See the accompanying notes to the condensed consolidated financial statements

Barfresh Food Group Inc.

Condensed Consolidated Statements of Operations

For the Three and Nine Months Ended September 30, 2016 and 2015

(Unaudited)

See the accompanying notes to the condensed consolidated financial statements

Barfresh Food Group Inc.

Condensed Consolidated Statements of Cash Flows

For the nine monthmonths ended September 30, 20162017 and 20152016

(Unaudited)

See the accompanying notes to the condensed consolidated financial statements

Barfresh Food Group Inc.

Notes to Condensed Consolidated Financial Statements

September 30, 2016 and 20152017

(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 consolidated financial statements of Barfresh Food Group Inc. at September 30, 20162017 and 2015December 31, 2016 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 consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in our annual report on Form 10-KT10-K for the nine monthsyear ended December 31, 2015.2016. 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 September 30, 20162017 and 20152016 presented are not necessarily indicative of the results to be expected for the full year. The December 31, 20152016 balance sheet has been derived from our audited financial statements included in our annual report on Form 10-KT10-K for the nine monthsyear ended December 31, 2015.2016.

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.

Concentration of Credit Risk

The amount of cash on deposit with financial institutions exceeds the $250,000 federally insured limit at September 30, 2017 and December 31, 2016. However, we believe that the financial institution where the cash on deposit that exceeds $250,000 is financially sound and the risk of loss is minimal.

Fair Value Measurement

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

Our financial instruments consist of accounts receivable, accounts payable, accrued expenses and installment debt. The carrying value of our financial instruments approximates their fair value due to their relative short maturities and the nature of the debt.

Barfresh Food Group Inc.

Notes to Condensed Consolidated Financial Statements

September 30, 2017

(Unaudited)

Inventory

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

Intangible Assets

Intangible assets are comprised of patents, net of amortization.amortization, and trademarks. 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. In accordance with ASC 350 legal costs related to trademarks have been capitalized. We have determined that trademarks have an indeterminable life and therefore are not being amortized.

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

Barfresh Food Group Inc.

Notes to Condensed Consolidated Financial Statements

September 30, 2016 and 2015

(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 September 30, 20162017 and 20152016 any equivalents would have been anti-dilutive as we had losses for the periods then ended.

Research and Development

Expenditures for research activities relating to product development and improvement are charged to expense as incurred. We incurred $101,304$107,324 and $74,635 in research and development expenses$101,304 for the three-month periods ended September 30, 2017 and 2016, and 2015, respectively,respectively. We incurred $447,927 and $256,874 and $179,340 in research and development expenses for the nine-month periods ended September 30, 2017 and 2016, and 2015, respectively.

During the current quarter, we re-classified certain personnel expenses that had previously been included in Personnel Expense, to Research and Development. These expenses relate to the services performed by our Director of Manufacturing and Product Development, and consultants supporting that employee. The reclassification doesn’t impact financial statement as all costs are in General and Administrative expense.

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 Pronouncementspronouncements

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.

Barfresh Food Group Inc.

Notes to Condensed Consolidated Financial Statements

September 30, 2017

(Unaudited)

In May 2014, the FASB issued ASU Update 2014-09 Revenue from Contracts with Customers (Topic 606) issued May 28, 2014 by FASB and IASB, which converged guidance on recognizing revenue in contracts with customers on an effective date after our year ending December 31, 2017 will be evaluated as to impact2017. The Company is in the initial stages of evaluating the effect of the standard on our financial statements and implemented accordingly.

ASU Update 2014-15 Presentation of Financial Statements-Going Concern (Sub Topic 205-40) issued August 27, 2014 by FASB defines managements responsibilitycontinue to evaluate whetherthe available transition methods. However, based on our initial evaluation, we do not expect there is a substantial doubt about an organizations ability to continue as a going concern.be material changes to our current Revenue Recognition policies due to the non-complex contracts with our customers, including the definition of our performance obligations and the transaction prices in our contracts with our customers. The additional disclosure required is effective after DecemberCompany does not plan to adopt the standard until the interim period ended March 31, 2015 and will be evaluated as to impact and implemented accordingly.

Barfresh Food Group Inc.

Notes to Condensed Consolidated Financial Statements

September 30, 2016 and 2015

(Unaudited)2018.

