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 September 30, 20172021

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)

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)

Securities registered pursuant to Section 12(b) of the Act: None

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 such 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.Yes ☒ No ☐

[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).Yes ☒ No ☐

[X] Yes [  ] No

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

If an emerging growth company, indicate by the check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [  ]☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). [  ] Yes [X] ☐ No ☒

AsIndicate the number of November 6, 2017, there were 118,428,967shares outstanding sharesof each of the issuer’s classes of common stock, as of the registrant.latest practicable date: 167,601,435 shares as of November 15, 2021.

TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.

Barfresh Food Group Inc.

Condensed Consolidated Balance Sheets

See the accompanying notes to the condensed consolidated financial statementsstatements.

Barfresh Food Group Inc.

Condensed Consolidated Statements of Operations

(Unaudited)For the three and nine months ended September 30, 2021 and 2020

See the accompanying notes to the condensed consolidated financial statementsstatements.

Barfresh Food Group Inc.

Condensed Consolidated Statements of Cash Flows

For the nine months ended September 30, 20172021 and 20162020

(Unaudited)

See the accompanying notes to the condensed consolidated financial statementsstatements.

Barfresh Food Group Inc.

Notes to Condensed Consolidated Financial Statements

September 30, 20172021

(Unaudited)

Note 1. BasisSummary 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. (“we,” “us,” “our,” and the “Company”) was incorporated on February 25, 2010 in the State of Delaware. We are engaged in the manufacturing and distribution of ready to blend beverages, particularly, smoothies, shakes and frappes.

The accompanying unaudited condensed consolidated financial statements of Barfresh Food Group Inc. at September 30, 2017 and December 31, 2016 have been prepared in accordanceconformity with accounting principles generally accepted accounting principlesin the United States of America (“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-K for the year ended December 31, 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, 2017 and 2016 presented are not necessarily indicative of the results to be expected for the full year. The December 31, 2016 balance sheet has been derived from our audited financial statements included in our annual report on Form 10-K for the year ended December 31, 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 in the balance sheets 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 exceedscan be in excess of the $250,000$250,000 federally insured limit at September 30, 2017 and December 31, 2016.limit. However, we believe that the financial institution where the cash on deposit that exceeds $250,000$250,000 in the financial institutions is financially sound and the risk of loss is minimal.

Restricted Cash

At September 30, 2021 and December 31, 2020, the Company had $142,382 and $142,382, respectively, in restricted cash related to a co-packing agreement.

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:

Level 1 – Quoted prices are available in active markets for identical assets or liabilities as of the reported date. The types of assets and liabilities included in Level 1 are highly liquid and actively traded instruments with quoted prices, such as equities listed on the New York Stock Exchange.

Level 2 – Pricing inputs are other than quoted prices in active markets but are either directly or indirectly observable as of the reported date. The types of assets and liabilities in Level 2 are typically either comparable to actively traded securities or contracts or priced with models using highly observable inputs.

Level 3 – Significant inputs to pricing that are unobservable as of the reporting date. The types of assets and liabilities included in Level 3 are those with inputs requiring significant management judgment or estimation, such as complex and subjective models and forecasts used to determine the fair value.

Barfresh Food Group Inc.

Notes to Condensed Consolidated Financial Statements

September 30, 2021

(Unaudited)

Our financial instruments consist of cash, accounts receivable, accounts payable, accrued expensesadvanced payments, restricted cash, convertible debt, derivative liability and installment debt.the PPP loan. The carrying value of our financial instruments approximates their fair value. The PPP loan approximates fair value dueas forgiveness is expected in the near term.

Accounts Receivable

Accounts receivable are typically unsecured. Our credit policy calls for payment generally within 30 days. The credit worthiness of a customer is evaluated prior to their relative short maturities and the naturea sale. As of the debt.

Barfresh Food Group Inc.

Notes to Condensed Consolidated Financial Statements

September 30, 20172021 and December 31, 2020, the Company’s allowance for doubtful accounts was $131,576 and $133,424, respectively. The allowance was estimated based on evaluation of collectability of outstanding accounts receivable.

(Unaudited)

Inventory

Inventory

Inventory consists of raw materials and finished goods and is carried at the lower of cost or net realizable value on a first in first out basis. The Company monitors the remaining useful life of its inventory and establishes a reserve of obsolescence where appropriate. As of September 30, 2021 and December 31, 2020, the Company’s inventory reserve was $53,188 and $59,093, respectively.

Intangible Assets

Intangible assets are comprised of patents, net of amortization and trademarks. The patent costs are being amortized over the life of the patents,patent, which is twenty years from the date of filing the patent applications.application. 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, costs associated with the acquisition of patents from third parties, 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.

Long-Lived Assets and Other Acquired Intangible Assets

We evaluate the recoverability of property and equipment and finite-lived intangible assets for possible impairment whenever events or circumstances indicate that the carrying amount of such assets may not be recoverable. The evaluation is performed at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. Recoverability of these assets is measured by a comparison of the carrying amounts to the future undiscounted cash flows the assets are expected to generate. If such review indicates that the carrying amount of property and equipment and intangible assets is not recoverable, the carrying amount of such assets is reduced to fair value. We have not recorded any impairment charges during the periods presented.

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

Furniture and fixtures: 5 years

Equipment: Manufacturing equipment and customer equipment: 3 years to 7 years

Leasehold improvements: 2 years

Vehicle: Vehicles: 5 years

Barfresh Food Group Inc.

