and 2023   F-3
     
Consolidated Statements of Operations for the Years Ended December 31, 2024 and 2023   F-4
     
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2024 and 2023   F-5
     
Consolidated Statements of Cash Flows for the Years Ended December 31, 2024 and 2023   F-6
     
Notes to Consolidated Financial Statements   F-7

 

F-1

 

 

Report of Independent Registered Public Accounting Firm

 

To the Board of Directors and Stockholders

Barfresh Food Group, Inc.

Los Angeles, California

 

Opinion on the Consolidated Financial Statements

 

We have audited the accompanying consolidated balance sheets of Barfresh Food Group, Inc. (the “Company”) as of December 31, 2024 and 2023, and the related consolidated statements of operations, stockholders’ equity, and cash flows for the years then ended, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Barfresh Food Group, Inc. as of December 31, 2024 and 2023, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

 

Basis for Opinion

 

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to Barfresh Food Group, Inc. in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Barfresh Food Group Inc. is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risk of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

Critical Audit Matter

 

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which they relate.

 

Valuation of Inventories

 

As discussed in Note 1 to the Company’s consolidated financial statements, adjustments are made to reduce the cost of inventory to its net realizable value for estimated excess or obsolete balances. The Company values its inventories at the lower of cost or net realizable value, with cost being determined using the first-in, first-out method. Management monitors inventory quantities on hand and records adjustments for estimated excess or obsolete items based on estimated future demand for product.

 

We identified the valuation of inventories as a critical audit matter. The principal considerations for our determination that performing procedures relating to valuation of inventories is a critical audit matter are related to the significant assumptions used by management when determining the future demand of the inventory. Auditing the significant assumptions involves especially challenging auditor judgment due to the nature and extent of audit evidence and effort required to address these matters.

 

The primary procedures we performed to address this critical audit matter included:

 

  ● Obtained management’s analysis and gained an understanding of management’s processes, controls and methodology to develop the estimate for excess and obsolete inventory.
  ● Evaluated the reasonableness of assumptions used by management in determining the estimated future demand for product, including examining the historical accuracy of the Company’s prior estimates, and sales and return activity in 2025.
  ● Tested the completeness, accuracy and relevance of the underlying data used in management’s estimate.
  ● Tested the mathematical accuracy and computations related to the application of the methodology.

 

We have served as Barfresh Food Group Inc.’s auditor since 2012.

 

/s/ Eide Bailly LLP

 

Denver, Colorado

March 27, 2025

 

F-2

 

 

Barfresh Food Group Inc.

Consolidated Balance Sheets

 

   December 31,   December 31, 
   2024   2023 
         
Assets          
Current assets:          
Cash  $235,000   $1,891,000 
Trade accounts receivable, net   829,000    821,000 
Other receivables   55,000    160,000 
Inventory, net   1,500,000    1,214,000 
Prepaid expenses and other current assets   104,000    67,000 
Total current assets   2,723,000    4,153,000 
Property, plant and equipment, net of depreciation   333,000    409,000 
Intangible assets, net of amortization   178,000    241,000 
Other non-current assets   84,000    7,000 
Total assets  $3,318,000   $4,810,000 
           
Liabilities and Stockholders’ Equity          
Current liabilities:          
Line of credit  $609,000   $- 
Accounts payable   1,200,000    1,670,000 
Disputed co-manufacturer accounts payable (Note 6)   499,000    499,000 
Accrued expenses   142,000    85,000 
Accrued payroll and employee related expenses   67,000    53,000 
Financing agreements - current   99,000    - 
Total current liabilities   2,616,000    2,307,000 
Financing agreements   124,000    - 
Total liabilities   2,740,000    2,307,000 
           
Commitments and contingencies   -    - 
           
Stockholders’ equity:          
Preferred stock, $0.000001 par value, 400,000 shares authorized, none issued or outstanding   -    - 
Common stock, $0.000001 par value; 23,000,000 shares authorized; 14,746,172 and 14,420,105 shares issued and outstanding at December 31, 2024 and 2023, respectively   -    - 
Additional paid in capital   64,199,000    63,299,000 
Accumulated deficit   (63,621,000)   (60,796,000)
Total stockholders’ equity   578,000    2,503,000 
Total liabilities and stockholders’ equity  $3,318,000   $4,810,000 

 

See the accompanying notes to the consolidated financial statements

 

F-3

 

 

Barfresh Food Group Inc.

