UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q/A10-Q

(Mark One)

 

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

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

 

For the quarterly period ended March 31, 20182019

 

or

 

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

 

For the transition period from ________________ to ___________________

 

Commission File Number:000-55131

 

BARFRESH FOOD GROUP INC.

(Exact name of registrant as specified in its charter)

 

Delaware 27-1994406

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

85303600 Wilshire Blvd.,Boulevard Suite 450, Beverly Hills,1720, Los Angeles,

90010, California

 90211
(Address of principal executive offices) (Zip Code)

 

310-598-7113
(Registrant’s telephone number, including area code)

310-598-7113

(Registrant’s telephone number, including area code)

 

Not Applicable

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

Not Applicable

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

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

[X]Yes [  ] No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

[X]Yes [  ] No

 

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

 

Large Accelerated Filer [  ]Accelerated Filer [  ]Non-Accelerated Filer (do not check if Smaller Reporting Company) [  ]
Smaller Reporting Company [X]Emerging Growth Company [  ]

 

If an emerging growth company, indicate by 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

 

As of May 9, 2018,10, 2019, there were 118,789,733130,085,820 outstanding shares of common stock of the registrant.

 

 

EXPLANATORY NOTE

This form 10Q/A is filed solely for the purpose of correcting a typographical error on the cover page. The wrong box was checked. The registrant isNOT a shell company.

   
 

 

TABLE OF CONTENTS

 

 

Page

Number

PART I - FINANCIAL INFORMATION 
  
Item 1.Financial Statements.3
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations.1419
Item 3.Quantitative and Qualitative Disclosures About Market Risk.1925
Item 4.Controls and Procedures.2025
  
PART II - OTHER INFORMATION 
  
Item 1.Legal Proceedings.2126
Item 1A.Risk Factors.2126
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds.2126
Item 3.Defaults Upon Senior Securities.2126
Item 4.Mine Safety Disclosures.2126
Item 5.Other Information.2126
Item 6.Exhibits.2126
  
SIGNATURES2227

 

2

PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

Barfresh Food Group Inc.

Condensed Consolidated Balance Sheets

 

 March 31, 2018 December 31, 2017  March 31, 2019  December 31, 2018 
 (Unaudited) (Audited)  (Unaudited)  (Audited) 
Assets             
Current assets:                
Cash $2,391,901  $1,304,916  $2,907,307  $1,041,569 
Accounts Receivable  349,935   301,012 
Inventory  1,546,051   1,415,495 
Accounts receivable, net  642,863   357,304 
Inventory, net  1,197,941   1,226,463 
Prepaid expenses and other current assets  107,114   24,496   121,254   98,457 
Total current assets  4,440,001   3,045,919   4,869,365   2,723,793 
Property, plant and equipment, net of depreciation  2,179,005   1,760,890   2,535,129   2,500,254 
Intangible asset, net of amortization  573,334   586,943 
Intangible assets, net of amortization  521,887   537,789 
Deposits  39,369   39,369   23,462   - 
Total Assets $7,231,709  $5,433,121  $7,949,843  $5,761,836 
                
Liabilities And Stockholders’ Equity                
Current liabilities:                
Accounts payable $531,826  $421,176  $742,875  $1,101,882 
Accrued expenses  1,315,175   849,529   163,259   175,259 
Deferred rent liability  -   495 
Notes Payable  250,000   - 
Total current liabilities  2,097,001   1,271,200 
Accrued payroll  -   638,706 
Accrued vacation  146,929   155,586 
Accrued Interest  196,842   - 
Convertible note - related party, net of discount  554,432   -   685,756   - 
Convertible note, net of discount  1,175,601   -   866,310   - 
Derivative Liabilities  1,014,323   - 
Derivative liabilities  973,021   - 
Total current liabilities  3,774,992   2,071,433 
Long term liabilities:        
Accrued interest  45,191   190,475 
Convertible note - related party, net of discount  239,992   841,836 
Convertible note, net of discount  344,217   1,367,487 
Derivative liabilities  758,644   1,325,653 
Total liabilities  4,841,357   1,271,200   5,163,036   5,796,884 
                
