UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended SeptemberJune 30, 20152016

 

or

 

[  ] 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:000-55131

 

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.)
   
8530 Wilshire Blvd., Suite 450, Beverly Hills, California 90211
(Address of principal executive offices) (Zip Code)

 

310-598-7113

(Registrant’s telephone number, including area code)

 

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

 

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 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.

[X] Yes [  ] No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).

[X] Yes [  ] No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer [  ]Accelerated filer [  ]
Non-accelerated filer [  ] (Do not check if a smaller reporting company)Smaller reporting company [X]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

[  ] Yes [X] No

 

As of November 10, 2015,August 4, 2016, there were 79,884,52195,157,137 outstanding shares of common stock of the registrant.

 

 

   

 

TABLE OF CONTENTS

 

 

Page


Number

PART I - FINANCIAL INFORMATION 
  
Item 1.Financial Statements.F-13
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations.314
Item 3.Quantitative and Qualitative Disclosures About Market Risk.820
Item 4.Controls and Procedures.820
   
PART II - OTHER INFORMATION 
  
Item 1.Legal Proceedings.921
Item 1A.Risk Factors.921
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds.921
Item 3.Defaults Upon Senior Securities.921
Item 4.Mine Safety Disclosures.921
Item 5.Other Information.921
Item 6.Exhibits.921
  21
SIGNATURES1022

 

 2 

 

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.

 

Barfresh Food Group Inc.

Condensed Consolidated Balance Sheets

June 30, 2016

 

 September 30, 2015 March 31, 2015  June 30, 2016 December 31, 2015 
 (Unaudited) (Audited)  (Unaudited) (Audited) 
Assets                
Current assets:                
Cash $1,511,686  $5,364,657  $1,305,126  $1,986,004 
Accounts Receivable  119,796   46,096   318,874   28,596 
Inventory  310,595   165,847   265,189   327,961 
Prepaid expenses and other current assets  36,190   6,386   61,355   30,524 
Total current assets  1,978,267   5,582,986   1,950,544   2,373,085 
Property, plant and equipment, net of depreciation  619,033   545,454   1,390,568   688,772 
Intangible asset, net of amortization  630,447   651,433   611,891   617,257 
Deposits  16,451   16,451   17,451   16,451 
Total Assets $3,244,198  $6,796,324  $3,970,454  $3,695,565 
                
Liabilities And Stockholders’ Equity                
Current liabilities:                
Accounts payable $162,593  $133,254  $380,821  $131,804 
Accrued expenses  369,867   424,262   800,772   236,312 
Deferred rent liability  2,040   1,484   742   1,855 
Short-term notes payable - related party, net of discount  300,000   157,393   50,000   50,000 
Short-term notes payable, net of discount  50,000   539,631   50,000   50,000 
Convertible note-related party, net of discount  -   119,993 
Convertible note, net of discount  50,000   325,114   234,045   1,975,878 
Current portion of long term debt  14,039   7,551   11,378   14,039 
Total current liabilities  948,539   1,588,689   1,527,758   2,579,881 
Long Term Debt  49,505   28,916 
Long Term Debt, net of current portion  30,984   45,992 
Total liabilities  998,044   1,617,605   1,558,742   2,625,873 
                
Commitments and contingencies (Note 6)  -   -         
                
Stockholders’ equity:                
Preferred stock, $0.000001 par value, 5,000,000 shares authorized, none issued or outstanding  -   -   -   - 
Common stock, $0.000001 par value; 295,000,000 shares authorized; 79,884,521 and 77,720,828 shares issued and outstanding at September, 2015 and March 31, 2015, respectively  80   78 
Common stock, $0.000001 par value; 300,000,000 shares authorized; 94,714,583 and 86,186,453 shares issued and outstanding at June 30, 2016 and December 31, 2015, respectively  95   86 
Additional paid in capital  14,923,086   14,034,623   22,357,518   15,798,338 
Accumulated deficit  (12,675,067)  (8,808,640)  (19,945,901)  (14,728,731)
Unearned services  (1,945)  (47,342)
Total stockholders’ equity  2,246,154   5,178,719   2,411,712   1,069,693 
Total Liabilities and Stockholders’ Equity $3,244,198  $6,796,324  $3,970,454  $3,695,566 

 

See the accompanying notes to the condensed consolidated financial statements

 

 F-13 

 

Barfresh Food Group Inc.

Condensed Consolidated Statements of Operations

For the Three and Six Months Ended June 30, 2016 and June 30, 2015

(Unaudited)

 

 For the three months ended For the six months ended  For the three months ended
June 30,
 For the six months ended
June 30,
 
 September 30, September 30,  2016 2015 2016 2015 
 2015 2014 2015 2014          
Revenue $226,127  $40,233  $394,227  $101,725  $559,172  $168,099  $834,497  $221,732 
Cost of revenue  119,229   19,744   209,431   61,103   277,934   90,202   418,670   119,550 
Gross profit  106,898   20,489   184,796   40,622   281,238   77,897   415,827   102,182 
                            
Operating expenses:                                
General and administrative  2,138,815   778,800   3,745,545   1,456,031   2,724,652   1,614,587   5,298,717   2,767,566 
Depreciation Amortization  42,524   29,196   87,572   57,916   52,059   45,048   98,807   84,446 
Total operating expenses  2,181,339   807,996   3,833,117   1,513,947   2,776,711   1,659,635   5,397,524   2,852,012 
                                
Operating loss  (2,074,441)  (787,507)  (3,648,321)  (1,473,325)  (2,495,473)  (1,581,738)  (4,981,697)  (2,749,830)
                                
Other expenses                                
Interest  62,507   126,766   210,249   237,756   14,142   147,741   235,473   285,477 
Loss on debt conversion  -   -   7,858   - 
  62,507   126,766   218,107   237,756 
                                
Net (loss) $(2,136,948) $(914,273) $(3,866,427) $(1,711,081) $(2,509,615) $(1,729,479) $(5,217,170) $(3,035,307)
                                
Per share information - basic and fully diluted:                                
Weighted average shares outstanding  78,496,262   66,254,136   78,188,337   65,887,401   94,635,203   77,880,413   91,955,895   73,219,231 
Net (loss) per share $(0.03) $(0.01) $(0.05) $(0.03) $(0.03) $(0.02) $(0.06) $(0.04)

 

See the accompanying notes to the condensed consolidated financial statements

 

 F-24 

 

Barfresh Food Group Inc.

Condensed Consolidated Statements of Cash Flows

For the six months ended June 30, 2016 and 2015

(Unaudited)

 

 For the six month ended
September 30,
 
 2015 2014  2016 2015 
Net Cash used in operations $(3,366,381) $(1,134,262) $(3,728,465) $(2,435,727)
                
Cash flow from investing activities:                
Investment in trademark  (9,906)  (11,438)  (25,343)  (320)
Purchase of equipment  (138,945)  (191,249)  (796,270)  (137,803)
Sale of equipment  7,684   1,977   26,374   9,957 
        
Net Cash used in investing activities  (141,167)  (200,710)  (795,239)  (128,166)
                
Cash flow from financing activities:                
Exercise of Warrant  2,500   - 
Repayment of Short Term Notes  (75,000)  - 
Repayment of Short Term Notes -related party  (300,000)  - 
Long term borrowing  33,000   - 
Issuance of common stock and warrants for cash  3,569,995   5,277,489 
Exercise of Warrant for cash  265,000   0 
Exercise of Option for cash  25,500   313,550 
Repayment of Short Term Notes payable  -   (75,000)
Repayment of Short Term Notes-related party  -   (300,000)
Repayment of long term debt  (5,923)  -   (17,669)  13,653 
Net cash used in financing activities  (345,423)  -   3,842,826   5,229,692 
                
Net (decrease) in cash  (3,852,971)  (1,334,972)
Net increase (decrease) in cash  (680,878)  2,665,799 
Cash at beginning of period  5,364,657   2,632,612   1,986,004   821,309 
Cash at end of period $1,511,686  $1,297,64  $1,305,126  $3,487,108 
        
                
Supplemental disclosure of cash flow information:                
Cash paid for interest $57,720  $3,182  $6,143  $- 
Cash paid for income taxes $-  $-  $-  $- 
                
Non-cash financing activities        
Non-cash financial activities        
Common Stock issued for services $60,500  $476,333  $95,000  $313,549 
Common stock issued on conversion of note $50,000  $- 
Common stock issued on conversion of convertible note $389,341  $- 
Common Stock issued on conversion of note $2,529,453  $- 
Common Stock issued on conversion of convertible note $50,000  $57,857 
Fair value of warrants issued with convertible notes $50,000  $- 

 

See the accompanying notes to the condensed consolidated financial statements

 

 F-35 

Barfresh Food Group Inc.