Consolidated Statements of Operations

For the years ended December 31, 2024 and 2023

 

   2024   2023 
Revenue  $10,717,000   $8,127,000 
Cost of revenue   7,049,000    5,243,000 
Gross profit   3,668,000    2,884,000 
Operating expenses:          
Selling, marketing and distribution   3,139,000    2,614,000 
General and administrative   3,043,000    2,686,000 
Depreciation and amortization   259,000    400,000 
Total operating expenses   6,441,000    5,700,000 
Loss from operations   (2,773,000)   (2,816,000)
Interest expense   52,000    8,000 
Net loss  $(2,825,000)  $(2,824,000)
           
Per share information - basic and fully diluted:          
Weighted average shares outstanding   14,678,000    13,359,000 
Net loss per share  $(0.19)  $(0.21)

 

See the accompanying notes to the consolidated financial statements

 

F-4

 

 

Barfresh Food Group Inc.

Consolidated Statements of Stockholders’ Equity

For the years ended December 31, 2024 and 2023

 

   Shares   Amount   Capital   (Deficit)   Total 
       Additional         
   Common Stock   paid in   Accumulated     
   Shares   Amount   Capital   (Deficit)   Total 
                     
Balance December 31, 2022   12,934,741   $         -   $60,905,000   $(57,972,000)  $2,933,000 
Conversion of debt and interest (Note 5)   1,315,491    -    1,863,000    -    1,863,000 
Issuance of common stock for equity compensation, net of shares repurchased for income tax withholding   165,779    -    (18,000)   -    (18,000)
Equity-based compensation expense   -    -    562,000    -    562,000 
Value of shares relinquished in modification of stock-based compensation awards (Note 7)   -    -    (24,000)   -    (24,000)
Issuance of stock for services   4,094    -    11,000    -    11,000 
Net loss   -    -    -    (2,824,000)   (2,824,000)
Balance December 31, 2023   14,420,105   $-   $63,299,000   $(60,796,000)  $2,503,000 
Conversion of debt and interest (Note 5)   124,208    -    136,000    -    136,000 
Issuance of common stock for equity compensation, net of shares repurchased for income tax withholding   201,859    -    (20,000)   -    (20,000)
Equity-based compensation expense   -    -    784,000    -    784,000 
Net loss   -    -    -    (2,825,000)   (2,825,000)
Balance December 31, 2024   14,746,172   $-   $64,199,000   $(63,621,000)  $578,000 

 

See the accompanying notes to the consolidated financial statements

 

F-5

 

 

Barfresh Food Group Inc.

Consolidated Statements of Cash Flows

For the years ended December 31 2024 and 2023

 

   2024   2023 
Net loss  $(2,825,000)  $(2,824,000)
Adjustments to reconcile net loss to net cash used in operating activities          
           
Stock-based compensation   784,000    562,000 
Depreciation and amortization   283,000    403,000 
Loss on asset disposal   -    18,000 
Amortization of line of credit discount   6,000    - 
Stock and options issued for services   -    11,000 
Changes in assets and liabilities          
Accounts receivable   (8,000)   (695,000)
Other receivables   105,000    (59,000)
Inventories   (286,000)   (166,000)
Prepaid expenses and other assets   40,000    10,000
Accounts payable   (399,000)   202,000 
Accrued expenses   71,000    (402,000)
Net cash used in operating activities   (2,229,000)   (2,940,000)
           
Investing activities          
Purchase of property and equipment   (53,000)   - 
Net cash used in investing activities   (53,000)   - 
           
Financing activities          
Borrowings under line of credit   2,811,000    - 
Repayment of line of credit   (2,208,000)   - 
Issuance of convertible debt   65,000    1,830,000 
Financing agreement payments   (22,000)   - 
Repurchases from stock compensation program   (20,000)   (18,000)
Net cash provided by (used in) financing activities   626,000    1,812,000
           
Net decrease in cash   (1,656,000)   (1,128,000)
Cash, beginning of year   1,891,000    3,019,000 
Cash, end of year  $235,000   $1,891,000 

 

See the accompanying notes to the consolidated financial statements

 

F-6

 

 

Barfresh Food Group Inc.

Notes to Consolidated Financial Statements

 

Note 1. Summary of Significant Accounting Policies

 

Barfresh Food Group Inc., (“we,” “us,” “our,” and the “Company”) was incorporated on February 25, 2010 in the State of Delaware. The Company is engaged in the manufacturing and distribution of ready-to-drink and ready-to-blend beverages, particularly, smoothies, shakes and frappes.

 

Basis of Presentation

 

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

 

Principles of Consolidation

 

The consolidated financial statements include the financial statements of the Company and our wholly owned subsidiaries, Barfresh Inc. and Barfresh Corporation Inc. (formerly known as Smoothie, Inc.). All inter-company balances and transactions among the companies have been eliminated upon consolidation.

 

Use of Estimates

 

The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities in the balance sheets and revenues and expenses during the years reported. Actual results may differ from these estimates.

 

Vendor Concentrations

 

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

 

   2024   2023 
Manufacturer A   54%   49%
Manufacturer B   38%   45%
Other Manufacturers   8%   6%

 

Concentration of Credit Risk

 

The amount of cash on deposit with financial institutions exceeds the $250,000 federally insured limit at December 31, 2023. However, we believe that cash on deposit that exceeds $250,000 in the financial institutions is financially sound and the risk of loss is minimal.

 

F-7

 

 

The following customers accounted for 10% or more of the Company’s accounts receivable balance at December 31:

 

   2024   2023 
Customer A   23%   10%
Customer B   16%   16%
Customer C   10%   25%
Customer D   10%   11%

 

Financial Instruments

 

Our financial instruments consist of cash, accounts receivable, accounts payable, and the line of credit and financing agreements. The carrying value of our financial instruments approximates their fair value.

 

Accounts Receivable

 

Accounts receivable are recorded and carried at the original invoiced amount less allowances for credits and for any potential uncollectible amounts due to credit losses. Accounts receivable from customers are typically unsecured. The Company’s credit policy calls for payment generally within 30 days. The credit worthiness of a customer is evaluated prior to an initial sale and is updated periodically based on payment performance. We make estimates of the expected credit and collectability trends for the allowance for credit losses based on our assessment of various factors, including historical experience, the age of the accounts receivable balances, credit quality of our customers, current economic conditions, and other factors that may affect our ability to collect from our customers. Expected credit losses are recorded as general and administrative expenses on our consolidated statements of operations. As of December 31, 2024 and 2023, there was no allowance for credit losses. There was no credit loss expense for the years ended December 31, 2024 and 2023. Accounts receivable amounted to $126,000 on January 1, 2023.

 

Inventory

 

Inventory consists of packaging, raw materials and finished goods and is carried at the lower of cost or net realizable value on a first in first out basis. The Company monitors the remaining useful life of its inventory and establishes a reserve of obsolescence where appropriate.

 

Intangible Assets

 

Intangible assets are comprised of patents, net of amortization and trademarks. The patent costs are being amortized over the life of the patent, which is twenty years from the date of filing the patent application. In accordance with ASC Topic 350 Intangibles – Goodwill and Other (“ASC 350”), the costs of internally developing other intangible assets, such as patents, are expensed as incurred. However, as allowed by ASC 350, costs associated with the acquisition of patents from third parties, legal fees and similar costs relating to patents have been capitalized.

 

In accordance with ASC 350 legal costs related to trademarks have been capitalized. We have determined that trademarks have an indeterminable life and therefore are not being amortized.

 

Long-Lived Assets and Other Acquired Intangible Assets

 

We evaluate the recoverability of property and equipment and finite-lived intangible assets for possible impairment whenever events or circumstances indicate that the carrying amount of such assets may not be recoverable. The evaluation is performed at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. Recoverability of these assets is measured by a comparison of the carrying amounts to the future undiscounted cash flows the assets are expected to generate. If such review indicates that the carrying amount of property and equipment and intangible assets is not recoverable, the carrying amount of such assets is reduced to fair value. There was no impairment in 2024 or 2023.

 

F-8

 

 

Property, Plant, and Equipment

 

Property, plant, and equipment is stated at cost less accumulated depreciation and accumulated impairment loss, if any. Depreciation is calculated on a straight-line basis over the estimated useful lives of the assets. Leasehold improvements are being amortized over the shorter of the useful life of the asset or the lease term that includes any expected renewal periods that are deemed to be reasonably assured. The estimated useful lives used for financial statement purposes are:

 

Manufacturing equipment 7 years
Customer equipment 7 years

 

Revenue Recognition

 

In accordance with ASC 606, Revenue from Contracts with Customers, revenue is recognized when a customer obtains ownership of promised goods. The amount of revenue recognized reflects the consideration to which the Company expects to be entitled to receive in exchange for these goods. The Company applies the following five steps:

 

  1) Identify the contract with a customer
     
    A contract with a customer exists when (i) the Company enters into an enforceable contract with a customer that defines each party’s rights, (ii) the contract has commercial substance and, (iii) the Company determines that collection of substantially all consideration for goods or services that are transferred is probable. For the Company, the contract is the approved sales order, which may also be supplemented by other agreements that formalize various terms and conditions with customers.

 

  2) Identify the performance obligation in the contract
     
    Performance obligations promised in a contract are identified based on the goods or services that will be transferred to the customer. For the Company, this consists of the delivery of frozen beverages, which provide immediate benefit to the customer.
     
  3) Determine the transaction price
     
    The transaction price is determined based on the consideration to which the Company will be entitled in exchange for transferring goods and is generally stated on the approved sales order. Variable consideration, which typically includes rebates or discounts, are estimated utilizing the most likely amount method. Provisions for refunds are generally provided for in the period the related sales are recorded, based on management’s assessment of historical and projected trends.

 

  4)

Allocate the transaction price to performance obligations in the contract

 

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

     
  5) Recognize revenue when or as the Company satisfies a performance obligation
     
   

The Company recognizes revenue from the sale of frozen beverages when title and risk of loss passes and the customer accepts the goods, which generally occurs at the time of delivery to a customer warehouse. Customer sales incentives such as volume-based rebates or discounts are treated as a reduction of sales at the time the sale is recognized. Shipping and handling costs are treated as fulfilment costs and presented in distribution, selling and administrative costs.

 

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

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

 

F-9

 

 

Research and Development

 

Expenditures for research activities relating to product development and improvement are charged to expense as incurred. The Company incurred $132,000 and $115,000, in research and development expenses for the years ended December 31, 2024 and 2023, respectively, which is included in general and administrative expense in the accompanying consolidated statements of operations.

 

Storage and Shipping Costs

 

Storage and outbound freight costs are included in selling, marketing and distribution expense. For the years ended December 31, 2024 and 2023, storage and outbound freight amounted to $1,473,000 and $1,278,000, respectively.

 

Leases

 

We determine if an arrangement is a lease upon inception. A contract is or contains a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. The right to control the use of an asset includes the right to obtain substantially all of the economic benefits of the underlying asset and the right to direct how and for what purpose the asset is used. Operating lease right-of-use assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. Lease expense is recognized on a straight-line basis over the lease term. As a lessee, the Company leases office space.

 

Income Taxes

 

The provision for income taxes is determined in accordance with the provisions of ASC Topic 740, Accounting for Income Taxes (“ASC 740”). Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted income tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Any effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

 

ASC 740 prescribes a comprehensive model for how companies should recognize, measure, present, and disclose in their financial statements, uncertain tax positions taken or expected to be taken on a tax return. Under ASC 740, tax positions must initially be recognized in the financial statements when it is more likely than not the position will be sustained upon examination by the tax authorities. Such tax positions must initially and subsequently be measured as the largest amount of tax benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the tax authority assuming full knowledge of the position and relevant facts.

 

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 of the deferred tax assets will not be recognized.

 

For the years ended December 31, 2024 and 2023 we did not have any interest and penalties or any significant unrecognized uncertain tax positions.

 

Derivative Liability

 

The Company evaluates its convertible instruments, options, warrants or other contracts to determine if those contracts or embedded components of those contracts qualify as derivatives to be separately accounted for under ASC Topic 815, “Derivatives and Hedging.” The Company determined that its convertible instruments issued in 2024 and 2023 did not include any embedded derivatives that require bifurcation.

 

Loss per Share

 

We calculate net loss per share in accordance with ASC Topic 260, Earnings per Share. Basic net loss per share is computed by dividing net loss by the weighted average number of shares of common stock outstanding for the period, and diluted earnings per share is computed by including common stock equivalents outstanding for the period in the denominator. At December 31, 2024 and 2023 any common stock equivalents would have been anti-dilutive as we had losses for the years then ended.

 

F-10

 

 

Stock Based Compensation

 

The Company calculates stock compensation in accordance with ASC Topic 718, Compensation-Stock Based Compensation (“ASC 718”). ASC 718 requires that the cost resulting from all share-based payment transactions be recognized in the financial statements and establishes fair value as the measurement objective in accounting for share-based payment arrangements and requires all entities to apply a fair-value-based measurement method in accounting for share-based payment transactions with employees.

 

Reclassifications

 

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

 

Interest expense has been reclassified from general and administrative expense in the 2023 financial statements to conform to the 2024 presentation.

 

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.

 

Subsequent events

 

On February 5, 2025, the Company entered into securities purchase agreements with several investors, pursuant to which the Company sold an aggregate of 1,052,793 shares of common stock at a price of $2.85 per share in a registered direct offering.

 

Note 2. Inventory

 

Inventory consists of the following at December 31:

 

   December,   December 31, 
   2024   2023 
Raw materials and packaging  $505,000   $28,000 
Finished goods   995,000    1,186,000 
Inventory, net  $1,500,000   $1,214,000 

 

Note 3. Property Plant and Equipment

 

Major classes of property and equipment consist of the following at December 31:

 

   December 31,   December 31, 
   2024   2023 
Manufacturing equipment  $1,376,000   $1,546,000 
Customer equipment   1,398,000    1,410,000 
Construction in Progress   152,000    - 
 Property and equipment, gross   2,926,000    2,956,000 
Less: accumulated depreciation   (2,593,000)   (2,547,000)
Property and equipment, net of depreciation  $333,000   $409,000 

 

F-11

 

 

The Company recorded depreciation expense related to these assets of $220,000 and $339,000 for the years ended December 31, 2024 and 2023, respectively. Depreciation expense in cost of revenue was $25,000 and $18,000 for the years ended December 31, 2024 and 2023 respectively.

 

Note 4. Intangible Assets

 

Intangible assets consist of the following at December 31:

 

   2024   2023 
Patent costs, subject to amortization  $768,000   $768,000 
Less: accumulated amortization   (714,000)   (651,000)
Patent costs, net   54,000    117,000 
Trademarks, not subject to amortization   124,000    124,000 
Total  $178,000   $241,000 

 

The amounts carried on the balance sheet represent cost to acquire, legal fees and similar costs relating to the patents incurred by the Company. Amortization is recorded through the expiration date of the patent. The amount charged to expenses for amortization of the patent costs was $63,000 for each of the years ended December 31, 2024 and 2023, respectively.

 

The Company expects to record $54,000 in amortization expense in 2025.

 

Note 5. Debt

 

Line of Credit

 

In August 2024, the Company secured receivables financing of $1,500,000 (the “Facility”). Under the Facility, the Company may borrow up to 90% of eligible customer account balances. Amounts outstanding bear interest at a rate prime plus 1.2% (8.70% as of December 31, 2024) and collateral fees of 0.15% and are secured by accounts receivable and inventory. The Facility expires on September 5, 2025, and renews automatically, unless notice is given or received. As of December 31, 2024, borrowings under the Facility amounted to $620,000 and $880,000 was available to borrow, subject to available collateral. Unamortized deferred financing cost amounted to $11,000 as of December 31, 2024.

 

F-12

 

 

Financing Agreements

 

In 2024, the Company entered into financing agreements to purchase equipment and software as a service, with imputed or stated interest of 15-19%. Amounts due under the agreements are as follows as of December 31, 2024:

 

      
2025   128,000 
2026   136,000 
Total payments due   264,000 
Less: interest   (41,000)
 Financing agreements   223,000 
Less: current portion   (99,000)
Financing agreements  $124,000 

 

Convertible Notes

 

From July 2023 to March 2024, the Company executed subscription agreements for substantially all of a $2,000,000 privately placed convertible debt offering. The debt was available to be drawn in 25% increments, maturing on the anniversary of the draw, bearing interest at 10% per annum for the term, regardless of earlier payment or conversion, and was mandatorily convertible as to principal and interest into shares of the Company’s common stock at any time prior to maturity at the greater of $1.20 or 85% of the volume-weighted average price of the common stock for the ten trading days immediately preceding the written notice of the conversion (the “Conversion Price”). If the Company had not exercised the mandatory conversion, the holder of the debt had the option after six months and on up to four occasions to convert all or any portion of the principal and interest into shares of the Company’s common stock at the Conversion Price.

 

On October 23, 2023, the Company drew down $1,390,000 in convertible debt and converted a total of $1,207,000 of principal into 820,160 shares of common stock. Additionally, on December 19, 2023, the Company drew $470,000 in convertible debt and converted a total of $653,000 of principal and $4,000 of accrued interest into 495,331 shares of common stock. Finally, between March 27 and 29, 2024 the Company drew down $136,000 in convertible debt and converted the total drawn into 124,208 shares, settling all debt. Debt drawdowns included the non-cash settlement of $30,000 and $71,000 in 2023 and 2024, respectively.

 

Note 6. Commitments and Contingencies

 

Lease Commitments

 

The Company leases office space under a non-cancelable operating lease which expired on March 31, 2023 and has been extended multiple times, most recently through March 31, 2025. The Company incurred lease expense of $85,000 and $80,000 for the years ended December 31, 2024 and 2023, respectively. Due to the short-term nature of the extensions, there is no right of use asset or related liability as of December 31, 2024 and 2023.

 

Legal Proceedings

 

Schreiber Dispute

 

The Company’s products are produced to its specifications through several contract manufacturers. One of the Company’s contract manufacturers (the “Manufacturer”) provided approximately 52% and 42% of the Company’s products in the years ended December 31, 2022 and 2021, respectively, under a Supply Agreement with an initial term through September 2025.

 

Over the course of 2022, the Company experienced numerous quality issues with the case packaging utilized by the Manufacturer. In addition, in July of 2022, the Company began receiving customer complaints about the texture of the Company’s smoothie products produced by the Manufacturer. In response, the Company withdrew product from the market and destroyed on-hand inventory, withholding $499,000 in payments due to the Manufacturer.

 

F-13

 

 

The Company attempted to resolve the issues based on the contractual procedures described in the Supply Agreement. However, on November 4, 2022, in response to a formal proposal of alternate resolutions, the Company received notification from the Manufacturer that it was denying any responsibility for the defective manufacture of the product. In response, on November 10, 2022, the Company filed a complaint in the United States District Court for the Central District of California, Western Division (the “Complaint”), claiming that the Manufacturer had not met its obligations under the Supply Agreement, and seeking economic damages. In response, the Manufacturer terminated the Supply Agreement. On January 20, 2023, the Company filed a voluntary dismissal of the Complaint which allowed the parties to reach a potential resolution outside of the court system. However, as the parties were once again unable to come to an agreement, the Company re-filed the Complaint in California State Court in August 2023 and continues to progress through the court system.

 

In May 2024, the Company entered into a non-recourse litigation financing arrangement which is expected to be adequate to pursue the Complaint to conclusion.

 

Due to the uncertainties surrounding the claim, the Company is not able to predict either the outcome or a range of reasonably possible recoveries that could result from its actions against the Manufacturer, and no gain contingencies have been recorded. The disruption in its supply resulting from the dispute has and will continue to adversely impact the Company’s results of operations and cash flow until a suitable resolution is reached or new sources of reliable supply at sufficient volume can be identified and developed, the timing of which is uncertain. The Company has mitigated the impact of the supply disruption with the introduction of its single-serve smoothie cartons; however, the product format has not been accepted by some customers or as a substitute for the bottle product in all use cases.

 

Other legal matters

 

From time to time, various lawsuits and legal proceedings may arise in the ordinary course of business. However, litigation is subject to inherent uncertainties and an adverse result in these or other matters may arise from time to time that may harm our business. We are currently the defendant in one legal proceeding for an amount less than $100,000. Our legal counsel and management believe a material unfavorable outcome to be remote.

 

Note 7. Stockholders’ Equity

 

In 2023, the Company issued 1,315,491 shares of common stock pursuant to the conversion of debt and accrued interest, as more fully described in Note 5.

 

In 2023, the Company issued 165,779 shares of common stock for equity-based compensation. Additionally, 4,094 shares of common stock valued between $1.45 - $4.00 were issued for services.

 

In 2024, the Company issued 124,208 shares of common stock pursuant to the conversion of debt and accrued interest, as more fully described in Note 5.

 

In 2024, the Company issued 201,859 shares of common stock for equity-based compensation.

 

Warrants

 

The following is a summary of changes in warrants outstanding for the years ended December 31, 2024 and 2023:

 

   Number of
warrants		 
Outstanding at December 31, 2022   1,180,190 
Expired   (936,375)
Outstanding at December 31, 2023   243,815 
Expired   (122,739)
Outstanding at December 31, 2024   121,076 

 

F-14

 

 

The following is a summary of all outstanding warrants as of December 31, 2024:

 

Warrant issuance event  Number of warrants   Exercise price per share   Remaining term in years   Intrinsic value at date of grant 
                     
Settlement of deferred compensation   121,076   $3.51    0.24   $     - 

 

Equity Incentive Plan

 

Through 2022, the Company issued equity incentive awards under the 2015 Equity Incentive Plan (the “2015 Plan”) and outside the Plan. In June 2023, the Company’s stockholders adopted the 2023 Equity Incentive Plan (the “2023 Plan”), reserving 650,000 shares for future issuance. The Board of Directors discontinued further grants under the 2015 Plan.

 

Awards may be granted to employees, members of the Board of Directors and consultants, and may take the form of options, restricted stock, restricted stock units, performance shares and stock appreciation rights. The Company has issued options with no intrinsic value, stock awards and stock units through December 31, 2023, and issues new shares upon exercise of options or vesting of stock awards and stock units.

 

The Company has reserved approximately 319,000 and 363,000, respectively for awards outstanding under the 2015 Plan and 2023 Plan, and 248,000 shares for equity awards issued outside either of the Company’s equity incentive plans. As of December 31, 2024, 822,000 shares remain available for the issuance of awards under the 2023 Plan. Total shares reserved for awards that are outstanding and expected to vest or available for issuance are 1,752,000 as of December 31, 2024.

 

Employee Stock Purchase Plan

 

In 2024, the Company adopted an Employee Stock Purchase Plan (the “ESPP”) which permits employees to defer compensation to purchase shares at a 15% discount to the lower of the market price at the beginning or end of the deferment period. There were no deferrals in 2024. The Company reserved 1,400,000 shares for issuance under the ESPP.

 

Stock-Based Compensation

 

The total amount of equity-based compensation included in general and administrative expense in the accompanying consolidated statements of operations was $784,000 and $562,000 for the years ended December 31, 2024 and 2023.

 

As of December 31, 2024, the Company has $338,000 of total unrecognized share-based compensation expense related to unvested options, stock awards and stock units, which is expected to be amortized over the remaining weighted average period of 3.0 years.

 

F-15

 

 

Stock Options

 

The following is a summary of stock option activity:

 

   Number of Options   Weighted average exercise price per share   Remaining term in years 
Outstanding on December 31, 2022   682,939   $7.30    3.2 
Issued   65,468   $1.50    8.0 
Forfeited   (4,254)  $5.65      
Expired   (157,062)  $7.92      
Outstanding on December 31, 2023   587,091   $6.50    3.6 
Issued   404,074   $4.80    8.0 
Forfeited   (178,669)  $7.39      
Expired   (102,173)  $8.38      
Outstanding on December 31, 2024   710,323   $5.04    5.5 
                
Exercisable, December 31, 2024   512,361   $5.77    4.1 

 

In December 2024, the Company modified 163,669 options that were expected to expire from December of 2024 through July of 2026 to extend the term through December 31, 2026. As a result of the modification, the Company recorded $110,000 of stock compensation expense, representing the fair value of the re-issued options compared to the fair value of the expiring options immediately prior to the modification.

 

The fair value of the options issued was calculated using the Black-Sholes option pricing model, based on the criteria shown below:

 

   2024   2023 
Expected term (in years)   5.6    8.0 
Expected volatility   103.9%   84.4%
Risk-free interest rate   4.2%   3.7%
Expected dividends  $-   $- 
Weighted average grant date fair value per share  $1.53   $1.21 

 

F-16

 

 

Restricted Stock

 

The following is a summary of restricted stock award and restricted stock unit activity:

 

   Number of shares   Weighted average grant date fair value 
Unvested at January 1, 2023   41,923   $4.92 
Granted   5,000   $1.25 
Forfeited   (4,386)  $5.06 
Vested   (9,931)  $3.33 
Unvested at December 31, 2023   32,606   $4.82 
Granted   65,000   $1.73 
Forfeited   (25,000)  $1.64 
Vested   (10,733)  $5.58 
Unvested at December 31, 2024   61,873   $2.72 

 

Performance Stock Units

 

The Company issues performance share units (“PSUs”) that represent shares potentially issuable based upon achievement of Company and individual performance targets. The grantees have the ability to earn 0% and, in some cases, up to 200% of the PSU target award. The awards also included various time-based service requirements.

 

The following is a summary of PSU activity:

 

   Number of shares   Weighted average grant date fair value 
Unvested January 1, 2023   17,678   $4.50 
Cash settled   (17,678)  $4.50 
Granted   288,469   $1.70 
Forfeited   (224,581)  $1.67 
Unvested at December 31, 2023   63,888   $1.84 
Granted   429,844   $1.22 
Forfeited   (283,369)  $1.22 
Vested   (52,669)  $1.15 
Unvested and expected to vest at December 31, 2024   157,694   $1.20 

 

In February 2023, the awards granted for 2022 were modified to pay the original grant-date fair value of the shares expected to vest in cash. Additionally, the Company performance targets were modified to allow approximately 77,000 shares to vest that would have otherwise been forfeited, and were not included in the total unvested at December 31, 2022. As a result of the modifications, the Company recorded an additional $218,000 in compensation expense in 2023.

 

F-17

 

 

Note 8. Income Taxes

 

Income tax provision (benefit) for the years ended December 31, 2024 and 2023 is summarized below:

 

   2024   2023 
Current:          
Federal  $-   $- 
State   -    - 
Total   -    - 
Deferred:          
Federal   (626,000)   (464,000)
State   1,270,000    (155,000)
Change in valuation allowance   (644,000)   619,000 
Total   -    - 
Provision for income taxes  $-   $- 

 

The provision for income taxes differs from the amount computed by applying the statutory federal income tax rate before provision for income taxes. The sources and tax effect of the differences are as follows:

 

   2024   2023 
Statutory federal income tax rate   21%   21%
State tax   4    7 
Permanent differences   -    - 
Change in valuation allowance   (25)   (28)
Total Income tax   -%   -%

 

Components of the net deferred income tax assets at December 31, 2024 and 2023 were as follows:

 

   2024   2023 
Net operating loss carryover  $13,923,000   $14,567,000 
Valuation allowance   (13,923,000)   (14,567,000)
Deferred tax assets, net  $-   $- 

 

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 of the deferred tax assets will not be recognized. After consideration of all the evidence, both positive and negative, management has determined that a $13,923,000 and $14,567,000 allowance at December 31, 2024 and 2023, respectively, is necessary to reduce the deferred tax assets to the amount that will more likely than not be realized. The decrease in the valuation allowance for the current period is $644,000 resulted from a lower blended state tax rate, partially offset by current year tax losses and the adjustments to finalize the 2023 tax loss upon filing the tax returns.

