BARFRESH FOOD GROUP INC
For the period ended Sep 30, 2024. Filed Oct 24, 2024.
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A company's report for each of its first three quarters. The financial statements are not audited. It shows how the business has moved since the last annual report, and what management says changed.
Sep 30, 2024 · Filed Oct 24, 2024
Contents
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
| September 30, · December 31, | |||
|---|---|---|---|
| 2024 · 2023 | |||
| (unaudited) · (audited) | |||
| Assets | |||
| Current assets: | |||
| Cash | $401,000 | $1,891,000 | |
| Trade accounts receivable, net | 1,663,000 | 821,000 | |
| Other receivables | 30,000 | 160,000 | |
| Inventory, net | 770,000 | 1,214,000 | |
| Prepaid expenses and other current assets | 226,000 | 67,000 | |
| Total current assets | 3,090,000 | 4,153,000 | |
| Property, plant and equipment, net of depreciation | 390,000 | 409,000 | |
| Intangible assets, net of amortization | 194,000 | 241,000 | |
| Other non-current assets | 98,000 | 7,000 | |
| Total assets | $3,772,000 | $4,810,000 | |
| Liabilities and Stockholders’ Equity | |||
| Current liabilities: | |||
| Line of credit, net | $86,000 | $ | - |
| Accounts payable | 1,220,000 | 1,670,000 | |
| Disputed co-manufacturer accounts payable (Note 4) | 499,000 | 499,000 | |
| Accrued expenses | 270,000 | 85,000 | |
| Accrued payroll and employee related | 48,000 | 53,000 | |
| Financing agreements - current | 95,000 | - | |
| Total current liabilities | 2,218,000 | 2,307,000 | |
| Financing agreements | 151,000 | - | |
| Total liabilities | 2,369,000 | 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 September 30, 2024 and December 31, 2023, respectively | - | - | |
| Additional paid in capital | 64,172,000 | 63,299,000 | |
| Accumulated deficit | (62,769,000) | (60,796,000) | |
| Total stockholders’ equity | 1,403,000 | 2,503,000 | |
| Total liabilities and stockholders’ equity | $3,772,000 | $4,810,000 | |
Condensed Consolidated Statements of Operations
For the three and nine months ended September 30, 2024 and 2023
(Unaudited)
| For the three months ended September 30, | For the nine months ended September 30, | |||
|---|---|---|---|---|
| 2024 | 2023 | 2024 | 2023 | |
| Revenue | $3,637,000 | $2,603,000 | $7,929,000 | $6,205,000 |
| Cost of revenue | 2,377,000 | 1,690,000 | 4,991,000 | 3,963,000 |
| Gross profit | 1,260,000 | 913,000 | 2,938,000 | 2,242,000 |
| Operating expenses: | ||||
| Selling, marketing and distribution | 990,000 | 697,000 | 2,267,000 | 1,990,000 |
| General and administrative | 705,000 | 577,000 | 2,423,000 | 2,062,000 |
| Depreciation and amortization | 65,000 | 114,000 | 197,000 | 310,000 |
| Total operating expenses | 1,760,000 | 1,388,000 | 4,887,000 | 4,362,000 |
| Loss from operations | (500,000) | (475,000) | (1,949,000) | (2,120,000) |
| Interest expense | 13,000 | 1,000 | 24,000 | 3,000 |
| Net loss | $(513,000) | $(476,000) | $(1,973,000) | $(2,123,000) |
| Per share information - basic and fully diluted: | ||||
| Weighted average shares outstanding | 14,744,000 | 13,036,000 | 14,655,000 | 13,005,000 |
| Net loss per share | $(0.03) | $(0.04) | $(0.13) | $(0.16) |
Consolidated Statements of Cash Flows
For the nine months ended September 30, 2024 and 2023
(Unaudited)
| 2024 · 2023 | ||||
|---|---|---|---|---|
| Net loss | $(1,973,000) | $(2,123,000) | ||
| Adjustments to reconcile net loss to net cash used in operating activities | ||||
| Stock-based compensation | 757,000 | 514,000 | ||
| Depreciation and amortization | 217,000 | 325,000 | ||
| Amortization of debt discounts | 17,000 | - | ||
| Stock and options issued for services | - | 11,000 | ||
| Changes in assets and liabilities | ||||
| Accounts receivable | (842,000) | (1,033,000) | ||
| Other receivables | 130,000 | (15,000) | ||
| Inventories | 444,000 | 300,000 | ||
| Prepaid expenses and other assets | (95,000) | (27,000) | ||
| Accounts payable | (379,000) | 195,000 | ||
| Accrued expenses | 180,000 | (137,000) | ||
| Net cash used in operating activities | (1,544,000) | (1,990,000) | ||
| Investing activities | ||||
| Purchase of property and equipment | (61,000) | - | ||
| Net cash used in investing activities | (61,000) | - | ||