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 doThe adoption of this guidance did 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 theThe adoption of this guidance todid not have a material impact on our Consolidated Financial Statements.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 organizationsorganization 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 amendmentsCompany is 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 after, the beginninginitial stages of evaluating the effect of the earliest comparative period presented instandard on our financial statements and continue to evaluate the financial statements. The modified retrospective approach wouldavailable transition methods. However, based on our initial evaluation, we do not require any transition accounting forexpect there to be material changes to both our current and long-term lease liabilities and our fixed assets of our limited number of operating leases that expired beforewill be converted to financing leases under the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition approach.new guidance. The Company is evaluatingdoes not plan to adopt the potential impact of ASU 2016-02 on its Consolidated Financial Statements.standard until the interim period ended March 31, 2019.

In March 2016, the FASB issued ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting, which amends ASC Topic 718, Compensation -– Stock Compensation. This Compensation (Topic 718) (“ASU simplifies2016-09”). The standard identifies areas for simplification involving several aspects of the accounting for share-based payment award transactions, including (i)the income tax consequences, (ii) classification of awards as either equity or liabilities, (iii) whetheran option to estimaterecognize stock compensation expense with actual forfeitures or account for them whenrecognized as they occur, and (iv) classificationas well as certain classifications on the statement of cash flows. The standardASU 2016-09 is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years, with early adoption permitted. The Company previously adopted ASU 2016-09.

In August 2014, the FASB issued FASB ASU2014-15,Presentation of Financial Statements – Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entities Ability to Continue as a Going Concern. FASB ASU 2015-15 changes the disclosure requirements of uncertainties about an entity’s ability to continue as a going concern. FASB ASU2014-15 is effective for annual periods ending after December 15, 2016, and for interim periods within annual periods beginning after December 31, 2016. Early adoption willthat date. These changes require an entity’s management to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about an entities ability to continue as a going concern within one year after the date the financial statements are issued. If management has concluded that substantial doubt exists, then the following disclosures should be permitted with any adjustments reflected asmade in the financial statements: (i) principal conditions or events that raised the substantial doubt; (ii) management’s evaluation of the beginningsignificance of those conditions or events in relation to the fiscal year of adoption. The Companyentities ability to meet those obligations; (iii) management’s plans that alleviated the initial substantial doubt or, if substantial doubt was not alleviated, management’s plans that are intended to at least mitigate the conditions or events that raise the substantial doubt, and (iv) if management’s plans did not alleviate the substantial doubt, an explicit statement that there is evaluatinga substantial doubt. These changes are reflected in the impact of this standard on its consolidated financial statements and disclosures.disclosure included in Note 10.

In August 2016, the FASB issued ASU No. 2016-15 – Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, which is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. The eight items that the ASU provides classification guidance on include (1) debt prepayment and extinguishment costs, (2) settlement of zero-coupon debt instruments, (3) contingent consideration payments made after a business combination, (4) proceeds from the settlement of insurance claims, (5) proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies, (6) distributions received from equity method investments, (7) beneficial interests in securitization transactions, and (8) separately identifiable cash flows and application of the predominance principle. The standard is effective on January 1, 2018, however early adoption is permitted. The standard requires the use of the retrospective transition method. The Company is in the process of evaluating the impact of this new guidance.

Barfresh Food Group Inc.

Notes to Condensed Consolidated Financial Statements

September 30, 2016 and 20152017

(Unaudited)

Note 2. Property Plant and Equipment

Major classes of property and equipment at September 30, 20162017 and December 31, 2015:2016 consist of the following:

We recorded depreciation expense related to these assets of $36,268$78,576 and $27,005$36,268 for the three-monthsthree-month periods ended September 30, 20162017 and 2015,2016, respectively and $104,367$180,380 and $80,705$104,367 for the ninenine- months periods ended September 30, 2017 and 2016, and 2015, respectively.

Note 3. Intangible Assets

As of September 30, 2016, and December 31, 2015,2017, intangible assets consist primarily of patent costs andof $764,891, trademarks of $816,503$87,360 and $760,475, less accumulated amortization of $189,304$250,899.

As of December 31, 2016, intangible assets consist of patent costs of $750,640, trademarks of $73,925 and $143,218 respectively.accumulated amortization of $204,702.

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 August,December 2025. The amount charged to expenses for amortization of the patent costs was $15,376$15,398 and $15,519$15,376 for the three-month periodsthree months ended September 30, 20162017 and 2015,2016, respectively, and $46,085$46,196 and $46,265$46,085 for the nine-month periodsnine months ended September 30, 20162017 and 2015,2016, respectively.

