AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 17 , 2018MAY 28, 2019

 

REGISTRATION STATEMENT NO. 333-228030333-_______________

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM S-1

Amendment No. 1 

 

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

BARFRESH FOOD GROUP, INC.

(Name of small business issuer in its charter)

 

Delaware 2038 27-1994406
(State or jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)

 

83833600 Wilshire Blvd.,Boulevard Suite 750

Beverly Hills, California 902111720, Los Angeles, CA 90010

Telephone: (310) 598-7113

(Address and telephone number of principal executive offices and principal place of business)

 

Copies to:

 

Mark Y. Abdou

Ruba Qashu

Libertas Law Group, Inc.

225 Santa Monica Boulevard, 5th Floor

Santa Monica, CA 90401

Telephone: (310) 359-8742

Facsimile: (310) 356-1922

 

Approximate date of proposed sale to the public:

From time to time after the effective date hereof.

 

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend or interest reinvestment plans, check the following box. [X]

 

If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [  ]

 

If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [  ]

 

If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [  ]

 

If delivery of the prospectus is expected to be made pursuant to Rule 434 under the Securities Act, check the following box. [  ]

 

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

 

Large Accelerated filer [  ]Accelerated filer [  ]Non-accelerated filer [  ]Smaller reporting company [X]

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

CALCULATION OF REGISTRATION FEE

 

Title of each class of securities to be registered Amount to be registered (1) Proposed maximum offering price per share Proposed maximum aggregate offering Price Amount of registration fee  Amount to be registered (1) Proposed maximum offering price per share Proposed maximum aggregate offering Price Amount of registration fee 
Common stock, par value $0.000001 per share 1,100,000 $0. 70(2) $770,000     4,000,000  $0. 45(2) $1,800,000     
Common stock, par value $0.000001 per share underlying Series D Warrant 1,800,000 $0.70(3)  $1,260,000  
Common stock, par value $0.000001 per share underlying Series M Warrants 1,827,174 $0.70(3) $1,279,220            
Total     $2,030,000 $246.04(4)               $3,079,022 $373.18(4)

 

(1) Pursuant to Rule 416 under the Securities Act of 1933, as amended (“Securities Act”), the shares of common stock being registered hereunder include such indeterminate number of shares of common stock as may be issuable with respect to the shares of common stock being registered hereunder as a result of stock splits, stock dividends or similar transactions.

 

(2) Estimated solely for the purpose of calculating the registration fee under Rule 457(c) under the Securities Act.

 

(3) Estimated solely for the purpose of calculating the registration fee under Rule 457(g) under the Securities Act.

 

(4) Fee submitted with the initial filing of this registration statement on Form S-1.

herewith.

 

 

 

 
 

 

SUBJECT TO COMPLETION, DATED DECEMBER [  ], 2018MAY 28, 2019

 

PROSPECTUS

 

 

2,900,000 5,827,174Shares of Common Stock

 

This prospectus relates to 2,900,0005,827,174 shares of our common stock, par value $0.000001 per share that may be sold from time to time by the selling shareholders listed under the caption “Selling Shareholders”, of which 1,800,0001,827,174 are shares underlying Series DM Warrants. All of the shares, when sold, will be sold by these selling shareholders. The selling shareholders may sell these shares from time to time in the open market at prevailing prices or in individually negotiated transactions through agents designated from time to time or through underwriters or dealers. We will not control or determine the price at which the selling shareholders decide to sell their shares. See “Plan of Distribution”. The selling shareholders may be deemed underwriters of the shares of common stock that they are offering. We will pay the expenses of registering these shares.

 

We are not selling any shares of common stock in this offering and therefore will not receive any proceeds from the sale of common stock hereunder. We will however receive up to $954,000$1,279,022 from the exercise of Series DM Warrants by the Selling Shareholders.

 

Our common stock is traded on the OTCQB under the symbol BRFH. On December 11 ,May 21, 2018 the last reported sale price of our common stock was $0. 66$0.45 per share.

 

INVESTING IN OUR COMMON STOCK INVOLVES SUBSTANTIAL RISK. IN REVIEWING THIS PROSPECTUS, YOU SHOULD CAREFULLY CONSIDER THE MATTERS DESCRIBED UNDER THE HEADING “RISK FACTORS” BEGINNING ON PAGE 5.

 

Neither we nor any selling shareholder has authorized any dealer, salesman or other person to give any information or to make any representation other than those contained or incorporated by reference in this prospectus. You must not rely upon any information or representation not contained or incorporated by reference in this prospectus.

 

NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES, OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THIS IS NOT AN OFFER TO SELL NOR A SOLICITATION OF AN OFFER TO BUY SECURITIES IN ANY JURISDICTION WHERE IT WOULD BE UNLAWFUL.

 

The date of this prospectus is DecemberMay [●], 20182019

 

 
 

 

TABLE OF CONTENTS

 

PROSPECTUS SUMMARY3
  
RISK FACTORS5
  
NOTE REGARDING FORWARD LOOKING STATEMENTS10
  
USE OF PROCEEDS10
  
SELLING SHAREHOLDERS10
  
PLAN OF DISTRIBUTION12
  
LEGAL PROCEEDINGS13
  
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS14
  
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT17
  
DESCRIPTION OF SECURITIES2019
  
LEGAL MATTERS2120
  
EXPERTS2120
  
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES2120
  
DESCRIPTION OF BUSINESS2221
  
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS3027
  
DESCRIPTION OF PROPERTY4136
  
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS4136
  
EXECUTIVE COMPENSATION4237
  
MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS4540
  
WHERE YOU CAN FIND ADDITIONAL INFORMATION4641
  
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS4742

2

PROSPECTUS SUMMARY

 

This summary highlights selected information contained elsewhere in this prospectus. To understand this offering fully, you should read the entire prospectus carefully, including the “Risk Factors” section, the financial statements and the notes to the financial statements. Unless the context otherwise requires, references contained in this prospectus to the “Company”, “Barfresh”, “we”, “us” or “our” shall mean Barfresh Food Group Inc.,a Delaware corporation.

 

BARFRESH FOOD GROUP INC.

 

Our Company

 

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. Products are packaged in two distinct formats. The Company’s original single serve format features portion controlled and ready to blend beverage ingredient packs or “beverage packs”. The beverage packs contain all of the solid ingredients necessary to make the beverage, including the base (either sorbet, frozen yogurt or ice cream), real fruit pieces, juices and ice – five ounces of water are added before blending. The Company’s bulk “Easy Pour” format also contains all of the solid ingredients necessary to make the beverage, packaged in gallon containers in a concentrated formula that is mixed “one to one” with water. The Company has recently launched a “no sugar added” version of the bulk “Easy Pour” format that is specifically targeted for the USDA national school meal program, including the School Breakfast Program, the National School Lunch Program, and Smart Snacks in Schools Program.

 

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

 

The Company conducts sales through several channels, including National Accounts, Regional Accounts, and Broadline Distributors. Barfresh’s primary broadline distribution arrangement is through an exclusive nationwide agreement with Sysco Corporation (“Sysco”), the U.S.’s largest broadline distributor, which was entered into during July 2014, and renewed for an additional two year term on October 2, 2017.

 

During 2016 and 2017 the Company announced that it had signed supply agreements with several of the major global on-site foodservice operators. On March 8, 2018, the Company announced that it had signed a new supply agreement with one of the largest of these foodservice operators, for exclusive distribution of four of Barfresh’s single serve sku’s to approximately one thousand food service locations. Distribution of product to these locations through SYSCO will begin during April of 2018. This new agreement marks the culmination of successful in market tests conducted at several locations, and makes Barfresh’s blended beverages available across many of the most attractive locations of the customer’s diverse customer base.

 

The Company also sells to broadline distributors that supply products to the food services market place. Effective July 2, 2014, the Company entered into an exclusive agreement with Sysco Merchandising and Supply Chain Services, Inc. for resale by the Sysco Corporation (“Sysco”) to the foodservice industry of the Company’s ready-to-blend smoothies, shakes and frappes. Pursuant to that agreement, all Barfresh products are included in Sysco’s national core selection of beverage items, making Barfresh its exclusive single-serve, pre-portioned beverage provider. The agreement is mutually exclusive; however, Barfresh may also sell the products to other foodservice distributors, but only to the extent required for such foodservice distributors to service multi-unit chain operators with at least 20 units and where Sysco is not such multi- unit chain operator’s nominated distributor for our products. On October 2, 2017, the Sysco agreement was extended for an additional two year period, and expanded to cover bulk easy pour products, on a non-exclusive basis.

 

On October 26, 2015, Barfresh signed a five year agreement with PepsiCo North America Beverages, a division of PepsiCo, to become its exclusive sales representative within the food service channel to present Barfresh’s line of ready-to-blend smoothies and frozen beverages throughout the United States and Canada. Through this agreement, Barfresh’ products are included as part of PepsiCo’s offerings to its significant customer base. The agreement facilitates access to potential National customer accounts, through introductions provided by PepsiCo’s one-thousand plus person foodservice sales team. Barfresh products have become part of PepsiCo’s customer presentations at national trade shows and similar venues.

Barfresh utilizes contract manufacturers to manufacture all of its products in the United States. Production lines are currently operational at two locations. The first location is in Salt Lake City, which currently produces both bulk easy pour and single serve products. Annual production capacity with this contract manufacturer is 14 million units per year. The second location is with Yarnell Operations, LLC, a subsidiary of Shulze and Burch, located in Arkansas. The Yarnell’s agreement, which was signed during February 2016, and secures the capacity to ramp up to an incremental production capacity of 100 million units. Yarnell’s location enhances the company’s ability to efficiently move product throughout the supply chain to destinations in the eastern United States, home to many of the country’s large foodservice outlets.

 

Our corporate office is located at 83833600 Wilshire Blvd.,Boulevard Suite 750, Beverly Hills,1720, Los Angeles, CA 90211.90010. Our telephone number is (310) 598-7113 and our website iswww.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.

RISK FACTORS

 

An investment in the Company’s securities involves significant risks, including the risks described below. You should carefully consider the risks described below before purchasing the shares. The risks highlighted here are not the only ones that the Company faces. For example, additional risks presently unknown to us or that we currently consider immaterial or unlikely to occur could also impair our operations. If any of the risks or uncertainties described below or any such additional risks and uncertainties actually occur, our business, prospects, financial condition or results of operations could be negatively affected, and you might lose all or part of your investment.

 

Risks Related to Our Business

 

We have a history of operating losses. If we continue to incur operating losses, we eventually may have insufficient working capital to maintain or expand operations according to our business plan.

 

For the nine monthsyear ended September 30,December 31, 2018, the Company recorded a net loss of $6,052,507$7,322,823 and used cash from operations of $3,536,246.$4,128,284. For the year ended December 31, 2017, the Company recorded a net loss of $8,911,540 and utilized cash in operations of $7,334,249. As of September 30, 2018, we had a stockholders’ deficit of $24,513 and working capital of $7,458 compared to stockholders’ equity of $4,161,921 and working capital of $1,774,719 at December 31, 2017. 

 

We have a history of operating losses and negative cash flow. These operating losses have been generated while we market to potential customers. We cannot guarantee that we will become profitable. As our operations grow, we expect to experience significant increases in our working capital requirements. These conditions raise substantial doubt over our ability to meet all of our obligations over the next twelve months. Management has evaluated these conditions and concluded that current plans should alleviate this concern. We have significantly reduced core operating costs beginning in 2016. In addition, we plan to raise additional capital. There can be no assurance that we will be able to obtain such financing on acceptable terms, or at all. If adequate funds are not available or are not available on acceptable terms, we may not be able to pursue our business objectives and would be required to reduce our level of operations, including reducing infrastructure, promotions, personnel and other operating expenses. These events could adversely affect our business, results of operations and financial condition. Even if we achieve profitability, given the competitive and evolving nature of the industry in which we operate, we may be unable to sustain or increase profitability and our failure to do so would adversely affect the Company’s business, including our ability to raise additional funds.

 

We may need additional financing in the future, which may not be available when needed or may be costly and dilutive.

 

We may require additional financing to support our working capital needs in the future. The amount of additional capital we may require, the timing of our capital needs and the availability of financing to fund those needs will depend on a number of factors, including our strategic initiatives and operating plans, the performance of our business and the market conditions for debt or equity financing. Additionally, the amount of capital required will depend on our ability to meet our case sales goals and otherwise successfully execute our operating plan. We believe it is imperative to meet these sales objectives in order to lessen our reliance on external financing in the future. Although we believe various debt and equity financing alternatives will be available to us to support our working capital needs, financing arrangements on acceptable terms may not be available to us when needed. Additionally, these alternatives may require significant cash payments for interest and other costs or could be highly dilutive to our existing shareholders. Any such financing alternatives may not provide us with sufficient funds to meet our long-term capital requirements.

