1           The address of those listed, except as noted is c/o Barfresh Food Group Inc., 8383 Wilshire Blvd., Beverly Hills, CA 90211.

2           Mr. Delle Coste is the Chief Executive Officer , President and a Director of the Company.

3           Includes 19,454,156 shares owned by R.D. Capital Holdings PTY Ltd. and of which Riccardo Delle Coste is deemed to be a beneficial owner.

4           Includes 550,000 shares underlying options granted.

5           Includes 282,647 shares underlying warrants issued in connection with a promissory note the holder of which was R.D. Capital Holdings PTY Ltd. And of which Riccardo Delle Coste is deemed to be a beneficial owner.

6           Includes 25,000 shares underlying warrants issued in connection with a promissory note the holder of which was R.D. Capital Holdings PTY Ltd. and of which Riccardo Delle Coste is deemed to be a beneficial owner.

7           Includes 76,130 shares underlying warrants issued in connection with the purchase of common shares, the holder of which was R.D. Capital Holdings PTY Ltd. and of which Riccardo Delle Coste is deemed to be a beneficial owner.

8           Mr. Lang is a Director of the Company.

9           Includes 19,054,828 shares owned by Sidra Pty Limited of which Steven Lang is deemed to be a beneficial owner.

10           Includes 950,000 shares underlying options granted.

11           Includes 282,646 shares underlying warrants issued in connection with a promissory note the holder of which is Sidra PTY Limited.

12           Mr. Tesoriero is the Chief Financial Officer of the Company.

13           Includes 76,629 shares underlying warrants issued in connection with a promissory note and conversion thereof.

14           Mr. Tinter is the Secretary and a Director of the Company.

15           Includes 150,000 shares underlying options granted.

16           Mr. Cugine is President of a subsidiary of the Company and a Director.

17           Includes 500,000 shares owned by Restaurant Consulting Group LLC of which Mr. Cugine is deemed to be a beneficial owner.

18           Includes 96,020 shares underlying warrants issued in connection with purchase of common shares.

19           Ms. Elliot is a Director of the Company.

20           Includes 360,000 shares owned by Elliot-Herbst LP of which Alice Elliot is deemed to be a beneficial owner.

21           Includes 64,599 shares owned by Elliot-Herbst Family LLC of which Ms. Elliot is deemed to be a beneficial owner.

22           Includes 130,000 shares underlying warrants issued in connection with purchase of common shares.

23           Mr. Ware is a Director of the Company.

24           Includes 156,250 shares owned by The Alexander Ware Revocable Trust of which Mr. Ware is deemed to be a beneficial owner.

25           Includes 78,125 shares underlying warrants issued to The Alexander Ware Revocable Trust in connection with purchase of common stock.

26           Includes 7,812,500 shares underlying warrants issued in connection with the purchase of common stock.

27           Includes 4,813,230 shares underlying warrants issued in connection with the purchase of common stock.

28           Wolverine Asset Management, LLC (“WAM”) is the investment manager of Wolverine Flagship Fund Trading Limited and has voting and dispositive power over these securities. The sole member and manager of WAM is Wolverine Holdings, L.P. (“Wolverine Holdings”). Robert R. Bellick and Christopher L. Gust may be deemed to control Wolverine Trading Partners, Inc., the general partner of Wolverine Holdings.

29           Includes 2,000,000 shares underlying warrants issued in connection with the purchase of common stock.

DESCRIPTION OF SECURITIES

Authorized Capital Stock

Our authorized share capital consists of 295,000,000 shares of common stock, par value $0.000001 per share and 5,000,000 shares of preferred stock, par value $0.000001 per share. As of February 6 , 2017, 117,103,236October 10, 2018, 120,756,547 shares of our common stock were outstanding.

Common Stock

Each share of our common stock entitles its holder to one vote in the election of each director and on all other matters voted on generally by our shareholders, other than any matter that (i) solely relates to the terms of any outstanding series of preferred stock or the number of shares of that series and (ii) does not affect the number of authorized shares of preferred stock or the powers, privileges and rights pertaining to the common stock. No share of our common stock affords any cumulative voting rights. This means that the holders of a majority of the voting power of the shares voting for the election of directors can elect all directors to be elected if they choose to do so. Holders of our common stock will be entitled to dividends in such amounts and at such times as our board of directors in its discretion may declare out of funds legally available for the payment of dividends. We currently intend to retain our entire available discretionary cash flow to finance the growth, development and expansion of our business and do not anticipate paying any cash dividends on the common stock in the foreseeable future. Any future dividends will be paid at the discretion of our board of directors after taking into account various factors, including:

If we liquidate or dissolve our business, the holders of our common stock will share ratably in all our assets that are available for distribution to our shareholders after our creditors are paid in full and the holders of all series of our outstanding preferred stock, if any, receive their liquidation preferences in full.

Our common stock has no preemptive rights and is not convertible or redeemable or entitled to the benefits of any sinking or repurchase fund.

Series J Warrants

Series J Warrants to purchase up to 2,343,750 shares common stock are currently outstanding. Series J Warrants may be exercised by the payment of the exercise price of $0.75 per share for a term of five years in cash or via cashless exercise and have registration rights for the shares of common stock underlying the warrants.

The Series J Warrants are subject to customary protective provisions for stock dividends and splits and fundamental corporate transactions, including any sale of all or substantially all of the Company’s assets, any tender offer or exchange offer, or any reclassification of the common stock.

Series K Warrants

Series K Warrants to purchase up to 7,812,500 shares common stock are currently outstanding. The Series K Warrants may be exercised by the payment of the exercise price of $0.88 in cash for a term of five years and have registration rights for the shares of common stock underlying the warrants.

The Series K Warrants are subject to full ratchet and weighted average anti-dilution protection. After the third anniversary of the issuance of the Series K Warrants, the Company may redeem the warrants for a redemption price of $0.001 per Warrant Share, subject to prior notice and provided the market price of the common stock receivable upon exercise of the Series K Warrants is at least $1.76, subject to adjustment as set otherwise provided herein.

LEGAL MATTERS

The validity of the common stock to be sold under this prospectus will be passed upon for us by Libertas Law Group, Inc. Libertas Law Group’sGroup, Inc. and its principal, Mark Y. Abdou, beneficially owns 641,872own 1,523,091 shares of the Company’s common stock, including 30,000 shares underlying 14,063 Series IG Warrants, 54,805 shares underlying Series J Warrants and 75,102 shares underlying 67,500 other warrants. Mr. AbdouSeries L warrants and 81,818 underlying convertible notes. Libertas Law Group, Inc. is a selling shareholder under the prospectus.

EXPERTS

Our financial statements, as of December 31, 20152017 and March 31, 20152016 and for the nine-monthsyears then ended December 31, 2015 and the year ended March 31, 2015 appearing in the prospectus, have been audited by Eide Bailly LLP, an independent registered public accounting firm, to the extent and for the periods indicated in their report appearing herein, which report expresses an unqualified opinion, and are included in reliance upon such report and upon authority of such firm as experts in accounting and auditing.

DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES

The Company’s directors and executive officers are indemnified as provided by the Delaware General Corporation Law and the Company’s Certificate of Incorporation. These provisions state that the Company’s directors may cause the Company to indemnify a director or former director against all costs, charges and expenses, including an amount paid to settle an action or satisfy a judgment, actually and reasonably incurred by him as a result of him acting as a director. The indemnification of costs can include an amount paid to settle an action or satisfy a judgment. Such indemnification is at the discretion of the Company’s board of directors and is subject to the SEC’s policy regarding indemnification.

Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling the Company pursuant to the foregoing provisions, or otherwise, the Company has been advised that in the opinion of the SEC, such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable.

In the event that a claim for indemnification against such liabilities (other than the payment of expenses incurred or paid by a director, officer or controlling person in a successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, we will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to the court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.