Barfresh Food Group Inc.

Notes to Condensed Consolidated Financial Statements

September 30, 2016 and 2015

(Unaudited)

Estimated future amortization expense related to the patentpatents as of September 30, 20162017, is as follows:

Note 4. Related Parties

During the quarter, $50,000 outstanding in a Short-Term Note Payable to a related party, who is a significant shareholder and a director was converted into stock at $0.64 per share plus 50% warrant coverage at $0.75.

As disclosed below in Note 9,7, members of management and directors have received shares of stock and options in exchange for services.

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 and $100,000 was purchased by a company controlled by a director and significant shareholder. 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 to the short-term notes. The amounts recorded as debt discount were amortized over the one-year term, and accreted 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 September 20, 2015. The extended Short-Term Notes bear at the rate of 3% per annum and required us to issue additional warrants (“Extension Warrants”). We issued 898,842 Extension Warrants to the Short-Term Note holders for the right to purchase shares of our common stock. Each Extension 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.

Barfresh Food Group Inc.

Notes to Condensed Consolidated Financial Statements

September 30, 2016 and 2015

(Unaudited)

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

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-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-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, one to a related party in the amount of $50,000, and one to an unrelated party in the amount of $50,000, plus total accrued interest $12,849 were converted into stock at $0.64 per share on September 27, 2016, plus 50% warrants coverage at $0.75 per share.

Note 6. Convertible Notes (Related and Unrelated)

In August 2012, we closed an offering of $440,000 of convertible 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 were due and payable on September 6, 2015. In addition, the new notes were 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.

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.

Barfresh Food Group Inc.

Notes to Condensed Consolidated Financial Statements

September 30, 2016 and 2015

(Unaudited)

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:

The relative value of the warrants to the notes was $142,873, which was 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 are being amortized over the two- year term, and accreted to interest expense. We estimated the effective interest rate as calculated to be approximately 74% but will be paying cash at a rate of 12% per annum.

All debt discount has been amortized.

During September 2015, all the holders of the convertible notes elected to convert the then outstanding $420,000 of notes, and accumulated interest of $21,955 to our common stock. We issued 1,767,822 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 matured in one year. Upon completion of an equity financing which occurred during the first quarter of 2016, 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.

Remaining $100,000 of convertible notes which did not elect to convert to common stock are summarized below.

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 no such beneficial conversion feature needed to be recorded.

Barfresh Food Group Inc.

Notes to Condensed Consolidated Financial Statements

September 30, 2016 and 2015

(Unaudited)

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

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.

Note 7. Long term Debt

Long term debt at September 30, 2017 and December 31, 2016 consists of an installment agreementsagreement on three vehiclesone vehicle maturing on different dates through Junein September 2020. The installment agreements, are with one financial institution and bearagreement bears no interest. Monthly payments are $949$320 per month.

Barfresh Food Group Inc.

Notes to Condensed Consolidated Financial Statements

September 30, 2017

(Unaudited)

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

Note 8.6. Commitments and Contingencies

We lease office space under a non-cancelable operating lease,leases, which will expireexpires on February 28, 2018

March 31, 2019. The aggregate minimum requirements under non-cancelable leasesare as of September 30, 2016, is:follows:

Barfresh Food Group Inc.

Notes to Condensed Consolidated Financial Statements

September 30, 2016 and 2015

(Unaudited)

Note 9.7. Stockholders’ Equity

During the nine months ended September 30, 2016 pursuant to a securities purchase agreement between us and certain accredited investors, we sold 11,558,579 shares of our common stock (“Shares”) and warrants to purchase up to 5,579,290 Shares (“Warrants”) for aggregate gross proceeds to us of $5,305,757. The financings consisted of three components: a new equity raise in the amount of $3,570,000, the conversion into common equity of $2,633,500 of principal and interest of convertible promissory notes previously issued, and new equity raise in the amount of $2,300,000. See discussion in Note 6.

In additions to the warrants discussed above2017, we issued 171,368 warrants to placement agents who worked on the above describe financings.

Of the 5,779,290 above described warrants 3,885,158 are exercisable at $1.00 and 1,894,132 are exercisable at $0.75 for a term of five-years.