Commitments and contingencies (Note 7, 8, 12)        
Commitments and contingencies (Note 5,6,7and 11)        
                
Stockholders’ equity:                
Preferred stock, $0.000001 par value, 5,000,000 shares authorized, none issued or outstanding  -   -   -   - 
Common stock, $0.000001 par value; 300,000,000 shares authorized; 118,789,733 and 118,690,527 shares issued and outstanding at March 31, 2018 and December 31, 2017, respectively  119   119 
Common stock, $0.000001 par value; 300,000,000 shares authorized; 130,085,820 and 122,770,960 shares issued and outstanding at March 31, 2019 and December 31, 2018, respectively  130   123 
Additional paid in capital  38,560,122   37,992,799   46,787,709   41,118,649 
Accumulated deficit  (36,169,889)  (33,830,997)  (44,001,032)  (41,153,820)
Total stockholders’ equity  2,390,352   4,161,921   2,786,807   (35,048)
Total Liabilities and Stockholders’ Equity $7,231,709  $5,433,121  $7,949,843  $5,761,836 

 

See the accompanying notes to the condensed consolidated financial statements

Barfresh Food Group Inc.

Condensed Consolidated Statements of Operations

For the three months ended March 31, 20182019 and 20172018

(Unaudited)

 

  2018  2017 
Revenue, net $623,071  $312,170 
Cost of revenue  278,466   181,649 
Gross profit  344,605   130,521 
         
Operating expenses:        
General and administrative  2,094,664   2,433,530 
Depreciation and Amortization  112,467   56,031 
Total operating expenses  2,207,131   2,489,561 
         
Operating loss  (1,862,526)  (2,359,040)
         
Other expenses        
Loss from derivative liability  444,736   - 
Interest  30,876   - 
         
Net (loss) $(2,338,138) $(2,359,040)
         
Per share information - basic and fully diluted:        
Weighted average shares outstanding  118,682,325   117,251,662 
Net (loss) per share $(0.02) $(0.02)

See the accompanying notes to the condensed consolidated financial statements

Barfresh Food Group Inc.

Condensed Consolidated Statements of Cash Flows

For the three months ended March 31, 2018 and 2017

(Unaudited)

  2018  2017 
Net Cash used in operations $(1,491,691) $(1,614,825)
         
Cash flow from investing activities:        
Investment in trademark  (2,293)  (5,132)
Purchase of equipment  (172,231)  (146,440)
Sale of equipment  -   940 
Net Cash used in investing activities  (174,524)  (150,632)
         
Cash flow from financing activities:        
Exercise of Warrant  -   35,401 
Issuance of short term notes  250,000   - 
Issuance of convertible notes, net of issuance costs  2,503,200   - 
Repayment of long term debt  -   (960)
Net cash provided by financing activities  2,753,200   34,441 
         
Net increase (decrease) in cash  1,086,985   (1,731,016)
Cash at beginning of period  1,304,916   9,180,947 
Cash at end of period $2,391,901  $7,449,931 
         
Supplemental Disclosure of Non-Cash Investing and Financing Activities        
Discount on convertible notes (warrants & derivative) $790,135  $- 
Property, plant and equipment included in accounts payable  342,448     

  2019  2018 
Revenue $834,534  $623,071 
Cost of revenue  387,724   278,466 
Depreciation of Manufacturing Equipment  12,106   11,584 
Gross profit  434,704   333,021 
         
Operating expenses:        
General and administrative  2,003,444   2,094,664 
Depreciation and Amortization  201,977   100,883 
Total operating expenses  2,205,421   2,195,547 
         
Operating loss  (1,770,717)  (1,862,526)
         
Other (income)/expenses        
Other (income)/expenses /loss from derivative liability  406,012   444,736 
Warrant modification  307,460   - 
Interest  363,073   30,876 
Total other expense  1,076,545   475,612 
         
Net (loss) $(2,847,262) $(2,338,138)
         
Per share information - basic and fully diluted:        
Weighted average shares outstanding  126,480,323   118,682,325 
Net (loss) per share $(0.02) $(0.02)

 

See the accompanying notes to the condensed consolidated financial statements

Barfresh Food Group Inc.