At present, there is no pending litigation or proceeding involving any of our directors, officers or employees as to which indemnification is sought, nor are we aware of any threatened litigation or proceeding that may result in claims for indemnification.

DESCRIPTION OF BUSINESS

PART I

Item 1. Business.

Business Overview

Barfresh is a leader in the creation, manufacturing and distribution of ready to blend frozen beverages. The current portfolio of products includes smoothies, shakes and frappes. All of the productsProducts 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.

Domestic and international patents and patents pending are owned by Barfresh, as well as related trademarks for all of the single serve products. In November 2011, the Company acquired the patentPatent rights in the United States and Canada. The Canadian patent has been granted and the United States patent was granted on August 16, 2016. On October 15, 2013, the Company acquired all of the related international patent rights, which were filed pursuant to the Patent Cooperation Treaty and have been granted in 13 jurisdictions. The patents are pending injurisdictions including the remainder of the jurisdictions that have signed the treaty.United States. In addition, on October 15, 2013, the Company has purchased all of the trademarks related to the patented products.

The Company has conductedconducts sales through two channels:several channels, including National Accounts, Regional Accounts, and Broadline Distributors. Barfresh’s primary broadline distribution arrangement is through an exclusive nationwide distribution agreement with Sysco Corporation (“Sysco”), the U.S.’s largest broadline distributor, which was entered into during July 2014.2014, and renewed for an additional two year term on October 2, 2017.

The process of obtaining sales orders for National Accounts generally follows several steps, including product demonstration, product testing,During 2016 and exclusive flavor development for2017 the larger National Accounts. We are currently in various stages of product development and testing with National Accounts representing over 37,000 restaurant locations.

The company recently launched in market testsCompany announced that it had signed supply agreements with several of the major National Key accounts, and is focused on moving from in-market tests to national roll-out.

global on-site foodservice operators. On July 6^th, 2016,March 8, 2018, the Company announced that it had signed a new supply agreement with a major global on-siteone of the largest of these foodservice operator. Theoperators, 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 will begin during April of 2018. This new agreement, which markedmarks the culmination of a successful in market testtests conducted at several locations, and makes Barfresh’s suite of blended beverages available across many of the most attractive locations of the customer’s diverse customer base in its education, healthcare, sports and entertainment, and business government channels, in the US and Canada representing over 2,000 potential accounts.base.

In addition to the National Accounts, theThe Company also sells to foodbroadline 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. AllPursuant to that agreement, all Barfresh products will beare included in Sysco’s national core selection of beverage items, making Barfresh its exclusive single-serve, pre-portioned beverage provider. The agreement is mutually exclusive; however, Barfresh may also sell the products to other foodservice distributors, but only to the extent required for such foodservice distributors to service multi-unit chain operators with at least 20 units and where Sysco is not such multi- unit chain operator’s nominated distributor for our products.

The Company is one of five vendors that were named On October 2, 2017, the Sysco agreement was extended for an additional two year period, and expanded to Sysco’s “Cutting Edge Solution” (“CES”) Platform during March of 2016. As part of this platform, ourcover bulk easy pour products, will receive national advertising and marketing, and will be consideredon a core product. All 72 of SYSCO’s OPCO’s will participate in the CES program, and will be evaluated on their success in moving the CES products. As a direct result the Company, which had already begun shipping products to 37 of the 72 Sysco distribution centers, expects to have its products in all 72 SYSCO Opco’s by the end of the second quarter 2016.non-exclusive basis.

On October 26, 2015, Barfresh signed ana five year agreement with PepsiCo North America Beverages, a division of PepsiCo, to become its exclusive sales representative within the food service channel to present Barfresh’s line of ready-to-blend smoothies and frozen beverages throughout the United States and Canada. Through this agreement, Barfresh’ products will beare 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.

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

Barfresh currently utilizes contract manufacturers to manufacture all of theits products in the United States. Production lines are currently operational at two locations. The first location is in our Salt Lake City, contract manufacturer location, which currently produces products sold to existing customers. Currently annualboth 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 additional production capacity ahead of expected dramatic sales growth in 2016. Barfresh will have the capacity to ramp up to an incremental production capacity of 100 million units through this agreement. Yarnell’s began shipping product for Barfresh during June of this year.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.

Although there currentlyOur corporate office is not a contract in place with any suppliers for the raw materials needed to manufacturelocated at 8383 Wilshire Blvd., Suite 750, Beverly Hills, CA 90211. Our telephone number is (310) 598-7113 and our products, there are a significant number of sources available and the company does not anticipate becoming dependent on any one supplier. As demand for the range of our products grows, we plan to contract a level of raw material requirements to ensure continuity of supply.website is www.barfresh.com.

Corporate History and Background

The Company, which was incorporated in Delaware on February 25, 2010, was originally formed to produce movies. As the result of the reverse merger, more fully described below, the Company is now engaged in the manufacturing and distribution of ready to blend beverages, particularly, smoothies, shakes and frappes.

Reorganization and Recapitalization

During January, 2012, the Company entered into a series of transactions pursuant to which Barfresh Inc., a Colorado corporation (“Barfresh NV”), was acquired, spun-out prior operations to the former principal shareholder, completed a private offering of securities for an aggregate purchase price of approximately $999,998, conducted a four for one forward stock split and changed the name of the Company. The following describes the steps of this reorganization:

Products

All of ourThe Company’s products are made in two formats. The first is in portion controlled single serving beverage ingredient packs, suitable for smoothies, shakes and frappes that can also be utilized for cocktails and mocktails. TheyThese packs contain all of the ingredients necessary to make a smoothie, shake or frappe, including the ice. Simply add water, empty the packet into a blender, blend and serve.

The second format is the bulk “Easy Pour” format. The Company’s 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 following eight flavors are available as part of our standard portfolio of single serve products:

In addition to the standard product range, the Company has developed a number of exclusive flavors for several National Accounts that are currently engaged in the pre-rollout testing process.

Some of the key product benefits for operators include:

Some of the key benefits of the products for the end consumers that drink the products include:

Customer Marketing Material

A wide range of consumer marketing materials has been created to assist customers in selling blended beverages.

Research and Development

The Company incurred research and development expenses for the 9 month transitional year ended December 31, 20152017 in the amount of $67,341,$574,989 and for fiscalthe year ended MarchDecember 31, 20152016 in the amount of $51,465.$432,146. The increase in Research and Development expenses was primarily attributable to commissioning of new production lines at our contract manufacturer facilities, and increased activity in creating unique flavors for potential customers in our national account pipeline.

Competition

There is significant competition in the smoothie market at both the consumer purchasing level and also the product level.

The competition at the consumer level is primarily between specialized juice bars (e.g. Jamba Juice) and major fast casual and fast food restaurant chains (such as McDonalds). Barfresh does not compete specifically at this level but intends to supply its product to customers that fall within these segments to enable them to compete for consumer demand.

There may also be new entrants to the smoothie market that may alter the current competitor landscape.

The existing competition from a product perspective can be separated into three categories:

● Specialized juice bar products: The product is made in-store and each ingredient is added separately.

● Syrup based products: The fruit puree is supplied in bulk and not portion controlled for each smoothie. These types of products still require the addition of juice, milk or water and/or yogurt and ice. While there are a number of competitors for this style of product, the two dominant competitors are Island Oasis and Minute Maid.

● Portion pack products: These products contain only the fruit and yogurt and require the addition of juice or milk and ice. The two dominant competitors are General Mills’ Yoplait Smoothies and Inventure Group’s Jamba Smoothies.