Notes to Condensed Consolidated Financial statements

September 30, 2015 and 2014

(Unaudited)

 

Note 1. Basis of Presentation and Significant Accounting Policies

 

Throughout this report, the terms “our”, “we”, “us” and the “Company” refer to Barfresh Food Group Inc., including its subsidiaries. The accompanying unaudited condensed financial statements of Barfresh Food Group Inc. at SeptemberJune 30, 20152016 and 20142015 have been prepared in accordance with generally accepted accounting principles (“GAAP”) for interim financial statements, instructions to Form 10-Q, and Regulation S-X. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted. These condensed financial statements should be read in conjunction with the financial statements and notes thereto included in our annual report on Form 10-K10-KT for the yearnine months ended MarchDecember 31, 2015. In management’s opinion, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation to make our financial statements not misleading have been included. The results of operations for the periods ended SeptemberJune 30, 20152016 and 20142015 presented are not necessarily indicative of the results to be expected for the full year. The MarchDecember 31, 2015 balance sheet has been derived from our audited financial statements included in our annual report on Form 10-K10-KT for the yearnine months ended MarchDecember 31, 2015.

 

Basis of Consolidation

 

The condensed 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 and revenues and expenses during the years reported. Actual results may differ from these estimates.

 

Inventory

 

Inventory consists of finished goods and is carried at the lower of cost or market on a first in first out basis.

 

Intangible Assets

 

Intangible assets are comprised of patents, net of amortization. The patent costs are being amortized over the life of the patents, which is twenty years from the date of filing the patent applications. In accordance with ASC Topic 350Intangibles - 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, legal fees and similar costs relating to patents have been capitalized.

 

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 deemed to be reasonably assured. The estimated useful lives used for financial statement purposes are:

 

Furniture and fixtures: 5 years

Equipment: 7 years

Leasehold improvements: 2 years

Vehicle: 5 years

 

F-4

Barfresh Food Group Inc.

Notes to Condensed Consolidated Financial statements

September 30, 2015 and 2014

(Unaudited)

Revenue Recognition

 

We recognize revenue from products sold when there is persuasive evidence of an arrangement, delivery has occurred or services have been rendered, the sales price is determinable and collection is reasonably assured.

 

Earnings 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 SeptemberJune 30, 20152016 and 20142015 any equivalents would have been anti-dilutive as we had losses for the periods then ended.

 

6

Research and Development

Expenditures for research activities relating to product development and improvement are charged to expense as incurred. We incurred $17,672credit of $8,335 in a prior period relates to credit received for refund and $33,577$0 in research and development expenses for the three-month periods ended June 30, 2016 and 2015, respectively, and $15,233 and credit of $2,061 in a prior period relates to credit received in research and development expenses for the six-month periods ended SeptemberJune 30, 20152016 and 2014, respectively, and $9,289 and $27,925 in research and development expenses for the three-month periods ended September 30, 2015, and 2014, respectively.

 

Rent Expense

We recognize rent expense on a straight-line basis over the reasonably assured lease term as defined in ASC Topic 840,Leases(“ASC 840”).

 

Recent Pronouncements

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

ASU Update 2014-09Revenue Fromfrom Contracts Withwith Customers (Topic 606)606) issued May 28, 2014 by FASB and IASB converged guidance on recognizing revenue in contracts with customers withon an effective date after December 15,31, 2017 will be evaluated as to impact and implemented accordingly. In addition,

ASU Update 2014-15Presentation of Financial Statements-Going Concern (Sub Topic 205-40) issued August 27, 2014 by FASB defines management’smanagements responsibility to evaluate whether there is a substantial doubt about an organization’sorganizations ability to continue as a going concern. The additional disclosure requirementrequired is effective after December 15, 201631, 2015 and will be evaluated as to impact and implemented accordingly.

In July 2015, the FASB issued ASU 2015-11, Inventory, which simplifies the measurement principle of inventories valued under the First-In, First-Out (“FIFO”) or weighted average methods from the lower of cost or market to the lower of cost and net realizable value. ASU 2015-11 is effective for reporting periods beginning after December 15, 2016 including interim periods within those annual periods. We do not expect the standard to have a material impact on our Consolidated Financial Statements.

In November 2015, the FASB issued ASU 2015-17, Balance Sheet Classification of Deferred Taxes, which requires that deferred tax assets and liabilities be classified as noncurrent on the consolidated balance sheet. ASU 2015-17 is effective for annual periods beginning after December 15, 2016, including interim periods within those annual periods. Early adoption is permitted as of the beginning of an interim or annual reporting period. Upon adoption, ASU 2015-17 may be applied either prospectively or retrospectively. We do not expect the adoption of this guidance to have a material impact on our Consolidated Financial Statements.

In February 2016, the FASB issued ASU No. 2016-02, Leases, to improve financial reporting about leasing transactions. This ASU will require organizations that lease assets (“lessees”) to recognize a lease liability and a right-of-use asset on its balance sheet for all leases with terms of more than twelve months. A lease liability is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis and a right-of-use asset represents the lessee’s right to use, or control use of, a specified asset for the lease term. The amendments in this ASU simplify the accounting for sale and leaseback transactions primarily because lessees must recognize lease assets and lease liabilities. This ASU leaves the accounting for the organizations that own the assets leased to the lessee (“lessor”) largely unchanged except for targeted improvements to align it with the lessee accounting model and Topic 606, Revenue from Contracts with Customers.

The amendments in ASU 2016-02 are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition approach. The Company is evaluating the potential impact of ASU 2016-02 on its Consolidated Financial Statements.

7

 

Note 2. Property Plant and Equipment

 

Major classes of property and equipment at SeptemberJune 30, 20152016 and MarchDecember 31, 2015:

 

 September 30, 2015 March 31, 2015  June 30, 2016 December 31, 2015 
Furniture and fixtures $13,604  $10,794  $13,604  $13,604 
Equipment  703,047   632,596   797,518   705,782 
Leasehold Improvements  3,300   3,300 
Leasehold Improvement  3,300   3,300 
Vehicle  116,752   58,752   90,378   116,752 
  836,703   705,442   904,800   839,438 
Less: accumulated depreciation  (217,670)  (159,988)  (317,830)  (249,732)
  586,970   589,706 
Equipment not yet placed in service  803,598   99,066 
Property and equipment, net of depreciation  619,033   545,454  $1,390,568  $688,772 

 

We recorded depreciation expense related to these assets of $57,682$36,683 and $27,284$29,675 for the six-month periodsthree-months ended SeptemberJune 30, 20152016 and 2014,2015, respectively and $28,007$68,098 and $13,642$53,700 for the three-month periodssix-months ended SeptemberJune 30, 2016 and 2015, and 2014, respectively.

F-5

Barfresh Food Group Inc.

Notes to Condensed Consolidated Financial statements

September 30, 2015 and 2014

(Unaudited)

 

Note 3. Intangible Assets

 

As of SeptemberJune 30, 20152016 and MarchDecember 31, 2015, intangible assets consist primarily of patent costs and trademarks of $ 758,712$785,818 and $748,806,$760,475, less accumulated amortization of $128,265$173,927 and $97,373,$143,218, respectively.

 

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 calculated through the expiration date of the patent, which is December,August, 2025. The amount charged to expenses for amortization of the patent costs was $30,892$15,332 and $30,633$15,373 for the three-month periods ended June 30, 2016 and 2015, respectively, and $30,708 and $30,746 for the six-month periods ended SeptemberJune 30, 2015and 2014, respectively,2016 and $15,519 and $15,555 for the three-month periods ended September 30, 1015 and 2014,2015, respectively.

 

Estimated amortization expense related to the patent as of SeptemberJune 30, 20152016 is as follows:

 

Fiscal Years Ending March 31,   
Years Ending December 31,   
2016 (6 months remaining) $41,579   $30,797 
2017 61,492    61,595 
2018 61,492    61,595 
2019 61,492    61,595 
2020 61,492    61,595 
2021   61,595 
Thereafter  342,900    273,119 
Total $630,447   $611,891 

 

Note 4. Related Parties

As disclosed below in Note 5, there remains $50,000 outstanding in a Short-Term Note Payable to a related party, who is a significant shareholder and a director.

As disclosed below in Note 6, members of management, directors, and members of their families, participated in $635,000 of the total $2,670,000 convertible notes offering.

As disclosed below in Note 9, members of management and directors have received shares of stock and options in exchange for services.

8

Note 5. Short-Term Notes Payable (Related and Unrelated)

 

In December 2013, we closed an offering of $775,000 in short-term notes payable (“Short-Term Notes”), $500,000 of which was purchased by a significant shareholder $100,000 was purchased by the family trust of an officer, director and significant shareholder and $100,000 was purchased by a company controlled by a director and significant shareholder. During December 31, 2014 the $100,000 that was purchased by the family trust of an officer, director and significant shareholder is no longer considered to be owned by the officer as he is no longer, nor is any other related party, the trustee and does not exercise control over the trust and is not classified as a related party debt. The Short-Term Notes bear interest at a rate of 2% per annum and were due and payable on December 20, 2014. We also issued 1,291,667 warrants to the Short-Term Note holders for the right to purchase shares of our common stock. Each warrant entitles the holder to purchase one share of our common stock at a price of $0.45 per share, may be exercised on a cashless basis and are exercisable for a period of five years.

 

In accordance with the guidance in ASC Topic 470-20Debt with Conversion and Other Options(“ASC 470”), we first calculated the fair value of the warrants issued and then determined the relative value of the Short-Term Notes.

 

The relative value of the warrants was $298,232, which was the amount recorded as debt discount.discount to the short term notes. The amounts recorded as debt discount waswere amortized over the life of the note, one year,one-year term, and chargedaccreted to interest expense. We estimated the effective interest rate as calculated to be approximately 52% but paid cash at a rate of 2% per annum.

 

We exercised our right to extend the due date of the Short-Term Notes to June 20, 2015. The extended Short-Term Notes bear at the rate of 3% per annum and we required us to issue additional warrants (“Extension Warrants”). We issued 898,842 warrantsExtension Warrants to the Short-Term Note holders for the right to purchase shares of our common stock. Each warrantExtension Warrant entitles the holder to purchase one share of our common stock at a price of $0.485 per share, may be exercised on a cashless basis and are exercisable for a period of three years.

 

As discussed above, we accounted for the warrants as per the guidance in ASC 470. The relative value of the Extension Warrants, $164,638, was the amount recorded as the new debt discount. The amounts recorded as debt discount were being amortized over the six-month term of the note, and accreted to interest expense. We estimated the effective interest rate as calculated to be approximately 53% but pay cash at a rate of 3% per annum.

The fair value of the Extension Warrant, $0.23 per share, was calculated using the Black-Sholes option pricing model using the following assumptions:

Expected life (in years)3
Volatility (based on a comparable company)76.88%
Risk Free interest rate1.10%
Dividend yield (on common stock)-%

On June 20, 2015, some of the Short-Term Notes were amended again, and some of the Short-Term Notes were redeemed. Short-Term Notes totaling $700,000 were amended to provide for repayment on June 20, 2015 of 50% of the face value, plus accrued interest to that date ($10,500), and extension of the remaining balance until September 20, 2015, and the interest rate on the notes that were extended was adjusted to 10%. The remaining Short-TermsShort-Term Notes were fully redeemed on June 20, 2015. One such note in the amount of $25,000 was redeemed for cash, and one such note in the amount of $50,000 was redeemed for 71,429 shares of our common stock. As a result of the above described amendments and redemptions of the Short-TermsShort-Term Notes, all remaining unamortized debt discount was expensed as of June 20, 2015.

 

Of the balance of the notes due that were payable on September 20, 2015, one note for $250,000 was repaid on October 1, 2015, and two notes, totaling $100,000one to a related party in the amount of $50,000, and one to an unrelated party in the amount of $50,000, were extended until DecemberOctober 31, 2015,2016, with 10% interest.

 

F-6

Barfresh Food Group Inc.

Notes to Condensed Consolidated Financial statements

September 30, 2015 and 2014

(Unaudited)

Note 5.6. Convertible NoteNotes (Related and Unrelated)

 

In August 2012, we closed an offering of $440,000 of convertible notes, $50,000 of which was purchased by the family trust of a significant shareholder of ours.notes. The notes bear interest at a rate of 12% per annum and were due and payable on September 6, 2013. In addition, the notes were convertible, at any time after the original issue date until the notes are no longer outstanding, into our common stock at a conversion price of $0.372 per share. We also issued 956,519 warrants to the note holders for the right to purchase shares of our common stock. Each warrant entitled the holder to purchase one share of our common stock at a price of $0.46 per share for a term of seven years.

 

When the convertible notes were due, we settled the notes by repaying $40,000 of the notes in cash, issuing new convertible notes in the amount of $400,000 and received payment for another note in the amount of $20,000. The new notes bear interest at a rate of 12% per annum and arewere due and payable on September 6, 2015. In addition, the new notes arewere convertible at any time after the original issue date until the new notes are no longer outstanding, into our common stock at a conversion price of $0.25 per share. We also issued warrants to the new note holders for the right to purchase shares of our common stock. Each warrant entitles the holder to purchase one share of our common stock at a price of $0.25 per share. There were 1,680,000 warrants issued. The warrants issued with the original notes were cancelled.

 

9

In accordance with the guidance in ASC 470, we first calculated the fair value of the warrants issued and then determined the relative value of the notes and determined that there was a beneficial conversion feature.

 

The fair value of the warrants, $0.13 per share ($216,531 in the aggregate), was calculated using the Black-Sholes option pricing model using the following assumptions:

 

Expected life (in years) 3 
Volatility (based on a comparable company) 85%
Risk Free interest rate 0.91%
Dividend yield (on common stock) - 

 

The relative value of the warrants to the notes was $142,873, which was the amount recorded as a portion of the debt discount. We also recorded a beneficial conversion feature on the convertible notes of $125,905. The amounts recorded as debt discount will beare being amortized over the life of the notes, two years,two- year term, and chargedaccreted to interest expense. We estimated the effective interest rate as calculated to be approximately 74% but the facewill be paying cash at a rate wasof 12% per annum.

 

As of September 30, 2015 allAll debt discount has been amortized.

 

During September 2015, all of the holders of the convertible notes elected to convert the then outstanding $420,000 of notes, $420,000, and accumulated interest of $21,955 to our common stock. We issued 1,557,3671,767,822 shares of our common stock in conversion of these notes.

During late 2015, we raised $2,670,000 through the issuance of convertible promissory notes. The notes bore interest at a rate of 10% and will issuematured in one year. Upon completion of an equity financing which occurred during the remaining 210,455current quarter, holders of approximately 96% of these notes elected to convert all outstanding principal and accrued and unpaid interest under the notes into the class of equity issued in such financing on the same terms as the other investors concurrently with the closing of such financing. During late 2015 we also issued 1,335,000 warrants to the note holders for the right to purchase shares of our common stock. Each warrant entitled the holder to purchase one share of our common stock at a price of $1.00 per share for a term of five years. Of the aggregate offering amount, $635,000 of the notes and warrants to purchase up to 317,500 shares of common stock were placed with members of the Company’s management, including officers and directors of the Company, and family members of certain officers and directors.

We elected early adoption of ASU 2015-03, accordingly issuance cost paid has been recorded as debt discount. The following is a breakdown of the convertible promissory note

  June 30, 2016  December 31, 2015 
Convertible notes (including related party)  250,000   2,720,000 
Less: Debt discount (warrant value)  (15,955)  (564,462)
Less: Debt discount (issuance costs paid)  -   (69,667)
  $234,045  $2,085,871 

We did not record any discount for beneficial conversion as the conversion terms were unknown at the time of issuance. The conversion price was set during the February 2016 equity transaction. At that time the Company evaluated whether a beneficial conversion feature should have been recorded, and concluded that so such beneficial conversion feature needed to be recorded.

The fair value of the warrants, $0.586 per share ($782,863 in the near future.aggregate), was calculated using the Black-Sholes option pricing model using the following assumptions:

Expected life (in years)3
Volatility (based on a comparable company)77.5%
Risk Free interest rate1.73%
Dividend yield (on common stock)-

The relative value of the warrants to the notes was $600,629, which was the amount recorded as a portion of the debt discount. The amount recorded as debt discount are being amortized over the one-year term of the notes, one years, and accreted to interest expense. We estimated the effective interest rate as calculated to be approximately 34% but will be paying cash at a rate of 10% per annum.

10

Note 7. Long term Debt

Long term debt at June 30, 2016 consists of installment agreements on three vehicles maturing on different dates through June 2020. The installment agreements, are with one financial institution and bear no interest. Monthly payments are $949 per month.

The annual maturities of long term debt as of June 30, 2016 are as follows:

For years ending December 31,     
2016  $5,689 
2017   11,390 
2018   11,390 
2019   11,390 
2020   2,503 
Total  $42,362 

 

Note 6.8. Commitments and Contingencies

 

We lease office space under a non-cancelable operating lease, which will expire on November 7, 2016.

 

The aggregate minimum requirements under non-cancelable leases as of SeptemberJune 30, 20152016 is as follows:$31,200.

Fiscal Years ending March 31,   
2016 $46,368 
2017  54,529 
  $100,897 

F-7

Barfresh Food Group Inc.

Notes to Condensed Consolidated Financial statements

September 30, 2015 and 2014

(Unaudited)

 

Note 7.9. Stockholders’ Equity

 

During the six months ended SeptemberJune 30, 2015,2016 pursuant to a securities purchase agreement between us and certain accredited investors, we increased our authorized capitalization to 300,000,000sold 7,561,818 shares of our common stock consisting(“Shares”) and warrants to purchase up to 3,780,909 Shares (“Warrants”) for aggregate gross proceeds to us of 295,000,000$6,049,456. The financing consists of two components: a new equity raise in the amount of $3, 570,000 and the conversion into common equity of $2, 479,456 of principal and interest of convertible promissory notes previously issued. See discussion in Note 6.

The Warrants are exercisable for a term of five-years at a per Share price of $1.00.

The fair value of the warrants, $2,012,168, was estimated at the date of grant using the Black-Scholes option pricing model, with an allocation of the proceeds applied to the warrants. The fair value of the warrants has been included in the total additional paid in capital. The following assumptions were used in the Black-Scholes option pricing model:

Expected life (in years)5
Volatility (based on a comparable company)78.12%
Risk Free interest rate1.23%
Dividend yield (on common stock)-

In addition, we had previously recorded debt discount on the convertible promissory note discussed above. As a result of the conversion we wrote off the remaining balance, $443,422, against additional paid in capital.

Also, during the six months ended June 30, 2016, we issued 210,455 shares of our common stock par value $0.000001per share,upon the conversion of outstanding convertible debt, not included in the equity raise described above, representing $50,000 in principal and 5,000,000 shares of blank check preferred stock, par value $0.000001. During the quarter, our Board of Directors also unanimously approved and adopted the Barfresh Food Group, Inc. 2015 Equity Incentive Plan (the “Plan”). The maximum number of shares that may be issued pursuant to awards under the Plan is 15,000,000 shares.$2,613.70 in interest.

 

During the six months ended SeptemberJune 30, 2015 we issued 97,5812016, the holder of warrants to purchase shares of common stock exercised their rights and purchased 500,000 shares of common stock for an aggregate price of $265,000. In addition the holders of 100,000 warrants exercised their right to a cash-less conversion and received 80,420 shares.

Also during the six months ended June 30, 2016 we issued 64,599 shares of stock to a member of our board of directors in lieu of $50,000 in director fees due and 60,878 shares of common stock in lieu of cash for legal fees. We valued the shares based on the trading value on the date issued.

In addition during the 6 months ended June 30, 2016 we issued 50,000 shares of stock at $60,500,a price of $0.51 per share in exchange for services.outstanding options.

 

During the six months ended SeptemberJune 30, 2015 we granted the right to 1,000,000 shares of restricted common stock to a director of the Company who during the period became an officer of the Company. The stock vests 50% on each of the second and third anniversary of the issuance. In accordance with ASC Topic 718, Compensation - Stock Compensation (“ASC 718”), compensation expense in the amount of $104,167 and $62,500, respectively for the six and three months ended September 30, 2015, was recognized in the statement of operations. In addition, we granted the right to 350,000 shares of restricted to another officer in connection with an employment agreement entered into during the six months ended September 30, 2015. In accordance with ASC Topic 718, Compensation - Stock Compensation (“ASC 718”), compensation expense in the amount of $44,040 and $29,896, respectively for the six and three months ended September 30, 2015 was recognized in the statement of operations.

During the six months ended September 30, 2015,2016, we issued 1,790,0001,262,000 options to purchase our common stock to officers and employees of the Company. In addition, we cancelled 10,000 options to purchase our common stock. The exercise price of the options ranged from $0.50$0.6129 to $0.82$0.83 per share, and are exercisable for periodsa period of between 58 years and 8 years. The options vest under a variety of vesting schedules. Seventy thousand (70,000) of the options vest on the first anniversary of issuance, 850,000 of the options vest on the second anniversary of issuance, and 870,000 of the options vest on the third anniversary of issuance.

 

11

The fair value of the options ($1,181,393528,280 in the aggregate) was calculated using the Black-Sholes option pricing model, based on the criteria shown below, and are being written offexpensed over the lifevesting period of each option.

 

Expected life (in years)  4.55.5 to 8 
Volatility (based on a comparable company)  78%75.81% to 99%77.31%
Risk Free interest rate  1.38%1.49% to 2.11%1.73%
Dividend yield (on common stock)  - 

The total amount of equity based compensation for the three and six month periods ended June 30, 2016 included in additional paid in capital was $270,252 and $515,041, respectively.

 

The following is a summary of outstanding stock options issued to employees and directors as of SeptemberJune 30, 2015:2016:

 

  Number of Options  Exercise price
per share
  Average remaining term in years  Aggregate intrinsic value at date of grant 
Outstanding March 31, 2015  1,600,000   $0.45 - $0.54   3.25  $- 
Issued  1,820,000   $0.45 - $0.82   7.59  $210,000 
Cancelled  (10,000)  -   -   - 
Outstanding September 30, 2015  3,410,000   $0.45 - $0.82   5.51  $210,000 
Exercisable  1,450,000   $0.45 - $0.51   3.05  $- 

F-8

Barfresh Food Group Inc.

Notes to Condensed Consolidated Financial statements

September 30, 2015 and 2014

(Unaudited)

  Number of
Options
  Exercise
price per
share $
  Average
remaining term in years
  Aggregate intrinsic
value at date of
grant $
 
Outstanding December 31, 2015  3,575,000   0.50   -   210,000 
                 
Issued  1,262,000   0.61-0.83   7.91   - 
Cancelled  -   -   -   - 
Exercised  (50,000)  0.51         
Outstanding June 30, 2016  4,787,000   0.45 -0.87   5.88   210,000 
                 
Exercisable  1,580,000    0.45 -0.80   2.47   - 

 

Note 8.10. Outstanding Warrants

 

The following is a summary of all outstanding warrants as of SeptemberJune 30, 2015:2016:

 

 Number of warrants price per share remaining term
in years
 intrinsic value at
date of grant
  Number of warrants price per share remaining term in years intrinsic value at date of grant 
Warrants issued in connection with private placements of common stock  22,033,332  $

0.25 - 1.50

   1.65  $

1,590,567

   17,025,464  $0.25 - 1.50   1.94  $1,590,567 
Warrants issued in connection with private placement of convertible notes  1,680,000  $0.25   0.94  $-   1,680,000  $0.25   0.44  $- 
Warrants issued in connection with short-term notes payable  2,190,509  $

0.45-$0.485

   2.73  $64,583   3,525,509  $0.45-$0.485   2.99  $64,583 
                
Warrants issued for services  300,000  $.025   0.42     

 

During the six monthsix-month period ended SeptemberJune 30, 20152016 holders of 667,560600,000 warrants to purchase shares of our common stock elected to exercise those warrants. Of the warrants exercised 657,560 were cashless and weWe issued 427,316480,420 shares of our common stock in exchange for the warrants and 10,000 were exercised for cash and we issued 10,000 shares of our common stock.received $240,000.

 

Note 9.11. Interest Expense

 

Interest expense includes direct interest of $37,387$5,887 and $33,041$17,661 for the three month periods ended June 30, 2016 and 2015, respectively, and $61,897 and $36,427 for the six month periods ended SeptemberJune 30, 2016 and 2015, and 2014, respectively, and $19,362 and $16,611 for the three months ended September 30, 2015 and 2014, calculated based on the interest rates stated in our various debt instruments.

 

In addition, as more fully described in Notes 45 and 56 above, interest expense includes non-cash amortization of the debt discount of $172,862$8,256 and $204,715$129,303 for the three months ended June 30, 2016 and 2015, respectively and $173,578 and $246,967 for the six months ended SeptemberJune 30, 2016 and 2015, and 2014, respectively and $43,145 and $110,155 for the three months ended September 30, 2015 and 2014.respectively.

 

12

Note 10.12. Income Taxes

 

We account for income taxes in interim periods in accordance with ASC Topic 740, Income Taxes (“ASC 740”). We have determined an estimated annual effective tax rate. The rate will be revised, if necessary, as of the end of each successive interim period during our fiscal year to our best current estimate. As of SeptemberJune 30, 20152016 the estimated effective tax rate for the year will be zero.

 

There are open statutes of limitations for taxing authorities in federal and state jurisdictions to audit our tax returns from 2009 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. There have been no income tax related interest or penalties assessed or recorded.

 

ASC 740 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This pronouncement also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition.

 

For the six monthsmonth periods ended SeptemberJune 30, 20152016 and 2014,2015, we did not have any interest and penalties associated with tax positions. As of SeptemberJune 30, 20152016 we did not have any significant unrecognized uncertain tax positions.

 

Note 11. Business Segments

 

During the three monthssix-month periods ended SeptemberJune 30, 20152016 and 2014,2015, we operated in only one business segment.

 

Note 12. Subsequent Events

 

Management has evaluated all activity and concluded that no subsequent events have occurred that would require recognition in the financial statements or disclosure in the notes to the financial statements.

 

 F-913 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

The following discussion should be read in conjunction with the financial information included elsewhere in this Quarterly Report on Form 10-Q (this “Report”), including our unaudited condensed consolidated financial statements as of September, 2015June 30, 2016 and for the three and six month periods ended SeptemberJune 30, 20152016 and 20142015 and the related notes. References in this Management’s Discussion and Analysis of Financial Condition and Results of Operations section to “us”, “we”, “our” and similar terms refer to Barfresh Food Group Inc. This discussion includes forward-looking statements, as that term is defined in the federal securities laws, based upon current expectations that involve risks and uncertainties, such as plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors. Words such as “anticipate”, “estimate”, “plan”, “continuing”, “ongoing”, “expect”, “believe”, “intend”, “may”, “will”, “should”, “could” and similar expressions are used to identify forward-looking statements.

 

We caution you that these statements are not guarantees of future performance or events and are subject to a number of uncertainties, risks and other influences, many of which are beyond our control, which may influence the accuracy of the statements and the projections upon which the statements are based. Any one or more of these uncertainties, risks and other influences could materially affect our results of operations and whether forward-looking statements made by us ultimately prove to be accurate. Our actual results, performance and achievements could differ materially from those expressed or implied in these forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statements, whether from new information, future events or otherwise.

 

During the nine-month period ended December 31, 2015 we changed our year end from March 31 to December 31, 2015. As a result, our 2015 fiscal period was shortened from twelve months to a nine-month transition period ended on December 31, 2015 (“Transition Period”).

Barfresh is a leader in the creation, manufacturing and distribution of ready to blend frozen beverages. The current portfolio of products includes smoothies, shakes and frappes. All of the products are portion controlled and ready to blend beverage ingredient packs or “beverage packs”. The beverage packs contain all of the solid 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 and patents pending are owned by Barfresh, as well as related trademarks for all of the products. In November 2011, the Company acquired the patent rights in the United States and Canada. The Canadian patent has been granted and the United States Patent and Trademark Office has notified the company that its US patent is “patent pending”.application has been approved and will be granted. On October 15, 2013, the Company acquired all of the related international patent rights, which were filed pursuant to the Patent Cooperation Treaty and have been granted in 13 jurisdictions. Once the US patent is granted, Barfresh will have patents granted in a total of sixteen countries. The patents are pending in the remainder of the jurisdictions that have signed the treaty. In addition, on October 15, 2013, the Company purchased all of the trademarks related to the patented products.

 

The Company has conductedconducts sales through two channels: National Accounts, and through an exclusive nationwide distribution agreement with Sysco Corporation (“Sysco”), the U.S.’s largest broadline distributor, which was entered into during July 2014.

 

The process of obtaining sales orders for National Accounts generally follows several steps, including product demonstration, product testing, and exclusive flavor development for the larger National Accounts. We are currently in various stages of product development and testing with National Accounts representing over 37,000 restaurant locations.

The Company recently moved into full roll outlaunched in market tests with Shari’s Caféseveral major National Key Accounts, and Pies,is focused on moving from in-market tests to national roll-out.

On July 6th, 2016, the Company announced that it had signed a family dining chainsupply agreement with a major global on-site foodservice operator. The agreement, which marked the culmination of a successful in market test conducted at several locations, makes Barfresh’s suite of blended beverages available across the customer’s diverse customer base in its education, healthcare, sports and entertainment, and business and government channels, in the Pacific Northwest operating 100 restaurants which are open 24 hours a day, 365 days a year. Barfresh also recently entered into a sales agreement with the Bowling Proprietor’s Association of America (“BPAA”), an organization that serves the interests of 3,340 bowling centers nationwide. Under the agreement with BPAA, Barfresh will work with the organization to provide Barfresh’s line of smoothies, shakesUS and frappes to its members.Canada, representing over 2,000 potential customer accounts.

 

In addition to the National Accounts, the Company sells to food distributors that supply products to the food services market place. Effective July 2, 2014, the Company entered into an exclusive agreement with Sysco Merchandising and Supply Chain Services, Inc. for resale by the Sysco Corporation (“Sysco”) to the foodservice industry of the Company’s ready-to-blend smoothies, shakes and frappes. All Barfresh products will beare included in Sysco’s national core selection of beverage items, making Barfresh its exclusive single-serve, pre-portioned beverage provider. The agreement is mutually exclusive; however, Barfresh may also sell the products to other foodservice distributors, but only to the extent required for such foodservice distributors to service multi-unit chain operators with at least 20 units and where Sysco is not such multi-unitmulti- unit chain operators nominated distributor for our products. The Company has already started shipping to 35 of the 74 Sysco distribution centers under this agreement and anticipates a national rollout over the next 12 months.

 

  314 

The Company is one of five vendors that was named to Sysco’s “Cutting Edge Solution” (“CES”) Platform during March of 2016. As part of this platform, our products are receiving national advertising and marketing, and are considered a core product. All 72 of SYSCO’s Operating Companies (“OPCO”) will participate in the CES program, and will be evaluated on their success in moving the CES products. As a direct result the Company now has its products in all 70 of SYSCO’s mainland U.S. Opco’s. Primarily as a result of the national roll-out of Barfresh’s products in the SYSCO distribution system, revenue during the first half of 2016 grew to $834,497 from $221,732 in the first half of 2015. Barfresh continues to work closely with SYSCO to leverage new national promotional and marketing opportunities, in addition to the CES platform.

 

On October 26, 2015, Barfresh signed an agreement with PepsiCo North America Beverages, a division of PepsiCo, to become its exclusive sales representative within the food service channel to present Barfresh’s line of ready-to-blend smoothies and frozen beverages throughout the United States and Canada. Through this agreement, Barfresh’ products will beis included as part of PepsiCo’s offerings to its significant customer base, which we expectbase. The agreement facilitates access to fast track our growthpotential National customer accounts, through introductions provided by PepsiCo’s one-thousand plus person foodservice sales team. Barfresh products have become part of PepsiCo’s customer presentations at national trade shows and expedite the test to market process.similar venues.

 

Finally, the Company intends to monetize the international patents outside of the current area of operations, North America, by expanding contract manufacturing to other countries and selling either through selling agents or internal sales personnel. The Company will also consider entering into some form of license or royalty agreements with third parties.

 

Barfresh currently utilizes contract manufacturers to manufacture all of the products in the United States. Ice cream manufacturers are best suited to produce the products and two productionProduction lines are currently operational at two locations. The first is in our Salt Lake City contract manufacturer location. This manufacturer islocation, which currently producingproduces products sold to existing customers as well as producing exclusive products developed for National Accounts.customers. Currently annual production capacity with our existingthis contract manufacturer is 14 million units per year. The Companysecond location is nowwith Yarnell Operations, LLC, a subsidiary of Schulze and Burch, located in advanced discussion withArkansas. The Yarnell’s agreement, which was signed during February of 2016, secures additional production capacity ahead of expected dramatic sales growth in 2016. Barfresh will have the capacity to ramp up to an additional contract manufacturing company that would be able to produce an additionalincremental production capacity of 100 million units perthrough this agreement. Yarnell’s began shipping product for Barfresh during June of this year. Yarnell’s location enhances the company’s ability to efficiently move product throughout the supply chain to destinations in the eastern United States, home to many of the country’s large foodservice outlets.

 

Although there currently is not a contract in place with any suppliers for the raw materials needed to manufacture our products, there are a significant number of sources available and the company does not anticipate becoming dependent on any one supplier. As demand for the range of our products grows, we plan to contract a level of raw material requirements to ensure continuity of supply.

 

As of September 30, 2015,Currently we had 34have 48 employees and 45 consultants. There are currently 2435 employees and 2 consultants1 consultant selling our products.

Most We have recently hired additional employees, particularly in the sales area, as part of the Company’s expansion duewe roll out our products to the acquisition of the international patents, a leading regional Australian food ingredient supply and product developer has been engaged as the wholesaler and distributor for Barfresh products in Australia.all 72 Sysco distribution centers.

 

Critical Accounting Policies

 

The significant accounting policies set forth in Note 21 to our audited consolidated financial statements included in our Annual Report on Form 10-K10-KT for the year ended MarchDecember 31, 2015, as updated by Note 1 to the Unaudited Condensed Consolidated Financial Statements included herein, and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K10-KT for the year ended MarchDecember 31, 2015, appropriately represent, in all material respects, the current status of our critical accounting policies and estimates, the disclosure with respect to which is incorporated herein by reference

 

Results of Operations

 

Results of Operation for Three Months Ended SeptemberJune 30, 20152016 as Compared to the Three Months Ended SeptemberJune 30, 2014 (References2015.

(References to 20152016 and 20142015 are to the three months ended September 30,March 31, 2016 and 2015, and 2014, respectively, unless otherwise specified.)

 

Revenue and cost of revenue

 

Revenue increased $185,894 (462%$391,073 (233%) from $40,233$168,099 in 20142015 to $226,127$559,172 in 2015.2016. The increase in revenue is a result of the continuation of the national rollout of our product beingduring the first quarter of 2016 to all 72 of Sysco’s U.S. mainland distribution centers. During the quarter ended June 30, 2015, our product was distributed through Sysco, a leading national broad line food distributor. We currently sell into 34 of Sysco’s 74 distribution locations. At this time last year we sold our product into 220 of Sysco’s distribution locations.centers. We expect tonow have our product in all of Sysco’s 7472 distribution locations during calendar year 2016.locations.

15

 

Cost of revenue for 20152016 was $119,229$277,934 as compared to $19,744$90,202 in 2014.2015. Our gross profit was $106,898 (47.27%$281,238 (50%) and $20,489 (50.93%$77,897 (46%) for 2016 and 2015, and 2014, respectively. There were no significant change in our selling prices. Revenue in both 20152016 and 20142015 included sales of blenders and freezers. We only make a nominal profit on these items as they are to accommodate our customers. We anticipate that our gross profit percentage for the remainder of 20152016 will be comparable to the percentage for the current percentage.quarter.

 

Operating expenses

 

Our operations during 2016 and 2015 and 2014 were primarily directed towards increasing sales and finalizing flavor profiles.expanding our distribution network. During the currentfirst quarter we increased our overheadoperating expenses as a result of adding personnel to our sales force to facilitate the ongoing implementationnationwide roll-out of theour product throughout all of Sysco’s mainland U.S. distribution agreement with Sysco.centers. We do not anticipate any further significant increases to personnel related selling costs mostly related to increasing our sales and marketing staff, as we continue to implement our distribution agreement with Sysco, and as we begin to implement our new sales agreement with PepsiCo North America Beverages.during 2016.

 4

 

Our general and administrative expenses increased $1,360,015 (175%$1,110,065 (69%) from $778,800$1,614,587 in 20142015 to $2,138,815$2,724,652 in 2015,2016, as our business grew, and may not necessarily be indicative of the rate of future increases.continued to grow. The following is a breakdown of our general and administrative expenses for the three months ended SeptemberJune 30, 20152016 and 2014:2015:

 

 Three months ended September 30,  three months ended
June 30
 three months ended
June 30,
   
 2015 2014 Difference  2016 2015 Difference 
Personnel costs $1,040,843  $239,626  $801,217  $1,506,934  $735,154  $771,780 
Stock based compensation/options  255,321   116,823   138,498   270,252   168,342   101,910 
Legal and professional fees  202,072   105,795   96,277   81,639   77,532   4,107 
Travel  110,404   55,323   55,081   153,229   131,656   21,573 
Rent  34,482   35,211   (729)  26,500   33,133   (6,633)
Marketing and selling  158,686   43,610   115,076   209,393   313,267   (103,874)
Consulting fees  172,090   78,495   93,595   93,320   30,001   63,319 
Director fees  25,000   -   25,000 
Research and development  (8,335)  -   (8,335)
Shipping and Storage  119,892   46,585   73,307 
Other expenses  164,917   103,917   61,000   246,828   78,917   167,911 
 $2,138,815  $778,800  $1,360,015  $2,724,652  $1,614,587  $1,110,065 

 

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 $801,217 (334%$771,780 (105%) from $239,626$735,154 to $1,040,842. We have$1,506,934. During the first quarter of this year we significantly increased our sales staff primarily as a result of the national roll-out of our distribution agreement with Sysco. We currently have 3448 full time employees compared to 625 at the end of the prioryear ago period. Personnel costs for the current period also include an accrual for our annual incentive plans, which was not reflected in the year ago period. We anticipate that personnel cost tocosts will not significantly increase in the futurebalance of 2016 as we add more staff for bothour current sales personnel staffing fully supports the further implementationnation-wide roll-out of the Sysco distribution agreement and the PepsiCo sales agreement.

 

Stock based compensation is used as an incentive to attract new employees and to compensate existing employees. Stock based compensation includes stock issued and options granted to employees and non-employees. During the three months ended SeptemberJune 30, 2015,2016, we granted 80,0001,217,000 options to purchase shares of our common stock to employees. The exercise prices range from $0.47.6129 cents to $0.72..76 cents. The fair value of the stock was based on the trading value of the shares on the date of grant and are being amortized over the vesting period. The fair value of the stock options was calculated using the Black-Sholes model using the following assumptions: expected life in years, 8; volatility, 98.7%75.46% to 99%80.31%; risk free rate of return, 1.64%1.24% to 2.11%1.39%, and no annual dividends and are being amortized over the vesting period. We anticipate making additional grants in the future. FewerCertain grants that were made in 2014.2015 had shorter vesting periods than the grants that were made during 2016. However, a higher overall number of stock options was granted during the current period, resulting in higher expense within the current period.

 

Legal and professional fees increased $ 96,277 ( 91%4,107 (5%) from $105,795$77,532 in 20142015 to $ 202,07281,639 in 2015.2016. The increase was primarily due to increased accounting costs and more legal services required as a result of increased business and financing activity. We anticipate legal fees related to ongoing Securities and Exchange Commission reporting to remain the same and additional legal fees to be related to the continuing increase in our business and financing activities.activities to increase as our business grows.

16

 

Travel expenses increased $55,081 (100%$21,573 (16%) from $55,323$131,656 in 20142015 to $110,404$153,229 in 2015.2016. The increase is due to increased travel related to increased personnel engaging in selling and marketing activities. We anticipate that travel cost for the balance of 2016 will continueremain comparable to increase as we increase our personnel and our customer base.that of the current quarter.

 

Rent expense is primarily for our location in Beverly Hills, California. Rent expense for the Beverly Hills office is approximately $7,600$8,833 per month. The lease on the office commenced in November 8, 2014 and expires in November 2016. Rent expense also includes monthly parking fees as well as an offsite storage facilities. The increase is due to a nominal increase on the office and the addition of additional parking fees as our employee base grows.

 

Marketing and selling expenses increased $115,076 (264%decreased $103,874 (33%) from $43,610$313,267 in 20142015 to $158,686$209,393 in 2015.2016. The increasedecrease relates primarily to re-classifying certain expenses categorized as marketing and selling in the increaseperiod ended June 30, 2015, to personnel expense in overall sales and marketing activities, including a rebranding project. We anticipate a continued increase in these costs as our business continues to grow.the period ending June 30, 2016.

 

Consulting fees increased $93,595 (119%$63,319 (211%) from $78,495$30,001 in 20142015 to $172,090$93,320 in 2015.2016. Our consulting fees vary based on needs. We engage consultants in the areas of sales, operations and accounting. Future consulting fees will be variable.

 

Director fees of $25,000 were accrued during the period ended June 30, 2016, however no director fees were accrued during the period ending June 30, 2015. Annual director fees are anticipated at $50,000 per non-employee director.

Research and development expenses decreased during the current period. The lower expense in 2016 was attributable to certain credits granted during the current period for costs incurred in the prior period related to finalizing customized test flavors for certain national accounts.

Shipping and storage expense increased $73,307 or 157%, from $46,585 in 2015 to $119,892 in 2016. The higher expense in 2016 is due to costs incurred to better position inventory for the national roll-out with Sysco. We anticipate that shipping and storage expense as a percentage of sales will reduce during the balance of the year, as the Company is able to take advantage of more efficient distribution arrangements.

Other expenses consist of ordinary operating expenses such as investor relations, office, telephone, insurance, and stock related costs. We anticipate increases in certain of these expenses.expenses, as our business continues to grow.

 

We had operating losses of $2,074,441$ $2,495,473 and $787,507$1,581,738 for 2016 and 2015, and 2014, respectively.

 5

 

Interest expense decreased $64,259 (51%$133,599 (90%) from $126,766$147,741 in 20142015 to $62,507$14,142 in 2015.2016. Interest primarily relates to convertible debt that was issued in August 2012, renewed in September 2013,November, 2015, and converted into stock during September of 2015,February, 2016, and short term notes that were issued in December 2013, which were partially repaid during June of 2015. The stated interest rate on the convertible debt is 12%10%. After giving effect to the debt discount the effective rate of interest on the short term debt is estimated to be approximately 53% and approximately 74% on the convertible notes. Interest expense includes direct interest of $19,362 and $16,611 for 2015 and 2014, respectively, calculated based on the interest rates stated in our various debt instruments. In addition, interest expense includes non-cash amortization of the debt discount of $43,145 and $110,155 for 2015 and 2014, respectively

 

We had net losses of $2,136,948$2,509,615 and $914,273 for$1,729,479 in 2016 and 2015, and 2014, respectively.

 

Results of Operation for Six Months Ended SeptemberJune 30, 20152016 as Compared to the Six Months Ended SeptemberJune 30, 20142015.

(References to 20152016 and 20142015 are to the six months ended SeptemberJune 30, 20152016 and 2014,2015, respectively, unless otherwise specified.)

 

Revenue and cost of revenue

 

Revenue increased $292,502 (288%$612,765 (276%) from $101,725$221,732 in 20142015 to $394,227$834,497 in 2015.2016. The increase in revenue is a result of the continuation of the national rollout of our product beingduring the first quarter of 2016 to all 72 of Sysco’s U.S. mainland distribution centers. During the six months ended June 30, 2015, our product was distributed through Sysco, a leading national broad line food distributor. We currently sell into 34 of Sysco’s 74 distribution locations. At this time last year we sold our product into 220 of Sysco’s distribution locations.centers. We expect tonow have our product in all of Sysco’s 7472 distribution locations during calendar year 2016.locations.

 

Cost of revenue for 20152016 was $209,431$418,670 as compared to $61,103$119,550 in 2014.2015. Our gross profit was $184,796 (46.88%$415,827 (50%) and $40,622 ( 39.93%$102,182 (46%) for 2016 and 2015, and 2014, respectively. There were no significant change in our selling prices. Revenue in both 20152016 and 20142015 included sales of blenders and freezers. We only make a nominal profit on these items as they are to accommodate our customers. We anticipate that our gross profit percentage for the remainder of 20152016 will be comparable to the percentage for the current percentage.period.

 

Operating expenses

 

Our operations during 2016 and 2015 and 2014 were primarily directed towards increasing sales and finalizing flavor profiles.expanding our distribution network. During the currentfirst quarter we increased our overheadoperating expenses as a result of adding personnel to our sales force to facilitate the ongoing implementationnationwide roll-out of theour product throughout all of Sysco’s mainland U.S. distribution agreement with Sysco.centers. We do not anticipate any further significant increases to personnel related selling costs mostly related to increasing our sales and marketing staff, as we continue to implement our distribution agreement with Sysco, and as we begin to implement our new sales agreement with PepsiCo North America Beverages.during 2016.

17

 

Our general and administrative expenses increased $2,289,514 (157%$2,531,151 (91%) from $1,456,031$2,767,566 in 20142015 to $3,745,545$5,298,717 in 2015,2016, as our business grew, and may not necessarily be indicative of the rate of future increases.grew. The following is a breakdown of our general and administrative expenses for the six months ended SeptemberJune 30, 20152016 and 2014:2015:

 

 Six months ended September 30,  six months ended
June 30
 six months ended
|June 30,
   
 2015 2014 Difference  2016 2015 Difference 
Personnel costs $1,775,997  $481,752  $1,294,245  $3,064,238  $1,058,320  $2,005,918 
Stock based compensation/options  423,663   320,823   102,840   515,041   508,522   6,519 
Legal and professional fees  279,604   134,306   145,298   233,039   120,460   112,579 
Travel  242,060   87,957   154,103   289,987   224,666   65,321 
Rent  67,615   59,160   8,455   41,947   34,580   7,367 
Marketing and selling  471,953   68,691   403,262   325,697   391,548   (65,851)
Consulting fees  202,091   110,995   91,096   174,912   86,006   88,906 
Director fees  50,000   (11,008)  61,008 
Research and development  15,233   (2,061)  17,294 
Shipping and Storage  205,851   62,100   143,751 
Other expenses  282,562   192,347   90,215   382,772   294,433   88,339 
 $3,745,545  $1,456,031  $2,289,514  $5,298,717  $2,767,566  $2,531,151 

 

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 $ 1,294,245 ( 269%$2,005,918 (190%) from $481,752$1,058,320 to $1,775,997. We have$3,064,238. During the first quarter of this year we significantly increased our sales staff primarily as a result of the national roll-out of our distribution agreement with Sysco. We currently have 3448 full time employees compared to 625 at the end of the prioryear ago period. Personnel costs for the current period also include an accrual for our annual incentive plans, which was not reflected in the year ago period. We anticipate that personnel cost tocosts will not significantly increase in the futurebalance of 2016 as we add more staff for bothour current sales personnel staffing fully supports the further implementationnation-wide roll-out of the Sysco distribution agreement and the PepsiCo sales agreement.

 

Stock based compensation is used as an incentive to attract new employees and to compensate existing employees. Stock based compensation includes stock issued and options granted to employees and non-employees. During the six months ended SeptemberJune 30, 2015,2016, we granted 1,820,0001,262,000 options to purchase shares of our common stock to officers, directors and employees. The exercise prices range from $0.45.6192 cents to $0.82 and we granted restricted stock rights for 1,350,000..83 cents. The fair value of the stock was based on the trading value of the shares on the date of grant and are being amortized over the vesting period. The fair value of the stock options was calculated using the Black-Sholes model using the following assumptions: expected life in years, 8; volatility, 98.7%75.46% to 99%80.31%; risk free rate of return, 1.64%1.24% to 2.11%1.73%, and no annual dividends and are being amortized over the vesting period. We anticipate making additional grants in the future. FewerCertain grants that were made in 2014.2015 had shorter vesting periods than the grants that were made during 2016, resulting in higher expense within the prior period.

 6

 

Legal and professional fees increased $ 145,298 (108%112,579 (93%) from $134,306$120,460 in 20142015 to $ 279,604$233,039 in 2015.2016. The increase was primarily due to increased accounting costs and more legal services required as a result of increased business and financing activity. We anticipate legal fees related to ongoing Securities and Exchange Commission reporting to remain the same and additional legal fees to be related to the continuing increase in our business and financing activities.activities to increase as our business grows.

 

Travel expenses increased $154,103 (175%$65,321 (29%) from $87,957$224,666 in 20142015 to $242,060$289,987 in 2015.2016. The increase is due to increased travel related to increased personnel engaging in selling and marketing activities. We anticipate that travel cost for the balance of 2016 will continueremain comparable to increase as we increase our personnel and our customer base.that of the first half of the year.

 

Rent expense is primarily for our location in Beverly Hills, California. Rent expense for the Beverly Hills office is approximately $7,600$8,833 per month. The lease on the office commenced in November 8, 2014 and expires in November 2016. Rent expense also includes monthly parking fees as well as an offsite storage facilities. The increase is due to a nominal increase on the office and the addition of additional parking fees as our employee base grows.

 

Marketing and selling expenses increased $403,262 (587%decreased $65,851 (17%) from $68,691$391,548 in 20142015 to $471,953$325,697 in 2015.2016. The increasedecrease relates primarily to re-classifying certain expenses categorized as marketing and selling in the increaseperiod ended June 30, 2015, to personnel expense in overall sales and marketing activities, including a rebranding project. We anticipate a continued increase in these costs as our business continues to grow.the period ending June 30, 2016.

 

Consulting fees increased $91,096 (82%$88,906 (103%) from $110,995$86,006 in 20142015 to $202,091$174,912 in 2015.2016. Our consulting fees vary based on needs. We engage consultants in the areas of sales, operations and accounting. Future consulting fees will be variable.

 

18

Director fees increased $61,008 from a credit of ($11,008) in 2015 to an expense of $50,000 in 2016. Annual director fees are anticipated at $50,000 per non-employee director.

Research and development expenses increased $17,294, from a credit of ($2,061) in 2015 to $15,233 in 2016. The higher expense in 2016 was attributable to costs incurred to finalize customized test flavors for certain national accounts.

Shipping and storage expense increased from $62,100 in 2015 to $205,851 in 2016, an increase of $143,751 or 231%. The higher expense in 2016 is due to costs incurred to better position inventory for the national roll-out with Sysco. We anticipate that shipping and storage expense as a percentage of sales will reduce during the balance of the year, as the Company is able to take advantage of more efficient distribution arrangements.

Other expenses consist of ordinary operating expenses such as investor relations, office, telephone, insurance, and stock related costs. We anticipate increases in certain of these expenses.expenses, as our business continues to grow.

 

We had operating losses of $3,648,321$4,981,697 and $1,473,325$2,749,830 for 20152016 and 2014,2015, respectively.

 

Interest expense decreased $27,507 (12%$50,004 (18%) from $237,756$285,477 in 20142015 to $210,249$235,473 in 2015.2016. Interest primarily relates to convertible debt that was issued in August 2012, renewed in September 2013,November, 2015, and converted into stock during September of 2015,February, 2016, and short term notes that were issued in December 2013, which were partially repaid during June of 2015. The stated interest rate on the convertible debt is 12%10%. After giving effect to the debt discount the effective rate of interest on the short term debt is estimated to be approximately 53% and approximately 74% on the convertible notes. Interest expense includes direct interest of $37,387 and $33,041 for 2015 and 2014, respectively, calculated based on the interest rates stated in our various debt instruments. In addition, interest expense includes non-cash amortization of the debt discount of $172,862 and $204,715 for 2015 and 2014, respectively

 

We had net losses of $3,866,427$5,217,170 and $1,711,081 for$3,035,307 in 2016 and 2015, and 2014, respectively.

 

Liquidity and Capital Resources

 

During the six months ended SeptemberJune 30, 20152016 we used cash for operations of $ $3,366,381, $9,906 for investment in patent and trademarks,3,728,465 and also purchased equipment for $138,945, and received $7,684 from the sale of equipment. In addition we used $380,923 to repay debt.$796,270.

 

During the six months ended SeptemberJune 30, 20142015 we used $1,134,262$2,435,727 of cash for operations, $11,438 for investment in patents, $191,249and $137,803 for the purchase of equipment, and received $1,977 from the sale of equipment.

 

Our operations to date have been financed by the sale of securities, the issuance of convertible debt and the issuance of short-term debt, including related party advances. If we are unableOur existing cash and cash equivalents and other working capital may not be sufficient to generate sufficientmeet all of the projected cash flow from operations with the capital raised we will be requiredneeds contemplated by our business strategies. We intend to raise additional funds either in the form of capital through equity or debt. There aredebt financing transactions to address both our short term and longer term liquidity needs. However there can be no assurances that we will be able to generate the necessary capital or debt to carry out our current plan of operations.

 

We lease office space under a non-cancelable operating lease, which expires November, 2016.

 

 7

The aggregate minimum requirements under non-cancelable leases as of March 31, 2015June 30, 2016 is as follows:$31,159.

 

Fiscal Years ending March 31,   
    
2016 $46,368 
2017  54,529 
  $100,897 

DuringOf the six months ended September 30, 2015, we renegotiated the short term notes that were due June 20, 2015. We repaid one note in full ($25,000) 50% of three notes were paid ($350,000) and one note was converted to 71,429 shares of our common stock. The balance of the notes due $350,000,that were payable on September 20, 2015, and bore interest at 12% per annum. Oneone note for $250,000 was repaid on October 1, 2015, and two notes, totaling $100,000one to a related party in the amount of $50,000, and one to an unrelated party in the amount of $50,000, were extended until DecemberOctober 31, 2015,2016 with 10% interest.

 

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 3. Quantitative and Qualitative Disclosures About Market Risk.

 

Not required because we are a smaller reporting company.

19

 

Item 4. Controls and Procedures.

 

Evaluation of Disclosure Controls and Procedures

 

Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Accounting Officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Securities and Exchange Act of 1934 Rules 13a-15(f). Based on this evaluation, our Chief Executive Officer and our Chief Accounting Officer concluded that the Company’s disclosure controls and procedures were not effective as of SeptemberJune 30, 2015.2016.

 

However, managementManagement has identified the following material weaknesses in our internal control over financial reporting:

 

 We established an audit committee during our last quarter ended June 30, 2015. We are not currently obligated to have an audit committee, including a member who is an “audit committee financial expert”, as defined in Item 407 of Regulation S-K, under applicable regulations or listing standards. It is management’s view that such a committee is an important internal control over financial reporting, the lack of which may result in ineffective oversight in the establishment and monitoring of internal control.
   
 We do not have a majority of independent directors on our board of directors, which may result in ineffective oversight in the establishment and monitoring of our internal control.
   
 Inadequate Segregation of Duties: We have an inadequate number of personnel to properly implement internal controls over financial reporting.

 

Since the assessment of the effectiveness of our internal control over financial reporting did identify material weaknesses, management considers its internal control over financial reporting to be ineffective.

 

Management believes that the material weakness set forth above did not have an effect on our financial results.

 

Changes in Internal Control over Financial Reporting

 

There have been no changes in the Company’s internal control over financial reporting during the three months ended SeptemberJune 30, 20152016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

  820 

 

PART II-OTHERII - OTHER INFORMATION

 

Item 1. Legal Proceedings.

 

Neither the Company nor its subsidiaries are party to or have property that is the subject of any material pending legal proceedings. We may be subject to ordinary legal proceedings incidental to our business from time to time that are not required to be disclosed

under this Item 1.

 

Item 1A. Risk Factors.

 

Not required because we are a smaller reporting company.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

During the three months ended September 30, 2015June, 2016 we granted 80,0001,217,000 options to purchase shares of our common stock to officers, directors and employees. The exercise prices range from $0.47$.6129 to $0.72.$.76.

The Company did not issue or sell any other unregistered equity securities during the period covered by this report that were not previously reported on a Current Report on Form 8-K.

 

The foregoing issuances of securities were made in reliance on Section 4(2) of the Securities Act of 1933, as amended (the “Act”) for transactions of an issuer not involving a public offering.

 

Item 3. Defaults Upon Senior Securities.

 

None.

 

Item 4. Mine Safety Disclosures.

 

Not applicable.

 

Item 5. Other Information.

 

None.

 

Item 6. Exhibits.

 

Exhibit
No.
 Description

31.1

 

31.1Certification of Principal Executive Officer, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)

31.2 Certification of Principal Accounting Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)
32.1 Certification of Principal Executive Officer of the Company, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith)
32.2 

Certification of Principal Accounting Officer of the Company, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith)

101.INS* XBRL Instance Document
101.SCH* XBRL Taxonomy Extension Schema Document
101.CAL* XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF* XBRL Taxonomy Extension Definition Linkbase Document
101.LAB* XBRL Taxonomy Extension Label Linkbase Document
101.PRE* XBRL Taxonomy Extension Presentation Linkbase Document
101.INS*XBRL Instance Document
101.SCH*XBRL Taxonomy Extension Schema Document
101.CAL*XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*XBRL Taxonomy Extension Label Linkbase Document
101.PRE*XBRL Taxonomy Extension Presentation Linkbase Document
101.INS* XBRL Instance Document
101.SCH*XBRL Taxonomy Extension Schema Document
101.CAL*XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*XBRL Taxonomy Extension Label Linkbase Document
101.PRE*XBRL Taxonomy Extension Presentation Linkbase Document

 

*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.

  
 

In accordance with SEC Release 33-8238, Exhibits 32.1 and 32.2 are furnished and not filed.

 

  921 

 

SIGNATURES

 

Pursuant to the requirements 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: November 20, 2015August 15, 2016By:/s/ Riccardo Delle Coste
  

Riccardo Delle Coste

Chief Executive Officer

(Principal Executive Officer)

   
Date: November 20, 2015August 15, 2016By:/s/ Joseph S. Tesoriero
  Joseph S. Tesoriero
  

Chief Financial Officer

(Principal Financial Officer)

 

  1022