The fair value of the warrants, $2,928,080, 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:

During the nine months ended September 30, 2016, the holder of warrants to purchase178,733 shares of common stock, exercised their rights and purchased 750,000 shares ofvalued at $112,250, for services. In addition, we issued 439,977 options to purchase our common stock for an aggregate price of $415,000. In addition the holders of 100,000 warrants exercised their right to a cash-less conversion and received 80,420 shares.

Also during the nine months ended September 30, 2016 we issued 64,599 shares of stock to acertain member of our boardthe Board of directors in lieu of $50,000 in director fees due and 170,487 shares of common stockDirectors in lieu of cash payments for legalDirector fees. We valuedThe exercise price of the shares based on the trading value on the date issued.

options ranged from $0.74 to $0.79 per share, vest immediately, and are exercisable for periods of 8 years. In addition, during the nine months ended September 30, 2016 we issued 50,000 shares of stock at a price of $0.51 per share in exchange for outstanding options.

During the nine months ended September 30, 2016, we issued 1,262,0001,480,000 options to purchase our common stock to employees of the Company.and executives. The exercise price of the options ranged from $0.6129$0.61 to $0.83$0.68 per share, vest after 3 years, and are exercisable for a periodperiods of 8 years and vest on the third anniversaryyears. We also issued 95,995 shares of issuance.

Barfresh Food Group Inc.

Notesour common stock, with a value of $73,560, to Condensed Consolidated Financial Statements

September 30, 2016 and 2015

(Unaudited)a member of our Board of Directors in lieu of cash payments for Director fees.

The fair value of the options ($528,280266,000, in the aggregate) was calculated using the Black-Sholes option pricing model, based on the criteria shown below, and are being expensed over the vesting period of each option.below.

The shares of our common stock were valued at the trading price on the date of grant, $0.75 and $0.79 per share

During the same period, we cancelled 90,000 options to purchase our common stock.

Holders of 59,000 warrants, exercised those warrants for cash proceeds of $35,400. The holders of 950,000 options elected to exercise those options on a cashless basis and received 276,171 shares of our common stock.

Holders of 180,000 warrants, elected to exercise those warrants on a cashless basis and received 40,832 shares of our common stock.

The total amount of equity based compensation for the three and nine-month periods ended September 30, 2016 included in additional paid in capital for the three-month periods ended September 30, 2017 and 2016 was $575,224 and $270,252, respectively, and for the nine-month period ended September 30, 2017 and 2016, was $1,181,798 and $515,041, respectively.

Barfresh Food Group Inc.

Notes to Condensed Consolidated Financial Statements

September 30, 2017

(Unaudited)

The following is a summary of outstanding stock options issued to employees and directors as of September 30, 2016:2017:

Note 10.8. Outstanding Warrants

The following is a summary of all outstanding warrants as of September 30, 2016:2017:

During the nine-month period ended September 30, 2016 holders of 2,630,000 warrants to purchase shares of our common stock elected to exercise those warrants. We issued 1,877,085 shares of our common stock in exchange for the warrants and we received $415,000.

Barfresh Food Group Inc.

Notes to Condensed Consolidated Financial Statements

September 30, 2016 and 2015

(Unaudited)

Note 11. Interest Expense

Interest expense includes direct interest of ($579) and $19,362 for the three-month periods ended September 30, 2016 and 2015, respectively, and $61,318 and $55,789 for the nine-month periods ended September 30, 2016 and 2015, respectively, calculated based on the interest rates stated in our various debt instruments.

In addition, as more fully described in Notes 5 and 6 above, interest expense includes non-cash amortization of the debt discount of $8,256 and $43,145 for the three-month periods ended September 30, 2016 and 2015, respectively and $181,832 and $292,195 for the nine-month periods ended September 30, 2016 and 2015, respectively.

Note 12.9. 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 September 30, 2016,2017, 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 nine-month periods ended September 30, 20162017 and 2015,2016, we did not have any interest and penalties associated with tax positions. As of September 30, 2016,2017, we did not have any significant unrecognized uncertain tax positions.