 

A worsening of economic conditions or a decrease in consumer spending may adversely impact our ability to implement our business strategy.

 

Our success depends to a significant extent on discretionary consumer spending, which is influenced by general economic conditions and the availability of discretionary income. There is no certainty regarding economic conditions in the United States, and credit and financial markets and confidence in economic conditions could deteriorate at any time. Accordingly, we may experience declines in revenue during economic turmoil or during periods of uncertainty. Any material decline in the amount of discretionary spending, leading cost-conscious consumers to be more selective in restaurants visited, could have a material adverse effect on our revenue, results of operations, business and financial condition.

 

The challenges of competing with the many food services businesses may result in reductions in our revenue and operating margins.

 

We compete with many well-established companies, food service and otherwise, on the basis of taste, quality and price of product offered, customer service, atmosphere, location and overall guest experience. Our success depends, in part, upon the popularity of our products and our ability to develop new menu items that appeal to consumers across all four-day parts. Shifts in consumer preferences away from our products, our inability to develop new menu items that appeal to consumers across all day parts, or changes in our menu that eliminate items popular with some consumers could harm our business. We compete with other smoothie and juice bar retailers, specialty coffee retailers, yogurt and ice cream shops, bagel shops, fast-food restaurants, delicatessens, cafés, take-out food service companies, supermarkets and convenience stores. Our competitors change with each of the four day parts, ranging from coffee bars and bakery cafés to casual dining chains. Many of our competitors or potential competitors have substantially greater financial and other resources than we do, which may allow them to react to changes in the market quicker than we can. In addition, aggressive pricing by our competitors or the entrance of new competitors into our markets, could reduce our revenue and operating margins. We also compete with other employers in our markets for workers and may become subject to higher labor costs as a result of such competition.

 

Fluctuations in various food and supply costs, particularly fruit and dairy, could adversely affect our operating results.

 

Supplies and prices of the various ingredients that we are going to use to can be affected by a variety of factors, such as weather, seasonal fluctuations, demand, politics and economics in the producing countries.

 

These factors subject us to shortages or interruptions in product supplies, which could adversely affect our revenue and profits. In addition, the prices of fruit and dairy, which are the main ingredients in our products, can be highly volatile. The fruit of the quality we seek tends to trade on a negotiated basis, depending on supply and demand at the time of the purchase. An increase in pricing of any fruit that we are going to use in our products could have a significant adverse effect on our profitability. We cannot assure you that we will be able to secure our fruit supply.

 

Our business depends substantially on the continuing efforts of our senior management and other key personnel, and our business may be severely disrupted if we lose their services.

 

Our future success heavily depends on the continued service of our senior management and other key employees. If one or more of our senior executives is unable or unwilling to continue to work for us in his present position, we may have to spend a considerable amount of time and resources searching, recruiting, and integrating a replacement into our operations, which would substantially divert management’s attention from our business and severely disrupt our business. This may also adversely affect our ability to execute our business strategy.

Our senior management’s limited experience managing a publicly traded company may divert management’s attention from operations and harm our business.

 

With the exception of our Chief Financial Officer, our senior management team has relatively limited experience managing a publicly traded company and complying with federal securities laws, including compliance with recently adopted disclosure requirements on a timely basis. Our management will be required to design and implement appropriate programs and policies in responding to increased legal, regulatory compliance and reporting requirements, and any failure to do so could lead to the imposition of fines and penalties and harm our business.

 

We may be unable to attract and retain qualified, experienced, highly skilled personnel, which could adversely affect the implementation of our business plan.

 

Our success depends to a significant degree upon our ability to attract, retain and motivate skilled and qualified personnel. As we become a more mature company in the future, we may find recruiting and retention efforts more challenging. If we do not succeed in attracting, hiring and integrating excellent personnel, or retaining and motivating existing personnel, we may be unable to grow effectively. The loss of any key employee, including members of our senior management team, and our inability to attract highly skilled personnel with sufficient experience in our industries could harm our business.

 

Product liability exposure may expose us to significant liability.

 

We may face an inherent business risk of exposure to product liability and other claims and lawsuits in the event that the development or use of our technology or prospective products is alleged to have resulted in adverse effects. We may not be able to avoid significant liability exposure. Although we believe our insurance coverage to be adequate, we may not have sufficient insurance coverage, and we may not be able to obtain sufficient coverage at a reasonable cost. An inability to obtain product liability insurance at acceptable cost or to otherwise protect against potential product liability claims could prevent or inhibit the commercialization of our products. A product liability claim could hurt our financial performance. Even if we ultimately avoid financial liability for this type of exposure, we may incur significant costs in defending ourselves that could hurt our financial performance and condition.

 

Our inability to protect our intellectual property rights may force us to incur unanticipated costs.

 

Our success will depend, in part, on our ability to obtain and maintain protection in the United States and internationally for certain intellectual property incorporated into our products. Our intellectual property rights may be challenged, narrowed, invalidated or circumvented, which could limit our ability to prevent competitors from marketing similar solutions that limit the effectiveness of our patent protection and force us to incur unanticipated costs. In addition, existing laws of some countries in which we may provide services or solutions may offer only limited protection of our intellectual property rights.

 

Our products may infringe the intellectual property rights of third parties, and third parties may infringe our proprietary rights, either of which may result in lawsuits, distraction of management and the impairment of our business.

 

As the number of patents, copyrights, trademarks and other intellectual property rights in our industry increases, products based on our technology may increasingly become the subject of infringement claims. Third parties could assert infringement claims against us in the future. Infringement claims with or without merit could be time consuming, result in costly litigation, cause product shipment delays or require us to enter into royalty or licensing agreements. Royalty or licensing agreements, if required, might not be available on terms acceptable to us, or at all. We may initiate claims or litigation against third parties for infringement of our proprietary rights or to establish the validity of our proprietary rights. Litigation to determine the validity of any claims, whether or not the litigation is resolved in our favor, could result in significant expense to us and divert the efforts of our technical and management personnel from productive tasks. If there is an adverse ruling against us in any litigation, we may be required to pay substantial damages, discontinue the use and sale of infringing products and expend significant resources to develop non-infringing technology or obtain licenses to infringing technology. Our failure to develop or license a substitute technology could prevent us from selling our products.

 

If securities or industry analysts do not publish research, or publish inaccurate or unfavorable research, about our business, our share price and trading volume could decline.

 

The trading market for our common stock may be impacted, in part, by the research and reports that securities or industry analysts publish about our business or us. There can be no assurance that analysts will cover us, continue to cover us or provide favorable coverage. If one or more analysts downgrade our stock or change their opinion of our stock, our share price may decline. In addition, if one or more analysts cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which could cause our share price or trading volume to decline.

 

We will continue to incur increased costs as a result of operating as a public company, and our management will be required to devote substantial time to compliance initiatives and corporate governance practices.

 

As a public company, we will continue to incur significant legal, accounting and other expenses. The Sarbanes-Oxley Act of 2002, the Dodd-Frank Wall Street Reform and Consumer Protection Act and other applicable securities rules and regulations impose various requirements on public companies, including establishment and maintenance of effective disclosure and financial controls and corporate governance practices. Our management and other personnel will need to continue to devote a substantial amount of time to these compliance initiatives. Moreover, these rules and regulations will increase our legal and financial compliance costs and make some activities more time-consuming and costly.

We cannot predict or estimate the amount of additional costs we may incur to continue to operate as a public company, nor can we predict the timing of such costs. These rules and regulations are often subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies which could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices.

 

We have identified material weaknesses in our internal control over financial reporting. If we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results or prevent fraud.

Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, or Section 404, we are required to furnish a report by our management on our internal control over financial reporting. As such, our management has conducted this evaluation and, as of December 31, 2017, identified the following material weakness in the Company’s internal control over financial reporting:

Inadequate Segregation of Duties: We have an inadequate number of personnel to properly implement certain control procedures related to segregation of duties.

Management concluded that our disclosure controls and procedures are not effective. Effective internal control over financial reporting is necessary to provide reliable financial reports and effectively prevent fraud. If we cannot provide reliable financial reports or prevent fraud, our operating results could be harmed. We will need to continue to dedicate internal resources, potentially engage outside consultants and adopt a detailed work plan to modify and document the adequacy of internal control over financial reporting, continue steps to improve control processes as appropriate, validate through testing that controls are functioning as documented and implement a continuous reporting and improvement process for internal control over financial reporting. Continued identification of one or more material weaknesses in our internal control over financial reporting could result in an adverse reaction in the financial markets due to a loss of confidence in the reliability of our financial statements.

Failure to comply with the United States Foreign Corrupt Practices Act could subject us to penalties and other adverse consequences.

 

As a Delaware corporation, we are subject to the United States Foreign Corrupt Practices Act, which generally prohibits United States companies from engaging in bribery or other prohibited payments to foreign officials for the purpose of obtaining or retaining business. Some foreign companies, including some that may compete with our Company, may not be subject to these prohibitions. Corruption, extortion, bribery, pay-offs, theft and other fraudulent practices may occur from time-to-time in countries in which we conduct our business. However, our employees or other agents may engage in conduct for which we might be held responsible. If our employees or other agents are found to have engaged in such practices, we could suffer severe penalties and other consequences that may have a material adverse effect on our business, financial condition and results of operations.

 

We could be subject to cybersecurity attacks.

 

Cybersecurity attacks are evolving and include malicious software, attempts to gain unauthorized access to data, and other electronic security breaches that could lead to disruptions in business processes, unauthorized release of confidential or otherwise protected information and corruption of data. Such unauthorized access could subject us to operational interruption, damage to our brand image and private data exposure, and harm our business.

 

Our reliance on distributors, retailers and brokers could affect our ability to efficiently and profitably distribute and market our products, maintain our existing markets and expand our business into other geographic markets.

 

Our ability to maintain and expand our existing markets for our products, and to establish markets in new geographic distribution areas, is dependent on our ability to establish and maintain successful relationships with reliable distributors, retailers and brokers strategically positioned to serve those areas. Most of our distributors, retailers and brokers sell and distribute competing products and our products may represent a small portion of their businesses. The success of this network will depend on the performance of the distributors, retailers and brokers of this network. There is a risk that the mentioned entities may not adequately perform their functions within the network by, without limitation, failing to distribute to sufficient retailers or positioning our products in localities that may not be receptive to our product. Our ability to incentivize and motivate distributors to manage and sell our products is affected by competition from other companies who have greater resources than we do. To the extent that our distributors, retailers and brokers are distracted from selling our products or do not employ sufficient efforts in managing and selling our products, our sales and results of operations could be adversely affected. Furthermore, such third-parties’ financial position or market share may deteriorate, which could adversely affect our distribution, marketing and sales activities.

 

Our ability to maintain and expand our distribution network and attract additional distributors, retailers and brokers will depend on a number of factors, some of which are outside our control. Some of these factors include:

 

 the level of demand for our brands and products in a particular distribution area;
 our ability to price our products at levels competitive with those of competing products; and
 our ability to deliver products in the quantity and at the time ordered by distributors, retailers and brokers.

 

We may not be able to successfully manage all or any of these factors in any of our current or prospective geographic areas of distribution. Our inability to achieve success with regards to any of these factors in a geographic distribution area will have a material adverse effect on our relationships in that particular geographic area, thus limiting our ability to maintain or expand our market, which will likely adversely affect our revenues and financial results.

 

It is difficult to predict the timing and amount of our sales because our distributors and national accounts may not be required to place minimum orders with us.

 

Our distributors are not required to place minimum monthly or annual orders for our products. Accordingly, we cannot predict the timing or quantity of purchases by any of our independent distributors or whether any of our distributors will continue to purchase products from us in the same frequencies and volumes as they may have done in the past. Additionally, our larger distributors and partners may make orders that are larger than we have historically been required to fill. Shortages in inventory levels, supply of raw materials or other key supplies could negatively affect us.

 

If we do not adequately manage our inventory levels, our operating results could be adversely affected.

 

We need to maintain adequate inventory levels to be able to deliver products on a timely basis. Our inventory supply depends on our ability to correctly estimate demand for our products. Our ability to estimate demand for our products is imprecise, particularly for new products, seasonal promotions and new markets. If we materially underestimate demand for our products or are unable to maintain sufficient inventory of raw materials, we might not be able to satisfy demand on a short-term basis. If we overestimate retailer demand for our products, we may end up with too much inventory, resulting in higher storage costs, increased trade spend and the risk of obsolete inventory. If we fail to manage our inventory to meet demand, we could damage our relationships with our retailers and could delay or lose sales opportunities, which would unfavorably impact our future sales and adversely affect our operating results.

 

Risks Related to Ownership of Our Common Stock

 

Our common stock is quoted on the OTCQB, which may have an unfavorable impact on our stock price and liquidity.

 

Our common stock is quoted on the OTCQB, which is a significantly more limited trading market than the New York Stock Exchange, or the NASDAQ Stock Market. The quotation of the Company’s shares on the OTCQB may result in a less liquid market available for existing and potential shareholders to trade shares of our common stock, could depress the trading price of our common stock and could have a long-term adverse impact on our ability to raise capital in the future.

There is limited liquidity on the OTCQB, which may result in stock price volatility and inaccurate quote information.

 

When fewer shares of a security are being traded on the OTCQB, volatility of prices may increase and price movement may outpace the ability to deliver accurate quote information. Due to lower trading volumes in shares of our common stock, there may be a lower likelihood of one’s orders for shares of our common stock being executed, and current prices may differ significantly from the price one was quoted at the time of one’s order entry.

 

If we are unable to adequately fund our operations, we may be forced to voluntarily file for deregistration of our common stock with the SEC.

 

Compliance with the periodic reporting requirements required by the SEC consumes a considerable amount of both internal, as well external, resources and represents a significant cost for us. If we are unable to continue to devote adequate funding and the resources needed to maintain such compliance, while continuing our operations, we could be forced to deregister with the SEC. After the deregistration process, our common stock would only be tradable on the “Pink Sheets” and could suffer a decrease in or absence of liquidity.

 

Because we became public by means of a “reverse merger”, we may not be able to attract the attention of major brokerage firms.

 

Additional risks may exist since we became public through a “reverse merger”. Securities analysts of major brokerage firms may not provide coverage of us since there is little incentive to brokerage firms to recommend the purchase of our common stock. We cannot assure you that brokerage firms will want to conduct any secondary offerings on behalf of our Company in the future.

 

Future sales of our common stock in the public market could lower the price of our common stock and impair our ability to raise funds in future securities offerings.

 

Future sales of a substantial number of shares of our common stock in the public market, or the perception that such sales may occur, could adversely affect the then prevailing market price of our common stock and could make it more difficult for us to raise funds in the future through a public offering of our securities.

 

Our common stock is thinly traded, so you may be unable to sell at or near asking prices or at all if you need to sell your shares to raise money or otherwise desire to liquidate your shares.

 

Currently, the Company’s common stock is quoted in the OTCQB and future trading volume may be limited by the fact that many major institutional investment funds, including mutual funds, as well as individual investors follow a policy of not investing in OTCQB stocks and certain major brokerage firms restrict their brokers from recommending OTCQB stocks because they are considered speculative, volatile and thinly traded. The OTCQB market is an inter-dealer market much less regulated than the major exchanges and our common stock is subject to abuses, volatility and shorting. Thus, there is currently no broadly followed and established trading market for the Company’s common stock. An established trading market may never develop or be maintained. Active trading markets generally result in lower price volatility and more efficient execution of buy and sell orders. Absence of an active trading market reduces the liquidity of the shares traded there.

 

The trading volume of our common stock has been and may continue to be limited and sporadic. As a result of such trading activity, the quoted price for the Company’s common stock on the OTCQB may not necessarily be a reliable indicator of its fair market value. Further, if we cease to be quoted, holders would find it more difficult to dispose of our common stock or to obtain accurate quotations as to the market value of the Company’s common stock and as a result, the market value of our common stock likely would decline.

 

Our common stock is subject to price volatility unrelated to our operations.

 

The market price of our common stock could fluctuate substantially due to a variety of factors, including market perception of our ability to achieve our planned growth, quarterly operating results of other companies in the same industry, trading volume in our common stock, changes in general conditions in the economy and the financial markets or other developments affecting the Company’s competitors or the Company itself. In addition, the OTCQB is subject to extreme price and volume fluctuations in general. This volatility has had a significant effect on the market price of securities issued by many companies for reasons unrelated to their operating performance and could have the same effect on our common stock.

 

We are subject to penny stock regulations and restrictions and you may have difficulty selling shares of our common stock.

 

Our common stock is currently quoted on the OTCQB. Our common stock is subject to the requirements of Rule 15(g)-9, promulgated under the Securities Exchange Act as long as the price of our common stock is below $5.00 per share. Under such rule, broker-dealers who recommend low-priced securities to persons other than established customers and accredited investors must satisfy special sales practice requirements, including a requirement that they make an individualized written suitability determination for the purchaser and receive the purchaser’s consent prior to the transaction. The Securities Enforcement Remedies and Penny Stock Reform Act of 1990, also requires additional disclosure in connection with any trades involving a stock defined as a penny stock. Generally, the Commission defines a penny stock as any equity security not traded on a national exchange that has a market price of less than $5.00 per share. The required penny stock disclosures include the delivery, prior to any transaction, of a disclosure schedule explaining the penny stock market and the risks associated with it. Such requirements could severely limit the market liquidity of the securities and the ability of purchasers to sell their securities in the secondary market.

Because we do not intend to pay dividends, shareholders will benefit from an investment in our common stock only if it appreciates in value.

 

We have never declared or paid any cash dividends on our preferred stock or common stock. For the foreseeable future, it is expected that earnings, if any, generated from our operations will be used to finance the growth of our business, and that no dividends will be paid to holders of the Company’s common stock. As a result, the success of an investment in our common stock will depend upon any future appreciation in its value. There can be no guarantee that our common stock will appreciate in value.

 

The price of our common stock may become volatile, which could lead to losses by investors and costly securities litigation.

 

The trading price of our common stock is likely to be highly volatile and could fluctuate in response to factors such as:

 

 actual or anticipated variations in our operating results;
   
 announcements of developments by us or our competitors;
   
 announcements by us or our competitors of significant acquisitions, strategic partnerships, joint ventures or capital commitments;
   
 adoption of new accounting standards affecting the our industry;
   
 additions or departures of key personnel;
   
 introduction of new products by us or our competitors;
   
 sales of our common stock or other securities in the open market; and
   
 other events or factors, many of which are beyond our control.

 

The stock market is subject to significant price and volume fluctuations. In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been initiated against such a company. Litigation initiated against us, whether or not successful, could result in substantial costs and diversion of our management’s attention and Company resources, which could harm our business and financial condition.

 

Investors may experience dilution of their ownership interests because of the future issuance of additional shares of our common stock.

 

We intend to continue to seek financing through the issuance of equity or convertible securities to fund our operations. In the future, we may also issue additional equity securities resulting in the dilution of the ownership interests of our present shareholders. We may also issue additional shares of our common stock or other securities that are convertible into or exercisable for our common stock in connection with hiring or retaining employees, future acquisitions or for other business purposes. The future issuance of any such additional shares of common stock will result in dilution to our shareholders and may create downward pressure on the trading price of our common stock.

 

Provisions in our corporate charter documents and under Delaware law could make an acquisition of our company, which may be beneficial to our stockholders, more difficult and may prevent attempts by our stockholders to replace or remove our current management.

 

Provisions in our certificate of incorporation and our bylaws may discourage, delay or prevent a merger, acquisition or other change in control of our company that stockholders may consider favorable, including transactions in which you might otherwise receive a premium for your shares. These provisions could also limit the price that investors might be willing to pay in the future for shares of our common stock, thereby depressing the market price of our common stock. In addition, because our board of directors is responsible for appointing the members of our management team, these provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors. In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which prohibits a person who owns in excess of 15% of our outstanding voting stock from merging or combining with us for a period of three years after the date of the transaction in which the person acquired in excess of 15% of our outstanding voting stock, unless the merger or combination is approved in a prescribed manner.

NOTE REGARDING FORWARD LOOKING STATEMENTS

 

This prospectus, including the sections entitled “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business,” contains forward-looking statements. We may, in some cases, use words such as “anticipate”, “believe”, “could”, “estimate”, “expect”, “intend”, “may”, “plan”, “potential”, “predict”, “project”, “should”, “will”, “would” or the negative of those terms, and similar expressions that convey uncertainty of future events or outcomes to identify these forward-looking statements. Any statements contained herein that are not statements of historical facts may be deemed to be forward-looking statements. Forward-looking statements in this prospectus include, but are not limited to, statements about:

 

 the success, cost and timing of our sales and licensing activities;
   
 our ability to attract collaborators with development, marketing and commercialization expertise;
   
 the size and growth potential of the markets for our products, and our ability to serve those markets;
   
 the performance of our third-party suppliers and manufacturers;
   
 our ability to attract and retain key management personnel;
   
 the accuracy of our estimates regarding expenses, future revenues, capital requirements and needs for additional financing; and
   
 our expectations regarding our ability to maintain and protect intellectual property protection for our products.

 

These forward-looking statements reflect our management’s beliefs and views with respect to future events and are based on estimates and assumptions as of the date of this prospectus and are subject to risks and uncertainties. We discuss many of these risks in greater detail under “Risk Factors”. In addition, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. Given these uncertainties, you should not place undue reliance on these forward-looking statements.

 

You should read this prospectus and the documents that we reference in this prospectus and have filed as exhibits to the registration statement, of which this prospectus is a part, completely and with the understanding that our actual future results may be materially different from what we expect. We qualify all of the forward-looking statements in this prospectus by these cautionary statements. Except as required by law, we undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise.

 

USE OF PROCEEDS

 

We will not receive any of the proceeds from the sale of the shares of common stock offered under this prospectus by the selling shareholders. Rather, the selling shareholders will receive those proceeds directly. We will however receive up to $954,000$1,279,022 from the exercise of Series DM Warrants by the Selling Shareholders.

 

SELLING SHAREHOLDERS

 

We are registering 2,900,0005,827,174 shares of our common stock, par value $0.000001 per share, of which 1,800,0001,827,174 are shares underlying Series DM Warrants.

 

The shares of common stock being registered include such indeterminate number of shares of common stock as may be issuable with respect to the shares of common stock being registered hereunder only as a result of stock splits, stock dividends or similar transactions.

 

The shares of common stock being registered do not include additional shares of common stock issuable as a result of changes in market price of the common stock, issuance by us of equity securities below a certain price or other anti-dilutive adjustments or variables not covered by Rule 416. All shares that may be issued will be restricted securities as that term is defined in Rule 144 under the Securities Act and will remain restricted unless and until such shares are sold pursuant to this prospectus, or otherwise are sold in compliance with Rule 144.

 

No shareholder may offer or sell shares of our common stock under this prospectus unless such shareholder has notified us of such shareholder’s intention to sell shares of our common stock and the registration statement of which this prospectus is a part has been declared effective by the SEC and remains effective at the time such selling shareholder offers or sells such shares. We are required to amend the registration statement of which this prospectus is a part to reflect material developments in our business and current financial information. Each time we file a post-effective amendment to our registration statement with the SEC, it must first become effective prior to the offer or sale of shares of our common stock by the selling shareholders.

 

The following table sets forth as of October 23, 2018,May 21, 2019, information regarding the current beneficial ownership of our common stock by the persons identified, based on information provided to us by them, which we have not independently verified. We have assumed for purposes of the table that the selling shareholders will sell all of the shares offered by this prospectus. The selling shareholders may, from time to time, offer all or some of their shares under this prospectus or in another manner. No assurance can be given as to the actual number of shares that will be resold by the selling shareholders (or any of them). In addition, a selling shareholder may have already sold or otherwise disposed of shares in transactions exempt from the registration requirements of the Securities Act. The selling shareholders are not making any representation that the shares covered by this prospectus will be offered for sale. Except as set forth below, no selling shareholder has held any position nor had any material relationship with our affiliates or us during the past three years. Except as set forth below, each of the selling shareholders has advised the Company that it is not a registered broker-dealer or an affiliate of a registered broker-dealer.

 

Ibex Investors LLC (“Ibex”)Riccardo Delle Coste is athe Company’s CEO, Chairman and significant shareholderstockholder. Joseph M. Cugine is an officer and director of the CompanyCompany. Joseph S Tesoriero and beneficially owns 13.17%Tim Trant are officers of the Company’sCompany. Series M Warrants were issued to these officers and outstanding common stock, although Ibex is not an affiliatedirectors in partial payment of the Company.

In the third quarter of 2018, we entered into a warrant exercise transaction with Ibex. Ibex exercised warrants to purchase 1,100,000 shares of common stock at $.50 per share for aggregate gross proceeds to the Company of $550,000, and we extended the exercise date on the warrant held by Ibex as to remaining 1,800,000 shares from July 26, 2018 to July 26, 2021. We further adjusted the exercise price per share to $0.53 and removed provision for cashless exercise. In addition, we used $50,000 of the proceeds from the warrant exercise to repay $50,000 of the short-term note held by Ibex in the principal amount of $250,000, and, in return, Ibex agreed to extend the maturity date of the note from September 12, 2018 to December 31 2018.deferred compensation.

 

The number of shares outstanding and the percentages of beneficial ownership are based on 120,756,547130,085,820 shares of our common stock issued and outstanding as of October 23, 2018.May 21, 2019.

