Barfresh Food Group Inc.

Notes to Condensed Consolidated Financial Statements

March 31, 2018

(Unaudited)

Note 4. Related Parties

As disclosed below in Note 6,5, members of management and directors invested in the company’s convertible notes; and in Note 7,8, members of management and directors have received shares of stock and options in exchange for services.

Barfresh Food Group Inc.

Notes to Condensed Consolidated Financial Statements

March 31, 2019

(Unaudited)

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

In March 31, 2018, we closed an offering of $250,000 in short-term notes payable. The short-term notes bear 12% interest per annum with maturity date in September 2018.

Note 6. Convertible Notes

During the three months needed March 31, 2018, we closed an offering of $2,527,500 in convertible notes, Series CN Note 1 of this2, of which, management, directors and significant shareholders have invested $810,000.$840,000. The convertible notes bear 10% interest per annum and are due and payable on March 14, 2020. The notes are convertible at any time prior to the due date into our common stock at a conversion price of $0.88 per share or 85% of the average closing price of the common stock over the twenty consecutive trading days immediately preceding the date of note holders’ election; but in no event lower than $0.60 per share. In addition, the interest is convertible at any time prior to the due dates into our common stock at conversion price of 85% of the average closing price of the common stock over the twenty consecutive trading days immediately preceding the date of note holders’ election; but in no event lower than $0.60 per share. There were 1,331,583 warrants issued, in conjunction with the convertible note offering.

The fair value of the warrants, $0.17 per share ($220,548 in the aggregate), was calculated using the Black-Scholes option pricing model using the following assumptions:

The value of $220,548 was recorded as a debt discount related to the issuance of the warrants.

In April 2018, we offered investors in our March 2018 Convertible Note (“Series CN Notes”) the opportunity to accelerate the issuance of certain warrants associated with the CN Notes. Pursuant to the acceleration offer, Series CN Notes investors who invested an additional 10% to 20% of the Series CN Note amount, immediately received an additional 25% warrant coverage on their initial CN Note investment, which would otherwise have been issued after one year. During April 2018, we closed the CN Note acceleration offer in the amount of $177,300 in convertible notes, of which, management, directors and significant shareholders have invested $30,000. The CN Note acceleration offer convertible notes bear 10% interest per annum and are due and payable on March 14, 2020. The notes are convertible at any time prior to the due date into our common stock at conversion price of $0.88 per share or 85% of the average closing price of the common stock over the twenty consecutive trading days immediately preceding the date of note holders’ election; but in no events lower than $0.60 per share. In addition, the interest is convertible at any time prior to the due dates into our common stock at conversion price of 85% of the average closing price of the common stock over the twenty consecutive trading days immediately preceding the date of note holders’ election; but in no events lower than $0.60 per share. There were 1,331,583937,373 warrants issued in conjunction with the Series CN Note acceleration offer convertible note offering.

The fair value of the warrants, $0.25 per share ($235,519 in the aggregate), was calculated using the Black-Scholes option pricing model using the following assumptions:

The value of $105,199 was recorded as a debt discount related to the issuance of the warrants as using the fair value would cause the debt discount to exceed the gross proceeds received.

In November and December 2018, three investors elected to convert their convertible note issued on March 14, 2018 into stock. The total debt converted was $453,000 and $30,459 accrued interest into 804,396 shares of stock.

In March 2019, an investor elected to exercise I-Warrants by using part of the investor’s convertible note. The total debt settled was $350,634 of principal and 33,929 of accrued interest.

Barfresh Food Group Inc.

Notes to Condensed Consolidated Financial Statements

March 31, 2019

(Unaudited)

The convertible notes consist of the following components as of December 31, 2018 and March 31, 2019:

In December 2018, we closed an offering of $1,363,200 in convertible notes, Series CN 2 of 2, of which, management, directors and significant shareholders have invested $560,000. The convertible notes bear 10% interest per annum and are due and payable on November 30, 2020. The notes are convertible at any time prior to the due date into our common stock at conversion price of $0.88 per share or 85% of the average closing price of the common stock over the twenty consecutive trading days immediately preceding the date of note holders’ election; but in no event lower than $0.60 per share. In addition, the interest is convertible at any time prior to the due dates into our common stock at a conversion price of 85% of the average closing price of the common stock over the twenty consecutive trading days immediately preceding the date of note holders’ election; but in no event lower than $0.60 per share. There were 678,864 warrants issued, in conjunction with the convertible note offering.

The fair value of the warrants, $0.17$0.31 per share ($220,548212,763 in the aggregate), was calculated using the Black-Scholes option pricing model using the following assumptions.

assumptions:

The value of $212,763 was recorded as a debt discount related to the issuance of the warrants.

Interest expense forThe convertible notes consist of the three months endedfollowing components as of December 31, 2018 and March 31, 2018, includes direct interest2019:

Barfresh Food Group Inc.

Notes to Condensed Consolidated Financial Statements

March 31, 2019

(Unaudited)

As of $11,772, amortizationMarch 31, 2019, the outstanding balances due of the Series CN Notes, net of all related debt discount, total $2,136,276. The related party convertible notes (net) and unrelated party convertible notes (net) represent $925,749 and $1,210,527, respectively as of $16,967.March 31, 2019.

Future maturity of convertible notes at face value before effect of all discount, are as follow:

Note 7.6. Derivative Liabilities

As discussed in Note 6,5, Convertible Notes, the Company issued Series CN Note acceleration offer convertible notes payable that provide variable conversion provisions. The conversion terms of the convertible notes are 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 is 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 is indeterminate.

Barfresh Food Group Inc.

Notes to Condensed Consolidated Financial Statements

March 31, 2018

(Unaudited)

The fair values of the Company’s derivative liabilities wereare estimated at the issuance date and are revalued at each subsequent reporting date. The Company recognized currenta derivative liabilitiesliability and debt discount of $569,587$569,588 at March 14, 2018.2018 related to the Series CN Convertible notes 1 of 2; $69,400 at April 11, 2018 related to the Series CN Notes Warrant Acceleration; and $697,186 at November 30, 2018 related to the Series CN Convertible note 2 of 2. The change in fairderivative liability was revalued at March 31, 2019 with a value of the derivative liabilities resulted in$1,731,665. The Company recorded a loss of $406,012 and $444,736 for the three monthsthree-months ended March 31, 2019 and March 31, 2018 which has been reported as loss on fair value ofrespectively related to the derivative liability in the statements of operations.liability.

The fair value of the derivative liability for CN Convertible Note 1 of 2 and CN Note Warrant Acceleration was calculated using the Black-Scholes opt model using the following assumptions.

The fair value of the derivative liability for CN Convertible Note 2 of 2 was calculated using the Black-Scholes model using the following assumptions.

Barfresh Food Group Inc.

Notes to Condensed Consolidated Financial Statements

March 31, 2019

(Unaudited)

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, 20172018 to March 31, 2018:2019:

The following table presents the Company’s fair value hierarchy for applicable assets and liabilities measured at fair value as of December 31, 2018 and March 31, 2018.2019.

Note 8.7. Commitments and Contingencies

We lease office space under non-cancelable operating leases,lease which expires on March 31, 2019. The aggregate minimum requirements are as follows:Our periodic lease cost and operating cash flows for the three months ended March 31, 2018 and 2019 was $37,201 and $53,906, respectively. As of March 31, 2019, our right of use asset and related liability was $0.

Subsequently we entered into a new four-year lease as of April 1, 2019. The lease requires monthly payments of $6,173 for the first year and increases to $6,359 for year two, $6,549 for year three and $6,746 for year four. There are no renewal options, covenants or purchase options.

Once we record the lease as of April 1, 2019, we estimate future maturities of lease Liabilities to be (using a 10% discount rate which approximates our borrowing rate): 

Note 9.8. Stockholders’ Equity

During the three monthsthree-months ended March 31, 2018,2019, we issued 99,206134,984 shares of common stock, valued at $50,000,$81,040 for services. In addition,We also issued 38,462 shares of our common stock, with a value of $25,000, to certain members of our Board of Directors in lieu of cash payments for Director fees. Also, we issued 109,065161,133 options to purchase our common stock to certain membermembers of the Board of Directors in lieu of cash payments for Director fees.fees, valued at $75,000. The exercise price of the options is at $0.50$0.65 per share, vest immediately, and are exercisable for periods of 8 years. In addition, we issued 105,000 options to purchase our common stock to employees. The exercise price of the options ranged from $0.65 to $0.69 per share, vest after 3 years, and are exercisable for periods of 8 years. In addition, we issued 4,000,000 shares of common stock for capital raise, valued at $2,400,000.

Barfresh Food Group Inc.