 

As of December 31, 2024, the Company has a net operating loss carry forward to offset future taxable income of approximately $55,036,000, $28,482,000 of which begins to expire in 2033. Net operating loss carry forwards of $26,554,000 may be carried forward indefinitely. The Company may have experienced an ownership change that could limit its ability to utilize its operating loss carryforward to offset taxable income in future years. An analysis will be required to determine whether such change has occurred, the outcome of which could impact the Company’s operating results and cash flow if and when it achieves profitability in taxable jurisdictions.

 

F-18

 

 

CARES Act

 

On March 27, 2020, the U.S. government enacted the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) to provide certain relief as a result of the COVID-19 pandemic. The CARES Act provides tax relief, along with other stimulus measures, including a provision for an Employee Retention Credit (“ERC”), which allows for employers to claim a refundable tax credit against the employer share of Social Security tax equal to 70% of the qualified wages paid to employees from the start of the COVID-19 pandemic through September 30, 2021. The ERC was designed to encourage businesses to keep employees on the payroll during the COVID-19 pandemic.

 

As there is no authoritative guidance under U.S. GAAP on accounting for government assistance to for-profit business entities, the Company accounts for the ERC by analogy to International Accounting Standard (“IAS”) 20, Accounting for Government Grants and Disclosure of Government Assistance. In accordance with IAS 20, management determined based upon receipt of confirmation of the claim made by its co-employment partner and review of the calculations provided that it has reasonable assurance for receipt of the ERC and recorded the ERC benefit of $92,000 within general and administrative expenses in the accompanying consolidated statement of operations for the year ended December 31, 2023. The Company recorded a corresponding receivable for the benefit expected to be received within other receivables on the consolidated balance sheet as of December 31, 2023. The Company received the refund in March 2024.

 

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

 

Note 9. Business Segments and Customer Concentrations

 

The Company operates in one business segment. The Chief Executive Officer is the chief operating decision maker whom assesses performance and allocates resources based on actual and projected operating results. Sales to the following customers represented more than 10% of total sales for the years ended December 31, 2024 and 2023:

 

   2024   2023 
Customer A   15%   15%
Customer B   15%   8%
Customer C   14%   14%
Customer D   8%   14%
Customer E   7%   11%

 

F-19

 

 

Note 10. Supplemental Cash Flow Information

 

Supplemental cash flow information is as follows:

 

   2024   2023 
         
Cash paid during the year for:          
Amounts included in the measurement of lease liabilities  $-   $20,000 
Interest  $46,000   $8,000 
Non-cash financing and investing activities:          
Financed acquisition of long-term assets  $245,000   $- 
Convertible note issued in exchange for trade payables  $71,000   $30,000 
Conversion of debt and interest to equity  $136,000   $1,863,000 
Value of shares relinquished in modification of stock-based compensation awards (Note 7)  $-   $24,000 

 

Note 11. Liquidity

 

During the years ended December 31, 2024 and 2023, the Company used cash for operations of $2,229,000 and $2,940,000, respectively. As of December 31, 2024, the Company had $235,000 of cash.

 

The Company has a history of operating losses and negative cash flow, which are expected to improve with growth. As described more fully in Note 6, the dispute and subsequent contract termination with the Manufacturer has resulted in limitations in the Company’s ability to procure certain products necessary to achieve our growth projections and in elevated legal costs.

 

To mitigate the impact of procurement constraints, the Company built and paid for inventory in anticipation of third quarter seasonal requirements, and invested in materials necessary to carry out trials and initial production runs at new co-manufacturers. The Company secured a receivables-based line of credit in August 2024 of $1,500,000, with $880,000 available to borrow as of December 31, 2024. Management expects that the cash cycle will shorten as additional contracted capacity improves in production volume and efficiency in 2025. Additionally, in May 2024, the Company obtained non-recourse litigation financing to allow vigorous pursuit of the complaint against the Manufacturer without further expense to the Company. Finally, as described in Note1, the Company raised $3,000,000 through the sale of the Company’s common stock in February 2025.

 

Although alleviated, the financial position at December 31, 2024 and historical results raise substantial doubt about the Company’s ability to continue as a going concern. As described, the Company has completed steps to mitigate dispute related issues and raise capital. The actions taken have resulted in the alleviation of the substantial doubt about the Company’s ability to continue as a going concern.

 

F-20

 

 

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