 

Under Rule 13d-3, beneficial ownership includes any shares as to which a selling shareholder has sole or shared voting power or investment power and also any shares that selling shareholder has the right to acquire within 60 days of the date of this prospectus through the exercise of any stock option.

 

The term “selling shareholders” also includes any pledgees, assignees, or other successors in interest to the selling shareholders named in the table below. Unless otherwise indicated, to our knowledge, each person named in the table below has sole voting and investment power (subject to applicable community property laws) with respect to the shares of common stock set forth opposite such person’s name. We will file a supplement to this prospectus (or a post-effective amendment hereto, if necessary) to name successors to any named selling stockholders who are able to use this prospectus to resell the common stock registered hereby.

 

 

 

Name of Selling Shareholder

 Number of Shares Owned Before Offering (1)  

Number of

Shares

Being Offered

  

Number of Shares Owned

After Offering

  Percent of Shares Owned After Offering 

Ibex Microcap Fund LLLP (2)(1)

  

16,245,766

  

2,900,000

   13,345,766   

10.98

% (3)
Name of Selling
Shareholder
 Number of Shares
Owned Before Offering
  Number of
Shares
Being
Offered
  Number of
Shares Owned
After Offering
  Percent of Shares
Owned After Offering
 
             
Sandra F. Pessin  1,866,667   1,666,667   200,000   * 
                 
Stephen Dreier  166,667   166,667   0   0 
                 
Abbey Investments, LLC (1)  1,023,815   250,000   773,815   * 
                 
Edwin A. Levy  250,000   250,000   0   0 
                 
Brian L. Pessin  974,333   333,333   641,333   * 
                 
Ephraim Fields  2,047,810   416,667   1,631,143   1.3%
                 
Lloyd B. Solomon  416,667   416,667   0   0 
                 
Michael E. Cahr  333,333   333,333   0   0 
                 
Augustus Graham Stern and Kirra Lindsay Brandon  166,667   166,667   0   0 
                 
Joseph S. Tesoriero  1,985,574   590,178   1,395,396   1.1%
                 
Riccardo Delle Coste  22,219,966   731,635   21,488,331   16.5%
                 
Joseph M. Cugine  3,167,287   273,798   2,893,389   2.2%
                 
Timothy Trant  1,431,563   231,563   1,200,000   * 

 

*Less than 1%

1.

Includes warrants to purchase 2,633,333 shares(1)

Raineris J. Reyes exercises voting and dispositive control of common stock held by Ibex Microcap Fund LLLP. Includes 3,000 shares of common stock held by Lazarus Macro Micro Partners LLLP.

2.Ibex Investors LLC is the investment adviser and general partner of Ibex Microcap and Macro Micro, and consequently may be deemed to have voting control and investment discretion over the securities owned by Ibex Microcap and Macro Micro. Justin B. Borus is the manager of Ibex Investors LLC. As a result, Mr. Borus may be deemed to be the beneficial owner of any shares deemed to be beneficially owned by Ibex Investors LLC. The foregoing should not be construed in and of itself as an admission by Ibex Investors LLC or Mr. Borus as to beneficial ownership of the shares owned by Ibex Microcap and Macro Micro. Each of Ibex InvestorsAbby Investment LLC and Mr. Borus disclaims beneficial ownership of the securities except to the extent ofas its or his pecuniary interests therein.
3.

Warrants held by Ibex Investors LLC are not exercisable by the holder to the extent (but only to the extent) that the holder, together with any of its affiliates, would beneficially own in excess of 9.99% of the Company’s common stock after giving effect to such exercise and as a result of such exercise. By written notice to the Company, the holder may increase or decrease this percentage, as applied to the holder, to any other percentage specified in such notice; provided that any such increase will not be effective until the 61st day after such notice is delivered to the Company.

Manager.

PLAN OF DISTRIBUTION

 

We are registering the shares of common stock previously issued and the shares of common stock issuable upon exercise of the warrants to permit the resale of these shares of common stock by the holders of the common stock and warrants from time to time after the date of this prospectus. We will not receive any of the proceeds from the sale by the selling shareholders of the shares of common stock. We will bear all fees and expenses incident to our obligation to register the shares of common stock.

 

The selling shareholders may sell or dispose of the securities in one or more of the following ways (or in any combination) from time to time:

 

 through underwriters or dealers;
   
 directly to a limited number of purchasers or to a single purchaser (including block transactions);
   
 through agents; or
   
 an offering of shares by way of a distribution to shareholders, partners or members.

 

If the selling shareholders use underwriters in the sale, the securities will be acquired by the underwriters for their own account(s) and may be resold from time to time in one or more transactions, including:

 

 negotiated transactions;
   
 at a fixed public offering price or prices, which may be changed;
   
 at market prices prevailing at the time of sale;
   
 at prices related to prevailing market prices; or
   
 at negotiated prices.

 

Broker-dealers engaged by the selling shareholders may arrange for other broker-dealers to participate in sales. Broker-dealers may receive commissions or discounts from the selling shareholders (or, if any broker-dealer acts as agent for the purchaser of shares of common stock, from the purchaser) in amounts to be negotiated, but, except as set forth in a supplement to this prospectus, in the case of an agency transaction, not in excess of a customary brokerage commission in compliance with FINRA Rule 2440; and in the case of a principal transaction a markup or markdown in compliance with FINRA IM-2440.

 

The obligations of the underwriters to purchase any securities will be conditioned on customary closing conditions and the underwriters will be obligated to purchase all of such series of securities, if any are purchased.

The selling shareholders may sell the securities through agents from time to time. Generally, any agent will be acting on a best-efforts basis for the period of its appointment.

 

The selling shareholders may enter into hedging transactions with broker-dealers or other financial institutions. In connection with such transactions, broker-dealers or other financial institutions may engage in short sales of our common stock in the course of hedging the positions they assume with the selling shareholders. The selling shareholders may also enter into options or other transactions with broker-dealers or other financial institutions which require the delivery to such broker-dealer or other financial institution of shares offered hereby, which shares such broker-dealer or other financial institution may resell pursuant to this prospectus (as supplemented or amended to reflect such transaction).

 

The selling shareholders and any broker-dealers or agents that are involved in selling the shares of common stock may be deemed to be “underwriters” within the meaning of the Securities Act in connection with such sales. In such event, any commissions received by such broker-dealers or agents and any profit on the resale of the shares of common stock purchased by them may be deemed to be underwriting commissions or discounts under the Securities Act. Each selling shareholder has informed us that it does not have any written or oral agreement or understanding, directly or indirectly, with any person to distribute the shares of common stock. In no event shall any broker-dealer receive fees, commissions and markups, which, in the aggregate, would exceed eight percent (8%).

 

Because selling shareholders may be deemed to be “underwriters” within the meaning of the Securities Act, they will be subject to the prospectus delivery requirements of the Securities Act including Rule 172 thereunder. In addition, any shares of common stock covered by this prospectus that qualify for sale pursuant to Rule 144 under the Securities Act may be sold under Rule 144 rather than under this prospectus. The selling shareholders have advised us that there is no underwriter or coordinating broker acting in connection with the proposed sale of the shares of common stock by the selling shareholders.

 

As used herein, “selling shareholders” includes donees, pledgees, distributees, transferees or other successors-in-interest selling shares received after the date of this prospectus from a named selling shareholder as a gift, pledge, partnership distribution or other non-sale related transfer.

 

Underwriters and agents may be entitled under agreements entered into with the selling shareholders, if applicable, to indemnification by the selling shareholders, if applicable, against certain civil liabilities, including liabilities under the Securities Act of 1933, or to contribution with respect to payments which the underwriters or agents may be required to make.

 

Under applicable rules and regulations under the Exchange Act, any person engaged in the distribution of the shares of common stock may not simultaneously engage in market making activities with respect to the common stock for the applicable restricted period, as defined in Regulation M, prior to the commencement of the distribution. In addition, the selling shareholders will be subject to applicable provisions of the Exchange Act and the rules and regulations thereunder, including Regulation M, which may limit the timing of purchases and sales of our securities by the selling shareholders or any other person. We will make copies of this prospectus available to the selling shareholders and have informed them of the need to deliver a copy of this prospectus to each purchaser at or prior to the time of the sale (including by compliance with Rule 172 under the Securities Act). In addition, in certain states, the resale securities covered hereby may not be sold unless they have been registered or qualified for sale in the applicable state or an exemption from the registration or qualification requirement is available and is complied with.

 

LEGAL PROCEEDINGS

 

We are not party to any lawsuits or legal proceedings, the adverse outcome of which, in management’s opinion, individually or in the aggregate, would have a material adverse effect on our results of operations and financial position, and have no knowledge of any threatened or potential lawsuits or legal proceedings against us. From time to time, we may be involved in litigation relating to claims arising out of operations in the ordinary course of business.

DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS

 

The following sets forth information about our directors and executive officers as of the date hereof:of this Report:

 

Name Age Position
Riccardo Delle Coste 3740 President, Chief Executive Officer and Chairman
Joseph S. Tesoriero 6364 Chief Financial Officer
Steven Lang 6466 Director
Arnold Tinter 7273 Secretary and Director
Joseph M. Cugine 56 Director
Alice Elliot60Director
Alexander H. Ware 5556 Director
Isabelle Ortiz-Cochet 5657 Director

 

Riccardo Delle Coste has been the Chairman of our board of directors, President and Chief Executive Officer since January 10, 2012. He has also been the President and Chief Executive Officer of Barfresh Inc., a Nevada corporation and our wholly owned subsidiary (“Barfresh NV”), since its inception. Mr. Delle Coste is the inventor of the patented technology and the creator of Barfresh. Mr. Delle Coste developed a unique system using controlled pre-packaged portions to deliver a freshly made smoothie that is quick, cost efficient, healthy and with no waste. In building the business, he is responsible for securing new business and maintaining key client relationships. He is also responsible for the development of new product from testing to full-scale production, establishment of the manufacturing facilities that have all necessary accreditations, technology development, product improvement and R&D with new product launches. Mr. Delle Coste also has over five years of investment banking experience. Mr. Delle Coste attended Macquarie University, Sydney, Australia while studying for a Bachelor of Commerce for 3.5 years but left to pursue business interests before receiving a degree.

 

Qualifications: Mr. Delle Coste has 17 years of experience within retail, hospitality and dairy manufacturing.

 

Joseph S. Tesoriero was appointed as Chief Financial Officer of the Company on May 18, 2015. Mr. Tesoriero has served as an independent director of Smart & Final Stores, Inc. (NYSE: SFS) since July of 2014, where he serves as Chairman of the Audit Committee and Chairman of the Nominating and Governance Committee. He was most recently engaged as a financial advisor for Dole Asia Holdings, Ltd. Pte., a Singapore based wholly owned subsidiary of Itochu Corporation of Japan, from April 2013 to October 2013. Prior to this consulting engagement, Mr. Tesoriero served as Executive Vice Present and Chief Financial Officer of Dole Food Company Inc. from February 2010 to April 2013, as its Vice President and Chief Financial Officer from August 2004 to February 2010 and as its Vice President of Tax from September 2002 to August 2004. Prior to joining Dole, Mr. Tesoriero was Senior Vice President of Tax of Global Crossing (1998-2002), Vice President of Tax of Coleman Camping Equipment (1997-1998), International Tax Attorney with Revlon Cosmetics (1989-1997) and Tax Attorney with IBM (1980-1988). Mr. Tesoriero began his career in 1978 as a Tax Associate with Haskins & Sells (now Deloitte Touche). Mr. Tesoriero holds a B.S. in Accounting from Villanova University, a J.D. from New York Law School and an LL.M. in Taxation from Boston University. He has been a member of the New York State Bar since 1978.

 

Qualifications: Mr. Tesoriero has over 30 years of experience in corporate finance leadership positions.

 

Steven Lang was appointed as Director of the Company on January 10, 2012. He has also served as Secretary of Barfresh NV since its inception. Prior to joining Barfresh NV, from 2003 to 2007, Mr. Lang was a director of Vericap Finance Limited, a company that specializes in providing advice to and investing in Australian companies with international growth potential. From 1990 to 1999, he served as a director of Babcock & Brown’s Australian operations where he was responsible for international structured finance transactions. Mr. Lang received a Bachelor of Commerce and a Bachelor of Laws from the University of New South Wales in 1976 and a Master of Laws from the University of Sydney in 1984. He has been a member of the Institute of Chartered Accountants in Australia and was licensed to practice foreign law in New York.

 

Qualifications: Mr. Lang has over 35 years of experience in business, accounting, law and finance and served as Chairman of an Australian public company.

 

Arnold Tinter was appointed as Director, Chief Financial Officer and Secretary of the Company on January 10, 2012. Mr. Tinter resigned his position as Chief Financial Officer on May 18, 2015 served temporarily as Principal Accounting Officer. Mr. Tinter founded Corporate Finance Group, Inc., a consulting firm located in Denver, Colorado, in 1992, and is its President. Corporate Finance Group, Inc., is involved in financial consulting in the areas of strategic planning, mergers and acquisitions and capital formation. He has been the chief financial officer and a director of other public companies: From 2012 to 2016, LifeApps Digital Media Inc. and Arvana Inc. From 2006 to 2010 he was the chief financial officer of Spicy Pickle Franchising, Inc. In all of the companies his responsibilities included oversight of all accounting functions, including SEC reporting, strategic planning and capital formation. From May 2001 to May 2003, he served as chief financial officer of Bayview Technology Group, LLC, a privately held company that manufactured and distributed energy-efficient products. From May 2003 to October 2004, he also served as that company’s chief executive officer. Prior to 1990, Mr. Tinter was chief executive officer of Source Venture Capital, a holding company with investments in the gaming, printing and retail industries. Mr. Tinter received a B.S. degree in Accounting in 1967 from C.W. Post College, Long Island University, and is licensed as a Certified Public Accountant in Colorado.

 

Qualifications: Mr. Tinter has over 40 years of experience as a Certified Public Accountant and a financial consultant. During his career he served as a director of numerous public companies.

Joseph M. Cugine was appointed as Director of the Company on July 29, 2014 and on April 27, 2015, was appointed president of our wholly owned subsidiary, Smoothie Inc. Mr. Cugine is the owner and president of Cugine Foods and JC Restaurants, a franchisee of Taco Bell and Pizza Hut in New York. He is also president and owner of Restaurant Consulting Group LLC. Prior to owning and operating his own firms, Mr. Cugine held a series of leadership roles with PepsiCo, lastly as chief customer officer and senior vice president of PepsiCo’s Foodservice division. Mr. Cugine also serves on the board of directors of The Chef’s Warehouse, Inc., a publicly traded specialty food products distributor in the U.S., as well as Ridgefield Playhouse and R4 Technology. He received his B.S. degree from St. Joseph’s University in Philadelphia.

 

Qualifications:Mr. Cugine’s career in sales, marketing, operations and supply chain spans more than 25 years. He has extensive industry contacts and proven experience leading and advising numerous successful food distribution companies.

 

Alice Elliot was appointed as Director of the Company on October 15, 2014. Ms. Elliot is the founder and chief executive of The Elliot Group, a global retained executive search firm specializing in the hospitality, foodservice, retail and service sectors. For more than 20 years, Ms. Elliot has hosted the exclusive invitation only ‘Elliot Leadership Conference.’ She was a co-founder of ‘The Elliot Leadership Institute,’ a nonprofit organization dedicated to leadership development and advancement in the foodservice industry, and is known for her philanthropic and educational endeavors and contributions. Throughout her career, Ms. Elliot has received various industry honors, including the Trailblazer Award from the Women’s Foodservice Forum and induction into the National Restaurant Association Educational Foundation’s College of Diplomates. She was also recently named to the Nation’s Restaurant News list of the 50 Most Powerful People in Foodservice.

Qualifications: Well recognized for the placement of senior-level executives at public and privately held restaurant organizations nationwide, Ms. Elliot is sought out for their intellectual and strategic thought leadership.

Alexander H. Ware was appointed as director of the company on July 13, 2016. Mr. Ware is President of Foodsby, Inc., a leading meal ordering platform serving the office marketplace, since September 2018. Previously, he served as Interim President, Executive Vice President & Chief Financial Officer of Buffalo Wild Wings since October 2016. From 2012 through 2016, Mr. Ware was Executive Chairman of MStar Holding Corporation (MicroStar), in addition, he served as Interim Chief Executive Officer in 2013. Prior to MicroStar, he served as a Senior Advisor and previously as Executive Vice President of Strategic Development of Pohlad Companies, a family office, from 2010 to 2015. Starting in 1994, he served in increasing capacities at PepsiCo, then PepsiAmericas, Inc. culminating as Executive Vice President & Chief Financial Officer from 2005 to 2010. Previously, he was a Senior Associate at Booz Allen Hamilton, Inc. from 1990-1994. Mr. Ware received his Bachelor of Arts degree in Economics from Hampden-Sydney College and his Master of Business Administration from the Darden Graduate School of Business at University of Virginia. In addition to Barfresh, Mr. Ware currently serves on the board of MStar Holding Corporation and on the advisory board of Stonearch Capital.

Qualifications: Mr. Ware brings over 30 years of experience in leadership, strategic planning and business portfolio management.

 

Isabelle Ortiz-Cochet was appointed as director of the Company on December 16, 2016. She is the Chief Investment Officer for Unibel, parent company of Bel Group. Bel is an international France-based group, a world leader in branded cheese business, with brands such as Laughing Cow, Mini-Babybel or Boursin. In that position since January 2016, Ms. Ortiz-Cochet drives Unibel diversification strategy, and leads the investment portfolio development. She was previously VP Strategic Development at Bel Group Form September 2013 to December 2015. From 2007 to 2013, based out of Bel’s New York office, Ms. Ortiz-Cochet led the development of long term strategies in North and South America, as well as Marketing strategy in the region. Prior to that position, she held a number of leadership positions in marketing and global strategy at Bel out of the Paris office, at French, European and corporate levels. Isabelle began her career with Kimberly Clark in France. Isabelle earned a master degree from ESSEC Business School in France, and an executive MBA from HEC Business School, France.

 

Pursuant to the investor rights agreement between Barfresh and Unibel dated November 23, 2016, Unibel is entitled to appoint one director to the board of directors of Barfresh, which director is entitled to sit on each committee of the board of directors selected by the Unibel, unless Unibel has beneficial ownership of less than: (i) 75.0% of the Shares; and (ii) 5.0% of the company’s issued and outstanding common stock. Unibel has designated Isabelle Ortiz-Cochet as its board designee. Barfresh has agreed to call shareholder meetings whenever necessary to ensure Unibel’s designee is elected as a director. At any time that Unibel’s designee is not a director, Unibel’s designee will be entitled to be a board observer. Riccardo Delle Coste, Steven Lang and their respective affiliates have agreed to vote their shares in favor of Unibel’s designee.

Employment Agreements

 

On April 27, 2015, Smoothie, Inc. entered into an executive employment agreement with Riccardo Delle Coste, its Chief Executive Officer and director. Mr. Delle Coste is also the Chief Executive Officer and Chairman of the Company. Pursuant to the employment agreement, he will receive a base salary of $350,000 and performance bonuses of 75% of his base salary based on mutually agreed upon performance targets. In addition, Mr. Delle Coste will receive up to an additional 500,000 performance options, on an annual basis. All options granted under the employment agreement are subject to the Company’s 2015 Equity Incentive Plan.

 

On April 27, 2015, Smoothie, Inc. entered into an executive employment agreement with Joseph M. Cugine to serve as President of Smoothie, Inc. Pursuant to the employment agreement, Mr. Cugine will receive a base salary of $300,000 and performance bonuses of 75% of his base salary based on mutually agreed upon performance targets. In addition, Mr. Cugine will receive 8-year options to purchase up to 600,000 shares of Barfresh, one-half vesting on each of the second and third anniversaries of the date of Mr. Cugine’s employment agreement. In addition, he will receive up to an additional 500,000 performance options, on an annual basis. All options granted under the employment agreement are subject to the Company’s 2015 Equity Incentive Plan.

 

The Company entered into an executive employment agreement with Joseph S. Tesoriero on May 18, 2015, pursuant to which he agreed to serve as Chief Financial Officer. Pursuant to the employment agreement, Mr. Tesoriero will receivereceived a base salary of $250,000 and performance bonuses of 75% of his base salary, based upon performance targets determined by the Board of Directors. In addition, Mr. Tesoriero was granted 350,000 shares of common stock of Barfresh and 8-year options to purchase up to 500,000 shares of common stock of Barfresh. One-half of each of the share and option grants vests on each of the second and third anniversaries of the date of commencement of Mr. Tesoriero’s employment. Mr. Tesoriero will also receivereceives 8-year performance options to purchase up to an additional 350,000 shares on an annual basis. All shares and options granted under the employment agreement are subject to the Company’s 2015 Equity Incentive Plan.

 

Effective April 1, 2019, the Company and Mr. Tesoriero entered into an amendment to his employment agreement reducing Mr. Tesoriero’s time commitment and compensation by 60%, in order to more effectively address the Company’s current needs.

Term of Office

 

Directors are appointed for a one-year term to hold office until the next annual general meeting of shareholders or until removed from office in accordance with our bylaws. Our officers are appointed by our board of directors and hold office until the earlier of resignation or removal.

 

Director Independence

 

We use the definition of “independence” standards as defined in the NASDAQ Stock Market Rule 5605(a)(2) provides that an “independent director” is a person other than an officer or employee of the company or any other individual having a relationship, which, in the opinion of the Company’s board of directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. We have determined, as of December 31, 2018, that fourfive of our seven directors are independent, which constitutes a majority. One of our directors, Alice Elliot, subsequently resigned effective March 31, 2019, reducing the current number of directors to six, four of which are independent.

 

Board Committees

 

We currently have an audit committee, a compensation committee and a nominating and governance committee. The members of the audit committee are Arnold Tinter, Steven Lang and Riccardo Delle Coste. The audit committee is primarily responsible for reviewing the services performed by our independent auditors and evaluating our accounting policies and our system of internal controls. Steven Lang is anand Arnold Tinter are independent membermembers of the audit committee, as defined above. In the future we expect to have an audit committee comprised of all independent members. The members of the compensation committee are Arnold Tinter Alice Elliot and Riccardo Delle Coste. The compensation committee is primarily responsible for reviewing and approving our salary and benefits policies (including stock options) and other compensation of our executive officers. The members of the nominating committee are Arnold Tinter Alice Elliot and Steven Lang. The nominating and governance committee is primarily responsible for overseeing corporate governance and for identifying, evaluating and recommending individuals to serve as directors of the company.

 

Legal Proceedings

 

To the best of our knowledge, none of our executive officers or directors are parties to any material proceedings adverse to the Company, have any material interest adverse to the Company or have been subject to legal, administrative or judicial orders, proceedings or decrees required to be disclosed.

 

Code of Ethics

 

Our Chief Executive Officer, and our Chief Financial Officer are bound by a Code of Ethics that complies with Item 406 of Regulation S-K of the Exchange Act.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) requires our directors and executive officers and beneficial holders of more than 10% of our common stock to file with the SEC initial reports of ownership and reports of changes in ownership of our equity securities.

To our knowledge, based solely upon a review of Forms 3 and 4 and amendments thereto furnished to Barfresh under 17 CFR 240.16a-3(e) during our most recent fiscal year and Forms 5 and amendments thereto furnished to Barfresh with respect to our most recent fiscal year or written representations from the reporting persons, we believe that during the fiscal year ended December 31, 2017 our directors, executive officers and persons who own more than 10% of our common stock complied with all Section 16(a) filing requirements with the exception of the following:

Joseph Cugine, late filing of Form 4
Joseph Tesoriero, late filing of Form 4
Isabelle Ortiz-Cochet, late filing of Form 4
Alexander H. Ware, late filing of Form 4
Alice Elliot, late filing of Form 4
Steve Lang, late Form 4
Riccardo Delle Coste, late Form 4

Legal Proceedings

 

To the best of our knowledge, none of our executive officers or directors are parties to any material proceedings adverse to the Company, have any material interest adverse to the Company or have, during the past ten years:

 

 been convicted in a criminal proceeding or been subject to a pending criminal proceeding (excluding traffic violations and other minor offenses);
   
 had any bankruptcy petition filed by or against him/her or any business of which he/she was a general partner or executive officer, either at the time of the bankruptcy or within two years prior to that time;
   
 been subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his/her involvement in any type of business, securities, futures, commodities or banking activities;
   
 been found by a court of competent jurisdiction (in a civil action), the Securities and Exchange Commission or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated;
   
 been subject to, or party to, any judicial or administrative order, judgment, decree , or finding, not subsequently reversed, suspended or vacated, relating to an alleged violation of (i) any Federal or State securities or commodities law or regulation, (ii) any law or regulation respecting financial institutions or insurance companies including, but not limited to, a temporary or permanent injunction, order of disgorgement or restitution, civil money penalty or temporary or permanent cease-and-desist order, or removal or prohibition order or (iii) any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or been the subject of, or a party to, any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory organization (as defined in Section 3(a)(26) of the Exchange Act (15 U.S.C. 78c(a)(26))), any registered entity (as defined in Section 1(a)(29) of the Commodity Exchange Act (7 U.S.C. 1(a)(29))), or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member.