Notes to Condensed Consolidated Financial Statements

March 31, 2019

(Unaudited)

The fair value of the options issued ($42,068,39,447, in the aggregate) was calculated using the Black-Sholes option pricing model, based on the criteria shown below.

Barfresh Food Group Inc.

Notes to Condensed Consolidated Financial Statements

March 31, 2018

(Unaudited)

The shares of our common stock were valued at the trading price on the date of grant, $0.39$0.66 and $0.72 per share

During the same period, we cancelled 360,18378,000 options to purchase our common stock.

Holder of 2,841,454 I warrants elected to exercise those warrant on a cash basis of $1,320,310 and cashless basis of $384,563 to offset convertible note and accrued interest; and received 2,841,454 shares of our common stock.

Holder of 300,000 G warrants elected to exercise those warrant on a cash basis of $180,000 and received 300,000 shares of our common stock.

During the first quarter of 2019, the Company completed additional funding efforts, including a Private Placement Offering for common shares priced at $0.60 per share, resulting in the receipt of proceeds in the amount of $2.4 million and the issuance of 4,000,000 shares.

During the first quarter of 2019, the Company settled certain Executive Deferred Compensation payments with a combination of cash and warrants. The total amount of equity basedDeferred Executive compensation settled is $771,113. One-third of that total or $243,623, was paid in cash. The remaining balance of $487,246 was settled by granting the Executives warrants exercisable for five years to purchase the Company’s stock at an exercise price of $0.70 per share.

The total amount of equity-based compensation included in additional paid in capital for the three-month periodsyears ended March 31, 2019 and 2018 was $136,941 and 2017 was $246,775, and $344,268, respectively.respectively,

The following is a summary of outstanding stock options issued to employees and directors as of March 31, 2018:2019:

Barfresh Food Group Inc.

Notes to Condensed Consolidated Financial Statements

March 31, 2019

(Unaudited)

The following is Changes in Stockholders’ Equity as of March 31, 2018 and March 31, 2019:

Barfresh Food Group Inc.

Notes to Condensed Consolidated Financial Statements

March 31, 2019

(Unaudited)

Note 10.9. Outstanding Warrants

The following is a summary of all outstanding warrants as of March 31, 2018:2019:

Note 11.10. 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 March 31, 2018,2019, 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 three-month periods ended March 31, 20182019 and 2017,2018, we did not have any interest and penalties associated with tax positions. As of March 31, 2018,2019, we did not have any significant unrecognized uncertain tax positions.

Barfresh Food Group Inc.

Notes to Condensed Consolidated Financial Statements

March 31, 2018

(Unaudited)

Note 12.11. Liquidity

During the three months ended March 31, 2019, we used cash for operations of $1,873,982, and purchased equipment for $160,590. We raised cash from the issuance of stock in the amount of $2,400,000, and we received cash for the exercise of warrants in the amount of $1,550,310.

During the three months ended March 31, 2018, we used $1,491,691 of cash for operations, $172,231 for the purchase of equipment, and $2,293 for trademarks. We raised cash in the amount of $2,503,200 from the issuance of convertible notes, and $250,000 from the issuance of short term notes.

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. As of March 31, 2019, we had $2,907,307 of cash on the balance sheet. We have significantly reduced core operating costs beginning in 2016, including reducing the number of our employees from 44continued to 28 over this time period. In addition, we have addressed this concern by raising additional capital through a loan or loans, and by continuing tosignificantly reduce core operating expenses, reducing total General and Administrative Expense in 2018 by $1.7 million, or 18%, as required.compared with 2017. In addition, we planin the first quarter of 2019, the Company completed $4.3 million of funding efforts. These efforts included a Private Placement Offering for common shares priced at .60 cents 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, the Company offered to raisereduce the exercise price on its I Warrants from $1 to .60 cents, for a limited time. During the time this offer was open, I Warrant holders converted 2,841,454 warrants at .60 cents, 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. In addition, during the first quarter of 2019, the Company settled certain Executive Deferred Compensation payments with a combination of cash and warrants. The total amount of Deferred Executive compensation settled is $771,113. One-third of that total or $243,623, was paid in cash. The remaining balance of $487,246 was settled by granting the Executives warrants exercisable for five years to purchase the Company’s stock at an exercise price of $0.70 per share, the closing price of our common stock on March 19, 2019, resulting in additional capital throughcash savings to the Company.

Barfresh Food Group Inc.