| Financing activities | ||||
| Borrowings under line of credit | 930,000 | - | ||
| Repayment of line of credit | (847,000) | - | ||
| Issuance of convertible debt | 65,000 | - | ||
| Financing agreement payments | (13,000) | - | ||
| Repurchases from stock compensation program | (20,000) | (18,000) | ||
| Net cash provided by (used in) financing activities | 115,000 | (18,000) | ||
| Net decrease in cash | (1,490,000) | (2,008,000) | ||
| Cash, beginning of period | 1,891,000 | 3,019,000 | ||
| Cash, end of period | $401,000 | $1,011,000 | ||
| Cash paid during the period for: | ||||
| Amounts included in the measurement of lease liabilities | $ | - | $20,000 | |
| Non-cash financing and investing activities: | ||||
| Convertible notes issued in exchange for trade payables | $71,000 | $ | - | |
| Conversion of debt and interest to equity | $136,000 | $ | - | |
| Financed acquisition of long-term assets | $245,000 | $ | - | |
| Value of shares relinquished in modification of stock-based compensations awards | $ | - | $24,000 | |
Barfresh Food Group Inc.
Notes to Condensed Consolidated Financial Statements
September 30, 2024
(Unaudited)
Note 1. Description of the Business, Basis of Presentation, and Summary of Significant Accounting Policies
Barfresh Food Group Inc., (“we,” “us,” “our,” and the “Company”) was incorporated on February 25, 2010 in the State of Delaware. The Company is engaged in the manufacturing and distribution of ready-to-drink and ready-to-blend beverages, particularly, smoothies, shakes and frappes.
Basis of Presentation
The accompanying condensed consolidated financial statements are unaudited. These unaudited interim condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) and applicable rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Certain information and footnote disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. Accordingly, these interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the fiscal year ended December 31, 2023 included in the Company’s Annual Report on Form 10-K, as filed with the SEC on March 22, 2024. In management’s opinion, the unaudited interim condensed consolidated financial statements reflect all adjustments, which are of a normal and recurring nature, that are necessary for a fair presentation of financial results for the interim periods presented. Operating results for any quarter are not necessarily indicative of the results for the full fiscal year.
Principles of Consolidation
The consolidated financial statements include the financial statements of the Company and our wholly owned subsidiaries, Barfresh Inc. and Barfresh Corporation Inc. (formerly known as Smoothie, Inc.). All inter-company balances and transactions among the companies have been eliminated upon consolidation.
Use of Estimates
The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities in the balance sheets and revenues and expenses during the years reported. Actual results may differ from these estimates.
Vendor Concentrations
The Company is exposed to supply risk as a result of concentration in its vendor base resulting from the use of a limited number of contract manufacturers. Purchases from the Company’s significant contract manufacturers as a percentage of all finished goods purchased were as follows:
| For the three months ended September 30, | For the nine months ended September 30, | |||
|---|---|---|---|---|
| 2024 | 2023 | 2024 | 2023 | |
| Manufacturer A | 63% | 55% | 58% | 47% |
| Manufacturer B | 37% | 37% | 40% | 44% |
| Manufacturer C | 0% | 8% | 2% | 9% |
| Concentration risk percentage | 100% | 100% | 100% | 100% |
Summary of Significant Accounting Policies
There have been no changes to our significant accounting policies described in our Annual Report on Form 10-K for the year ended December 31, 2023, as filed with the SEC on March 22, 2024 that have had a material impact on our condensed consolidated financial statements and related notes.
Financial Instruments
The Company’s financial instruments consist of cash, accounts receivable, accounts payable, the line of credit and financing agreements. The carrying value of the Company’s financial instruments approximates their fair value.
Accounts Receivable and Allowances
Accounts receivable are recorded and carried at the original invoiced amount less allowances for credits and for any potential uncollectible amounts due to credit losses. We make estimates of the expected credit and collectability trends for the allowance for credit losses based on our assessment of various factors, including historical experience, the age of the accounts receivable balances, credit quality of our customers, current economic conditions, and other factors that may affect our ability to collect from our customers. Expected credit losses are recorded as general and administrative expenses on our condensed consolidated statements of operations. As of September 30, 2024 and December 31, 2023, there wasno allowance for credit losses. There wasno credit loss expense for the three and nine months ended September 30, 2024 and 2023.
Other Receivables
Other receivables consist of the Company’s 2021 Employee Retention Tax Credit “ERTC” claim, which the Company collected in March 2024, amounts due from vendors for materials acquired on their behalf for use in manufacturing the Company’s products, vendor rebates and freight claims.
ERTC 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 ERTC claim was based on objectively calculated declines in revenue using methods that are clearly defined in the Coronavirus Aid, Relief, and Economic Security Act and various regulations and interpretations thereof.
Revenue Recognition
In accordance with ASC 606, Revenue from Contracts with Customers, revenue is recognized when a customer obtains ownership of promised goods. The amount of revenue recognized reflects the consideration to which the Company expects to be entitled to receive in exchange for these goods. The Company applies the following five steps:
| 1) | Identify the contract with a customer |
| A contract with a customer exists when (i) the Company enters into an enforceable contract with a customer that defines each party’s rights, (ii) the contract has commercial substance and, (iii) the Company determines that collection of substantially all consideration for goods or services that are transferred is probable. For the Company, the contract is the approved sales order, which may also be supplemented by other agreements that formalize various terms and conditions with customers. | |
|---|---|
| 2) | Identify the performance obligation in the contract |
| Performance obligations promised in a contract are identified based on the goods or services that will be transferred to the customer. For the Company, this consists of the delivery of frozen beverages, which provide immediate benefit to the customer. | |
|---|---|
| 3) | Determine the transaction price |
| The transaction price is determined based on the consideration to which the Company will be entitled in exchange for transferring goods and is generally stated on the approved sales order. Variable consideration, which typically includes rebates or discounts, are estimated utilizing the most likely amount method. Provisions for refunds are generally provided for in the period the related sales are recorded, based on management’s assessment of historical and projected trends. | |
| 4) | Allocate the transaction price to performance obligations in the contract Since the Company’s contracts contain a single performance obligation, delivery of frozen beverages, the transaction price is allocated to that single performance obligation. |
| 5) | Recognize revenue when or as the Company satisfies a performance obligation |
| The Company recognizes revenue from the sale of frozen beverages when title and risk of loss passes and the customer accepts the goods, which generally occurs at the time of delivery to a customer warehouse. Customer sales incentives such as volume-based rebates or discounts are treated as a reduction of sales at the time the sale is recognized. Shipping and handling costs are treated as fulfilment costs and presented in distribution, selling and administrative costs. Payments that are received before performance obligations are recorded are shown as current liabilities. | |
|---|---|
| The Company evaluated the requirement to disaggregate revenue and concluded that substantially all of its revenue comes from a single product, frozen beverages. | |
Storage and Shipping Costs
Storage and outbound freight costs are included in selling, marketing and distribution expense. For the three months ending September 30, 2024 and 2023, storage and outbound freight totaled approximately $480,000 and $370,000, respectively. For the nine months ended September 30, 2024 and 2023, storage and outbound freight totaled approximately $1,061,000 and $932,000, respectively.
Research and Development
Expenditures for research activities relating to product development and improvement are charged to expense as incurred. The Company incurred approximately $52,000 and $32,000 in research and development expense for the three months ended September 30, 2024 and 2023, respectively, and $99,000 and $88,000 for the nine months ended September 30, 2024 and 2023, respectively.
Loss Per Share
For the three and nine months ended September 30, 2024 and 2023, common stock equivalents have not been included in the calculation of net loss per share as their effect is anti-dilutive as a result of losses incurred.
Reclassifications
Certain reclassifications have been made to the 2023 financial statements to conform to the 2024 presentation, namely stock-based compensation paid to the Company’s directors has been reclassified from stock and options issued for services and shares repurchased for employee tax withholding under the Company’s stock compensation program have been reclassified to financing activities in the consolidated statement of cash flows, with corresponding changes reflected in the statement of stockholders’ equity for the nine months ended September 30, 2023.
Recent Pronouncements
From time to time, new accounting pronouncements are issued that we adopt as of the specified effective date. We have not determined if the impact of recently issued standards that are not yet effective will have an impact on our results of operations and financial position.
Note 2. Inventory
Inventory consists of the following:
| September 30, | December 31, | |
|---|---|---|
| 2024 | 2023 | |
| Raw materials and packaging | $335,000 | $28,000 |
| Finished goods | 435,000 | 1,186,000 |
| Inventory, net | $770,000 | $1,214,000 |
Note 3. Property Plant and Equipment
Property and equipment, net consist of the following:
| September 30, | December 31, | |
|---|---|---|
| 2024 | 2023 | |
| Manufacturing equipment | $1,548,000 | $1,546,000 |
| Customer equipment | 1,402,000 | 1,410,000 |
| Construction in progress | 145,000 | - |
| Property and equipment, gross | 3,095,000 | 2,956,000 |
| Less: accumulated depreciation | (2,705,000) | (2,547,000) |
| Property and equipment, net of depreciation | $390,000 | $409,000 |
Depreciation expense related to these assets was approximately $55,000 and $102,000 for the three months ended September 30, 2024 and 2023, respectively, and $168,000 and $277,000 for the nine months ended September 30, 2024 and 2023, respectively. Depreciation expense in cost of revenue was $6,000 and $4,000 for the three months ended September 30, 2024 and 2023, respectively, and $19,000 and $13,000 for the nine months ended September 30, 2024 and 2023, respectively.
Note 4. Commitments and Contingencies
Lease Commitments
The Company leases office space under a non-cancellable operating lease which expired on March 31, 2023, and wasextended in a series of amendments through March 31, 2025. The Company’s periodic lease cost was approximately $20,000 for each of the three month periods ended September 30, 2024 and 2023 and $60,000 for each of the nine month periods ended September 30, 2024 and 2023.
Legal Proceedings
Schreiber Dispute
The Company’s products are produced to its specifications through several contract manufacturers. One of the Company’s contract manufacturers (the “Manufacturer”) provided approximately 52% and 42% of the Company’s products in the years ended December 31, 2022 and 2021, respectively, under a Supply Agreement with an initial term through September 2025.
Over the course of 2022, the Company experienced numerous quality issues with the case packaging utilized by the Manufacturer. In addition, in July of 2022, the Company began receiving customer complaints about the texture of the Company’s smoothie products produced by the Manufacturer. In response, the Company withdrew product from the market and destroyed on-hand inventory, withholding $499,000 in payments due to the Manufacturer.
The Company attempted to resolve the issues based on the contractual procedures described in the Supply Agreement. However, on November 4, 2022, in response to a formal proposal of alternate resolutions, the Company received notification from the Manufacturer that it was denying any responsibility for the defective manufacture of the product. In response, on November 10, 2022, the Company filed a complaint in the United States District Court for the Central District of California, Western Division (the “Complaint”), claiming that the Manufacturer had not met its obligations under the Supply Agreement, and seeking economic damages. In response, the Manufacturer terminated the Supply Agreement. On January 20, 2023, the Company filed a voluntary dismissal of the Complaint which allowed the parties to reach a potential resolution outside of the court system. However, as the parties were once again unable to come to an agreement, the Company re-filed the Complaint in California State Court in August 2023 and continues to progress through the court system.
In May 2024, the Company entered into a non-recourse litigation financing arrangement which is expected to be adequate to pursue the Complaint to conclusion.
Due to the uncertainties surrounding the claim, the Company is not able to predict either the outcome or a range of reasonably possible recoveries that could result from its actions against the Manufacturer, and no gain contingencies have been recorded. The disruption in its supply resulting from the dispute has and will continue to adversely impact the Company’s results of operations and cash flow until a suitable resolution is reached or new sources of reliable supply at sufficient volume can be identified and developed, the timing of which is uncertain. The Company has mitigated the impact of the supply disruption with the introduction of its single-serve smoothie cartons; however the product format has not been accepted by some customers or as a substitute for the bottle product in all use cases.
Other Legal Matters
From time to time, various lawsuits and legal proceedings may arise in the ordinary course of business. However, litigation is subject to inherent uncertainties and an adverse result in these or other matters may arise from time to time that may harm our business. We are currently the defendant in one legal proceeding for an amount less than $100,000. Our legal counsel and management believe the probability of a material unfavorable outcome is remote.
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% (9.20% as of September 30, 2024) and collateral fees of 0.15% and are secured by accounts receivable and inventory. The Facility terminates on September 5, 2025, and renews automatically, unless notice is given or received. As of September 30, 2024, borrowings under the Facility amounted to $86,000, net of unamortized deferred financing cost of $14,000, and $1,400,000 was available to borrow.
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 September 30, 2024:
| 2024 (3 months) | $32,000 |
| 2025 | 129,000 |
| 2026 | 136,000 |
| Total payments due | 297,000 |
| Less: interest | (51,000) |
| Financing agreements | 246,000 |
| Less: current portion | (95,000) |
| Financing agreements | $151,000 |
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 down $470,000 in convertible debt and converted a total of $653,000 of principal and $4,000 of accrued interest into 495,331 shares of common stock. Finally, on March 27 and 29, 2024 the Company drew down $136,000 in convertible debt and converted the total drawn into 124,208 shares, settling all debt. Debt drawdowns included the non-cash settlement of $30,000 and $71,000 in 2023 and 2024, respectively.
Note 6. Stockholders’ Equity
The following are changes in stockholders’ equity for the nine months ended September 30, 2023 and 2024:
| Additional | ||||||
|---|---|---|---|---|---|---|
| Common Stock · paid in · Accumulated | ||||||
| Shares · Amount · Capital · (Deficit) · Total | ||||||
| Balance December 31, 2022 | 12,934,741 | $ | - | $60,905,000 | $(57,972,000) | $2,933,000 |
| Issuance of common stock for equity compensation, net of shares repurchased for income tax withholding | 165,779 | - | (18,000) | - | (18,000) | |
| Equity-based compensation expense | - | - | 514,000 | - | 514,000 | |
| Cash settlement of equity-based compensation | - | - | (24,000) | - | (24,000) | |
| Issuance of stock for services | 4,094 | - | 11,000 | - | 11,000 | |
| Net loss | - | - | - | (2,123,000) | (2,123,000) | |
| Balance September 30, 2023 | 13,104,614 | $ | - | $61,388,000 | $(60,095,000) | $1,293,000 |
| Additional | ||||||
|---|---|---|---|---|---|---|
| Common Stock · paid in · Accumulated | ||||||
| Shares · Amount · Capital · (Deficit) · Total | ||||||
| Balance December 31, 2023 | 14,420,105 | $ | - | $63,299,000 | $(60,796,000) | $2,503,000 |
| Issuance of common stock for equity compensation, net of shares repurchased for income tax withholding | 201,859 | - | (20,000) | - | (20,000) | |
| Equity-based compensation expense | - | - | 757,000 | - | 757,000 | |
| Conversion of debt and interest (Note 5) | 124,208 | - | 136,000 | - | 136,000 | |
| Net loss | - | - | - | (1,973,000) | (1,973,000) | |
| Balance September 30, 2024 | 14,746,172 | $ | - | $64,172,000 | $(62,769,000) | $1,403,000 |
Warrants
During the nine months ended September 30, 2024,122,739 warrants at a weighted average exercise price of $9.10 per share expired.
Equity Incentive Plan
Through 2022, the Company issued equity awards under the 2015 Equity Incentive Plan (the “2015 Plan”) and outside the Plan. In June 2023, the Company’s stockholders adopted the 2023 Equity Incentive Plan (the “2023 Plan”), reserving 650,000 shares for future issuance. The Board of Directors discontinued further grants under the 2015 Plan. In March 2024, the Board of Directors amended the 2023 Plan to reserve an additional 650,000 shares for future issuance, bringing the total for the plan to 1,300,000, and to provide an evergreen provision that reserves additional shares depending on future non-plan issuances of common stock.
As of September 30, 2024, the Company has $545,000 of total unrecognized share-based compensation expense relative to unvested options, stock awards and stock units, which is expected to be recognized over the remaining weighted average period of 2.8 years.