 

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

 

The following table sets forth certain information regarding our shares of common stock beneficially owned as of OctoberMay 10, 2018,2019 for (i) each shareholder known to be the beneficial owner of 5% or more of our outstanding shares of common stock, (ii) each named executive officer and director, and (iii) all executive officers and directors as a group. A person is considered to beneficially own any shares: (i) over which such person, directly or indirectly, exercises sole or shared voting or investment power, or (ii) of which such person has the right to acquire beneficial ownership at any time within 60 days through an exercise of stock options or warrants or otherwise. Unless otherwise indicated, voting and investment power relating to the shares shown in the table for our directors and executive officers is exercised solely by the beneficial owner or shared by the owner and the owner’s spouse or children.

 

For purposes of this table, a person or group of persons is deemed to have “beneficial ownership” of any shares of common stock that such person has the right to acquire within 60 days of OctoberMay 10, 2018.2019. As of OctoberMay 10, 2018,2019, the Company had 120,756,547130,085,820 shares of common stock outstanding. For purposes of computing the percentage of outstanding shares of our common stock held by each person or group of persons named above, any shares that such person or persons has the right to acquire within 60 days of October 23, 2018May 10, 2019 is deemed to be outstanding, but is not deemed to be outstanding for the purpose of computing the percentage ownership of any other person. The inclusion herein of any shares listed as beneficially owned does not constitute an admission of beneficial ownership.

  Common Stock 
Name and address of beneficial owner(1) Amount and nature of beneficial ownership  Percent of
class o/s
 
Riccardo Delle Coste(2) (3) (4) (5)  20,744,573   17.06%
         
Steven Lang(6) (7) (8) (9)  20,040,849   16.51%
         
Joseph Tesoriero(10) (11) (12)  1,200,829   0.99%
         
Arnold Tinter(13) (14)  950,000   0.79%
         
Joe Cugine(15) (16) (17)  2,743,305   2.25%
         
Alice Elliot(18) (19) (20)  960,718   0.79%
         
Alexander Ware(23) (24) (25)  421,990   0.35%
         

Isabelle Ortiz-cochet(26) (27)

2 Allee De Longchamp

Suresnes, France

  171,832   0.14%
         
All directors and officers as a group (8 persons)  47,234,096   37.90%
         

Unibel(28) (29)

2 Allee De Longchamp

Suresnes, France 92150

  24,187,500   18.70%
         

IBEX Investors LLC (fka) Lazarus Investment Partners LLLP(30)

3200 Cherry Creek South Drive Suite 670

Denver, CO 80209

  16,245,766   13.17%
         

Wolverine Asset Management, LLC (“WAM”)(31) (32)

175 West Jackson Blvd. Suite 340

Chicago, IL 60604

  6,501,600   5.30%
  Common Stock 
Name and address of beneficial owner(1) Amount and nature of beneficial ownership  

Percent of

class o/s

 
Riccardo Delle Coste(2) (3) (4) (5)(6)  22,219,966   16.80%
         
Steven Lang(7) (8) (9) (10) (11)  20,696,294   15.81%
         
Joseph Tesoriero(12) (13) (14)  1,985,574   1.51%
         
Arnold Tinter(15) (16)  950,000   0.73%
         
Joe Cugine(17) (18) (19) (20)  3,167,287   2.41%
         
Alexander Ware(21) (22) (23)  460,452   0.35%
         
Isabelle Ortiz-cochet(24) (25) 2 Allee De Longchamp Suresnes, France  225,543   0.17%
         
All directors and officers as a group (8 persons)  49,705,116   36.51%
         
Unibel(26) (27) 2 Allee De Longchamp Suresnes, France 92150  25,551,503   18.47%
         
IBEX Investors LLC (fka) Lazarus Investment Partners LLLP (28)
3200 Cherry Creek South Drive Suite 670 Denver, CO 80209
  16,245,766   12.24%

(1)1The address of those listed, except as noted is c/o Barfresh Food Group Inc., 83833600 Wilshire Blvd., Beverly Hills,Boulevard Suite 1720, Los Angeles, CA 90211
(2) 2Mr. Delle Coste is the Chief Executive Officer, President and a Director of the Company
(3) 3Includes 19,471,779 shares owned by R.D. Capital Holdings PTY Ltd. and of which Riccardo Delle Coste is deemed to be a beneficial owner.
(4) 4Includes 508,333633,333 shares underlying options granted.
(5) 5Includes 283,444154,788 shares underlying warrants issued in connection with promissory notes the holder of which is R.D. Capital Holdings PTY Ltd. And of which Riccardo Delle Coste is deemed to be a beneficial owner.owner 731,635 shares underlying warrants issued in connection with deferred compensation.
(6) 6Includes 83,333 shares underlying convertible debt
7Mr. Lang is a Director of the Company
(7) 8Includes 19,072,45119,127,177 shares owned by Sidra Pty Limited of which Steven Lang is deemed to be a beneficial owner
(8) 9Includes 480,757534,468 shares underlying options granted
(9) 10Includes 166,668268,402 shares underlying warrants issued in connection with a promissory note the holder of which is Sidra PTY Limited
(10) 11Includes 500,000 shares underlying convertible debt
12Mr. Tesoriero is the Chief Financial Officer of the Company
(11) 13Includes 634,855811,378 shares underlying options granted.
(12) 14Includes 76,629 shares underlying warrants issued in connection with a promisorypromissory note and conversion thereof.thereof and 590,178 shares underlying warrants issued in connection with deferred compensation
(13) 15Mr. Tinter is the Secretary and a Director of the Company
(14) 16Includes 150,000 shares underlying options granted
(15) 17Mr. Cugine is President of a subsidiary of the Company and a Director
(16) 18Includes 794,596822,526 shares underlying options granted.
(17) 19Includes 96,020111,666 shares underlying warrants issued in connection with purchase of common shares.
(18) Ms. Elliot is a Director of the Company
(19) Includes 360,000 shares owned by Elliot-Herbst LP of which Alice Elliot is deemed to be a beneficial owner
(20) Includes 64,599 shares owned by Elliot-Herbst Family LLC of which Ms. Elliot is deemed to be a beneficial owner
(21) Includes 314,499 shares underlying options granted
(22) Includes 130,000and 273,798 shares underlying warrants issued in connection with purchase of common sharesdeferred compensation.
(23) 20Includes 83,333 shares underlying convertible debt
21Mr. Ware is a Director of the Company
(24) 22Includes 301,848 shares owned by The Alexander Ware Revocable Trust of which Mr. Ware is deemed to be a beneficailbeneficial owner
(25) 23Includes 78,125 shares underlying warrants issued to The Alexander Ware Revocable Trust in connection with purchase of common stock.
(26) 24Ms. Ortiz-cochet is a Director of the Company
(27) 25Includes 171,832225,543 shares underlying options granted
(28) 26Includes 7,812,500 shares underlying warrants issued in connection with the purchase of common stock.
(29) Includes750,000stock and 447,336 shares underlying warrants issued in connection with a convertible promissory notenote.
(30) 27Includes 1,666,667 shares underlying convertible debt
28Includes 2,633,333 shares underlying warrants issued in connection with the purchase of common stock.
(31) 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.
(32) 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 October 10, 2018, 120,756,547 sharesMay 21, 2019, 130,085,820shares 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:

 

 general business conditions;
   
 industry practice;
   
 our financial condition and performance;
   
 our future prospects;
   
 our cash needs and capital investment plans;
   
 our obligations to holders of any preferred stock we may issue;
   
 income tax consequences; and
   
 the restrictions Delaware and other applicable laws and our credit arrangements then impose.

 

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.

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, Inc. and its principal, Mark Y. Abdou, beneficially own 1,523,091 shares of the Company’s common stock, including 30,000 shares underlying Series G Warrants, 54,805 shares underlying Series J Warrants and 75,102 shares underlying Series L warrants and 81,818 underlying convertible notes. Libertas Law Group, Inc. is a selling shareholder under the prospectus.stock.

 

EXPERTS

 

Our financial statements, as of December 31, 20172018 and 20162017 and for the years then ended 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. Products are packaged in two distinct formats. The Company’s original single serve format features portion controlled and ready to blend beverage ingredient packs or “beverage packs”. The beverage packs contain all of the solid ingredients necessary to make the beverage, including the base (either sorbet, frozen yogurt or ice cream), real fruit pieces, juices and ice – five ounces of water are added before blending. The Company’s bulk “Easy Pour” format also contains all of the solid ingredients necessary to make the beverage, packaged in gallon containers in a concentrated formula that is mixed “one to one” with water. The Company has recently launched a “no sugar added” version of the bulk “Easy Pour” format that is specifically targeted for the USDA national school meal program, including the School Breakfast Program, the National School Lunch Program, and Smart Snacks in Schools Program.

 

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

 

The Company conducts sales through several channels, including National Accounts, Regional Accounts, and Broadline Distributors. Barfresh’s primary broadline distribution arrangement is through an exclusive nationwide agreement with Sysco Corporation (“Sysco”), the U.S.’s largest broadline distributor, which was entered into during July 2014, and renewed for an additional two year term on October 2, 2017.

 

During 2016 and 2017 the Company announced that it had signed supply agreements with several of the major global on-site foodservice operators. On March 8, 2018, the Company announced that it had signed a new supply agreement with one of the largest of these foodservice operators, for exclusive distribution of four of Barfresh’s single serve sku’s to approximately one thousand food service locations. Distribution of product to these locations through SYSCO will begin during April of 2018. This new agreement marks the culmination of successful in market tests conducted at several locations, and makes Barfresh’s blended beverages available across many of the most attractive locations of the customer’s diverse customer base.

The Company also sells to broadline distributors that supply products to the food services market place. Effective July 2, 2014, the Company entered into an exclusive agreement with Sysco Merchandising and Supply Chain Services, Inc. for resale by the Sysco Corporation (“Sysco”) to the foodservice industry of the Company’s ready-to-blend smoothies, shakes and frappes. Pursuant to that agreement, all Barfresh products are included in Sysco’s national core selection of beverage items, making Barfresh its exclusive single-serve, pre-portioned beverage provider. The agreement is mutually exclusive; however, Barfresh may also sell the products to other foodservice distributors, but only to the extent required for such foodservice distributors to service multi-unit chain operators with at least 20 units and where Sysco is not such multi- unit chain operator’s nominated distributor for our products. On October 2, 2017, the Sysco agreement was extended for an additional two year period, and expanded to cover bulk easy pour products, on a non-exclusive basis.

 

On October 26, 2015, Barfresh signed a five year agreement with PepsiCo North America Beverages, a division of PepsiCo, to become its exclusive sales representative within the food service channel to present Barfresh’s line of ready-to-blend smoothies and frozen beverages throughout the United States and Canada. Through this agreement, Barfresh’ products are included as part of PepsiCo’s offerings to its significant customer base. The agreement facilitates access to potential National customer accounts, through introductions provided by PepsiCo’s one-thousand plus person foodservice sales team. Barfresh products have become part of PepsiCo’s customer presentations at national trade shows and similar venues.

 

Barfresh utilizes contract manufacturers to manufacture all of its products in the United States. Production lines are currently operational at two locations. The first location is in Salt Lake City, which currently produces both bulk easy pour and single serve products. Annual production capacity with this contract manufacturer is 14 million units per year. The second location is with Yarnell Operations, LLC., a subsidiary of Shulze and Burch, located in Arkansas. The Yarnell’s agreement, which was signed during February 2016, and secures the capacity to ramp up to an incremental production capacity of 100 million units. Yarnell’s location enhances the company’s ability to efficiently move product throughout the supply chain to destinations in the eastern United States, home to many of the country’s large foodservice outlets.

 

Our corporate office is located at 83833600 Wilshire Blvd.,Boulevard Suite 750, Beverly Hills, CA 90211.1720, Los Angeles, 90010. Our telephone number is (310) 598-7113 and our website iswww.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:

 

 Acquisition of Barfresh NV.We acquired all of the outstanding capital stock of Barfresh NV in exchange for the issuance of 37,333,328 shares of our $0.000001 par value common stock pursuant to a Share Exchange Agreement between us, our former principal shareholder, Barfresh NV and the former shareholders of Barfresh NV. As a result of this transaction, Barfresh NV became our wholly owned subsidiary and the former shareholders of Barfresh NV became our controlling shareholders.
   
 Spinout of prior business.Immediately prior to the acquisition of Barfresh NV, we spun-out our previous business operations to a former officer, director and principal shareholder, in exchange for all of the shares of our common stock held by that person. Such shares were cancelled immediately following the acquisition.
   
 Financing transaction. Immediately following the acquisition of Barfresh, we sold an aggregate of 1,333,332 shares of our common stock and five-year warrants to purchase 1,333,332 shares of common stock at a per share exercise price of $1.50 in a private offering for gross proceeds of $999,998, less expenses of $26,895.
   