Notes to Condensed Consolidated Financial Statements

September 30, 2021

(Unaudited)

Revenue Recognition

We recognizeIn accordance with ASC 606, Revenue from Contracts with Customers, revenue is recognized when a customer obtains ownership of promised goods. The amount of revenue recognized reflects the consideration to which the Company expects to be entitled to receive in exchange for these goods. The Company applies the following five steps:

1) Identify the contract with a customer

A contract with a customer exists when (i) the Company enters into an enforceable contract with a customer that defines each party’s rights, (ii) the contract has commercial substance and, (iii) the Company determines that collection of substantially all consideration for goods or services that are transferred is probable. For the Company, the contract is the approved sales order, which may also be supplemented by other agreements that formalize various terms and conditions with customers.

2) Identify the performance obligation in the contract

Performance obligations promised in a contract are identified based on the goods or services that will be transferred to the customer. For the Company, this consists of the delivery of frozen beverages, which provide immediate benefit to the customer.

3) Determine the transaction price

The transaction price is determined based on the consideration to which the Company will be entitled in exchange for transferring goods and is generally stated on the approved sales order. Variable consideration, which typically includes volume-based rebates or discounts, are estimated utilizing the most likely amount method.

4) Allocate the transaction price to performance obligations in the contract

Since our contracts contain a single performance obligation, delivery of frozen beverages, the transaction price is allocated to that single performance obligation.

5) Recognize Revenue when or as the Company satisfies a performance obligation

The Company recognizes revenue from products soldthe sale of frozen beverages when theretitle and risk of loss passes and the customer accepts the goods, which generally occurs at the time of delivery to a customer warehouse. Customer sales incentives such as volume-based rebates or discounts are treated as a reduction of sales at the time the sale is persuasive evidencerecognized. Shipping and handling costs are treated as fulfillment costs and presented in distribution, selling and administrative costs.

Payments that are received before performance obligations are recorded are shown as current liabilities.

The Company evaluated the requirement to disaggregate revenue and concluded that substantially all of its revenue comes from a single product, frozen beverages.

Research and Development

Expenditures for research activities relating to product development and improvement are charged to general and administrative expense as incurred. We incurred $34,454 and $147,738, in research and development expenses for the three months ending September 30, 2021 and 2020, respectively. For the nine months ending September 30, 2021 and 2020, research and development costs totaled $172,900 and $326,892, respectively.

Barfresh Food Group Inc.

Notes to Condensed Consolidated Financial Statements

September 30, 2021

(Unaudited)

Shipping and Storage Costs

Shipping and handling costs are included in general and administrative expenses. For the three months ending September 30, 2021 and 2020, shipping and storage costs totaled $335,414 and $126,737, respectively. For the nine months ending September 30, 2021 and 2020, shipping and storage costs totaled $716,552 and $356,270, respectively.

Leases

We determine if an arrangement is a lease upon inception. A contract is or contains a lease if the contract conveys the right to control the use of an arrangement, deliveryidentified asset for a period of time in exchange for consideration. The right to control the use of an asset includes the right to obtain substantially all of the economic benefits of the underlying asset and the right to direct how and for what purpose the asset is used.

After adoption of ASU 2016-02 and related standards, operating lease right-of-use assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. Lease expense is recognized on a straight-line basis over the lease term. As a lessee, the Company leases office space.

Income Taxes

The provision for income taxes is determined in accordance with the provisions of ASC Topic 740, Accounting for Income Taxes (“ASC 740”). Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted income tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Any effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. ASC 740 prescribes a comprehensive model for how companies should recognize, measure, present, and disclose in their financial statements, uncertain tax positions taken or expected to be taken on a tax return. Under ASC 740, tax positions must initially be recognized in the financial statements when it is more likely than not the position will be sustained upon examination by the tax authorities. Such tax positions must initially and subsequently be measured as the largest amount of tax benefit that has occurreda greater than 50% likelihood of being realized upon ultimate settlement with the tax authority assuming full knowledge of the position and relevant facts. ASC 740 requires a valuation allowance to reduce the deferred tax assets reported if, based on the weight of evidence, it is more than likely than not that some portion or services have been rendered,all of the salesdeferred tax assets will not be recognized.

Derivative Liability

The Company evaluates its convertible instruments, options, warrants or other contracts to determine if those contracts or embedded components of those contracts qualify as derivatives to be separately accounted for under ASC Topic 815, “Derivatives and Hedging.” The result of this accounting treatment is that the fair value of any derivative is marked-to-market each balance sheet date and recorded as a liability. In the event that the fair value is recorded as a liability, the change in fair value is recorded in the statement of operations as gain/loss from derivative liability. Upon conversion or exercise of a derivative instrument, the instrument is marked to fair value at the conversion date and then that fair value is reclassified to equity. We analyzed the derivative financial instruments in accordance with ASC 815. The objective is to provide guidance for determining whether an equity-linked financial instrument is indexed to an entity’s own stock. This determination is needed for a scope exception which would enable a derivative instrument to be accounted for under the accrual method. The classification of a non-derivative instrument that falls within the scope of ASC 815-40-05 “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock” also hinges on whether the instrument is indexed to an entity’s own stock. A non-derivative instrument that is not indexed to an entity’s own stock cannot be classified as equity and must be accounted for as a liability. There is a two-step approach in determining whether an instrument or embedded feature is indexed to an entity’s own stock. First, the instrument’s contingent exercise provisions, if any, must be evaluated, followed by an evaluation of the instrument’s settlement provisions. The Company utilized the fair value standard set forth by the Financial Accounting Standards Board, defined as the amount at which the assets (or liability) could be bought (or incurred) or sold (or settled) in a current transaction between willing parties, that is, other than in a forced or liquidation sale.

Barfresh Food Group Inc.

Notes to Condensed Consolidated Financial Statements

September 30, 2021

(Unaudited)

Debt Extinguishment

The Company evaluates its convertible instruments in accordance with ASC 470-50, “Debt Modifications and Extinguishments.” For all extinguishments of debt, ASC 470-50 requires the difference between the reacquisition price (including any premium) and the net carrying amount of the debt being extinguished (including any deferred debt issuance costs) to be recognized as a gain or loss when the debt is determinable extinguished. Accordingly, the Company recorded a net loss of $193,562 and collection is reasonably assured.net gain of $379,200, respectively, non-cash gain/loss on extinguishment of debt in its statements of operations for the nine months ended September 30, 2021 and 2020, and zero net loss for the three months ended September 30, 2021 and 2020 respectively.

Earnings per Share

We calculate net loss per share in accordance with ASC Topic 260,Earnings per Share.260. 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, 20172021 and 20162020 any equivalents would have been anti-dilutive as we had losses for the periods then ended.

Research and DevelopmentStock Based Compensation

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

Rent Expense

We recognize rent expense on a straight-line basis over the reasonably assured lease term as defined inaccordance with ASC Topic 840,Leases(“718, Compensation-Stock Based Compensation (“ASC 840”718”).

Recent pronouncements

From time to time, new accounting pronouncements are issued that we adopt as of the specified effective date. We believe ASC 718 requires that the impact of recently issued standards 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 Revenuecost resulting from Contracts with Customers (Topic 606), which converged guidance on recognizing revenue in contracts with customers on an effective date after our year ending December 31, 2017. The Company isall share-based payment transactions be recognized in the initial stages of evaluating the effect of the standard on our financial statements and continue to evaluate the available transition methods. However, based on our initial evaluation, we do not expect there to 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 Company does not plan to adopt the standard until the interim period ended March 31, 2018.

In July 2015, the FASB issued ASU 2015-11, Inventory, which simplifiesestablishes fair value as 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. The adoption of this guidance did not 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 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. The adoption of this guidance did not have a material impact on our 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 amendmentsobjective in this ASU leaves the accounting for the organization that own the assets leasedshare-based payment arrangements and requires all entities 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 Company isapply a fair-value based measurement method in the initial stages of evaluating the effect of the standard on our financial statements and continue to evaluate the available transition methods. However, based on our initial evaluation, we do not expect 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 will be converted to financing leases under the new guidance. The Company does not plan to adopt the standard until the interim period ended March 31, 2019.

In March 2016, the FASB issued ASU No. 2016-09, Compensation – Stock Compensation (Topic 718) (“ASU 2016-09”). The standard identifies areas for simplification involving several aspects of accounting for share-based payment transactions including the income tax consequences, classificationwith employees except for equity instruments held by employee stock ownership plans.

Note 2. Inventory

Inventory consists of awards as either equity or liabilities, an option to recognize stock compensation expense with actual forfeitures recognized as they occur, as well as certain classifications on the statement of cash flows. ASU 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 that 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 made in the financial statements: (i) principal conditions or events that raised the substantial doubt; (ii) management’s evaluation of the significance of those conditions or events in relation to the entities 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 a substantial doubt. These changes are reflected in the disclosure included in Note 10.

Barfresh Food Group Inc.

Notes to Condensed Consolidated Financial Statements

September 30, 20172021 and December 31, 2020:

(Unaudited)Schedule of Inventory

Note 2. 3. Property Plant and Equipment

Major classes of property and equipment at September 30, 20172021 and December 31, 2016 consist2020:

Schedule of the following:Major Classes of Property and Equipment

Barfresh Food Group Inc.

Notes to Condensed Consolidated Financial Statements

September 30, 2021

(Unaudited)

We recorded depreciation expense related to these assets of $78,576$146,346 and $36,268 $122,827 for the three-month periodsthree-months ended September 30, 20172021 and 2016,2020, respectively and $180,380$407,432 and $104,367$394,670 for the nine-nine months periods ended September 30, 20172021 and 2016,2020, respectively. Depreciation expense in Cost of Goods Sold was $0 and $5,115 for three months ended September 30, 2021 and 2020, respectively, and $17,673 and $14,717 for the nine months ended September 30, 2021 and 2020, respectively.

Note 3. 4. Intangible Assets

As of September 30, 2017,2021, intangible assets consist of patent costs of $764,891,$768,138, trademarks of $87,360$124,285 and accumulated amortization of $250,899.$506,149.

As of December 31, 2016,2020, intangible assets consist of patent costs of $750,640,$768,138, trademarks of $73,925$119,911 and accumulated amortization of $204,702.$457,833.

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,patents, which is December 2025. The amount charged to expenses for amortization of the patent costs was $15,398$16,105 and $15,376$15,902 for the three months ended September 30, 20172021 and 2016,2020, respectively, and $46,196$48,316 and $46,085$47,707 for the nine months ended September 30, 20172021 and 2016,2020, respectively.

Estimated future amortization expense related to patents as of September 30, 2017,2021, is as follows:

Schedule of Estimated Future Amortization Expense Related to Intangible Property

Note 4. 5. Related Parties

As disclosed below in Note 7, members of management and directors invested in the Company’s convertible notes; and in Note 10, members of management and directors have received shares of stock and options in exchange for services.

Note 6. Paycheck Protection Program (PPP) loan

On May 7, 2020 the Company was granted a $568,131 loan under the PPP administered by a Small Business Administration (SBA) approved partner. The loan, which was to mature in two years, was uncollateralized and was fully guaranteed by the Federal government. The Company was eligible for loan forgiveness of up to 100% of the loan, upon meeting certain requirements. On May 20, 2021 the loan for $568,131 was legally released and forgiven by the SBA. Forgiveness income of $568,131 has been recorded for the nine months ended September 30, 2021.

Note 5. Long term DebtOn January 27, 2021, the Company was granted a second $568,131 loan under the PPP administered by an SBA approved partner. The loan, which matures in five years, has an interest rate of 1%, and is uncollateralized and is fully guaranteed by the Federal government. The deferral period is 24 weeks plus 10 months from the loan note date.The Company is eligible for loan forgiveness of up to 100% of the loan, upon meeting certain requirements. The Company has recorded a note payable and will record the forgiveness upon being legally released from the loan obligation by the SBA. The Company will be required to repay any remaining balance, plus interest accrued at 1 percent, in monthly payments commencing upon notification that the loan will not be forgiven or only partially forgiven.

Long term debt at September 30, 2017 and December 31, 2016 consists of an installment agreement on one vehicle maturing in September 2020. The installment agreement bears no interest. Monthly payments are $320 per month.

Barfresh Food Group Inc.

Notes to Condensed Consolidated Financial Statements

September 30, 20172021

(Unaudited)

The annual maturitiesrepayment for the PPP loan as of long term debtSeptember 30, 2021, are as follows:

Schedule of Repayment of Paycheck Protection Program (PPP) Loan

Note 7. Convertible Notes (Related and Unrelated Party)

As of September 30, 2021, the Company settled all outstanding convertible note which included the $1,071,000 Series CN Note 1 noteholders. The debt settlement consisted of debt converted to company stock of $231,000 ($30,000 related party) in principal and $192,663 ($37,689 related party) in interest into 1,159,243 shares of common stock, and debt in the amount of $840,000 ($180,000 related party) was repaid.

The convertible notes consist of the following components as of September 30, 2021 and December 31, 2020:

Schedule of Convertible Notes

As of September 30, 2021, the Company settled all outstanding convertible note holders which included the $168,000 Series CN Note 2 noteholders. The debt settlement consisted of debt converted to company stock of $168,000 in principal and $41,747 in interest into 582,630 shares of common stock.

The convertible notes consist of the following components as of September 30, 2021 and December 31, 2020:

Schedule of Convertible Notes 

The total of $1,167,042 shown in the two tables above at December 31, 2020, are presented in the balance sheet as Current Liabilities: $158,243 Convertible Note-Net of Discount and Long-Term Liabilities: Convertible Note – related party net of Discount of $197,804, and Convertible Note – net of Discount $810,995.

Barfresh Food Group Inc.

Notes to Condensed Consolidated Financial Statements

September 30, 2021

(Unaudited)

Note 8. Derivative Liabilities

As discussed in Note 7, Convertible Notes, the Company had $168,000 of principal outstanding in CN Notes 2 that contained variable conversion provisions. The conversion terms of the convertible notes were variable based on certain factors, such as the future price of the Company’s common stock. The number of shares of common stock to be issued was based on the future price of the Company’s common stock; therefore the number of shares of common stock issuable upon conversion of the promissory note was indeterminate. The Company fair valued the variable conversion provisions each reporting period. The fair value was reported as a derivative liability in the accompanying consolidated balance sheets and the change in value was recorded as a gain or loss in the accompanying consolidated statements of operations.

The fair values of the Company’s derivative liabilities are estimated at the issuance date and are revalued at each subsequent reporting date. As of September 30, 2021, the Convertible Noteholders discussed in Note 7 were settled. Upon debt extinguishment the Company’s derivative liability was revalued at May 26, 2021 with value of $25,170, which resulted in a gain of $16,305 for the nine months ended September 30, 2021.

The fair value of the derivative liabilities for CN Notes 2 was calculated using the Black-Scholes model using the following assumptions.

Schedule of Fair Value of the Derivative Liability

Reconciliation of the derivative liability measured at fair value on a recurring basis with the use of significant unobservable inputs (level 3) from December 31, 2020 to September 30, 2021:

Schedule of Derivative Liability Measured at Fair Value on a Recurring Basis

The following table presents the Company’s fair value hierarchy for applicable assets and liabilities measured at fair value as of December 31, 2020 and September 30, 2021:

Schedule of Fair Value Hierarchy of Assets and Liabilities

Note 6. 9. Commitments and Contingencies

We lease office space under a non-cancelable operating leases,lease which expires on March 31, 2019.2023. Our periodic lease cost and operating cash flows were $19,818 and $19,813 for the three months ended September 30, 2021 and 2020, respectively. Our periodic lease cost and operating cash flow were $59,489 and $59,657 for the nine months ended September 30, 2021 and 2020, respectively. As of September 30, 2021, our right of use asset and related liability was $102,525 and $111,180.

Barfresh Food Group Inc.

Notes to Condensed Consolidated Financial Statements

September 30, 2021

(Unaudited)

In determining the present value of our operating lease right-of-use asset and liability, we used a 10% discount rate (which approximated our borrowing rate). The aggregate minimum requirementsremaining term on the lease is 3 years.

The following table presents the future operating lease payment as of September 30, 2021:

Schedule of Estimate Future Maturities of Lease Liabilities

From time to time, various lawsuits and legal proceedings may arise in the ordinary course of business. However, litigation is subject to inherent uncertainties and an adverse result in these or other matters may arise from time to time that may harm our business. We are as follows:currently the defendant in one legal proceeding for an amount less than $100,000. Our legal counsel and management believe a material unfavorable outcome to be remote.

Note 7. 10. Stockholders’ Equity

During the nine months ended September 30, 2017,2021, we issued 178,733 shares of common stock, valued at $112,250, for services. In addition, we issued 439,977539,998 options to purchase our common stock to certain member of the Board of Directors in lieu of cash payments for Director fees.employees. The exercise price of the options ranged from $0.74 to $0.79were $0.38-$0.59 per share, vest immediately,with a combination of both cliff and are exercisable for periods of 8 years. In addition, we issued 1,480,000 options to purchase our common stock to employees and executives. The exercise price of the options ranged from $0.61 to $0.68 per share, vest after graded vesting over 3 years and are exercisable for periodsa period of 8 years. We also issued 95,995 shares of our common stock, with a value of $73,560, to a member of our Board of Directors in lieu of cash payments for Director fees.

The fair value of the options issued ($266,000,177,751, in the aggregate) was calculated using the Black-SholesBlack-Scholes option pricing model, based on the criteria shown below.

Summary of Fair Value of Options Using Black-Sholes Option Pricing Model

The shares of our common stockFor the nine months ended September 30, 2021, the Company issued 148,810 options for board director compensation, and 460,000 options 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.

cancelled. The total amount of equity basedequity-based compensation included in additional paid in capital was $41,574 and $45,692for the three-month periodsthree months ended September 30, 20172021 and 20162020, respectively. The total amount of equity-based compensation included in additional paid in capital was $575,224$51,857 and $270,252, respectively, and$240,216 for the nine-month periodnine months ended September 30, 20172021 and 2016, was $1,181,798 and $515,041,2020, 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, 2017:2021:

Summary of Outstanding Stock Options Issued to Employees and Directors

Barfresh Food Group Inc.

Notes to Condensed Consolidated Financial Statements

September 30, 2021

(Unaudited)

As of September 30, 2021, the Company has $192,500 of total unrecognized share-based compensation expense related to unvested options, which is expected to be amortized over the remaining weighted average period of 3.21 years.

The following is Changes in Stockholders’ Equity as of September 30, 2020 and September 30, 2021:

Schedule of Changes in Stockholders' Equity

Barfresh Food Group Inc.

Notes to Condensed Consolidated Financial Statements

September 30, 2021

(Unaudited)

On June 1, 2021, the Company completed a private placement of 16,666,666 shares of its common stock at $0.36 per share, resulting in gross proceeds of $6,000,000. In addition, holders of debt converted a total of $399,000 in principal and $234,410 in interest into 1,741,873 shares of common stock, and debt in the amount of $840,000 was retired.

Note 8. 11. Outstanding Warrants

The following is a summary of all outstanding warrants as of September 30, 2017:2021:

Summary of Outstanding Warrants

Note 9. 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 effectiverequires a valuation allowance to reduce the deferred tax rate. The rate will be revised,assets reported if, necessary, asbased on the weight of evidence, it is more than likely than not that some portion or all of the end of each successive interim period during our fiscal year to our best current estimate.deferred tax assets will not be recognized. Accordingly, at this time the Company has placed a valuation allowance on all tax assets. As of September 30, 2017,2021, 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.0. 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, 2017 and 2016, we did not have any interest and penalties associated with tax positions. As of September 30, 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 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.

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, 2017 and for the nine month periods ended September 30, 2017 and 2016 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.

BarfreshThe Company’s products are made in four formats. The first is a leader in the creation, manufacturing and distribution of ready to blend frozen beverages. The current portfolio of products includesportion controlled single serving beverage ingredient packs, suitable for smoothies, shakes and frappes.frappes that can also be utilized for cocktails and mocktails. These packs contain all of the ingredients necessary to make a smoothie, shake or frappe, including the ice. Simply add water, empty the packet into a blender, blend and serve. The second format is the bulk “Easy Pour” format. The Company’s products include portion controlled and ready to blend beverage ingredient packs or “beverage packs”. The beverage packs containbulk “Easy Pour” format also contains 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. The Company’s products also include bulk “Easy Pour” ready to blend frozen beverages, which are manufacturedpackaged in gallon containers and containin a concentrated product formula that is mixed “one to one” with water. The Company has also recently launchedthird format is the Company’s new WHIRLZ 100% Juice Concentrates. These new 5:1 juice concentrates are a “no sugar added” version ofperfect complement to the company’s current existing 1:1 bulk Easy Pour products used in beverage dispensing equipment. The fourth format that is specifically targeted for the USDA national school meal programs, including the School Breakfast Program, the National School Lunch Program,Company’s new ready-to-drink bottled smoothie, “Twist & Go”™, This sweet fruit and Smart Snackscreamy yogurt smoothie contains four ounces of yogurt and a half-cup of fruit/fruit juice and comes in Schools Program.three different flavors (Peach, Mango and Strawberry/Banana).

Domestic and international patents and patents pending are owned by Barfresh, as well as related trademarks for all of the single serve products. In November 2011, the Company acquired the patentPatent rights in the United States and Canada. The Canadian patent has been granted and the United States patent 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. The patents are pending injurisdictions including the remainder of the jurisdictions that have signed the treaty.United States. In addition, on October 15, 2013, the Company has purchased all of the trademarks related to the patented products.

The Company has conductedconducts sales through several channels: throughchannels, including National Accounts;Accounts, Regional Accounts, and Broadline Distributors. Barfresh’s primary broadline distribution arrangement is through an exclusive nationwide distribution agreement with Sysco Corporation (“Sysco”), the U.S.’s largest broadline distributor, which was entered into during July 2014, and was recently extended for two years, and expanded2014. Pursuant 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 and have launched in market tests with several major National Key accounts. The Company is focused on moving from in-market tests to national roll-out with those major National Key accounts.

In addition to the National Accounts, the Company sells to food distributors that supply products to the food services market place. The Company has an exclusive agreement, with Sysco Merchandising and Supply Chain Services, Inc. for resale by Sysco to the foodservice industry of the Company’s ready-to-blend smoothies, shakes and frappes. Allall 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 as to portion controlled products;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 operatorsoperator’s nominated distributor for our products. TheOn October 2, 2019, the exclusive distribution agreement is not exclusive aswith Sysco expired, opening the possibility to expand distribution with other distributors outside of the bulk Easy Pour products.Sysco system.

The Company’s products have been included in Sysco’s “Cutting Edge Solutions” (“CES”) Platform since March ofDuring 2016 and 2017, the Company announced that it had signed supply agreements with several of the major global on-site foodservice operators. On March 8, 2018, the Company announced that it had signed a new supply agreement with one of the largest of these foodservice operators, for exclusive distribution of four Barfresh single serve SKUs. On November 14, 2018, the Company announced that it had received approval for multiple products to be rolled out to a national restaurant chain with over 2,500 locations. The Company has multiple SKUs developed and approved by the customer which are once again included in Sysco’s most recent CES Platform, announced during February of 2017. As part of this platform, our products receive national advertising andawaiting placement on the marketing and will 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.calendar.

On October 26, 2015, Barfresh signed ana five-year agreement with PepsiCo North America Beverages, a division of PepsiCo, to become its exclusive sales representative within the food service channel to present Barfresh’sthe Barfresh line of ready-to-blend smoothies and frozen beverages throughout the United States and Canada. Through this agreement, Barfresh’ products are included as part of PepsiCo’s offerings to its significant customer base, which the Company expects to fast track our growth and expedite the test to market process.base. The agreement gives Barfreshfacilitates access to potential National customer accounts, through introductions provided by PepsiCo’s one-thousandone thousand plus person foodservice sales team, withteam. Barfresh products becominghave become part of PepsiCo’s customer presentations.

The Company has recently announced placement of the no sugar added version of its bulk Easy Pour productpresentations at national trade shows and similar venues. On May 30, middle and high school cafeterias in Pasco County, Florida, representing a student body of over 40,000. Within the education channel, Barfresh is now being sold in a number of leading universities including Penn State University, Stanford, Colorado State, Florida State University and the University of Tennessee. The Company also recently announced that it had entered into a contract with one of Canada’s leading third party food service provider to provide its bulk, Easy Pour product to 22 dining locations.

Finally,2019, the Company intendsamended its agreement with Pepsi which included a reduction in the commission fee and a clause which allows either party the right to monetizeterminate the international patents outside ofagreement upon 90 days written notice. Neither party has exercised its right to terminate 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.agreement. This agreement remains in effect.

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 one production line is currently operational in our Salt Lake City contract manufacturer location. This manufacturer is currently producing products sold to existing customers as well as producing exclusive test products. Currently annual production capacity with our Salt Lake City contract manufacturer is 14 million units per year. In February 2016, the Company signed an agreement with Yarnell Operations, LLC, a subsidiary of Schulze and Burch, securing additional production capacity ahead of expected sales growth. Barfresh now has the capacity to ramp up to an incremental production capacity of 100 million units through this agreement. 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.

During November 2016, the Company received an equity investment from Unibel, the majority shareholder of the 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 providesprovided 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.

On February 14, 2018, the Company announced the private placement of convertible notes with gross proceeds of $4.1 million. The closing of the first 60% of this amount occurred between March 12 and 22, 2018, after notice was issued by the Company that it had entered into a material agreement or series of related agreements with a national account for the sale of its products into approximately 1,000 new locations. The remaining 40% of the principal amount was to be received upon achieving a second milestone, which is entering into a material agreement or series of related agreements with a national account for the sale of its products into approximately 2,500 new locations. During November of 2018, the Company and several of the Convertible Note investors agreed to amend the definition of Milestone 2 to allow for the funding the remaining 40% of the principal amount upon the Company receiving approval from a National Restaurant Chain with over 2,500 for the rollout of its products. Such approval was received during the fourth quarter of 2018, and the Company received an additional $1.4 million of convertible note proceeds.

The convertible notes were unsecured and had (i) a two-year term, and (ii) a 10% annual coupon to be paid in cash or stock at the Company’s discretion at a conversion price equal to 85% of the average closing bid prices of the Common Stock over the twenty (20) consecutive trading day period immediately preceding the payment date, but in no event lower than sixty cents ($0.60) per share of Common Stock. The investors could elect to convert their principal into common stock at a conversion price equal to the lower of: (i) $0.88 per share of Common Stock, or (ii) 85% of the average closing bid prices of the Common Stock over the twenty (20) consecutive trading day period immediately preceding the date of investor’s election to convert, but in no event lower than $0.60 per share of Common Stock. Investors also received warrant coverage of 25% of the number of shares that would be issuable upon a full conversion of the principal amount at an average of the twenty consecutive trading day period immediately preceding the applicable closing date. If any principal amount were to remain outstanding after the one-year anniversary of the closing, investors would be granted an additional warrant with identical terms. The warrants are exercisable for a period of three years for cash at the greater of 120% of the closing price or $0.70 per share of common stock. After the initial private placement, investors were offered the opportunity to accelerate the issuance of the additional warrant by increasing their convertible note investment by 10% to 20%. After the close of the first quarter 2018, a number of investors took advantage of this acceleration opportunity, resulting in an increase in the amount of the total convertible note by $177,300 and the issuance of 930,332 additional warrants. During the fourth quarter 2018, four of the convertible note investors elected to convert their notes into stock, with a total of $453,000 of convertible debt, plus accrued interest being converted into stock.

During the fourth quarter of 2018, one investor exercised 833,333 N warrants for cash, at $0.45 per share. $221,918 of the proceeds of that transaction were used to pay down a short term note payable, held by the same investor, in the amount of $200,000, plus accrued interest. The balance of the proceeds of the N warrant exercise, in the amount of $153,082 were received by the Company.

During the first quarter of 2019, the Company completed additional funding, including a Private Placement Offering for common shares priced at $0.60 per share, resulting in the receipt of capital investment in the amount of $2.4 million and the issuance of 4,000,000 shares. In addition, during the first quarter of 2019 the Company offered to reduce the exercise price on its I Warrants from $1 to $0.60, for a limited time. During the time this offer was open, I Warrant holders converted 2,841,454 warrants at $0.60, resulting in the receipt of capital investment in the amount of $1.7 million. In addition, during the first quarter of 2019, one investor exercised G series warrants, resulting in the receipt of capital investment in the amount of $180,000, and the issuance of 300,000 shares. In total, during the first quarter of 2019 the Company raised $4.3 million and issued 7,141,454 shares, and no additional warrants were issued.

On March 23, 2020, the Company completed additional funding, including a Private Placement Offering for common shares priced at $0.50 per share (subject to adjustment) resulting in the receipt of proceeds in the amount of $3,825,000 and the issuance of 7,650,000 shares. The investors of this Private Placement Offering were granted O warrants which are eligible to purchase an additional 0.50 shares for every share issued to each purchaser, exercisable for a period of 3 years at an exercise price of $0.60 per share (subject to adjustment). If the volume-weighted average trading price for the 20 consecutive trading days that concluded 6 months after the initial closing (the “Six Month Price”) exceeded or equaled $0.50 per share (the “Target Price”), the per share purchase price would not be adjusted. If the Six Month Price was less than the Target Price, the per share purchase price would be automatically reduced to the Six Month Price, but in no event less than $0.35 per share, in which case the Company would issue to each investor, pro-rata based on such investor’s investment: (a) shares in a quantity that equaled the difference between the number of shares issued to such purchaser at closing and the number of shares that would have been issued to such purchaser at closing at the Six Month Price; and (b) a warrant for a number of shares of common stock equal to 50% of the difference between the number of shares issued to such investor at closing and the number of shares that would have been issued to such investor at closing at the Six Month Price, with an exercise price equal to the sum of $0.10 per share and the Six Month Price, but in no event less than $0.45 per share. The exercise price per share for each warrant would automatically adjust to the sum of $0.10 per share and the Six-Month Price, but in no event less than $0.45 per share. On September 28, 2020, the Company determined the volume-weighted average price was below the $0.35 per share and consequently issued 5,322,868 additional shares in accordance with provisions of the Private Placement Offering. Similarly, the Company issued an additional 2,652,868 Warrants to investors that contributed capital or exercised the conversion of their convertible note. Lastly, the Company issued an additional 459,000 Warrants for convertible noteholders that extended their convertible notes.

In addition, the Company obtained a 24 month extension on $1,071,000 in principal, and conversion of $720,000 of principal of the Milestone I Convertible Notes at a conversion price of $0.50 per share. The remaining $110,166 was extended for thirty days. The interest rate on the principal balance of the extended Milestone I Convertible Notes was amended to 15%. Furthermore, the Company obtained a 12 month extension on $168,000 in principal, and conversion of $1,128,000 in principal of the Milestone II Convertible Notes. The Convertible Noteholders of the Milestone I and II Convertible Notes were granted additional interest depending upon their election to convert or extend their Convertible Notes.

On June 1, 2021, the Company completed a private placement of 16,666,666 shares of its common stock at $0.36 per share, resulting in gross proceeds of $6,000,000. In addition, holders of debt converted a total of $399,000 in principal and $234,410 in interest into 1,741,873 shares of common stock, debt in the amount of $840,000 was retired, and a PPP loan in the amount of $568,131 was forgiven, leaving the Company with no debt except for a PPP loan in the amount of $568,131.

Currently we have 3014 employees and 43 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 inIn accordance with local and industry practices, typically require payment within 30 daysASC 606, “Revenue from Contracts with Customers”, revenue is recognized when a customer obtains ownership of delivery. We recognizepromised goods. The amount of revenue upon receipt of our products by our distributors and retail accounts,recognized reflects the consideration to which the Company expects to be entitled to receive in accordance with written sales terms, net of provisionsexchange 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.these goods. The Company applies the following five steps:

ImpairmentsStock-based Compensation

We periodically evaluate whether the carrying value of long-lived assets has been impaired when circumstances indicate the carrying value of those assets may not be recoverable. The carrying amount is not recoverable if it exceeds the sum 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, 20172021 as Compared to the Three Months Ended September 30, 20202016

Revenue and cost of revenue

Revenue increased $201,272 (42%$1,222,936 (173%) from $478,680$707,610 in 20162020 to $679,952$1,930,546 in 2017.2021. The increase inoverall revenue is primarilyfor the resultthird quarter 2021 was higher due to growing “Twist & Go”™ revenue and the gradual return of the rollout of our newsingle serve and 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.demand.

Cost of revenue for 20172021 was $334,376$1,209,425 as compared to $265,072$423,942 in 2016.2020. Our gross profit was $345,576 (51%$721,121 (37.4%) and $213,408 (45%$278,553 (39.4%) for 20172021 and 2016,2020, respectively. Gross margin percentages decreased in the third quarter primarily due to higher supply chain costs. We anticipate that ourmargins will improve based on improving Twist and Go margins and having a greater mix of higher margin bulk and single serve revenue. As a result, the gross profit percentage for the remainder of 2017 will2021 is expected to be approximately 50% 39%.

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%increased slightly $89,122 (9%) from $ 2,520,632$976,208 in 20162020 to $ 2,337,634$1,065,330 in 2017, with the improvement primarily driven by2021. Shipping and storage costs were significantly higher due to higher sales volume due to unprecedented market price and labor shortage, which offset lower research and development, and personnel expenses resulting from the November 2016 realignment of our sales force.costs. The following is a breakdown of our general and administrative expenses for the three months ended September 30, 20172021 and 2016:2020:

Personnel cost represents the cost of employees including salaries, bonuses, employee benefits and employment taxes and continues to be one of our largest cost.costs. Personnel cost decreased $387,255 (28%$20,440 (6%) from $1,386,141$370,010 to $998,886. During the fourth quarter of 2016, we affected a restructuring of our sales force, whereby we eliminated 13$349,570. We had 17 full time sales positions, and replaced the associated sales territory coverage with brokerage arrangements. This change has allowed our remaining sales force to more effectively focus on pursuing larger accounts, while our expanded brokerage network will support and expand our “up and down the street” business. This restructuring is the primary driver for the reduction in personnel costs in the third quarter. In addition, afteremployees at the end of the third quarter of 2020, and we affected a further restructuring of our sales force, whereby we eliminated an additional 5currently have 14 full time sales position. We expect this further restructuring to result in estimated additional annualized savings of $700,000, bringing the total annualized savings resulting from these two sales force restructurings to $2.2 to $2.7 millionemployees.

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. Stock based compensation for the current quarter was in line with$41,574, a decrease of $4,118, or (9%), from the prior quarter.year ago quarter expense of $45,692 The Company issues additional stock options to its employees from time to time under its Equity Compensation Plan.

Legal and professional fees decreased $25,617 (20%increased $16,121 (54%) from $129,346$29,680 in 20162020 to $103,729$45,801 in 2017.2021. The decreaseincrease was primarily due to a timing of legal services required.for up listing. We anticipate legal fees related to our business and financing activities to increasedecrease as our business continues to grow.we have renegotiated arrangements with existing service providers.

Travel expenses decreased $73,052 (46%$1,801 (10%) from $157,746$17,331 in 20162020 to $84,694$15,530 in 2017. The decrease is primarily due to reduction in travel costs associated with terminated employees.2021. We anticipate that travel expenses for the balanceremainder of this year will be lower thangradually pick up and for the third quarter expenses, as a resultsecond half of reduced travel costs associated with2021 comparable to 2019 trends.

Rent expense remained flat for the additional employees terminated afterthree months ended September 30, 2020 compared to the end of the third quarter.

three months ended September 30, 2021. Rent expense is primarily for our location in Beverly Hills,Los Angeles, California. Rent expense for the Beverly HillsLos Angeles office is approximately $10,996$6,500 per month. We have entered intolease office space at 3600 Wilshire Boulevard, Los Angeles, California pursuant to a new lease for office space at 8383 Wilshire Boulevard, Beverly Hills, California. The new leasethat commenced on NovemberApril 1, 20162019 and expires March 31, 2019.2023.

Marketing and selling expenses increased $$79,872 (74%decreased $19,623 (36%) from $108,166$55,194 in 20162020 to $188,038$35,571 in 2017. Higher2021. Lower marketing and selling expenses were primarily due to higherchanges that were made to certain sales commissions associated with higher sales during the quarter.commission agreements.

Consulting fees were $58,870$20,774 in 2017,2021, as compared with $58,192$9,005 in 2016.2020, an increase of 130%. Our consulting fees vary based on needs. We engaged consultants in the areas of sales and operationsfinance during the quarter.quarter due to reduced headcount. The need for future consulting services will be variablevariable.

Director fees increased $75,000 from $25,000are flat $50,000 in 20162020 to $100,000$50,000 in 2017. The increase was due to both the addition of a director during the fourth quarter of 2016, and the timing of recording fees.2021. Annual director fees are anticipated at $50,000 per non-employee director.director of which six directors will be compensated in 2021.

Research and development expenses increased $ 6,020decreased $113,284 (77%) from $ 101,304$147,738 in 20162020 to $ 107,324$34,454 in 2017. During the third quarter of 2016 we re-classified certain personnel expenses that had previously been included in Personnel Expense, to Research and Development.2021. These expenses relate to the services performed by our Director of Manufacturing and Product Development, and consultants supporting that employee. The re-classificationreduction is shownprimarily due to a reduction in both the current period and the prior period.labor hours for our development staff.

Shipping and storage expense became our largest expense in third quarter 2021, it increased $ 122,009 (107%$208,677 (165%) from $ 113,674$126,737 in 20162020 to $ 235,683$335,414 in 2017. Shipping and storage expense as a percentage of revenue increased from 24% in 2016 to 35% in 2017. The higher expense in 20172021. This is primarily due to a number of factors, including the continued movement of inventoryhigher sales volume, higher fuel costs, and from relocating materials from one location to new forward warehouses as the Company expanded its business into Canada, movement of sample inventory into position for trade shows and customer demonstrations, and special situation ordering of raw materials for production and R&D runs.another. 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.arrangements as well as an increased volume per load due to higher sales volume in 2021.

Other expenses increased $11,846 (11%) from $105,008 in 2020 to $116,854 in 2021, primarily due to lower insurance expense and the results of the cash and accrued expense reconciliations. 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 as our business continues to grow.be comparable to 2020 for the balance of the year.