Notes to Condensed Consolidated Financial Statements

March 31, 2019

(Unaudited)

Net Cash Used For Operating Activities during the first quarter of 2019 was higher than is anticipated on a quarterly basis for the next twelve months. During the first quarter, the Company settled several large vendor payables and also made $243,623 in cash payments to settle a portion of deferred Executive Compensation amounts that had accrued over the prior 18 months. The Company’s forecast for the balance of 2019 reflect a significant improvement in cash flow from operations during the next twelve months, as the Company continues to increase contracts with school locations, military bases, and anticipates the roll-out of a National Account with over 2,500 locations. Additionally, the Company has implemented numerous cost reduction measures which will reduce cash expenses over the next twelve months, including relocation of its headquarters office, as well as entering into a new contract for personnel related services. These two measures alone will yield $200,000 per year in cash savings, and the Company continues to pursue additional loans,measures to reduce cash expenses. Finally, the Company has received proposed Term Sheets from potential lenders for an ABL facility, and is of the view that an ABL facility will be available on acceptable terms, should the need arise.

The Company has $1.9 million of convertible short term debt coming due in March of 2020. Approximately half of this debt is held by insiders. The Company expects that if for any reason available cash upon maturity of this debt is not adequate to further reduce core operating expenses as required. While these plans have not yet been implemented, managementrepay the convertible short term debt, that it will be able to refinance such debt, in particular the portion held by insiders.

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 mitigatethese actions have mitigated 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 13.12. Subsequent Events

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

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 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.

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. Products are packaged in two distinct formats.

The Company’s original single serve format features 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.

The Company’s bulk “Easy Pour” format also contains all of the solid ingredients necessary to make the beverage, packaged in gallon containers in a concentrated formula that is mixed “one to one” with water. The Company has recently launched a “no sugar added” version of the bulk “Easy Pour” format that is specifically targeted for the USDA national school meal program, including the School Breakfast Program, the National School Lunch Program, and Smart Snacks in Schools Program. The Company is currently in contract to sell its bulk Easy Pour products into over three hundred schools. In addition, the Company recently received approval from the United States Defense Logistics Agency (“DLA”) to sell its smoothie products into all branches of the U.S. Armed Forces, and has begun to sellis currently in contract with and selling its bulk Easy Pour productproducts into a number ofover one hundred military bases in the United States.

Domestic and international patents and patents pending are owned by Barfresh, as well as related trademarks for all of the single serve products. Patent rights have been granted in 13 jurisdictions including the United States. In addition, the Company has purchased all of the trademarks related to the patented products.

The Company conducts sales through several channels, including National Accounts, Regional Accounts, and Broadline Distributors. Barfresh’s primary broadline distribution arrangement is through an exclusive nationwide agreement with Sysco Corporation (“Sysco”), the U.S.’s largest broadline distributor, which was entered into during July 2014, and renewed for an additional two year term on October 2, 2017.2014.

During 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 of Barfresh’s single serve sku’s to approximately one thousand food service locations. Distribution of product to these locations through SYSCO began during April of 2018. This new agreement, which marks the culmination of successful in market tests conducted at several locations, and makes Barfresh’s blended beverages available across many of the most attractive locations of the customer’s diverse customer base.

The Company also sells to broadline distributors that supply products to the food services market place. Effective July 2, 2014, the Company entered into an exclusive agreement with Sysco Merchandising and Supply Chain Services, Inc. for resale by the Sysco Corporation (“Sysco”) to the foodservice industry of the Company’s ready-to-blend smoothies, shakes and frappes. Pursuant to that agreement, 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; 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- unit chain operator’s nominated distributor for our products. On October 2, 2017, the Sysco agreement was extended for an additional two year period, and expanded to cover bulk easy pour products, on a non-exclusive basis.

During 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 of Barfresh’s single serve sku’s. 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.

On October 26, 2015, Barfresh signed a 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’s 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. The agreement facilitates access to potential National customer accounts, through introductions provided by PepsiCo’s one-thousand plus person foodservice sales team. Barfresh products have become part of PepsiCo’s customer presentations at national trade shows and similar venues.

Barfresh utilizes contract manufacturers to manufacture all of theits products in the United States. Production lines are currently operational at two locations. The first location is in Salt Lake City, which currently produces both bulk easy pour and single serve products. Annual production capacity with this contract manufacturer is 14 million units per year. The second location is with Yarnell Operations, LLC., a subsidiary of Shulze and Burch, located in Arkansas. The Yarnell’s agreement, which was signed during February 2016, and secures the capacity to ramp up to an incremental production capacity of 100 million units. 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.

During November, 2016, the Company received an equity investment from Unibel, the majority shareholder of the Bel Group (“Unibel”). The Bel GroupOur corporate office is headquartered in Paris, France, with global operations in 33 countries, 30 production sites on 4 continentslocated at 3600 Wilshire Boulevard Suite 1720, Los Angeles, 90010. Our telephone number is (310) 598-7113 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 provided Barfresh with necessary capital 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.website iswww.barfresh.com.

On February 14, 2018, wethe Company announced the private placement of convertible notes with gross proceeds of $4.1 million The closing shall be no later than five (5) business daysof the first 60% of this amount occurred between March 12 and 22, 2018, after receipt of notice fromwas issued by the Company that it has achieved certain milestones establishing significant sales to national accounts. One milestone is that the Company shall havehad 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 first milestone was achieved on March 8, 2018, and according to the terms of the note the Company has received 60% of the principal amount. The remaining 40% of the principal amount willwas 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 are unsecured and have (i) a two-year term, (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 investor’s may 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 pershare 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 remains outstanding after the one-year anniversary of the closing, investors will 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, 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, 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 efforts, 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 has raised $4.3 million and issued 7,141,454 shares, and no additional warrants.

Currently we have 2823 employees and 3 consultants. There are currently 1814 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

In accordance with ASC 606, Revenue from Contracts with Customers, revenue is recognized when a customer obtains ownership of promised goods. The Company adopted this standard at the beginning of fiscal year 2018, with no significant impact to its financial position or results of operations, using the modified retrospective method. 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:

Impairments

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.

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.

Results of Operations

Results of Operation for Three Months Ended March 31, 20182019 as Compared to the Three Months Ended March 31,20172018

Revenue and cost of revenue

Revenue increased $310,901 (99%$211,463 (34%) from $312,170 in 2017 to $623,071 in 2018.2018 to $834,534 in 2019. 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.momentum. 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 20182019 was $278,466$399,830 as compared to $181,649$290,050 in 2017.2018. Our gross profit was $344,605 (55.3%$434,704 (52%) and $130,521 (41.8%$333,021 (53%) for 2019 and 2018 and 2017, respectively. This improvement was driven by a number factors, including leverage due to larger scale of production and product mix. We anticipate that our gross profit percentage to remain the same for the remainder of 2018 will be approximately 50%.2019.

Operating expenses

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

Our general and administrative expenses decreased $338,866 (14%$91,220 (4%) from $2,433,530 in 2017 to $2,094,664 in 2018 with the improvement primarily driven by lower personnel expenses resulting from the realignment of our sales force.to $2,003,444 in 2019. The following is a breakdown of our general and administrative expenses for the three months ended March 31, 20182019 and 2017:2018:

Personnel cost represents the cost of employees including salaries, bonuses, employee benefits and employment taxes and continues to be our largest cost. Personnel cost decreased $380,889 (30%increased $61,063 (7%) from $1,278,692$897,803 to $897,803.$958,866. Personnel expense in the first quarter of 2019 includes $190,746 of expense related to the settlement of Deferred Executive Compensation amounts that had accrued prior to the current period. Excluding this amount, Personnel Expense for the first quarter of 2019 would have decreased by $129,683, or 14%, as compared with the first quarter of 2018. During the fourth quarters of 2016 and 2017, we realigned ours sales force to a more efficient model, by increasing the number of dedicated sales brokers that represent our products, and reducing the number of sales force employees. When taking into consideration start dates for new employees, and separation dates for those employees who left our workforce, we had 43 full time employees during 2016, and at March 31, 2018 weWe had 28 full time employees. We expect these restructurings to result in estimated annualized savingsemployees at the end of $2.2 to $2.7 millionthe first quarter of 2018, and we currently have 23 full time employees.

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 compensation for the current quarter was $246,775,$136,941 a decrease of $97,493,$109,834 or 28%45%, from the year ago quarter expense of $344,268.$246,775. The decrease is primarily due to the timing of equity grants.grants and the reduction in workforce. The Company issues additional stock options to its employees from time to time under its Equity Compensation Plan.

Legal and professional fees decreased $5,643 (5%$48,374 (45%) from $113,014 in 2017 to $107,371 in 2018.2018 to $58,997 in 2019. The decrease was primarily due to a timing of legal services required. We anticipate legal fees related to our business and financing activities to increase as our business continues to grow.

Travel expenses decreased $9,013 (10%increased $27,911 (33%) from $92,861 in 2017 to $83,848 in 2018.2018 to $111,759 in 2019. The decreaseincrease is primarily due to reductionthe need for our in house sales force to travel costs associated with terminated employees.more frequently in order to cover larger territories. We anticipate that travel expenses for the balance of this year will be comparable to the current quarter.

Rent expense isfor the first quarters of 2018 and 2019 was primarily for our location in Beverly Hills, California. Rent expense for the Beverly Hills office is approximately $14,488 per month. We leaseleased office space at 8383 Wilshire Boulevard, Beverly Hills, California pursuant to a new lease that commenced on November 1, 2016 and expiresexpired March 31, 2019. Beginning April 1, 2019, we have leased new office space at 3600 Wilshire Boulevard, Los Angeles, California, 90010, pursuant to a four year lease, at a monthly rental rate of $$6,173.

Marketing and selling expenses increased $41,277 (35%) from $118,658 in 2017 towere $160,380 in 2018. Higher marketing2018, and $159,429 in 2019. Marketing and selling expenses were primarily dueattributable to higher sales agent commissions associated with higher sales during the quarter.commissions.

Consulting fees were $17,734$5,416 in 2018,2019, as compared with $48,945$17,734 in 2017.2018. Our consulting fees vary based on needs. We engaged consultants in the areas of sales and operations during the quarter. The need for future consulting services will be variable.

Director fees increased $25,000 from $37,500 in 2017 towere $62,500 in 2018.2018 and in 2019. Annual director fees are anticipated at $50,000 per non-employee director.

Research and development expenses increased $75,740, (66%decreased $34,142 (18%) from $114,601 in 2017 to $190,341 in 2018.2018 to $156,199 in 2019. These expenses relate to the services performed by our Director of Manufacturing and Product Development, and consultants supporting that employee. The increase in researchemployee, and for product development expense was primarily driven by the commissioning of manufacturing facilities.activity.

Shipping and storage expense increased $101,917 (159%decreased $39,909 (29%) from $64,154$138,248 in 20172018 to $166,071$98,339 in 2018.2019. Shipping and storage expense as a percentage of revenue increaseddecreased from 20%22% in 20172018 to 26% 12%in 2018.2019. The higherimprovement in shipping costs expense in 20182019 is due to a number of factors, including the continuedmore efficient movement of inventory to new forward warehouses as the Company expanded its business into Canada, and building of inventory levels in preparation for expected national account launch in early 2018. Welarger loads whenever possible we anticipate that shipping and storage expense as a percentage of sales will reducecontinue to improve during the balance of the year, as the Company is able to take advantage of more efficient distribution arrangements.

Storage expense increased $23,484 (84%), from $27,823 in 2018 to $51,307 in 2019. The increase in storage costs was primarily due to increased costs associated with our forward warehouse program.

Other expenses consist of ordinary operating expenses such as investor relations, office, telephone, insurance, and stock related costs. We anticipate these expenses to be comparable for the balance of the year.

We had operating losses of $1,862,526$1,770,717 and $2,359,040$1,862,526 for the three month periods ended March 31, 2019 and 2018, and 2017, respectively. The improvement of $496,515, or 21%, was primarily due to higher gross profit margin on higher sales, and lower G&A expenses.

Interest expense in the first quarter of 2018 is $30,876.2019 was $363,073, and was $30,876 in the first quarter of 2018. Interest for the first quarter of 2019 relates to convertible debt in the amount of $2,527,500 that was issued onduring March 14,and November of 2018, which bears interest at 10%. Interest for the first quarter of 2018 relates to convertible debt that was issued in March of 2018, which bears interest at 10%, and to a note payable in the amount of $250,000 that was issued on March 5, 2018, which bears interest at 12%. Interest expense in the first quarter of 2019 includes amortization of $16,967 of the value of warrants issued with the convertible debt.

debt in the amount of $277,587 in the first quarter of 2019, and $16,967 in the first quarter of 2018.

We had net losses of $2,338,138$2,847,262 and $2,359,040$2,338,138 in the three month periods ended March 31, 20182019 and 2017.2018.

Liquidity and Capital Resources

During the three months ended March 31, 2018,2019, we used cash for operations of $1,491,691,$1,873,982, and purchased equipment for $172,231, and incurred spending for trademarks in the amount $2,293.$160,590. We raised cash from the issuance of convertible notes, net of issuance cost,stock in the amount of $2,503,200 plus issuance$2,400,000 and we received cash for the exercise of short term notewarrants in the amount of $250,000.$1,550,310.

During the three months ended March 31, 2017,2018, we used $1,614,825$1,491,691 of cash for operations, $146,440$172,231 for the purchase of equipment, and $5,132$2,293 for trademarks. We raised cash in the amount of $2,503,200 from the issuance of convertible notes, and $250,000 from the issuance of short term notes.

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. As of March 31, 2019, we had $2,907,307 of cash on the balance sheet. We have significantly reduced core operating costs beginning in 2016, including reducing the number of our employees from 44continued to 28 over this time period. In addition, we plan to address this concern by raising additional capital through an additional loan or loans, and by continuing tosignificantly reduce core operating expenses, reducing total General and Administrative Expense in 2018 by $1.7 million, or 18%, as required. While these plans havecompared with 2017. In addition, in the first quarter of 2019, the Company completed $4.3 million of funding efforts. These efforts included a Private Placement Offering for common shares priced at .60 cents 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, the Company offered to reduce the exercise price on its I Warrants from $1 to .60 cents, for a limited time. During the time this offer was open, I Warrant holders converted 2,841,454 warrants at .60 cents, 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. In addition, during the first quarter of 2019, the Company settled certain Executive Deferred Compensation payments with a combination of cash and warrants. The total amount of Deferred Executive compensation settled is $771,113. One-third of that total or $243,623, was paid in cash. The remaining balance of $487,246 was settled by granting the Executives warrants exercisable for five years to purchase the Company’s stock at an exercise price of $0.70 per share, the closing price of our common stock on March 19, 2019, resulting in additional cash savings to the Company.

Net Cash Used For Operating Activities during the first quarter of 2019 was higher than is anticipated on a quarterly basis for the next twelve months. During the first quarter, the Company settled several large vendor payables and also made $243,623 in cash payments to settle a portion of deferred Executive Compensation amounts that had accrued over the prior 18 months. The Company’s forecast for the balance of 2019 reflect a significant improvement in cash flow from operations during the next twelve months, as the Company continues to increase contracts with school locations, military bases, and anticipates the roll-out of a National Account with over 2,500 locations. Additionally, the Company has implemented numerous cost reduction measures which will reduce cash expenses over the next twelve months, including relocation of its headquarters office, as well as entering into a new contract for personnel related services. These two measures alone will yield $200,000 per year in cash savings, and the Company continues to pursue additional measures to reduce cash expenses. Finally, the Company has received proposed Term Sheets from potential lenders for an ABL facility, and is of the view that an ABL facility will be available on acceptable terms, should the need arise.

The Company has $1.9 million of convertible short term debt coming due in March of 2020. Approximately half of this debt is held by insiders. The Company expects that if for any reason available cash upon maturity of this debt is not yet been implemented, managementadequate to repay the convertible short term debt, that it will be able to refinance such debt, in particular the portion held by insiders.

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 mitigatethese actions have mitigated 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.

WeAs of April 1, 2019, we lease office space under a non-cancelable operating lease, which expires March 31, 2019.2023.

The aggregate minimum requirements under non-cancelable leases as of March 31, 2018 is $173,851.April 1, 2019 are $309,928.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to stockholders.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Not required because we are a smaller reporting company.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Accounting Officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Securities and Exchange Act of 1934 Rules 13a-15(f). Based on this evaluation, our Chief Executive Officer and our Chief Accounting Officer concluded that the Company’s disclosure controls and procedures were not effective as of March 31, 2018.

Management has identified the following material weaknesses in our internal control over financial reporting:

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

Management believes that the material weakness set forth above did not have an effect on our financial results.2019.

Changes in Internal Control over Financial Reporting

There have been no changes in the Company’s internal control over financial reporting during the three months ended March 31, 20182019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II-OTHER INFORMATION

Item 1. Legal Proceedings.

Neither the Company nor its subsidiaries are party to or have property that is the subject of any material pending legal proceedings.

We may be subject to ordinary legal proceedings incidental to our business from time to time that are not required to be disclosedunder this Item 1.

Item 1A. Risk Factors.

Not required because we are a smaller reporting company.

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

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

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

None.

Item 6. Exhibits.

*XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.