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, 2025 and 2024. 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 is primarily engaged in selling frozen beverages and food. As a result of the Acquisition, the Company sells raw and processed milk to a single customer. Continuation of the raw and processed milk business is strategic from the standpoint of our supply chain and capacity utilization.
The Company’s legacy 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 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.
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.
The Company conducts sales through several channels, including National Accounts, Regional Accounts, and Broadline Distributors.
The raw and processed milk is sold directly to a single customer.
As of April 13, we have 32 employees and 3 consultants.
In 2025, Barfresh utilized contract manufacturers to manufacture the predominate majority of all of the products in the United States. Barfresh anticipates that it will manufacture the majority of its products in 2026.
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:
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.
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 products, which provide immediate benefit to the customer.
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.
Allocate the transaction price to performance obligations in the contract
Since the Company’s contracts contain a single performance obligation, delivery of products, the transaction price is allocated to that single performance obligation.
Recognize revenue when or as the Company satisfies a performance obligation
The Company recognizes revenue from the sale of products 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.
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
We determined that we operate in two reportable segments: Frozen Beverages and Food, and Raw and Processed Milk. The following table summarizes revenue and gross profit by segment for the years ended December 31, 2025 and 2024:
Change
Percent
Revenue
Frozen beverages and food
Raw and processed milk
Revenue
Gross profit
Frozen beverages and food
Raw and processed milk
Gross profit
Revenue was $14,208,000 in 2025 compared to $10,717,000 in 2024, an increase of $3,491,000, or 33%. Arps Dairy contributed $2,852,000 to revenue, including $2,748,000 in raw and processed milk sales. Our revenue in 2025 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 and growth of our Pop & Go juice pops, introduced in the fourth quarter of 2024, partially offset by declining revenue from our bulk, single serve and smoothie carton products.
Cost of revenue was $11,094,000 in 2025 compared to $7,049,000 in 2024, an increase of $4,045,000, or 57%. Cost of revenue increased at a higher rate compared to revenue due to the inclusion of the raw and processed milk operations after the Acquisition. Products in this segment are generally commodities with commensurate margins, but provide a strategic milk supply to the business and contribute to fixed overhead costs. Cost of revenue in the frozen beverages and food segment, which consisted primarily of Barfresh legacy products in 2025, increased 20%. The rate of increase in cost of revenue exceeded revenue growth due to start up costs at Arps Dairy, provisions for anticipated expirations of bulk product inventory, and provisions for ingredient related cost obligations to conclude our multi-year co-manufacturing agreements.
Our gross profit was $3,114,000 (22%) and $3,668,000 (34%) for 2025 and 2024, respectively. Excluding production relocation cost and ingredient contract obligations, our gross profit was $3,177,000 in 2025 (22%) and $3,951,000 in 2024 (37%).
Gross profit from frozen beverages and food was $2,977,000 in 2025 (26%) compared to $3,668,000 in 2024 (34%). The decrease is due to product mix, as bulk, single serve and smoothie carton products have generally sold at a higher gross margin compared to smoothie bottles. Additionally, gross profit was impacted by the increase in cost of revenue from start-up costs and inventory provisions.
Gross profit from raw and processed milk was $137,000 in 2025 (5%).
Selling, marketing and distribution expense
Change
Percent
Sales and marketing
Storage and outbound freight
Selling, marketing and distribution expense increased approximately $43,000 (1%) from $3,139,000 in 2024 to $3,182,000 in 2025.
Sales and marketing expense decreased approximately $14,000 (1%) from approximately $1,666,000 in 2024 to $1,652,000 in 2025.
Storage and outbound freight expense increased approximately $57,000 (4%) from $1,473,000 in 2024 to $1,530,000 in 2025, primarily because of the 7% increase in frozen beverage and food revenue over the same period, partially offset by freight efficiencies, and lower storage and inventory management cost in 2024. We incurred $99,000 in outbound freight in 2025 for processed milk deliveries.
General and administrative expense
Change
Percent
Personnel costs
Stock based compensation
Legal, professional and consulting fees
Research and development
Other general and administrative expenses
Business acquisition expense
General and administrative expense increased approximately $143,000 (5%) from $3,043,000 in 2024 to $3,186,000 in 2025.
Personnel cost represents the cost of employees including salaries, bonuses, employee benefits and employment taxes and continues to be our largest cost. Personnel cost decreased by approximately $37,000 (3%) from $1,250,000 in 2024 to $1,213,000 in 2025. The decrease in personnel cost resulted primarily from a reduction in co-manufacturing administration headcount, partially offset by the addition of general and administrative personnel at Arps Dairy.
Stock-based compensation decreased by $248,000 (32%) from $784,000 in 2024 to $536,000 in 2025. The decrease is due to lower attainment under performance awards and the non-recurrence of the two-year extension of expiring board of director options in December 2024.
Legal, professional and consulting fees decreased by approximately $61,000 (22%) due to non-recourse litigation funding secured in May of 2024. Legal, professional and consulting fees associated with the Acquisition are included in business acquisition expense.
Other general and administrative expenses decreased approximately $25,000 (4%) from $595,000 in 2024 to $570,000 in 2025.
Business acquisition expense of $518,000 represents legal, accounting, and consulting fees, as well as travel associated with the Acquisition.
Interest expense
Interest expense was $217,000 in 2025 compared to $52,000 in 2024. The increase of $165,000 is a result of utilization of receivables financing throughout the year, and mortgage debt, notes and lease financing related to the Acquisition and the purchase of equipment required for the New Facility.
Net loss
We had net losses of approximately $2,694,000 and $2,825,000 for the years ended December 31, 2025 and 2024, 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.
On February 5, 2025, we 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, raising $2,974,000.
Our continuing dispute with the Manufacturer and the resulting loss of product supply in 2022 negatively impacted our financial position, results of operations and cash flow. Subsequently, we contracted with a co-manufacturer for additional smoothie bottle manufacturing capacity. While expanded capacity became available in the fourth quarter of 2024, we were notified in 2025 that other co-manufacturers elected to discontinue production of smoothie cartons and smoothie bottles in December 2025 and January 2026, respectively. The Acquisition was undertaken to resolve constrained capacity experienced since 2022 under the co-manufacturing business model.
In order to consummate the Acquisition, we paid $1,223,000, net of cash acquired, to purchase 100% of Arps Dairy stock. Additionally, we incurred $518,000 in acquisition costs in 2025. In order to finance the Acquisition, we increased our receivables-based line of credit in September 2025 to $2,500,000. As a result of the Acquisition, $5,251,000 of mortgage debt, construction related payables and advances from former shareholders payable by Arps Dairy became short-term financial commitments of the Company. The Acquisition was structured to allow us to take control of Arps Dairy manufacturing operations ahead of completing all necessary long-term financing activities.
Following the Acquisition, Arps Dairy secured a receivables-based line of credit of $1,500,000.
We acquired $728,000 of equipment through leasing transactions in 2025. In December 2025, we were granted $2,400,000 to fund up to 50% of the cost of new equipment purchases and installation for the New Facility.
During the year ended December 31, 2025, we used $1,666,000 in operations. Our net loss adjusted for non-cash operating expenses was a loss of $2,839,000, while changes in current assets and liabilities provided $1,173,000 primarily because of delayed payments to co-manufacturers who discontinued providing product in December 2025 and January 2026.
As of December 31, 2025, we had negative working capital of $6,303,000, including $2,170,000 of mortgage debt and $2,433,000 of construction payables, compared with working capital $606,000 on December 31, 2024. Disputed accounts payable due to the Manufacturer of $499,000 are excluded from both December 31, 2025 and 2024 working capital amounts.
In February 2026, $400,000 of Arps selling shareholder advances were converted into shares of our common stock.
In March 2026, we raised $7,528,000 through the sale of convertible promissory notes. The proceeds were used to retire $2,541,000 in mortgage debt and construction payables, and are expected to be used to repay remaining construction related payables as well as complete construction of the New Facility in 2026.
Our operations to date have been financed by the sale of securities, the issuance of convertible and short-term debt and equipment leasing. Our liquidity needs will depend on careful management of the construction of the New Facility, as well as how quickly we are able to profitably ramp up sales, achieve manufacturing cost synergies anticipated as a result of the Acquisition, control and reduce variable operating expenses, and control fixed overhead expense. There are no assurances that the grant received in December 2025 and the proceeds from the sale of convertible promissory notes in March 2026 will be sufficient to carry out our current plan of operations. We anticipate that we will have additional sources of liquidity, if required, through mortgage financing supported by the guarantee of the United States Department of Agriculture, and equipment lease financing, among other options. However, there are no assurances that these funds will be available. If we are unable to generate sufficient cash flow from operations, control construction costs, or raise additional capital through debt issuances, we may be required to raise additional funds in the form of equity.
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.