Condensed Consolidated Statements of Cash Flows

For the three months ended March 31, 2019 and 2018

(Unaudited)

  2019  2018 
Net Cash (used for) Operating Activities  (1,873,982)  (1,491,691)
         
Investing Activities        
Purchase of property and equipment  (160,590)  (172,231)
Purchase of Intangibles  -   (2,293)
Net Cash (used for) Investing Activities  (160,590)  (174,524)
         
Financing Activities        
Cash received for Warrant Exercises  1,500,310   - 
Cash received for Stock  2,400,000     
Issuance of short term notes  -   250,000 
Issuance of convertible notes  -   2,503,200 
Net Cash from Financing Activities  3,900,310   2,753,200 
         
Net Change in Cash and Cash Equivalents  1,865,738   1,086,985 
         
Cash and Cash Equivalents, Beginning of Year  1,041,569   1,304,916 
         
Cash and Cash Equivalents, End of Year $2,907,307  $2,391,901 
         
Non Cash Financing and Investing Activities        
Total property and equipment included in accounts payable  60,130   342,448 
Discount on convertible notes  -   790,135 
Convertible notes principal and interest settled through warrant exercise  384,563   - 

See the accompanying notes to the condensed consolidated financial statements

5

Barfresh Food Group Inc.

Notes to Condensed Consolidated Financial Statements

March 31, 20182019

(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 March 31, 2018 and December 31, 2017 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, 2017. 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 March 31, 2018 and 2017 presented are not necessarily indicative of the results to be expected for the full year. The December 31, 2017 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, 2017..

 

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 exceeds the $250,000 federally insured limit at March 31, 20182019 and December 31, 2017.2018. However, we believe that the financial institution where the cash on deposit that exceeds $250,000 in the financial institutions is financially sound and the risk of loss is minimal.

 

Fair Value Measurement

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

 

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 of financial transmission rights.

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.

 

Our financial instruments consist of cash, accounts receivable, accounts payable, accrued expenses, notes payablederivative liabilities, and derivative liabilities.convertible notes. The carrying value of our financial instruments approximates their fair value, except for the derivative liability in which carrying value is fair value.

 

6

Barfresh Food Group Inc.

Notes to Condensed Consolidated Financial Statements

March 31, 20182019

(Unaudited)

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 a sale. As of March 31, 2019 and December 31, 2018, the company’s allowance for doubtful accounts was $61,788 and $61,788, respectively. The allowance was estimated based on evaluation of collectability of outstanding Accounts Receivable.

 

Inventory

Inventory consists of 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 March 31, 2019 and December 31, 2018, the Company’s inventory reserve was $31,237 and $31,237, 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 significant impairment charges during the years 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-line basis over the estimated useful lives of the assets. Leasehold improvements are being amortized over the shorter of the useful life of the asset or the lease term that includes any expected renewal periods 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

 

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:

 

 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.

Barfresh Food Group Inc.

Notes to Condensed Consolidated Financial Statements

March 31, 2019

(Unaudited)

 2)Identify the performance obligation in the contract
  Performance obligations promised in a contract are identified based on the goods or 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 contractSince our contracts contain a single performance obligation, delivery of frozen beverages, the transaction price is allocated to that single performance obligation.

Barfresh Food Group Inc.

Notes to Condensed Consolidated Financial Statements

March 31, 2018

(Unaudited)

 5)Recognize Revenue when or as the Company satisfies a performance obligation
  The Company recognizes revenue from the sale of frozen beverages when title and risk of loss passes and the customer accepts the goods, which generally occurs at delivery. Customer sales incentives such as volume-based rebates or discounts are treated as a reduction of sales at the time the sale is recognized. Shipping and handling costs are treated as fulfillment costs and presented in distribution, selling and administrative costs.
   
  The company evaluated the requirement to disaggregate revenue, and concluded that substantially all of its revenue comes from a single product, frozen beverages.

 

Earnings per Share

We calculate net loss per share in accordance with ASC Topic 260,Earnings per Share. Basic net loss per share is computed by dividing net loss by the weighted average number of shares of common stock outstanding for the period, and diluted earnings per share is computed by including common stock equivalents outstanding for the period in the denominator. At September 30, 2017 and 2016 any equivalents would have been anti-dilutive as we had losses for the periods then ended.

Research and Development

Expenditures for research activities relating to product development and improvement are charged to expense as incurred. We incurred $156,199 and $190,341, in research and $114,601development expenses for the three-months ended March 31, 2019 and 2018, respectively.

Shipping and Handling Costs

Shipping and handling costs are included in general and administrative expenses. For the three-month periods ended March 31, 2019 and 2018, shipping and 2017,handling costs totaled $98,339 and $138,248, respectively.

Income Taxes

 

The provision for income taxes is determined in accordance with the provisions of ASC Topic 740,Rent ExpenseAccounting 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.

 

WeASC 740 prescribes a comprehensive model for how companies should recognize, rent expensemeasure, present, and disclose in their financial statements, uncertain tax positions taken or expected to be taken on a straight-line basis overtax return. Under ASC 740, tax positions must initially be recognized in the reasonably assured lease termfinancial 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 defined in the largest amount of tax benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the tax authority assuming full knowledge of the position and relevant facts.

ASC Topic 840,740 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 all of the deferred tax assets will not be recognized.

For the three-months ended March 31, 2019 and 2018 we did not have any interest and penalties or any significant unrecognized uncertain tax positions.

Leases(“ASC 840”).

8

Barfresh Food Group Inc.

Notes to Condensed Consolidated Financial Statements

March 31, 2019

(Unaudited)

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.

 

Earnings per Share

We calculate net loss per share in accordance with ASC Topic 260,Earnings per Share. Basic net loss per share is computed by dividing net loss by the weighted average number of shares of common stock outstanding for the period, and diluted earnings per share is computed by including common stock equivalents outstanding for the period in the denominator. At March 31, 2019 and 2018 any equivalents would have been anti-dilutive as we had losses for the periods then ended.

Stock Based Compensation

We calculate stock compensation in accordance with ASC Topic 718,Compensation-Stock Based Compensation (“ASC 718”). ASC 718 requires that the cost resulting from all share-based payment transactions be recognized in the financial statements and establishes fair value as the measurement objective in accounting for share-based payment arrangements and requires all entities to apply a fair-value-based measurement method in accounting for share-based payment transactions with employees except for equity instruments held by employee stock ownership plans

Reclassifications

Certain reclassifications of amounts previously reported have been made to the accompanying consolidated financial statements to maintain consistency between periods presented. The reclassifications had no impact on net income or stockholder’s equity.

Recent pronouncements

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

 

Barfresh Food Group Inc.

Notes to Condensed Consolidated Financial Statements

March 31, 2018

(Unaudited)

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

 

The Company is in the initial stages of evaluatinghas evaluated the effect of the standard on our financial statements and continue to evaluate the available transition methods. However, basedstatements. Based on our initial evaluation, we do not expect therewill have one material lease subject to be material changes to both our current and long-termadoption of this standard, effective January 1, 2019. As disclosed in Note 7, we entered into a new office space lease liabilities and our fixed assets of our limited number of operating leases that will be convertedtake effect on April 1, 2019 and would expect to financing leases under the new guidance. The Company does not planrecord a right-of-use asset and corresponding liability for amounts that approximate our future commitments of $258,140.

Barfresh Food Group Inc.

Notes to adopt the standard until the interim period ended Condensed Consolidated Financial Statements

March 31, 2019.2019

(Unaudited)

 

Note 2. Property Plant and Equipment

 

Major classes of property and equipment at March 31, 20182019 and December 31, 2017 consist of the following:2018:

 

 2018 2017  2019  2018 
Furniture and fixtures $1,524  $1,524  $1,524  $1,524 
Equipment  2,456,190   1,952,538 
Manufacturing Equipment and customer equipment  3,243,121   3,118,391 
Leasehold Improvements  4,886   4,886   4,886  ��4,886 
Vehicles  29,696   29,696   29,696   29,696 
  2,492,296   1,988,644   3,279,227   3,154,497 
Less: accumulated depreciation  (762,221)  (665,657)  (1,376,921)  (1,190,846)
  1,730,075   1,322,987   1,902,307   1,963,651 
Equipment not yet placed in service  448,930   437,903   632,822   536,605 
Property and equipment, net of depreciation $2,179,005  $1,760,890  $2,535,129  $2,500,254 

 

We recorded depreciation expense related to these assets of $96,564$186,074 and $40,632$96,564 for the three-month periodsthree-months ended March 31, 2019 and 2018, respectively. Depreciation expense in Cost of Goods Sold was $12,106 and 2017, respectively.$11,584 for three-months ended March 31, 2019 and 2018 respectively

 

Note 3. Intangible Assets

 

As of March 31, 2019, intangible assets consist of patent costs of $764,891, trademarks of $103,309 and accumulated amortization of $346,313.

As of December 31, 2018, intangible assets consist of patent costs of $764,891, trademarks of $91,146$103,309 and accumulated amortization of $282,703.

As of December 31, 2017, intangible assets consist of patent costs of $764,891, trademarks of $88,853 and accumulated amortization of $266,801.$330,411.

 

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 $15,903$15,902 and $15,399$15,902 for the three monthsthree-months ended March 31, 20182019 and 2017,2018, respectively.

 

Estimated future amortization expense related to patents as of March 31, 2018,2019, is as follows:

 

  Total Amortization 
Years ending December 31,    
2018  47,708 
2019  63,610 
2020  63,610 
2021  63,610 
2022  63,610 
Later years  180,040 
  $

482,188

 

9

Barfresh Food Group Inc.

Notes to Condensed Consolidated Financial Statements

March 31, 2018

(Unaudited)

  Total Amortization 
Years ending December 31,    
2019 $47,708 
2020  63,610 
2021  63,610 
2022  63,610 
2023  63,610 
Later years  116,430 
  $418,578 

 

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.

 

10

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:

Expected life (in years)3
Volatility (based on a comparable company)54.82%
Risk Free interest rate2.41%
Dividend yield (on common stock)-

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:

Expected life (in years)3
Volatility (based on a comparable company)55.49%
Risk Free interest rate2.45%
Dividend yield (on common stock)-

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:

  December 31, 2018  March 31, 2019 
Convertible notes $2,704,800  $2,704,800 
Less: Debt discount (warrant value)  (325,747)  (325,747)
Less: Debt discount (derivative value)(Note 6)  (638,988)  (638,988)
Less: Debt discount (issuance costs paid)  (27,000)  (27,000)
Less: Note conversion/settlements  (453,000)  (803,634)
Add: Debt discount amortization  481,042   642,635 
  $1,741,107  $1,552,066 

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:

 

Expected life (in years)  3 
Volatility (based on a comparable company)  54.81659.00%
Risk FeeFree interest rate  2.412.83%
Dividend yield (on common stock)  - 

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:

  December 31, 2018  March 31, 2019 
Convertible notes $1,363,200  $1,363,200 
Less: Debt discount (warrant value)  (212,763)  (212,763)
Less: Debt discount (derivative value)(Note 6)  (697,186)  (697,186)
Less: Debt discount (issuance costs paid)  (23,700)  (23,700)
Add: Debt discount amortization  38,665   154,658 
  $468,216  $584,209 

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.

 

  March 31, 2018 
Convertible notes $2,527,500 
Less: Debt discount (warrant value)  (220,548)
Less: Debt discount (derivative value)  (569,587)
Less: Debt discount (issuance costs paid)  (24,300)
Add: Debt discount amortization  16,967 
  $1,730,032 

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

  Total Convertible Notes 
Years ending December 31,   
2019 $- 
2020  3,264,366 
2021  - 
2022  - 
2023  - 
  $3,264,366 

 

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.

 

  March 14, 2018  March 31, 2018 
Expected life  2.00   1.96 
Volatility (based on a comparable company)  49.00%  51.14%
Risk Fee interest rate  2.41%  2.39%
Dividend yield (on common stock)  -   - 

  31-Dec-18  31-Mar-19 
Expected life  1.20   0.96 
Volatility (based on comparable company)  72.03%  102.60%
Risk Fee interest rate  2.48%  2.27%
Dividend yield (on common stock)  -   - 

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.

  31-Dec-18  31-Mar-19 
Expected life  1.92   1.68 
Volatility (based on comparable company)  63.70%  85.61%
Risk Fee interest rate  2.48%  2.27%
Dividend yield (on common stock)  -   - 

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:

 

For the year ended December 31, 2017 $- 
Initial value  569,587 
Change in value March 31, 2018  444,736 
For the period ended March 31, 2018 $1,014,323 
December 31, 2018 $1,325,653 
Loss from change in value  406,012 
For the period ended December 31, 2018 $1,731,665 

 

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.

 

  Level 1  Level 2  Level 3  Total 
Expected life    -   -   1,014,323  $1,014,323 
  Level 1  Level 2  Level 3  Total 
Derivative Liability December 31, 2018 $      -        -   1,325,653  $1,325,653 

  Level 1  Level 2  Level 3  Total 
Derivative Liability March 31, 2019 $       -      -    1,731,665  $1,731,665 

 

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.

 

For years ending December 31,   
2018  130,389 
2019  43,462 
  $173,851 

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): 

Twelve months ending April 1,   
2020 $74,081 
2021 $76,304 
2022 $78,593 
2023 $80,951 
Total Lease payments $309,929 
Less Interest $(51,789)
Present value of lease liabilities $258,140 

 

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.

 

Expected life (in years)  5.5 to 8 
Volatility (based on a comparable company)  79.5463.83%-64.00%
Risk Free interest rate  2.48% to 2.542.47%-2.54%
Dividend yield (on common stock)  - 

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:

 

  Number of
Options
  Exercise price
per share $
  Average
remaining
term in years
  Aggregate
intrinsic value at
date of grant $
 
Outstanding December 31, 2017  6,715,419   0.45 – 0.87   5.69   - 
Issued  109,065   0.50 – 0.50   7.80     
Cancelled  (360,183)  0.50 – 0.81         
Exercised  -             
Outstanding, March 31, 2018  6,464,301   0.45 – 0.87   5.73   - 
                 
Exercisable, March 31, 2018  2,964,943   0.40 - 0.87   4.80   - 
  Number
of Options
  Exercise
price per share $
  

Average

remaining term

in years

  Aggregate
intrinsic value
at date of
grant $
 
Outstanding January 1, 2019  7,428,014   .40 - .87   5.48          - 
Issued  105,000   .65 - .69         
Cancelled  (78,000)            
Outstanding March 31, 2019  7,455,014   .40 - .87   5.27     
                 
Exercisable, March 31 2019  3,586,396   .40 - .87   4.07   - 

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:

        Additional       
  Common Stock  paid in  Accumulated    
  Shares  Amount  Capital  (Deficit)  Total 
                
Balance January 1, 2018  118,690,527  $119  $37,992,799  $(33,830,997) $4,161,921 
Cashless exercise of options  8,812   -   -   -   - 
Issuance of stock for services  99,206   -   100,000   -   100,000 
Equity based compensation  -   -   246,775   -   246,775 
Discount on convertible notes (warrants)  -   -   220,548   -   220,548 
Net (loss) for the year  -   -   -   (2,338,138)  (2,338,138)
Balance March 31, 2018  118,798,545  $119  $38,560,122  $(36,169,135) $2,391,106 

     Additional       
  Common Stock  paid in  Accumulated    
  Shares  Amount  Capital  (Deficit)  Total 
                
Balance January 1, 2019  122,770,960  $123  $41,118,649  $(41,153,820) $(35,048)
Exercise of warrants  3,141,454   3   1,884,869       1,884,872 
Issuance of stock for services  173,446   -   181,040   -   181,040 
Equity based compensation  -   -   136,941   -   136,941 
Warrants issued to Management  -   -   758,754   -   758,754 
Issuance of stock for capital raise  4,000,000   4   2,399,996   -   2,400,000 
Warrant modification  -   -   307,460   -   307,460 
Net (loss) for the year  -   -   -   (2,847,262)  (2,847,262)
Balance March 31, 2019  130,085,860  $130  $46,787,709  $(44,001,032) $2,786,807 

16

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:

 

 Number of
warrants
 price per share remaining term
in years
 intrinsic value
at date of grant
  Number of
warrants
 

price

per share

 remaining term
in years
 intrinsic value
at date of grant
 
Warrants issued in connection with private placements of common stock  23,189,808  0.50 - $1.00   2.55  $-   17,888,354  $         0.53 - $1.00   1.70  $        - 
Warrants issued in connection with private placement of notes  2,626,667  0.45 - $1.00   1.76  $64,583   1,335,000  $1.00   1.76  $- 
Warrants issued in connection with convertible note  2,261,915  0.60 - $0.88   2.96  $-   2,4680,259  $0.70   2.16  $- 
Warrants issued in connection with settlement of deferred compensation  1,595,611  $0.70   5.00  $- 

 

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.

18

 

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.

20

 

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:

 

 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 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 the sale of frozen beverages when title and risk of loss passes and the customer accepts the goods, which generally occurs at delivery. Customer sales incentives such as volume-based rebates or discounts are treated as a reduction of sales at the time the sale is recognized. Shipping and handling costs are treated as fulfillment costs and presented in distribution, selling and administrative costs.
   
  The company evaluated the requirement to disaggregate revenue, and concluded that substantially all of its revenue comes from a single product, frozen beverages.

 

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.

 

21

 

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:

 

  three months
ended
March 31,
  three months
ended
March 31,
    
  2018  2017  Difference 
Personnel costs $897,803  $1,278,692  $(380,889)
Stock based compensation/options  246,775   344,268   (97,493)
Legal and professional fees  107,371   113,014   (5,643)
Travel  83,848   92,861   (9,013)
Rent  53,906   54,241   (335)
Marketing and selling  160,380   118,658   41,722 
Consulting fees  17,734   48,945   (31,211)
Director fees  62,500   37,500   25,000 
Research and development  190,341   114,601   75,740 
Shipping and Storage  166,071   64,154   101,917 
Other expenses  107,934   166,596   (58,662)
  $2,094,664  $2,433,530  $(338,866)

  three months
ended
  three months
ended
    
  March 31,2019  March 31,2018  Difference 
Personnel costs $958,866  $897,803  $61,063 
Stock based compensation/options  136,941   246,775   (109,834)
Legal and professional fees  58,997   107,371   (48,374)
Travel  111,759   83,848   27,911 
Rent  37,201   53,906   (16,705)
Marketing and selling  159,429   160,380   (951)
Consulting fees  5,416   17,734   (12,318)
Director fees  62,500   62,500   - 
Research and development  156,199   190,341   (34,142)
Shipping  98,339   138,248   (39,909)
Storage  51,307   27,823   23,484 
Other expenses  166,490   107,935   58,555 
  $2,003,444  $2,094,664  $(91,220)

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.

24

 

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:

Inadequate Segregation of Duties: We have an inadequate number of personnel to properly implement internal controls over financial reporting.

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

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

 

Exhibit No. Description

31.1

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

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

*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.

 

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

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

 

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SIGNATURES

 

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

 

 BARFRESH FOOD GROUP INC.
   

Date: May 30, 2018

15, 2019
By:/s/Riccardo Delle Coste
  

Riccardo Delle Coste

Chief Executive Officer

(Principal Executive Officer)

   

Date: May 30, 2018

15, 2019
By:/s/Joseph S. Tesoriero
  Joseph S. Tesoriero
  

Chief Financial Officer

(Principal Financial Officer)