Stock Options
The following is a summary of stock option activity for the nine months ended September 30, 2024:
| Number of Options | Weighted average exercise price per share | Remaining term in years | |
|---|---|---|---|
| Outstanding on December 31, 2023 | 587,091 | $6.50 | 3.6 |
| Issued | 238,482 | $2.05 | 8.0 |
| Expired | (71,930) | $7.95 | |
| Outstanding on September 30, 2024 | 753,643 | $4.95 | 5.3 |
| Exercisable, September 30, 2024 | 540,681 | $5.98 | 3.8 |
The fair value of the options issued was calculated using the Black-Scholes option pricing model, based on the following:
| Expected term (in years) | 8.0 | |
|---|---|---|
| Expected volatility | 93.5% | |
| Risk-free interest rate | 4.2% | |
| Expected dividends | $ | - |
| Weighted average grant date fair value per share | $1.77 |
Restricted Stock
The following is a summary of restricted stock award and restricted stock unit activity for the nine months ended September 30, 2024:
| Number of shares | Weighted average grant date fair value | |
|---|---|---|
| Unvested at January 1, 2024 | 32,606 | $4.82 |
| Granted | 65,000 | $1.73 |
| Vested | (10,733) | $5.58 |
| Unvested at September 30, 2024 | 86,873 | $2.41 |
Performance Share Units
During 2023 and 2024, the Company issued performance share units (“PSUs”) that represented shares potentially issuable based upon Company and individual performance in the years of issuance.
The following table summarizes the activity for the Company’s unvested PSUs for the nine months ended September 30, 2024:
| Number of shares | Weighted average grant date fair value | |
|---|---|---|
| Unvested at January 1, 2024 | 63,888 | $1.70 |
| Granted | 429,844 | $1.22 |
| Vested | (55,217) | $1.15 |
| Unvested and expected to vest at September 30, 2024 | 438,515 | $1.20 |
In February 2023, the unvested awards issued and outstanding for individual performance under the 2022 PSU program were modified to cash-settle the original grant-date fair value of approximately $80,000, resulting in incremental compensation of $56,000 after considering the $24,000 fair value of the vested shares at the date of the modification. Additionally, the Company performance targets were modified to allow approximately 71,000 PSUs to vest, with an additional time-based vesting requirement for approximately 26,000 of the PSUs. Because the awards did not vest based on the original terms, the modification was considered a new grant, resulting in $64,000 in compensation expense in the nine months ended September 30, 2023.
The Company adopted a 2024 PSU program in March 2024, granting approximately 430,000 PSUs at target performance against company-wide and individual performance metrics. The results for the three and nine months ended September 30, 2024 include $79,000 and $289,000, respectively, in expense for the 2024 PSU program. Estimates of expense associated with 2024 performance will be reassessed each quarter through the performance period.
Note 7. Income Taxes
ASC 740 requires a valuation allowance to reduce the deferred tax assets reported if, based on the weight of evidence, it is more than likely than not that some portion or all the deferred tax assets will not be recognized. Accordingly, at this time the Company has placed a valuation allowance on all tax assets. As of September 30, 2024, the estimated effective tax rate for 2024 waszero.
There are open statutes of limitations for taxing authorities in federal and state jurisdictions to audit our tax returns from 2018 through the current period. Our policy is to account for income tax related interest and penalties in income tax expense in the statement of operations.
For the three and nine months ended September 30, 2024 and 2023, the Company did not incur any interest and penalties associated with tax positions. As of September 30, 2024, the Company did not have any significant unrecognized uncertain tax positions.
Note 8. Liquidity
During the nine months ended September 30, 2024, the Company used $1,544,000 in operations. As of September 30, 2024, the Company had $1,371,000 of working capital, including $401,000 in cash and excluding $499,000 in disputed co-manufacturer accounts payable (Note 4).
The Company has a history of negative cash flow and operating losses, which were expected to improve with growth. As described more fully in Note 4, the dispute and subsequent contract termination with the Manufacturer has resulted in limitations in 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, contributing $320,000 to the cash used in operations in the first half of 2024. The inventory build allowed the Company to generate a 40% increase in revenue in the three months ended September 30, 2024 compared to the prior year quarter. Accounts receivable increased with revenue by $504,000 compared with September 30, 2023. The Company secured a receivables-based line of credit in August 2024 of $1,500,000, with $1,400,000 available to borrow as of September 30, 2024. Management expects that the cash cycle will shorten as additional contracted capacity commences production in the fourth quarter of 2024, offset by additional working capital necessary for further anticipated growth. 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.
Although alleviated, the financial position at September 30, 2024 and historical results raise substantial doubt about the Company’s ability to continue as a going concern. As described, the Company has taken and partially completed steps to mitigate the dispute related issues. Management believes that other potential actions are feasible, including raising additional financing and reducing growth-related expenditures. While management cannot predict with certainty whether additional actions would achieve the predicted outcome, the availability of such options, along with the actions already taken, resulted in the alleviation of the substantial doubt about the Company’s ability to continue as a going concern.
The text of this filing, as the company filed it with the SEC, without its images or exhibits. This is not investment advice.