The Company believes that its single serve products afford a very significant competitive advantage based on ease of use, portion control, premium quality, and minimal capital investment required to enable a customer to begin to carry Barfresh beverage products all add up to representproducts. The Company also believes that its bulk “Easy Pour” product represents an attractive alternative delivery method for customers that serve high volume locations, where speed of service over extended periods is a very significant competitive advantagecritical requirement. The Company has recently launched a “no sugar added” version of the bulk “Easy Pour” format that will allow us to quickly gain tractionis specifically targeted for the USDA national school meal program, including the School Breakfast Program, the National School Lunch Program, and Smart Snacks in the market and secure long-term agreements with customers. However, there are other factors that may influence the adoption of a particular product by customers, including their dependence on prior relationships with competition.

Schools Program.

Intellectual Property

Barfresh owns the domestic and intellectual property rights to its products’ sealed pack of ingredients.ingredients used in its single serve products.

In November 2011, the Company acquired patent applications filed in the United States (Patent Application number 11/660415) and Canada (Patent Application number 2577163) from certain related parties. The United States patent was issuedoriginally filed on December 4, 2007 and it was granted during August 16, 2016.of 2017. The Canadian patent was originally filed on August 16, 2005 and it has been granted.was granted on May 27, 2014.

On October 15, 2013, the Company acquired all of the related international patent rights, which were filed pursuant to the Patent Cooperation Treaty, have been granted in 13 jurisdictions and are pending in the remainder of the jurisdictions that have signed the PCT. In addition, the Company purchased all of the trademarks related to the patented products.

Governmental Approval and Regulation

The Company is not aware of the need for any governmental approvals of its products.

The Company utilizes a contract manufacturer.manufacturers. Before entering into any manufacturing contract,contracts, the Company determines that the manufacturer has metmeets all government requirements.

The Company will be subject to certain labeling requirements as to the contents and nutritional information of our products.

Environmental Laws

The Company does not believe that it will be subject to any environmental laws, either state or federal. Any laws concerning manufacturing will be the responsibility of the contract manufacturer.

Employees

Currently we have 34The Company currently has 30 employees and 53 consultants. There are currently 2320 employees and 1 consultant selling our products. We have recently hired additional employees, particularlyrestructured our sales force, eliminating 18 full time positions over a twelve month period, while at the same time expanding our brokerage network.

Research and Development

The Company incurred research and development expenses for the year ended December 31, 2017, in the sales area, as we roll outamount of $574,989, and for the year ended December 31, 2016 in the amount of $432,146. The increase in Research and Development expenses was primarily attributable to commissioning of new production lines at our products to all 72 Sysco distribution centers.contract manufacturer facilities, and increased activity in creating unique flavors for potential customers in our national account pipeline.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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. Factors that may affect our results include, but are not limited to, the risk factors set forth in this prospectus under the heading “Risk Factors”. Any one or more of these uncertainties, risks and other influences could materially affect our results of operations and whether forward-looking statements made by us ultimately prove to be accurate. Our actual results, performance and achievements could differ materially from those expressed or implied in these forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statements, whether from new information, future events or otherwise.

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

Barfresh is a leader in the creation, manufacturing and distribution of ready to blend frozen beverages. The current portfolio of products includes smoothies, shakes and frappes. All of the productsProducts 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’s bulk “Easy Pour” product is currently sold to more than 200 school locations throughout the United States. 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 sell its bulk Easy Pour product into a number of military bases in the United States. The Company’s products are currently sold to more than 45 military locations throughout 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. In November 2011, the Company acquired the patentPatent rights in the United States and Canada. The Canadian patent has been granted and the United States Patent was granted on August 16, 2016. On October 15, 2013, the Company acquired all of the related international patent rights, which were filed pursuant to the Patent Cooperation Treaty and have been granted in 13 jurisdictions. Barfresh has patents granted in a total of sixteen countries. The patents are pending injurisdictions including the remainder of the jurisdictions that have signed the treaty.United States. In addition, on October 15, 2013, the Company has purchased all of the trademarks related to the patented products.

The Company conducts sales through two channels:several channels, including National Accounts, Regional Accounts, and Broadline Distributors. Barfresh’s primary broadline distribution arrangement is through an exclusive nationwide distribution agreement with Sysco Corporation (“Sysco”), the U.S.’s largest broadline distributor, which was entered into during July 2014.2014, and renewed for an additional two year term on October 2, 2017.

The process of obtaining sales orders for National Accounts generally follows several steps, including product demonstration, product testing,During 2016 and exclusive flavor development for2017 the larger National Accounts. We are currently in various stages of product development and testing with National Accounts representing over 37,000 restaurant locations.

The Company recently launched in market testsannounced that it had signed supply agreements with several of the major National Key Accounts, and is focused on moving from in-market tests to national roll-out.

global on-site foodservice operators. On July 6^th, 2016,March 8, 2018, the Company announced that it had signed a new supply agreement with a major global on-siteone of the largest of these foodservice operator. Theoperators, 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 markedmarks the culmination of a successful in market testtests conducted at several locations, and makes Barfresh’s suite of blended beverages available across many of the most attractive locations of the customer’s diverse customer base in its education, healthcare, sports and entertainment, and business and government channels, in the US and Canada, representing over 2,000 potential customer accounts.base.

In addition to the National Accounts, the

The Company also sells to foodbroadline 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 single serve smoothies, shakes and frappes. AllPursuant 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 operatorsoperator’s nominated distributor for our products.

The Company is one of five vendors that were namedOn October 2, 2017, the Sysco agreement was extended for an additional two year period, and expanded to Sysco’s “Cutting Edge Solution” (“CES”) Platform during March of 2016. As part of this platform, ourcover bulk easy pour products, are receiving national advertising and marketing, and are consideredon a core product. All 72 of SYSCO’s Operating Companies (“OPCO”) will participate in the CES program, and will be evaluated on their success in moving the CES products. As a direct result the Company now has its products in all 70 of SYSCO’s mainland U.S. Opco’s. Primarily as a result of the national roll-out of Barfresh’s products in the SYSCO distribution system, revenue during the first half of 2016 grew to $834,497 from $221,732 in the first half of 2015. Barfresh continues to work closely with SYSCO to leverage new national promotional and marketing opportunities, in addition to the CES platform.non-exclusive basis.

On October 26, 2015, Barfresh signed ana five year agreement with PepsiCo North America Beverages, a division of PepsiCo, to become its exclusive sales representative within the food service channel to present Barfresh’s line of ready-to-blend smoothies and frozen beverages throughout the United States and Canada. Through this agreement, Barfresh’ products isare included as part of PepsiCo’s offerings to its significant customer base. 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.

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

Barfresh currently utilizes contract manufacturers to manufacture all of the products in the United States. Production lines are currently operational at two locations. The first location is in our Salt Lake City, contract manufacturer location, which currently produces products sold to existing customers. Currently annualboth 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,LLC., a subsidiary of SchulzeShulze and Burch, located in Arkansas. The Yarnell’s agreement, which was signed during February, of 2016, and secures additional production capacity ahead of expected dramatic sales growth in 2016. Barfresh will have the capacity to ramp up to an incremental production capacity of 100 million units through this agreement. Yarnell’s began shipping product for Barfresh during June of this year.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.

Although there currentlyDuring November, 2016, the Company received an equity investment from Unibel, the majority shareholder of the Bel Group (“Unibel”). The Bel Group is notheadquartered in Paris, France, with global operations in 33 countries, 30 production sites on 4 continents and nearly 12,000 employees. Its many branded products, including The Laughing Cow®, Mini Babybel® and Boursin®, are sold in over 130 countries around the world. Pursuant to the securities purchase agreement, Unibel purchased 15,625,000 shares of common stock at $0.64 per share (“Shares”) and warrants to purchase 7,812,500 shares of common stock (“Warrants”) for aggregate gross proceeds to Barfresh of $10 million. The Warrants are exercisable for a contractterm 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 placenew and existing markets and product channels.

On February 14, 2018, we announced the private placement of convertible notes with any suppliersthe potential of gross proceeds up of $4.1 million The closing shall be no later than five (5) business days after receipt of notice from the Company that it has achieved certain milestones establishing significant sales to national accounts. One milestone is that the Company shall have entered into a material agreement or series of related agreements with a national account for the raw materials neededsale of its products into approximately 1,000 new locations. The first milestone was achieved on March 8, 2018, and according to manufacture ourthe terms of the note the Company has received 60% of the principal amount. The remaining 40% of the principal amount will 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 thereinto approximately 2,500 new locations.

The convertible notes are unsecured and have (i) a significanttwo-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 per share of Common Stock. Investors also received warrant coverage of 25% of the number of sources availableshares 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 company does not anticipate becoming dependent on any one supplier. As demand for the rangeissuance of our products grows, we plan to contract a level of raw material requirements to ensure continuity of supply.937,373 additional warrants.

Currently we have 3425 employees and 53 consultants. There are currently 2315 employees and 1 consultant selling our products. We have recently hired additional employees, particularly in the sales area, as we roll out our products to all 72 Sysco distribution centers.

Critical Accounting Policies

The significant accounting policies set forth in Note 1 to our audited consolidatedOur financial statements includedhave been prepared in our Annual Report on Form 10-KT forconformity with accounting principles generally accepted in the year ended December 31, 2015, as updated by Note 1 to the Unaudited Condensed Consolidated Financial Statements included herein, and Management’s Discussion and AnalysisUnited States of Financial Condition and Results of Operations included in our Annual Report on Form 10-KT for the year ended December 31, 2015, appropriately represent, in all material respects, the current status of our critical accounting policies and estimates, the disclosure with respect to which is incorporated herein by reference.America (“GAAP”).

Revenue Recognition

We recognize revenue when there is persuasive evidence of an arrangement, delivery has occurred or services have been rendered, the sales price is determinable, and collection is reasonably assured. Revenue is recorded net of provisions for discounts, slotting fees, and promotion allowances. Our products are sold on various terms. Our credit terms, which are established inIn accordance with local and industry practices, typically require payment within 30 daysASC 606, Revenue from Contracts with Customers, revenue is recognized when a customer obtains ownership of delivery. We recognizepromised goods. The 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 upon receipt of our products by our distributors and retail accounts,recognized reflects the consideration to which the Company expects to be entitled to receive in accordance with written sales terms, net of provisionsexchange for discounts or allowances. Allowances for returns and discounts are made on a case- by-case basis. Historically, neither returns nor discounts have been material.these goods. The Company applies the following five steps:

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.

Convertible NotesDerivative Liability

We issue debt that may have separateThe Company evaluates its convertible instruments, options, warrants conversion features, or no equity-linked attributes. When we issue debt with warrants, weother contracts to determine the valueif those contracts or embedded components of the warrants using the Black-Scholes Option Pricing Model (“Black-Scholes”) using the stock price on the date of issuance, the risk free interest rate associated with the life of the debt, and the estimated volatility of our stock. When we issue debt with a conversion feature, we must first assess whether the conversion feature meets the requirementsthose contracts qualify as derivatives to be treated as a derivative. If the conversion feature within convertible debt meets the requirements to be treated as a derivative, we estimateseparately accounted for under ASC Topic 815, “Derivatives and Hedging.” The result of this accounting treatment is that the fair value of the convertible debtany derivative using Black-Scholes upon theis marked-to-market each balance sheet date of issuance, using the stock price on the date of issuance, the risk free interest rate associated with the life of the debt, and the estimated volatility of our stock. If the conversion feature is not treatedrecorded as a derivative, we assess whether it is a beneficial conversion feature (“BCF’). A BCF exists ifliability. In the conversion price of the convertible debt instrument is less than the stock price on the commitment date. This typically occurs when the conversion price is less thanevent 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 stock oninstrument’s settlement provisions. The Company utilized the datefair value standard set forth by the instrument was issued. The value ofFinancial Accounting Standards Board, defined as the amount at which the assets (or liability) could be bought (or incurred) or sold (or settled) in a BCFcurrent transaction between willing parties, that is, equal to the intrinsic value of the feature, the difference between the conversion price and the common stock into which it is convertible.other than in a forced or liquidation sale.

Results of Operations

Results of Operation for Three Months Ended SeptemberJune 30, 20162018 as Compared to the Three Months Ended SeptemberJune 30, 2015.2017

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

Revenue and cost of revenue

Revenue increased $310,851 (185%$457,169 (73%) from $168,099$628,997 in 20152017 to $478,680$1,086,166 in 2016.2018. The increase in revenue is primarily the result of the continuation of the national rollout of our new bulk Easy Pour product which began during the first quarter of 20162017 and has continued to gain momentum during the balance of 2018, especially in the school and Military channels. Our product continues to be distributed through all 72 of Sysco’s U.S. mainland distribution centers. Duringcenters, as well as through new customers beyond the quarter ended September 30, 2015, our product was distributed through 38 of Sysco’sSysco distribution centers. We now have our product in all of Sysco’s 72 distribution locations.network.

Cost of revenue for 20162018 was $265,072$519,688 as compared to $90,202$306,877 in 2015.2017. Our gross profit was $213,608 (45%$566,478 (52.2%) and $77,897 (46%$322,120 (51.2%) for 20162018 and 2015,2017, respectively. Revenue in both 2016The strong gross profit margin is attributable to a number factors, including leverage due to larger scale of production and 2015 included sales of blenders and freezers. We only make a nominal profit on these items as they are to accommodate our customers.product mix. We anticipate that our gross profit percentage for the remainder of 20162018 will be comparable to the percentage for the current quarter.approximately 50%.

Operating expenses

Our operations during 2016 and 2015 were primarily directed towards increasing sales and expanding our distribution network.

Our general and administrative expenses increased $381,817 (18%decreased $174,031 (7%) from $2,138,815$2,403,293 in 2015the second quarter of 2017 to $2,520,632$2,229,262 in 2016, asthe second quarter of 2018, with the improvement primarily driven by lower personnel expenses resulting from the ongoing realignment of our business continued to grow.sales force. The following is a breakdown of our general and administrative expenses for the three months ended SeptemberJune 30, 20162018 and 2015:2017:

Personnel cost represents the cost of employees including salaries, bonuses, employee benefits and employment taxes and continues to be our largest cost. Personnel cost increased $393,193 (40%decreased $158,930 (16%) from $992,948$998,798 to $1,386,141.$839,868. During the first quarterfourth quarters of this year2016 and 2017, we significantly increasedrealigned 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 staff primarily as a result of the national roll-out offorce employees. When taking into consideration start dates for new employees, and separation dates for those employees who left our distribution agreement with Sysco. At the end of the quarter,workforce, we had 4643 full time employees comparedduring 2016, and at June 30, 2018 we had 28 full time employees. We expect these restructurings to 38 atresult in estimated annualized savings of $2.2 to $2.7 million. After the endclose of the year ago period. After thesecond quarter closed,2018, we affected a restructuring ofeliminated three additional positions in our sales force, whereby we eliminated 13 full time sales positions, and replaced the associated sales territory coverage with brokerage arrangements. This change will allow our remaining sales force to more effectively focus on pursuing larger accounts, while our expanded brokerage network will support and expand our “up and down the street” business. In addition, we expect the change to reduce our overall overhead costs by a net $1 million to $1.5 million on anresulting in approximately $300,000 of additional annualized basis.

We do not anticipate any further changes to our personnel organization during the balance of 2016.savings.

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. AfterStock compensation for the current quarter closed, we madewas $117,670, a decrease of $154,366, or 57%, from the year ago quarter expense of $272,036. The decrease is primarily due to the reductions in our work force and the timing of equity grants. The Company issues additional grants to our sales force members who are remaining with the Company after our personnel restructuring. We anticipate making additional grants in the future. Certain grants that were made in 2015 had shorter vesting periods than the grants that were made during 2016. However, a higher overall number of stock options was granted during the current period, resulting in higher expense within the current period.to its employees from time to time under its Equity Compensation Plan.

Legal and professional fees decreased $ 72,726 (36%$10,865 (8%) from $202,072$143,218 in 20152017 to $129,346$132,353 in 2016.2018. The decreaseddecrease was primarily due to a decrease intiming of legal services required. We anticipate legal fees related to our business and financing activities to increase as our business grows.continues to grow.

Travel expenses increased $47,342 (43%decreased $8,227 (6%) from $110,404$135,539 in 20152017 to $157,746$127,312 in 2016.2018. The increasedecrease is primarily due to increased travel related to increased personnel engaging in selling and marketing activities. We anticipate that travel cost for the balance of 2016 will remain comparable to that of the current quarter, as the reduction in travel costs associated with terminated employees,employees. We anticipate that quarterly travel expenses for the balance of this year will be largely offset byabout $15,000 lower than the increased travel activitycurrent quarter due to the additional work force reduction that occurred after the close of the remaining sales force employees.second quarter.

Rent expense is primarily for our location in Beverly Hills, California. Rent expense for the Beverly Hills office is approximately $8,833$14,488 per month. TheWe lease on the office commenced in November 8, 2014 and expires in November 2016. Rent expense also includes monthly parking fees as well as an offsite storage facilities. We have entered into a new lease for office space at 8383 Wilshire Boulevard, Beverly Hills, California. TheCalifornia pursuant to a new lease that commenced on November 1, 2016 and expires in February 8, 2018.March 31, 2019.

Marketing and selling expenses decreased $50,520 (32%increased $159,050 (109%) from $158,686$146,584 in 20152017 to $108,166$305,634 in 2016.2018. Higher marketing and selling expenses were primarily due to higher sales agent commissions associated with higher sales during the quarter.

Consulting fees decreased $96,448 (62%) from $154,640were $17,925 in 2015 to $58,1922018, as compared with $47,556 in 2016.

2017. Our consulting fees vary based on needs. We engageengaged consultants in the areas of sales and operations and accounting. Futureduring the quarter. The need for future consulting feesservices will be variable.

Director fees of $25,000 were accrued during the period ended September 30, 2016, however no director fees were accrued during the period ending September 30, 2015.increased $31,204 from $18,796 in 2017 to $50,000 in 2018. Annual director fees are anticipated at $50,000 per non-employee director.

Research and development expenses increased $26,669( 36%decreased $72,673, (32%) from $74,635$226,002 in 2017 to $101,304 during the current period. During the current quarter, we re-classified certain personnel expenses that had previously been included$153,329 in Personnel Expense, to Research and Development.2018. These expenses relate to the services performed by our Director of Manufacturing and Product Development, and consultants supporting that employee. The re-classification is shownreduction in both the current period and the prior period. The increase in Research and Development Expense is being driven by an increased need for research and development services,expense was primarily driven by lower commissioning expense at manufacturing facilities in the current quarter, as we continueour manufacturing processes have continued to expand product offerings, both for our standard SKU’s, and for National Accounts.mature.

Shipping and storage expense increased $44,708 (65%$124,159 (73%) from $68,966$169,115 in 20152017 to $113,674$293,794 in 2016. The higher expense in 2016 is due to costs incurred to better position inventory for the national roll-out with Sysco.2018. Shipping and storage expense as a percentage of revenue decreased to 23.7%, as compared with 41%was comparable at 27% in the prior quarter. This improvement results from the transition to more efficient shipping options that have become available as our operations have expanded.both 2017 and in 2018. We anticipate that shipping and storage expense as a percentage of sales will reduce during the balance of the year, as the Company is able to take advantage of more efficient distribution arrangements.

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

We had operating losses of $2,358,669$1,812,407 and $2,074,442$2,157,743 for 2016the three month periods ended June 30, 2018 and 2015,2017, respectively. The improvement of $345,336, or 16%, was primarily due to higher gross profit margin on higher sales, and lower G&A expenses.

Interest expense decreased $54,830 (88%) from $62,507 in 2015 to $7,677 in 2016.for the three months ended June 30, 2018 is $199,220. Interest primarily relates to convertible debt in the amount of $2,527,500 that was issued on March 14, 2018, which bears interest at 10%, and to a note payable in November, 2015,the amount of $250,000 that was issued on March 5, 2018, which bears interest at 12%, and converted into stock during February, 2016, and short termto acceleration notes that werein the amount of $177,300, issued in December 2013,on April 11,2018, which were partially repaid during Junebear interest at 10%. Interest expense includes amortization of 2015. The stated interest rate on$124,840 of the value of warrants issued with the convertible debt is 10%.debt.

We had net losses of $2,366,346$1,814,786 and $2,136,949$2,157,743 in 2016the three month periods ended June 30, 2018 and 2015, respectively.

2017.

Results of Operation for NineSix Months Ended SeptemberJune 30, 20162018 as Compared to the NineSix Months Ended SeptemberJune 30, 2015.2017

(References to 2016 and 2015 are to the nine months ended September 30, 2016 and 2015, respectively, unless otherwise specified.)

Revenue and cost of revenue

Revenue increased $865,319 (193%$768,070 (82%) from $447,859$941,167 in 20152017 to $1,313,178$1,709,237 in 2016.2018. The increase in revenue is aprimarily the result of the continuation of the national rollout of our new bulk Easy Pour product which began during the first quarter of 20162017 which has continued to gain momentum during the first half of 2018, especially in the school and Military channels. Our product continues to be distributed through all 72 of Sysco’s U.S. mainland distribution centers. Duringcenters, as well as through new customers beyond the nine months ended September 30, 2015, our product was distributed through 38 of Sysco’sSysco distribution centers. We now have our product in all of Sysco’s 72 distribution locations.network.

Cost of revenue for 20162018 was $683,741$798,154 as compared to $238,779$488,526 in 2015.2017. Our gross profit was $629,437$911,083 (53%) and $452,641 (48%) for 2018 and $209,080 (47%) for 2016 and 2015,2017, respectively. Revenue in both 2016 and 2015 included sales of blenders and freezers. We only make a nominal profit on these items as they are to accommodate our customers. We anticipate that our gross profit percentage for the remainder of 20162018 will be comparable to the percentage for the current period.approximately 50%.

Operating expenses

Our operations during 2016 and 2015 were primarily directed towards increasing sales and expanding our distribution network.

Our general and administrative expenses increased $2,912,967 (59%decreased $512,898 (11%) from $4,906,381in 2015$4,836,823 in the first half of 2017 to $7,819,348$4,323,925 in 2016, asthe first half of 2018, with the improvement primarily driven by lower personnel expenses resulting from the realignment of our business grew.sales force. The following is a breakdown of our general and administrative expenses for the ninesix months ended SeptemberJune 30, 20162018 and 2015:2017:

Personnel cost represents the cost of employees including salaries, bonuses, employee benefits and employment taxes and continues to be our largest cost. Personnel cost increased $2,398,386 (123%decreased $539,819 (24%) from $1,952,885$2,277,490 to $4,351,271.$1,737,671. During the first quarterfourth quarters of this year2016 and 2017, we significantly increasedrealigned 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 staff primarily as a result of the national roll-out offorce employees. When taking into consideration start dates for new employees, and separation dates for those employees who left our distribution agreement with Sysco. At the end of the current quarterworkforce, we had 4643 full time employees comparedduring 2016, and at June 30, 2018 we had 28 full time employees. We expect these restructurings to 34 atresult in estimated annualized savings of $2.2 to $2.7 million. After the endclose of the year ago period. Personnel costs for the current period also include an accrual for our annual incentive plans, which was not reflectedsecond quarter 2018, we eliminated three additional positions in the year ago period. After the quarter closed, we affected a restructuring of our sales force, whereby we eliminated 13 full time sales positions, and replaced the associated sales territory coverage with brokerage arrangements. This change will allow our remaining sales force to more effectively focus on pursuing larger accounts, while our expanded brokerage network will support and expand our “up and down the street” business. In addition, we expect the change to reduce our overall overhead costs by a net $1 million to $1.5 million on anresulting in approximately $300,000 of additional annualized basis. We do not anticipate any further changes to our personnel organization during the balance of 2016.savings.