Note 10. Liquidity

We have a history of operating losses and negative cash flow. As our operations grow, we expect to experience significant increases in our working capital requirements. These conditions raise substantial doubt over the Company’s ability to meet all of its obligations over the twelve months following the filing of this Form 10-Q. Management has evaluated these conditions, and concluded that current plans will alleviate this concern. We currently have no debt. In addition, we have significantly reduced core operating costs beginning in 2016, including reducing the number of our employees from 44 to 30 over this time period. In addition, we plan to address this concern by raising additional capital through a loan or loans, and by continuing to reduce core operating expenses as required. While these plans have not yet been implemented, management has concluded that it is probable that they will be implemented within one year of the issuance of the financial statements, and that they will mitigate the substantial doubt of our ability to continue as a going concern. However, the Company cannot predict, with certainty, the outcome of its action to generate liquidity, including the availability of additional financing, or whether such actions would generate the expect liquidity as planned.

Note 13.11. 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.

Subsequent to September 30, 2016 and as of the filing of our quarterly report, the company sold an additional 1,093,750 shares for $0.64 per share and issued an additional 546,875 warrants at $0.75 per share.

In October and November of 2016, the company effectuated a personnel restructuring plan which eliminated 12 sales positions and effectively replaced those positions with commission based broker representatives. This shift will allow our remaining sale personnel to sharpen their focus on larger accounts while allowing brokers to cover our distribution business.

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 30, 20162017 and for the three and nine month periods ended September 30, 20162017 and 20152016 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 theThe Company’s products areinclude 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. DuringThe Company’s products also include bulk “Easy Pour” ready to blend frozen beverages, which are manufactured in gallon containers and contain a concentrated product formula that is mixed “one to one” with water. The Company has also recently launched a “no sugar added” version of the quarter,bulk Easy Pour format that is specifically targeted for the Company introduced a new flavor to its portfolio of products “Triple Berry”, featuring raspberries, strawberries,USDA national school meal programs, including the School Breakfast Program, the National School Lunch Program, and blueberries.Smart Snacks in Schools Program.

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 Patentpatent was granted on August 16, 2016. 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. Barfresh now has 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 conductshas conducted sales through twoseveral channels: through National Accounts, andAccounts; through an exclusive nationwide distribution agreement with Sysco Corporation (“Sysco”), the U.S.’s largest broadline distributor, which was entered into during July 2014.2014, and was recently extended for two years, and expanded to include bulk “Easy Pour” products; through a variety of national distributors that meet the exception to exclusivity in the Sysco contract, and through direct sales to customers (e.g., Penn State University).

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 a number of National Accounts representing over 37,000 restaurant locations.

The Company recentlyand have launched in market tests with several major National Key Accounts, andaccounts. The Company is focused on moving from in-market tests to national roll-out.

On August 31, 2016, the Company announced the completion of a successful testroll-out with a national 300 unit frozen yogurt chain, one of the fastest growing self-serve frozen yogurt chains in the world. The next phase of the national roll-out of the chain has been approved to expand to 60 units within the southeastern United States. On September 12, 2016, the Company announced the roll out of its products within Wegman’s Food Markets’ in-store concept,The Pub.Wegmans currently operates 11 of it’s the Pub in-store restaurants with another opening soon. On July 6^th, 2016, the Company announced that it had signed a supply agreement with athose 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 US and Canada, representing over 2,000 potential customerNational Key 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, theThe Company entered intohas 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 are 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;exclusive as to portion controlled products; 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 agreement is not exclusive as to the bulk Easy Pour products.

The Company is one of five vendors that was named toCompany’s products have been included in Sysco’s “Cutting Edge Solution”Solutions” (“CES”) Platform duringsince March of 2016.2016, and are once again included in Sysco’s most recent CES Platform, announced during February of 2017. As part of this platform, our products are receivingreceive national advertising and marketing, and arewill be 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 nine months of 2016 grew to $1,313,178 from $447,859 in the nine months of 2015. On October 6, 2016, Sysco awarded Barfresh the Emerging Supplier of the Year award, 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 isare included as part of PepsiCo’s offerings to its significant customer base.base, which the Company expects to fast track our growth and expedite the test to market process. The agreement facilitatesgives Barfresh access to potential National customer accounts, through introductions provided by PepsiCo’s one-thousand plus person foodservice sales team.team, with Barfresh products have becomebecoming part of PepsiCo’s customer presentations at national trade shows and similar venues.presentations.

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. Production linesIce cream manufacturers are best suited to produce the products and one production line is currently operational at two locations. The first is in our Salt Lake City contract manufacturer location, whichlocation. This manufacturer is currently producesproducing products sold to existing customers.customers as well as producing exclusive test products. Currently annual production capacity with thisour Salt Lake City contract manufacturer is 14 million units per year. The second location isIn February 2016, the Company signed an agreement with Yarnell Operations, LLC, a subsidiary of Schulze and Burch, located in Arkansas. The Yarnell’s agreement, which was signed during February of 2016, securessecuring additional production capacity ahead of expected dramatic sales growth in 2016.growth. Barfresh will havenow has the capacity to ramp up to an incremental production capacity of 100 million units through this agreement. Yarnell’s began shipping product for Barfresh during June of this year.The Yarnell Operations, LLC, subsidiary is strategically located in Arkansas. 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.

AtDuring November, 2016, the endCompany received an equity investment from Unibel, the majority shareholder of the current quarter,Bel Group (“Unibel”). The Bel Group is headquartered in Paris, France, with global operations in 33 countries, 30 production sites on 4 continents and nearly 12,000 employees. Its many branded products, including The Laughing Cow®, Mini Babybel® and Boursin®, are sold in over 130 countries around the world. Pursuant to the securities purchase agreement, Unibel purchased 15,625,000 shares of common stock at $0.64 per share (“Shares”) and warrants to purchase 7,812,500 shares of common stock (“Warrants”) for aggregate gross proceeds to Barfresh of $10 million. The Warrants are exercisable for a term of five years at a per share price of $.88 for cash. Pursuant to the Investor Rights agreement, Barfresh has registered the Shares and the Warrants, and Unibel was granted a seat on the Barfresh Board. This strategic investment provides Barfresh with the necessary capital to drive revenue growth while leveraging Unibel’s more than 150 years of industrial expertise, innovative capabilities, world-class marketing and branding expertise to accelerate our growth in new and existing markets and product channels.

Currently we had 46have 30 employees and 5 consultants; 354 consultants. There are currently 19 employees and 1 consultant selling our products.

Critical Accounting Policies

Our financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”).

Revenue Recognition

We recognize revenue 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. Revenue is recorded net of provisions for discounts, slotting fees, and promotion allowances. Our products are sold on various terms. Our credit terms, which are established in accordance with local and industry practices, typically require payment within 30 days of delivery. We recognize revenue upon receipt of our products by our distributors and retail accounts, in accordance with written sales terms, net of provisions for discounts or allowances. Allowances for returns and discounts are made on a case-by-case basis. Historically, neither returns nor discounts have been material.

Impairments

We periodically evaluate whether the carrying value of long-lived assets has been impaired when circumstances indicate the carrying value of those employees were selling our products. Afterassets may not be recoverable. The carrying amount is not recoverable if it exceeds the closesum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. If the carrying value is not recoverable, the impairment loss is measured as the excess of the asset’s carrying value over its fair value.

Share-based Compensation

We account for share-based employee compensation plans under the fair value recognition and measurement provisions in accordance with applicable accounting standards, which require all share-based payments to employees, including grants of stock options and restricted stock units (RSUs), to be measured based on the grant date fair value of the awards, with the resulting expense generally recognized on a straight-line basis over the period during which the employee is required to perform service in exchange for the award.

Results of Operations

Results of Operation for Three Months Ended September 30, 2017 as Compared to the Three Months Ended September 30,2016

Revenue and cost of revenue

Revenue increased $201,272 (42%) from $478,680 in 2016 to $679,952 in 2017. The increase in revenue is primarily the result of the rollout of our new bulk Easy Pour product which began during the first quarter of 2017 and has continued to gain momentum during the balance of the year. Our product continues to be distributed through all 72 of Sysco’s U.S. mainland distribution centers, as well as through new customers beyond the Sysco distribution network.

Cost of revenue for 2017 was $334,376 as compared to $265,072 in 2016. Our gross profit was $345,576 (51%) and $213,408 (45%) for 2017 and 2016, respectively. We anticipate that our gross profit percentage for the remainder of 2017 will be approximately 50% .

Operating expenses

Our operations during 2017 and 2016 were primarily directed towards increasing sales and expanding our distribution network.

Our general and administrative expenses decreased $182,998 (7.3%) from $ 2,520,632 in 2016 to $ 2,337,634 in 2017, with the improvement primarily driven by lower personnel expenses resulting from the November 2016 realignment of our sales force. The following is a breakdown of our general and administrative expenses for the three months ended September 30, 2017 and 2016: