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Description of the Business, Basis of Presentation, and Summary of Significant Accounting Policies

9 Months Ended

Sep. 30, 2022

Accounting Policies [Abstract]

Description of the Business, Basis of Presentation, and Summary of Significant Accounting Policies

Note 1. Description of the Business, Basis of Presentation, and Summary of Significant Accounting Policies

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

Recent Business Developments

The Company’s products are produced to its specifications through several co-manufacturers. One of the Company’s co-manufacturers has provided approximately 58% of the Company’s products in the nine months ended September 30, 2022 under a Supply Agreement that expires in September 2025.

Over the course of 2022, the Company has experienced quality issues with the case packaging utilized by the co-manufacturer. In July of 2022, the Company began receiving customer complaints about the texture of the Company’s smoothie products produced by the same co-manufacturer. In response, subsequent to September 30, 2022, the Company has withdrawn product from the market and destroyed on-hand inventory. The results for the third quarter of 2022 reflect the estimated accounting impact of such actions, including $630,000 in refund and administrative fees due to customers and $932,000 to dispose of unsaleable inventory.

The Company has been attempting to informally resolve the issues. However, on November 4, 2022, in response to a formal proposal of alternate resolutions, the Company received notification from its co-manufacturer that it was denying any responsibility for the defective manufacture of the product. In response, on November 10, 2022, the Company filed a complaint in the United States District Court for the Central District of California, Western Division, claiming that the co-manufacturer has not met its obligations under the Agreement, and seeking economic damages. Due to the uncertainties of litigation, the Company is not able to predict either the outcome or a range of reasonably possible recoveries that could result from its legal action against the co-manufacturer, and no gain contingencies have been recorded. The Company anticipates that the disruption in its supply resulting from the dispute will adversely impact its results of operations and cash flow until a suitable resolution is reached or new sources of reliable supply at sufficient volume can be identified and developed, the timing of which is uncertain.

Basis of Presentation

The accompanying condensed consolidated financial statements are unaudited. These unaudited interim condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) and applicable rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Certain information and footnote disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. Accordingly, these interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the fiscal year ended December 31, 2021 included in the Company’s Annual Report on Form 10-K, as filed with the SEC on March 10, 2022. In management’s opinion, the unaudited interim condensed consolidated financial statements reflect all adjustments, which are of a normal and recurring nature, that are necessary for a fair presentation of financial results for the interim periods presented. Operating results for any quarter are not necessarily indicative of the results for the full fiscal year.

Reverse Stock Split

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

Principles of Consolidation

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

Use of Estimates

The preparation of consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities in the balance sheets and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates are based on information available as of the date of the financial statements; therefore, actual results may differ from these estimates.

Vendor Concentrations

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

Schedule of Company’s Contact Manufacturers of Finished Goods 

		For the three months ended September 30,								For the nine months ended September 30,
		2022				2021				2022				2021
Manufacturer A			54	%			31	%			58	%			42	%
Manufacturer B			31	%			32	%			28	%			36	%
Manufacturer C			9	%			30	%			8	%			15	%
Manufacturer D			6	%			7	%			6	%			7	%
			100	%			100	%			100	%			100	%

Summary of Significant Accounting Policies

There have been no changes to our significant accounting policies described in our Annual Report on Form 10-K for the year ended December 31, 2021, as filed with the SEC on March 10, 2022 that have had a material impact on our condensed consolidated financial statements and related notes.

Fair Value Measurement

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

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

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

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

Our financial instruments consist of cash, accounts receivable, accounts payable, advanced payments, restricted cash, as well as our Paycheck Protection Program (“PPP”) loan, convertible notes, and derivative liabilities which were settled in 2021. The carrying value of our financial instruments on September 30, 2022, December 31, 2021 and September 30, 2021 approximates their fair values, except for the derivative liability, which was carried at fair value prior to its extinguishment.

Restricted Cash

At September 30, 2022 and December 31, 2021, the Company had approximately $211,000 and $142,000, respectively, in restricted cash related to a co-packing agreement.

Accounts Receivable

As of December 31, 2021, the Company’s allowance for doubtful accounts was approximately $121,000. The Company did not have an allowance for doubtful accounts as of September 30, 2022. The allowance is estimated based on evaluation of collectability of outstanding accounts receivable. Delinquent accounts are written-off when it is determined that the amounts are uncollectible.

Other Receivables

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

Revenue Recognition

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

	1)	Identify the contract with a customer
		A contract with a customer exists when (i) the Company enters into an enforceable contract with a customer that defines each party’s rights, (ii) the contract has commercial substance and, (iii) the Company determines that collection of substantially all consideration for goods or services that are transferred is probable. For the Company, the contract is the approved sales order, which may also be supplemented by other agreements that formalize various terms and conditions with customers.
	2)	Identify the performance obligation in the contract
		Performance obligations promised in a contract are identified based on the goods or services that will be transferred to the customer. For the Company, this consists of the delivery of frozen beverages, which provide immediate benefit to the customer.
	3)	Determine the transaction price
		The transaction price is determined based on the consideration to which the Company will be entitled in exchange for transferring goods and is generally stated on the approved sales order. Variable consideration, which typically includes rebates or discounts, are estimated utilizing the most likely amount method and amounts recorded as revenue and accounts receivable reflect such estimates at the time of shipment. Subsequent adjustments to estimates of variable consideration have not been material.
	4)	Allocate the transaction price to performance obligations in the contract Since our contracts contain a single performance obligation, delivery of frozen beverages, the transaction price is allocated to that single performance obligation.
	5)	Recognize Revenue when or as the Company satisfies a performance obligation
		The Company recognizes revenue from the sale of frozen beverages when title and risk of loss passes and the customer accepts the goods, which generally occurs at the time of delivery to a customer warehouse. Customer sales incentives such as volume-based rebates or discounts are treated as a reduction of sales at the time the sale is recognized. Shipping and handling costs are treated as 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 smoothie beverages.

Storage and Shipping Costs

Storage and outbound freight costs are included in selling and marketing expense. For the three months ending September 30, 2022 and 2021, storage and outbound freight totaled approximately $450,000 and $316,000, respectively. For the nine months ending September 30, 2022 and 2021, storage and outbound freight costs totaled approximately $1,208,000 and $717,000, respectively.

Research and Development

Expenditures for research activities relating to product development and improvement are charged to expense as incurred. The Company incurred approximately $220,000 and $34,000, in research and development expense for the three months ending September 30, 2022 and 2021, respectively. For the nine months ending September 30, 2022 and 2021, research and development expense totaled approximately $347,000 and $173,000, respectively.

Loss Per Share

At September 30, 2022 and 2021 common stock equivalents have not been included in the calculation of net loss per share as their effect is anti-dilutive as a result of losses incurred.

Reclassifications

Certain reclassifications have been made to the 2021 financial statements to conform to the 2022 presentation, including the presentation of selling and marketing expense apart from general and administrative expense in the condensed consolidated statement of operations, and the presentation of a reconciliation of the components of net cash used in operating activities as well as the inclusion of operating lease payments in operating activities in the condensed consolidated statement of cash flows.

Recent Pronouncements

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

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- Definition

The entire disclosure for the general note to the financial statements for the reporting entity which may include, descriptions of the basis of presentation, business description, significant accounting policies, consolidations, reclassifications, new pronouncements not yet adopted and changes in accounting principles.

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