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. DuringStock compensation for the ninesix months ended SeptemberJune 30, 2016, we granted 1,262,0002018 was $364,445, a decrease of $251,859, or 41%, from the year ago period expense of $616,304. The decrease is primarily due to the reductions in our work force and the timing of equity grants. The Company issues additional stock options to purchase shares of our common stockits employees from time to employees. The exercise prices range from .6192 cents to .83 cents. The fair value of the stock was based on the trading value of the shares on the date of grant and is being amortized over the vesting period. The fair value of the stock options was calculated using the Black-Sholes model using the following assumptions: expected life in years, 8; volatility, 75.46% to 80.31%; risk free rate of return, 1.24% to 1.73%, and no annual dividends and are being amortized over the vesting period. We anticipate making additional grants in the future. Certain grants that were made in 2015 had shorter vesting periods than the grants that were made during 2016, resulting in higher expense within the prior period. After the quarter closed, we made additional grants to our sales force members who are remaining with the Company after our personnel restructuring.time under its Equity Compensation Plan.

Legal and professional fees increased $ 72,353 (25%decreased $16,508 (6%) from $290,032$256,232 in 20152017 to $362,385$239,724 in 2016.2018. The increasedecrease was primarily due to increaseda timing of legal services required as a result of increased business and financing activity.required. We anticipate legal fees related to our business and financing activities to increase as our business grows.continues to grow.

Travel expenses increased $112,663 (34%decreased $17,240 (8%) from $335,070$228,400 in 20152017 to $447,733$211,160 in 2016.2018. The increasedecrease is primarily due to increasedreduction in travel related to increased personnel engaging in selling and marketing activities.costs associated with terminated employees. We anticipate that travel costexpenses for the balance of 2016this year will remain comparable to that ofbe about $30,000 lower than the first three quartershalf of this year due to the year.additional work force reduction.

Rent expense is primarily for our location in Beverly Hills, California. Rent expense for the Beverly Hills office is approximately $8,833$14,488 per month. TheWe lease on the office commenced in November 8, 2014 and expires in November 2016. Rent expense also includes monthly parking fees as well as an offsite storage facilities. We have entered into a new lease for office space inat 8383 Wilshire Boulevard, Beverly Hills, California ispursuant to a new lease that commenced inon November 1, 2016 and expires in February 8, 2018.March 31, 2019.

Marketing and selling expenses decreased $116,371 (21%increased $200,772 (76%) from $550,234$265,242 in 20152017 to $433,863$466,014 in 2016. The decrease relates primarily to re-classifying certain expenses categorized as2018. Higher marketing and selling inexpenses were primarily due to higher sales agent commissions associated with higher sales during the period ended September 30, 2015, to personnel expense in the period ending September 30, 2016.period.

Consulting fees decreased $71,271 (27%) from $263,146were $35,659 in 2015 to $191,8752018, as compared with $96,501 in 2016.2017. Our consulting fees vary based on needs. We engageengaged consultants in the areas of sales and operations and accounting. Futureduring the period. The need for future consulting feesservices will be variable.

Director fees increased $86,008$56,204 from a credit of ($11,008)$56,296 in 20152017 to an expense of $75,000$112,500 in 2016.2018. Annual director fees are anticipated at $50,000 per non-employee director.

Research and development expenses increased $77,534(43%$3,067 (1%) from 179,340$340,603 in 20152017 to $256,874$343,670 in 2016. During the current quarter, we re-classified certain personnel expenses that had previously been included in Personnel Expense, to Research and Development.2018. These expenses relate to the services performed by our Director of Manufacturing and Product Development, and consultants supporting that employee. The re-classification is shown in both the current periodemployee, and the prior period. The increase in Research and Development Expense is being driven by an increased need for research and development services, as we continue to expand product offerings, both forcertain commissioning expenses at our standard SKU’s, and for National Accounts.

contract manufacturing locations

Shipping and storage expense increased $226,076 (97%) from $128,800$233,269 in 20152017 to $319,525$459,345 in 2016, an increase of $190,725 (148%). The higher expense in 2016 is due to costs incurred to better position inventory for the national roll-out with Sysco.2018. Shipping and storage expense as a percentage of revenue decreased to 24%, as compared with 28%was comparable at 25% in the prior period. This improvement results from the transition to more efficient shipping options that have become available as our operations have expanded.2017 and 27% in 2018. We anticipate that shipping and storage expense as a percentage of sales will reduce during the balance of the year, as the Company is able to take advantage of more efficient distribution arrangements.

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

We had operating losses of $7,340,363$3,674,932 and $4,824,271$4,516,783 for 2016the six month periods ended June 30 2018 and 2015,2017, respectively. The improvement of $841,851, or 19%, was primarily due to higher gross margin percent on higher sales, and lower G&A expenses.

Interest expense decreased $104,834 (30%) from $347,984 in 2015 to $243,150 in 2016.for the six months ended June 30, 2018 was $230,096. Interest primarily relates to convertible debt in the amount of $2,527,500 that was issued on March 14, 2018, which bears interest at 10%, and to a note payable in November, 2015,the amount of $250,000 that was issued on March 5, 2018, which bears interest at 12%, and converted into stock during February, 2016, and short termto acceleration notes that werein the amount of $177,300, issued in December 2013,on April 11^,2018, which were partially repaid during Junebear interest at 10%. Interest expense includes amortization of 2015. The stated interest rate on$141,807 of the value of warrants issued with the convertible debt is 10%.debt.

We had net losses of $7,583,513$4,152,424 and $5,172,255$4,516,783 in 2016the six month periods ended June 30, 2018 and 2015, respectively.2017.

Results of Operations

Results of Operation for the NineTwelve Months Ended December 31, 20152017 as Compared to the NineTwelve Months Ended December 31, 20142016

Revenue and Cost of Revenue

Revenue for 20152017 was $ 437,272$1,997,012 as compared to $157,834$1,457,499 in 2014.2016, an increase of 37%. Our business grew primarily through the continuing expansion of our business relationship with Sysco Corporation (“Sysco”), a major broad line food distributor. We began shipping to Sysco in July 2014, and by the end of 2015early 2016 had our products in approximately 37all 72 of Sysco’s 72 Operating Companies. In addition we shipped product directly toOur business also grew as a number of quick serve restaurants outsideresult of the Sysco distribution system.

introduction of our Bulk Easy Pour product during early 2017.

Cost of revenue for 2017 was $251,300$1,085,575 as compared to $ 97,456$772,827 in 2014.2016. Our gross profit was $185,972$911,437 or 46%, for 20152017 and $60,378$684,672 or 47% for 2014. There were no significant changes in our selling prices during 2015. During the first quarter of 2016, we increased our selling prices by approximately 8%.2016. We anticipate that our gross profit percentage will improve in the future, as our business gains scale and as we expand our manufacturing operations.

Operating Expenses

Our operations during 20152017 were directed towards increasing sales and creating and finalizing customized flavors for potential customers. The increase in our business relationship with Sysco, and the expansion of our product offerings to include Bulk Easy Pour, drove an increase in our selling, marketing, and general and administrative expenses. We have continued to hire additional sales personnelDuring the fourth quarter of 2016, and during the year, to support and enhancefourth quarter of 2017, we re-aligned our business relationship with Sysco, and to work with the PepsiCo North America sales force in gaining new customersto a more efficient model, by increasing the number of dedicated sales brokers that represent our products, and supporting existing customers.reducing the number of sales force employees.

Primarily as a result of buildingre-aligning our sales force, general and administrative expenses increaseddecreased from $2,058,929$10,415,933 in 20142016 to $5,666,204$9,492,094 in 2015, an increase2017, a decrease of $3,607,275$923,839, or 175%9%. We have continued to hire additional sales personnel during the first quarter of 2016, and our sales force at this time includes 35 full time employees. However we do not expect to continue to hire additional sales personnel at a similar rate during the balance of 2016.

The followingFollowing is a breakdown of our selling, marketing and general and administrative expenses for 20152017 and 2014.2016.

Personnel cost represents the cost of employees including salaries, employee benefits, car allowances, and employment taxes, and continues to be our largest expense. Personnel costs increased $2,166,253 (301%)decreased 23%, or $1,299,556, from $719,704$5,560,502 in 20142016 to $2,885,957$4,260,946 in 2015.2017. During the fourth quarters of 2016 and 2017, we re-aligned our 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 equivalent employees during 2016. At December 31, 2015,2017, we had 3330 full time employees, as compared to 734 at December 31, 2014.2016. We currently have 44 full time employees. Wedo not anticipate adding additionalany significant change in personnel during the balance of 2016 but at a slower pace than we added employees during 2015 and the first quarter of 2016.2018.

Stock based compensation is used as an incentive to attract new employees and to compensate and retain existing employees. Stock based compensation includes stock issued and stock options granted to employees and certain non-employees, and increased $284,669 (82%$227,539 (20%) from $345,726$1,133,149 in 20142016 to $630,395$1,360,688 in 2015.2017 in part to offset salary reductions. The fair value of the stock grants is based on the trading value of our shares on the date of the grants and isare being amortized over applicable vesting periods. We anticipate making additional grants in the future.

Legal and professional fees, which include accounting and legal services, increased $61,609 (25%$39,956 (9%) from $251,061$425,781 in 20142016 to $312,670$465,737 in 2015.2017. We anticipate legal fees related to ongoing legal compliance to remain comparable to 2014 and 2015.

in 2018.

Travel and entertainment expenses increased $178,947 (117%decreased $183,636 (30%) from $153,377$605,920 in 20142016 to $332,324$422,284 in 2015.2017. The increasedecrease is due to an increase in business activitythe re-alignment of our sales force and an increasethe related decrease in the number of personnel traveling on company business.

Consulting feesRent expense increased $46,421 from $105,175 in 2014 to $322,834 in 2015, an increase of $217,659 or 207%. During the time that we have been hiring new sales personnel, we have relied on the services of consultants to supplement our personnel resources. We anticipate consulting costs to reduce during 2016.

Investor and public relations fees increased $34,789 (77%), from $45,374 in 2014 to $80,163 in 2015. Our investor relations services are incurred on a monthly retainer basis. We expect investor relations costs to be relatively constant$96,151 in 2016 on a full year basis.

Rent expense decreased from $93,974to $142,572 in 2014 to $85,578 in 2015.2017. Rent expense is primarily incurred for our Headquarters location in Beverly Hills, California. TheDuring September of 2016 we relocated our Headquarters location to larger sub-leased premises in Beverly Hills, where the monthly rent for our headquarters location is approximately $7,789 per month. Theof $10,997, increased to $11,327 on November 1, 2017. We have entered into a direct lease on the headquarters office commencedsame premises beginning on March 1, 2018, expiring March 31, 2019, at a monthly rent of $14,488.

Marketing and selling expenses decreased $33,889 (5%), from $730,142 in 2016, to $696,253 in 2017. Lower marketing and selling expenses were primarily due to lower personnel expense and lower sample expense.

Consulting fees decreased from $242,668 in 2016 to $203,721 in 2017, a decrease of $38,947 or 16%. We anticipate consulting costs to continue to decline during October, 2012, expired and was renewed2018.

Director fees for 2017 were $206,296 as compared with $165,227 in October 2014, and2016. The increase is now setprimarily due to expire during Novemberthe full year effect of 2016. Rent expense also includes monthly parking fees and offsite storage. We have been notified that an increase of rent will occur if we decide to extend the current lease fornumber of our Headquarters office.directors during the second half of 2016. We currently pay our non-employee directors $50,000 per year. These fees can either be paid in cash, or in stock or stock options, at the election of the director.

ResearchThe Company incurred research and development expenses increased $13,815, or 26%, from $53,526for the year ended December 31, 2017, in 2014the amount of $574,989 and for the year ended December 31, 2016 in the amount of $432,146. During the quarter ended September 30, 2016, we re-classified certain personnel expenses that had previously been included in personnel expense, to $67,341 in 2015. Research and development representsDevelopment. These expenses relate primarily to the costservices performed by our Director of developing new flavor profiles,Manufacturing and Product Development, and supporting consultant expenses. The re-classification is shown in both the current period and the prior period. The increase in Research and Development expenses was primarily attributable to increased activity in creating unique flavors for potential customers in our general portfolio of products, and for customized profiles for specific customers.national account pipeline. We anticipate this cost continuing in future periods, at an increased rate as compared with 2015.2017.

Director feesShipping and storage expense increased $212,624 (52%), from $407,247 in 2016 to $619,871 in 2017. Shipping and storage expense as a percentage of revenue increased from 28% in 2016 to 31% in 2017. The higher expense in 2017 is due to a number of factors, including the continued movement of inventory to new forward warehouse as the company expanded its business into Canada, and building of inventory levels in preparation for 2015 were $48,096 as compared with $61,341expected national account launch in 2014. We currently pay our non-employee directors $12,500 per quarter. These fees can either be paid in cash, or in stock, at the election of the director.early 2018.

Other expenses consist of ordinary operating expenses such as office, telephone, insurance, and other similar expenses. These expenses directly correlate to our overall business activity. We expect these expenses to continue to increase during 20162018 as our business grows.

Operating losses were $2,093,374loss was $8,911,540 in 2014,2017, and $5,615,726$9,939,875 in 2015.2016.

Interest expense was $296,509zero in 2015,2017, as compared with $379,279$250,850 in 2014.2016. Interest expense primarilyfor 2016 relates to $2,670,000 of convertible debt that was issued in August 2012, and renewed induring September 2013, and short term notes that were issued in December 2013 and renewed in December 2014.of 2015, the majority of which was converted to equity during the first quarter of 2016. The stated interest rate on the convertible debt issued during September of 2015 was 12%10%.

Net losses were $2,472,653loss was $8,911,540 in 2014,2017, and $5,920,092$10,190,725 in 2015.2016.

Liquidity and Capital Resources

During the ninesix months ended SeptemberJune 30, 20162018, we used cash for operations of $ 5,590,671 and also$2,732,466, purchased equipment for $985,315.$678,287, and incurred spending for trademarks in the amount $6,062. We raised cash from issuance of convertible notes, net of issuance cost, in the amount of $2,677,799 plus we issued a short term note in the amount of $250,000.

During the ninesix months ended SeptemberJune 30, 20152017, we used $4,356,965$3,293,056 of cash for operations, and $171,178$219,655 for the purchase of equipment.equipment, and $5,434 for trademarks.

AtAfter the close of the second quarter, we extended the exercise date on warrants that were scheduled to expire by July 26, 2018. As part of the warrant extension transaction, the company received a cash warrant exercise amount of $550,000, and the Company issued 1,100,000 shares of common stock to the warrant holder, at an exercise price of .50 cents a share. The Company extended the maturity date on the holder’s remaining 1,800,000 by three years, adjusted the exercise price of those warrants to .53 cents, and converted those warrants into cash only warrants. In addition, the Company used $50,000 of those proceeds to repay $50,000 of the short term note payable, and the note holder agreed to extend the maturity date of the note from September 12, 2018 to December 31 2015,2018.

We have a history of operating losses and negative cash flow. As our operations grow, we had aexpect to experience significant increases in our working capital deficit of $206,796.

Our operations to date have been financed byrequirements. These conditions raise substantial doubt over the sale of securities, the issuance of convertible debt and the issuance of short-term debt, including related party advances. Our existing cash and cash equivalents and other working capital may not be sufficientCompany’s ability to meet all of its obligations over the projected cash needs contemplatedtwelve months following the filing of this Form 10-Q. Management has evaluated these conditions, and concluded that current plans will alleviate this concern. We have significantly reduced core operating costs beginning in 2016, including reducing the number of our employees from 44 to 28 over this time period. In addition, we plan to address this concern by our business strategies. We intend to raiseraising additional capital through equityan additional loan or debt financing transactionsloans, and by continuing to address both our short term and longer term liquidity needs. However there can be no assurancesreduce core operating expenses as required. While these plans have not yet been implemented, management has concluded that weit is probable that they will be ableimplemented within one year of the issuance of the financial statements, and that they will mitigate the substantial doubt of our ability to continue as a going concern. However, the Company cannot predict, with certainty, the outcome of its action to generate liquidity, including the necessary capitalavailability of additional financing, or debt to carry out our current plan of operations.whether such actions would generate the expect liquidity as planned.

We lease office space under a non-cancelable operating lease, which expires February 8, 2018.March 31, 2019.

The aggregate minimum requirementrequirements under non-cancelable leases as of SeptemberJune 30, 20162018 is $29,783.$130,388.

We generated $2,670,000 from financing activity from the issuance of convertible promissory notes during the fiscal period ended December 31, 2015.

Subsequent to December 31, 2015, we sold 7,379,371 shares of our common stock (“Shares”) and warrants to purchase up to 3,689,686 Shares (“Warrants”) for aggregate gross proceeds to the Company of $5,903,498. The financing consists of two components: a new equity raise in the amount of $3,270,000 and the conversion into common equity of $2,633,498 of principal and interest of convertible promissory notes previously issued on January 29, 2016. The effect of this transaction on our liquidity is to increase our cash and reduce short term debt.

During the quarter ended September 30, 2016, the Company raised $2.3 million in a private placement of its equity securities. In accordance with the terms of the private placement, the Company issued 3,593,754 shares of common equity at a price of $.0.64 per share, with warrant coverage of 50%, exercisable for a term of 5 years at $0.75 per share. After the quarter closed, during the first week of October 2016, the Company raised an additional $700,000, in a private placement of its securities, on the same terms as described in the preceding sentence, bringing the total raised to $3 million.

Subsequently, on November 23, 2016, the Company sold 15,625,000 shares of common stock at $0.64 per share and warrants to purchase 7,812,500 shares of common stock for aggregate gross proceeds of $10 million. The warrants are exercisable for a term of five years at a per share price of $0.88 for cash.

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.

DESCRIPTION OF PROPERTY

Our principal executive offices are located at 8383 Wilshire Blvd., Suite 750, Beverly Hills, CA 90211. We leaseBeginning in September, 2016, we leased this office space pursuant to a sub-lease with the primary tenant for $10, 996.65$10,997 per month, increasing to $11,326.55$11,327 per month as of November 1, 2017. WeAs of March 1, 2018, we lease the same office space underpursuant to a non-cancelable operatingdirect lease which expires February 28, 2018.

for $14,488 a month through March 31, 2019.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The following includes a summary of transactions since the beginning of fiscal 2011,2015, or any currently proposed transaction, in which we were or are to be a participant and the amount involved exceeded or exceeds the lesser of $120,000 or one percent of the average of our total assets at year end for the last two completed fiscal years and in which any related person had or will have a direct or indirect material interest (other than compensation described under “Executive Compensation”). We believe the terms obtained or consideration that we paid or received, as applicable, in connection with the transactions described below were comparable to or better than terms available or the amounts that would be paid or received, as applicable, in arm’s-length transactions.

During the three months needed March 31, 2018, we closed an offering of $2,527,500 in convertible notes, of this which, management, directors and significant shareholders have invested $810,000. 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 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. 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.

On January 29, 2016, we closed a private placement to accredited investors of $2,670,000 in promissory notes and warrants to purchase up to 1,297,500 shares of common stock of the Company for aggregate gross proceeds to the Company of $2,670,000. Of the aggregate offering amount, $635,000 of the notes and warrants to purchase up to 317,500 shares of common stock were placed with members of the Company’s management, including officers and directors of the Company, and family members of certain officers and directors.

The acquisition of the international patents on October 15, 2013 was funded through an advance of $672,157 from an affiliate of Steven Lang at an interest rate of 6.0%. Two hundred thousand ($200,000) of the advances were satisfied through the participation of Riccardo Delle Coste and Steven Lang, separately through their affiliates, in the Company’s December 20, 2013On September 28, 2016, we closed a private placement to accredited investors of notes and warrants. Five-year warrants to purchase 333,3344,687,504 shares of common stock at an exercise price of $0.45$.64 per share, were issued to each of these related parties as part of their investment. The related parties participated in the offering upon the same terms offered to other investors. The balance of the remaining loan, plus accrued interest of $5,617, was paid in full and in cash by the Company prior to the end of 2013.

Lazarus Investment Partners LLP, a greater than 10% shareholder of the Company (“Lazarus”) participated in the private placement that closed on December 20, 2013. Lazarus purchased a 2%, one-year $500,000 note and five-year warrants to purchase 833,333up to 2,343,752 shares of common stock, at an exercise pricefor aggregate proceeds to the Company of $0.45 in this offering.

During$3,000,000. Of the period beginning April 1, 2010aggregate offering amount, 371,639 shares and ending March 31, 2012, a related party that is under common control of Riccardo Delle Coste and Steven Lang made advances to us of $144,011. These advances185,819 warrants, were non-interest bearing. As of March 31, 2012, we repaid these advances. The company under common control was located in Australia and was in the same line of businessplaced with members of the Company; however, at the time, we did not conduct business in the same territories.

Pursuant to the Share Exchange Agreement dated January 10, 2012 we issued 37,333,328 shares of our common stock to Riccardo Delle CosteCompany’s management, including officers and Steven Lang, through the entities that they controlled. Accordingly, Riccardo Delle Coste and Steven Lang, together, control more than 50%directors of the votes eligible to be cast by shareholders in the election of directorsCompany, and generally. Immediately following the share exchange, Messrs. Delle Coste and Lang became our principal shareholders and were appointed asfamily members of our board ofcertain officers and directors.

In December 2009 we entered into a contract whereby entities controlled by Riccardo Delle Coste and Steven Lang agreed to assign to us certain intellectual property related to certain patent applications filed in the United States and Canada in respect to the ingredient pack for an individual smoothie. The assignment was completed in November 2011. We issued two shares of our common stock in consideration for such assignment.

The Company’s policy with regard to related party transactions requires any related party loans that are (i) non-interest bearing and in excess of $100,000 or (ii) interest bearing, irrespective of amount, must be approved by the Company’s board of directors. All issuances of securities by the Company must be approved by the board of directors, irrespective of whether the recipient is a related party. Each of the foregoing transactions, if required by its terms, was approved in this manner.

EXECUTIVE COMPENSATION

The following table summarizes all compensation for the fiscal yearyears ending December 31, 2017 (“2017”) and December 31, 2016 (“2016”)⁽¹⁾ and Transition Period, 9 months ending December 31, 2015 (“12/2015”) received by our “Named Executive Officers”: