BARFRESH FOOD GROUP INC. Commitments Disclosure

Note 6. Commitments and Contingencies

 

Lease Commitments, Construction and Demolition

 

The Company leases headquarters 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, 2026. The Company incurred lease expense of $85,000 for the years ended December 31, 2025 and 2024, respectively. Due to the short-term nature of the extensions, there is no right of use asset or related liability as of December 31, 2025 and 2024. The lease was not extended on March 31, 2026, and new commitments for headquarters facilities are leased on a month-to-month basis.

 

During 2023, the Arps Dairy sold its manufacturing facility (the “Existing Facility”) and purchased a different facility, executing both transactions with the same counterparty. Following the exchange, Arps Dairy commenced to expand the acquired property to provide a 44,000 square foot of production and office space (the “New Facility”). Arps Dairy continues to operate at the Existing Facility under a leasing arrangement. The initial lease term was 18 months, and the lease was classified as an operating lease. Additionally, the counterparty leases space at the New Facility. Neither party pays rent for the space that it occupies.

 

In connection with the Acquisition, the lease on the Existing Facility was extended until September 30, 2026 to permit the completion of the New Facility. Right of use assets and lease liabilities related to the free rent periods for the Existing Facility and New Facility were considered immaterial at the Acquisition date and were not considered in accounting for the business combination (Note 11). The Company is subject to penalties of $1,000 per day if it has not vacated the Existing Facility by September 30, 2026.

 

 

The New Facility expansion is expected to cost $6,000,000, of which $3,706,000 was incurred prior to the Acquisition (the “Construction Obligations”). As of December 31, 2025, Arps Dairy had incurred $4,388,000, $1,782,000 of which was construction related. In conjunction with the Acquisition, the contractor agreed to forebear from filing a mechanics lien against the building through December 2, 2025. Additionally, the agreement with the contractor stipulates that if any portion of the balance remains outstanding after December 31, 2025, it will accrue interest at 8% per annum from day sixty-one until repayment is received, subject to rate adjustment for scope modifications.

 

The Company is liable for the demolition of the Existing Facility, once it has vacated the premises. The Company has been awarded a $100,000 grant to pay for the demolition, which expires on December 31, 2026. No liability is currently recorded for the demolition as management believes the grant is sufficient to cover the liability.

 

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.

 

In 2025, the California State Court heard on the merits of fraud claims included in the complaint and determined that there was sufficient evidence to allow the claims to be heard. A trial date has been set for April 2027.

 

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.