 Change of name. Subsequent to the merger, we changed the name of the Company from Moving Box Inc. to Barfresh Food Group Inc.
   
 Forward stock split. Subsequent to the merger, we conducted a four for one forward stock split of the Company’s common stock.

 

Products

 

The 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. These packs contain all of the ingredients necessary to make a smoothie, shake or frappe, including the ice. Simply add water, empty the packet into a blender, blend and serve. The second format is the bulk “Easy Pour” format. The Company’s 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.

 

23

The following flavors are available as part of our standard portfolio of single serve products:

 

 

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

 

 From as little as 150 calories (per serving)
   
 Real fruit in every smoothie
   
 Dairy free options
   
 Kosher approved
   
 Gluten Free

 

Customer Marketing Material

 

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

25

 

Research and Development

 

The Company incurred research and development expenses for the year ended December 31, 20172018 in the amount of $574,989$674,224 and for the year ended December 31, 20162017 in the amount of $432,146.$574,989. 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 arecompetitor is 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. 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 critical requirement. 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.

Intellectual Property

 

Barfresh owns the domestic and intellectual property rights to its products’ sealed pack of 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 originally filed on December 4, 2007 and it was granted during August of 2017. The Canadian patent was originally filed on August 16, 2005 and it 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 contract manufacturers. Before entering into any manufacturing contracts, the Company determines that the manufacturer meets all government requirements.

 

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

 

The Company currently has 3026 employees and 3 consultants. There are currently 2014 employees and 1 consultant selling our products. We have recently restructured 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 amount 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 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.

 

Barfresh is a leader in the creation, manufacturing and distribution of ready to blend frozen beverages. The current portfolio of products includes smoothies, shakes and frappes. Products are packaged in two distinct formats.

The Company’s original single serve format features portion controlled and ready to blend beverage ingredient packs or “beverage packs”. The beverage packs contain all of the solid ingredients necessary to make the beverage, including the base (either sorbet, frozen yogurt or ice cream), real fruit pieces, juices and ice – five ounces of water are added before blending.

 

The Company’s bulk “Easy Pour” format also contains all of the solid ingredients necessary to make the beverage, packaged in gallon containers in a concentrated formula that is mixed “one to one” with water. The Company has a “no sugar added” version of the bulk “Easy Pour” format that is specifically targeted for the USDA national school meal program, including the School Breakfast Program, the National School Lunch Program, and Smart Snacks in Schools Program. The Company is currently in contract to sell its bulk Easy Pour products into over 300three hundred schools. In addition, the Company 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 is currently in contract to sellwith and selling its bulk Easy Pour products into over fiftyone hundred military bases in the United States.

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

 

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

 

During 2016 and 2017 the Company announced that it had signed supply agreements with several of the major global on-site foodservice operators. On March 8, 2018, the Company announced that it had signed a new supply agreement with one of the largest of these foodservice operators, for exclusive distribution of four of Barfresh’s single serve sku’s.

The Company also sells to broadline distributors that supply products to the food services market place. Effective July 2, 2014, the Company entered into an exclusive agreement with Sysco Merchandising and Supply Chain Services, Inc. for resale by the Sysco Corporation (“Sysco”) to the foodservice industry of the Company’s ready-to-blend smoothies, shakes and frappes. Pursuant to that agreement, all Barfresh products are included in Sysco’s national core selection of beverage items, making Barfresh its exclusive single-serve, pre-portioned beverage provider. The agreement is mutually exclusive; however, Barfresh may also sell the products to other foodservice distributors, but only to the extent required for such foodservice distributors to service multi-unit chain operators with at least 20 units and where Sysco is not such multi- unit chain operator’s nominated distributor for our products. On October 2, 2017, the Sysco agreement was extended for an additional two year period, and expanded to cover bulk easy pour products, on a non-exclusive basis.

During 2016 and 2017 the Company announced that it had signed supply agreements with several of the major global on-site foodservice operators. On March 8, 2018, the Company announced that it had signed a new supply agreement with one of the largest of these foodservice operators, for exclusive distribution of four of Barfresh’s single serve sku’s. On November 14, 2018, the Company announced that it had received approval for multiple products to be rolled out to a national restaurant chain with over 2,500 locations.

On October 26, 2015, Barfresh signed a five year agreement with PepsiCo North America Beverages, a division of PepsiCo, to become its exclusive sales representative within the food service channel to present Barfresh’s line of ready-to-blend smoothies and frozen beverages throughout the United States and Canada. Through this agreement, Barfresh’ products are included as part of PepsiCo’s offerings to its significant customer base. The agreement facilitates access to potential National customer accounts, through introductions provided by PepsiCo’s one-thousand plus person foodservice sales team. Barfresh products have become part of PepsiCo’s customer presentations at national trade shows and similar venues.

 

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

 

During November, 2016, the Company received an equity investment from Unibel, the majority shareholder of the Bel Group (“Unibel”). The Bel GroupOur corporate office is headquartered in Paris, France, with global operations in 33 countries, 30 production sites on 4 continentslocated at 3600 Wilshire Boulevard Suite 1720, Los Angeles, 90010. Our telephone number is (310) 598-7113 and nearly 12,000 employees. Its many branded products, including The Laughing Cow®, Mini Babybel® and Boursin®, are sold in over 130 countries around the world. Pursuant to the securities purchase agreement, Unibel purchased 15,625,000 shares of common stock at $0.64 per share (“Shares”) and warrants to purchase 7,812,500 shares of common stock (“Warrants”) for aggregate gross proceeds to Barfresh of $10 million. The Warrants are exercisable for a term of five years at a per share price of $.88 for cash. Pursuant to the Investor Rights agreement, Barfresh has registered the Shares and the Warrants, and Unibel was granted a seat on the Barfresh Board. This strategic investment provided Barfresh with necessary capital while leveraging Unibel’s more than 150 years of industrial expertise, innovative capabilities, world-class marketing and branding expertise to accelerate our growth in new and existing markets and product channels.website iswww.barfresh.com.

 

On February 14, 2018, wethe Company announced the private placement of convertible notes with gross proceeds of $4.1 million. Funding was contingent upon achievement of two milestones.million The closing of the first 60% of this amount occurred between March 12 and 22, 2018, upon the Company’s achievement of the first milestone – entryafter notice was issued by the Company that it had entered into a material agreement or series of related agreements with a national account for the sale of its products into approximately 1,000 new locations. After the initial private placement, investors were offered the opportunity to accelerate the issuance of the additional warrant by increasing their convertible note investment by 10% to 20%. After the close of the first quarter, a number of investors took advantage of this acceleration opportunity, resulting in an increase in the amount of the total convertible note by $ 177,300 and the issuance of 930,332 additional warrants. The balanceremaining 40% of the principal amount was contingentto be received upon achievement ofachieving a second milestone, – the Company’s entrywhich is entering into a material agreement or series of related agreements with a national account for the sale of its products into approximately 2,500 new locations. InDuring November of 2018 the Company and several of the Convertible Note investors agreed to amend the definition of Milestone 2 to allow for the funding the remaining 40% of the principal amount upon the Company receiving approval from a National Restaurant Chain with over 2,500 for the rollout of its products. Such approval was received during the fourth quarter of 2018, and the Company and certain investors agreed to subsequently amend the second milestone to allow for written notification of the approval of the roll-out in lieu of requiring a binding material agreement. [As such, the Company fundedreceived an additional $1.3$1.4 million in the fourth quarter].

of convertible note proceeds.

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

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

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

Currently we have 2423 employees and 23 consultants. There are currently 14 employees and 1 consultant selling our products.

 

Critical Accounting Policies

 

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

 

Revenue Recognition

 

In accordance with ASC 606, Revenue from Contracts with Customers, revenue is recognized when a customer obtains ownership of promised goods. The Company adopted this standard at the beginning of fiscal year 2018, with no significant impact to its financial position or results of operations, using the modified retrospective method. The amount of revenue recognized reflects the consideration to which the Company expects to be entitled to receive in exchange for these goods. The Company applies the following five steps:

 

 1)Identify the contract with a customer
   
  A contract with a customer exists when (i) the Company enters into an enforceable contract with a customer that defines each party’s rights, (ii) the contract has commercial substance and, (iii) the Company determines that collection of substantially all consideration for goods or services that are transferred is probable. For the Company, the contract is the approved sales order, which may also be supplemented by other agreements that formalize various terms and conditions with customers.
   
 2)Identify the performance obligation in the contract
   
  Performance obligations promised in a contract are identified based on the goods or that will be transferred to the customer. For the Company, this consists of the delivery of frozen beverages, which provide immediate benefit to the customer.
 3)Determine the transaction price
   
  The transaction price is determined based on the consideration to which the Company will be entitled in exchange for transferring goods, and is generally stated on the approved sales order. Variable consideration, which typically includes volume-based rebates or discounts, are estimated utilizing the most likely amount method.
   
 4)Allocate the transaction price to performance obligations in the contract
   
  Since our contracts contain a single performance obligation, delivery of frozen beverages, the transaction price is allocated to that single performance obligation.

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

Impairments

 

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

 

Share-based Compensation

 

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

 

Derivative Liability

 

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

Results of Operations

 

Results of Operation for Three MonthsFiuscal Year Ended September 30,December 31, 2018 as Compared to the Three MonthsFiscal Year Ended September 30,December 31, 2019.2017

 

Revenue and cost of revenue

 

Revenue increased $940,262 (138%$2,238,147 (112%) from $679,952$1,997,012 in 2017 to $1,620,214$4,235,159 in 2018. The increase in revenue is primarily the result of the rollout of our new bulk Easy Pour product which began during the first quarter of 2017 and has continued to gain momentum during 2018. Our products continue to be distributed through all 72 of Sysco’s U.S. mainland distribution centers, as well as through new customers beyond the Sysco distribution network.

 

Cost of revenue for 2018 was $723,219$2,090,495 as compared to $334,376$1,107,341 in 2017. Our gross profit was $896,495 (55.3%$2,144,664 (51%) and $345,576 (50.8%$889,671 (45%) for 2018 and 2017, respectively. This improvement was driven by a number factors, including leverage due to larger scale of production and product mix. We anticipate that our gross profit percentage for the remainder of 20182019 will be comparable to the current quarter.that of 2018.

Operating expenses

 

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

 

Our general and administrative expenses decreased $198,570 (8.5%$1,678,669 (18%) from $2,337,634$9,492,094 in 2017 to $2,139,064$7,813,425 in 2018, with the improvement primarily driven by lower personnel expenses resulting from the realignment of our sales force. The following is a breakdown of our general and administrative expenses for the three months ended September 30,years 2018 and 2017:2017.

 

 three months ended
September 30,
 three months ended
September 30,
    Twelve
months ended
 Twelve
months ended
     
 2018 2017 Difference  December 31, 2018 December 31, 2017 Change   
Personnel costs $724,101  $998,886  $(274,785) $3,027,548  $4,260,946  $(1,233,398)  (29)%
Stock based compensation/options  134,082   259,949   (125,867)  498,768   1,360,688   (861,920)  (63)%
Legal and professional fees  87,170   103,729   (16,559)  463,991   465,737   (1,746)  0%
Travel  107,223   84,694   22,529   432,140   422,284   9,856   2%
Rent  46,614   42,674   3,940   201,100   142,572   58,528   41%
Marketing and selling  382,587   188,038   194,549   750,059   696,253   53,806   8%
Consulting fees  17,450   58,870   (41,420)  60,359   203,721   (143,362)  (70)%
Director fees  75,000   100,000   (25,000)  241,000   206,296   34,704   17%
Research and development  150,299   107,324   42,975   674,224   574,989   99,235   17%
Shipping and Storage  259,164   235,683   23,481 
Shipping Expense and storage  864,871   619,871   245,000   40%
Other expenses  155,374   157,787   (2,413)  599,365   538,737   (60,627)  11%
 $2,139,064  $2,337,634  $(198,570) $7,813,425  $9,492,094  $(1,678,669)  (18)%

 

Personnel cost represents the cost of employees including salaries, bonuses, employee benefits and employment taxes for the years 2018 and 2017 and continues to be our largest cost. Personnel cost decreased $274,785 (28%$1,233,398 (29%) from $998,886$4,260,946 to $724,101.$3,027,548. During the fourth quarters of 2016 and 2017, we realigned ours sales force to a more efficient model, by increasing the number of dedicated sales brokers that represent our products, and reducing the number of sales force employees. When taking into consideration start dates for new employees, and separation dates for those employees who left our workforce,At year end 2017 we had 4330 full time employees, during 2016, and we currently have 2426 full time employees.

 

Stock based compensation is used as an incentive to attract new employees and to compensate existing employees. Stock based compensation includes stock issued and options granted to employees and non-employees.employees. Stock compensation for the current quarteryear was $134,082,$498,768, a decrease of $125,785,$861,920, or 48%63%, from the year ago quarter expense of $259,949.$1,360,688. The decrease is primarily due to reductions in our workforce and the timing of equity grants. The Company issues additional stock options to its employees from time to time under its Equity Compensation Plan.

Legal and professional fees decreased $16,559 (16%)were relatively flat between 2018 and 2017, with a small decrease $1,746, from $103,729$465,737 in 2017 to $87,170$463,991 in 2018. The decrease was primarily due to a timing of legal services required. We anticipate legal fees related to our business and financing activities to increase as our business continues to grow.

 

Travel expenses increased $22,529 (27%$9,856 (2%) from $84,694$422,284 in 2017 to $107,223$432,140 in 2018. The increase is primarily due to the net effect of the decrease in travel costs associated with terminated employees, offset by the increase in per employee travel costs as remaining employees have been asked to cover larger territories. We anticipate that travel expenses for the balance of this year2019 will be comparable to the current quarter.year.

 

Rent expense is primarily for our location in Beverly Hills, California. Rent expense for the Beverly Hills office is approximately $14,488 per month. We leaseDuring 2018 we leased office space at 8383 Wilshire Boulevard, Beverly Hills, California pursuant to a new lease that commenced on November 1, 2016 and expiresexpired March 31, 2019. Effective April 1, 2019, we have entered into a new lease for office space located at 3600 Wilshire Boulevard Suite 1720, Los Angeles, 90010.

 

Marketing and selling expenses increased $194,549 (103%$53,806 (8%) from $188,038$696,253 in 2017 to $382,587$750,059 in 2018. Higher marketing and selling expenses were primarily due to higher sales agent commissions associated with higher sales during the quarter.year.

Consulting fees were $17,450decreased $143,362 (70%), from $203,721 in 2018, as compared with $58,8702017, to $60,359 in 2017.2018. Our consulting fees vary based on needs. We engaged consultants in the areas of sales and operations during the quarter.both 2018 and 2017. The need for future consulting services will be variable.

 

Director fees decreased $25,000increased $34,704 (17%) from $100,000$206,296 in 2017 to $75,000$241,000 in 2018. Annual director fees are anticipated at $50,000 per non-employee director.

 

Research and development expenses increased $42,975, (40%$99,235, (17%) from $107,324$574,989 in 2017 to $150,299$674,224 in 2018. These expenses relate to the services performed by our Director of Manufacturing and Product Development, and consultants supporting that employee. These activities are primarily directed towards to development of new products.

 

Shipping and storage expense increased $23,481 (10%$245,000 (40%) from $235,683$619,871 in 2017 to $259,164$864,871 in 2018. Shipping and storage expense as a percentage of revenue decreased from 35%31% in 2017 to 16%20% in 2018. This improvement is primarily due to the growth of the scale of our business, and the corresponding cost savings associated with freight movement. We anticipate that shipping and storage expense as a percentage of sales will continue to reduce duringin the balance of the year,future, as the Company continues 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 these expenses to be comparable for the balance of the year.

 

We had operating losses of $1,407,171 and $2,086,033 for the three month periods ended September 30,$6,180,080 in 2018 and 2017, respectively.$8,911,540 in 2017. The improvement of $678,862,$2,731,460 or 32.5%31%, was primarily due to higher gross profit margin on higher sales, and lower G&A expenses.

 

Interest expense in the third quarter offor 2018 is $196,201. Interest$764,813 relates to “Milestone 1” convertible debt in the amount of $2,527,500$2,704,800 that was issued on March 14, 2018, which bears interest at 10%, “Milestone 2” convertible debt in the amount of $1,363,200, that was issued on November 30, 2018, which bears interest at 10%, and to a note payable in the amount of $200,000$250,000 that was issued on March 5, 2018, which bears2018. Of the Milestone 1 convertible debt, $453,000 of principal, and the accrued interest at 12%.thereon, was converted into stock during the fourth quarter of 2018. The principal and accrued interest on the Note Payable in the amount of $250,000 was repaid during the fourth quarter of 2018. Interest expense for 2018 includes amortization of $121,508$519,707 of the value of warrants issued with the Milestone 1 and Milestone 2 convertible debt.

The change in fair value of the derivative liability resulted in a loss of $5,911$87,630 for the three monthsyear ended September 30,December 31, 2018. This results from the netting of a loss of $198,454 from the change in value of the derivative, partially offset by gain on the conversion to stock of convertible notes during the fourth quarter of 2018.

The warrant modification was revalued at July 31, 2018 with a value of $452,308. The difference in fair value immediately before and after the modification of the warrant modification expense wasresulted in a loss of $290,300.

 

We had net losses of $1,899,583$7,322,823 and $2,086,033$8,911,540 for the years 2018 and 2017, respectively. This reduction in net loss, in the three month periods ended September 30, 2018amount of $1,588,717, or 18%, is primarily attributable to the same factors that drove the improvement in operating losses, partially offset by certain non-cash charges, including higher interest, warrant modification, and 2017.loss from derivative liability, in 2018.

 

Results of Operation for NineThree Months Ended September 30, 2018March 31, 2019 as Compared to the NineThree Months Ended September 30,March 31, 20182017

 

Revenue and cost of revenue

 

Revenue increased $1,708,372 (105%$211,463 (34%) from $ 1,621,119$623,071 in 20172018 to $ 3,329,451$834,534 in 2018.2019. The increase in revenue is primarily the result of the rollout of our new bulk Easy Pour product which began during the first quarter of 2017 and has continued to gain momentum during 2018.momentum. Our products continueproduct continues to be distributed through all 72 of Sysco’s U.S. mainland distribution centers, as well as through new customers beyond the Sysco distribution network.

 

Cost of revenue for 20182019 was $ 1,521,873$399,830 as compared to $ 822,902$290,050 in 2017.2018. Our gross profit was $ 1,807,578 (54.3%$434,704 (52%) and $ 798,217 (49.2%$333,021 (53%) for 20182019 and 2017,2018 respectively. We anticipate that our gross profit percentage to remain the same for the remainder of 2018 will be approximately 50%.2019.

 

Operating expenses

 

Our operations during 2018 and 2017 were primarily directed towards increasing sales and expanding our distribution network.

Our general and administrative expenses decreased $711,468 (10%$91,220 (4%) from $7,174,457 in 2017 to $6,462,989$2,094,664 in 2018 with the improvement primarily driven by lower personnel expenses resulting from the realignment of our sales force.to $2,003,444 in 2019. The following is a breakdown of our general and administrative expenses for the ninethree months ended September 30, 2018March 31, 2019 and 2017:2018:

 

 nine months ended
September 30,
 nine months ended
September 30,
    three months
ended
 three months
ended
   
 2018 2017 Difference  March 31, 2019 March 31, 2018 Difference 
Personnel costs $2,461,772  $3,276,377  $(814,605) $958,866  $897,803  $61,063 
Stock based compensation/options  498,527   876,253   (377,726)  136,941   246,775   (109,834)
Legal and professional fees  326,894   359,961   (33,067)  58,997   107,371   (48,374)
Travel  318,383   313,094   5,289   111,759   83,848   27,911 
Rent  147,197   130,472   16,725   37,201   53,906   (16,705)
Marketing and selling  848,601   453,280   395,321   159,429   160,380   (951)
Consulting fees  53,109   155,371   (102,262)  5,416   17,734   (12,318)
Director fees  187,500   156,296   31,204   62,500   62,500   - 
Research and development  493,969   447,927   46,042   156,199   190,341   (34,142)
Shipping and Storage  718,509   468,952   249,557 
Shipping  98,339   138,248   (39,909)
Storage  51,307   27,823   23,484 
Other expenses  408,528   536,474   (127,946)  166,490   107,935   58,555 
 $6,462,989  $7,174,457  $(711,468) $2,003,444  $2,094,664  $(91,220)

 

Personnel cost represents the cost of employees including salaries, bonuses, employee benefits and employment taxes and continues to be our largest cost. Personnel cost decreased $ 814,605 (24.9%increased $61,063 (7%) from $3,276,377$897,803 to $ 2,461,772.$958,866. Personnel expense in the first quarter of 2019 includes $190,746 of expense related to the settlement of Deferred Executive Compensation amounts that had accrued prior to the current period. Excluding this amount, Personnel Expense for the first quarter of 2019 would have decreased by $129,683, or 14%, as compared with the first quarter of 2018. During the fourth quarters of 2016 and 2017, we affected restructurings of our sales force, whereby we eliminated full time sales positions, and replaced the associated sales territory coverage with brokerage arrangements. This change has allowed our remainingrealigned ours sales force to a more effectively focus on pursuing larger accounts, whileefficient model, by increasing the number of dedicated sales brokers that represent our expanded brokerage network will supportproducts, and expand our “upreducing the number of sales force employees. We had 28 full time employees at the end of the first quarter of 2018, and down the street” business.

we currently have 23 full time employees.

Stock based compensation is used as an incentive to attract new employees and to compensate existing employees. Stock based compensation includes stock issued and options granted to employees and non-employees. Stock compensation for the first nine months of 2018current quarter was $ 498,527$136,941 a decrease of $ 377,726,$109,834 or 43%45%, as compared withfrom the first nine monthsyear ago quarter expense of 2017, which was $876,523.$246,775. The decrease in stock based compensation expense wasis primarily due to reductions in our workforce and the timing of equity grants and the reduction in workforce. The Company issues additional stock options to its employees from time to time under its Equity Compensation Plan.

 

Legal and professional fees decreased $ 33,067 (9.2%$48,374 (45%) from $ 359,961$107,371 in 20172018 to $326,894$58,997 in 2018.2019. The decrease was primarily due to a timing of legal services required. We anticipate that legal fees related to our business and financing activities willto increase as our business continues to grow.

 

Travel expenses increased $ 5,289 (1.7%$27,911 (33%) from $ 313,094$83,848 in 20172018 to $318,383$111,759 in 2018.2019. The changeincrease is primarily due to the net effect of a reductionneed for our in house sales force to travel costs associated with terminated employees, offset by an increasemore frequently in per employee travel costs as remaining employees have been assignedorder to cover larger territories. We anticipate that travel expenses for the balance of this year will be comparable to the quarterlycurrent quarter.

Rent expense for the first nine monthsquarters of this year. .

Rent expense is2018 and 2019 was primarily for our location in Beverly Hills, California. Rent expense for the Beverly Hills office is approximately $14,488 per month. We have entered into a new lease forleased office space at 8383 Wilshire Boulevard, Beverly Hills, California. The newCalifornia pursuant to a lease that commenced on November 1, 2016 and expiresexpired March 31, 2019. Beginning April 1, 2019, we have leased new office space at 3600 Wilshire Boulevard, Los Angeles, California, 90010, pursuant to a four year lease, at a monthly rental rate of $$6,173.

 

Marketing and selling expenses increased $ 395,321 (87.2%) from $ 453,280were $160,380 in 2017 to $ 848,6012018, and $159,429 in 2018. Higher marketing2019. Marketing and selling expenses were primarily dueattributable to higher sales commissions associated with higher sales revenue.agent commissions.

 

Consulting fees decreased $102,262 (65.8%) from $ 155,371were $5,416 in 2017 to $53,1092019, as compared with $17,734 in 2018. Our consulting fees vary based on needs. We engageengaged consultants in the areas of sales and operations and accounting.during the quarter. The need for future consulting services will be variablevariable.

Director fees increased $31,204 from $156,296were $62,500 in 2017 to $187,5002018 and in 2018.2019. Annual director fees are anticipated at $50,000 per non-employee director.

 

Research and development expenses increased $46,042 (10.3%decreased $34,142 (18%) from $447,927$190,341 in 20172018 to $493,969$156,199 in 2018. The increase in Research2019. These expenses relate to the services performed by our Director of Manufacturing and Product Development, Expense is being driven by an increased need for research and development services, as we continue to expand product offerings, both for our standard SKU’s,consultants supporting that employee, and for National Accounts, and commissioning costs at our third party production facility in Searcy, Arkansas.product development activity.

 

Shipping and storage expense increased $249,547 (53.2%decreased $39,909 (29%) from $468,952$138,248 in 20172018 to $718,509$98,339 in 2018.2019. Shipping and storage expense as a percentage of revenue was 21.5% for the first nine months ofdecreased from 22% in 2018 and 28.9% for the first nine months of 2017.to 12%in 2019. The higherimprovement in shipping costs expense in the first nine months of 20182019 is primarily due to expansiona number of our business. Wefactors, including the more efficient movement of inventory in larger loads whenever possible we anticipate that shipping and storage expense as a percentage of sales will continue to reduceimprove during the balance of the year, as the Company is able to take advantage of more efficient distribution arrangements.

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

 

Other expenses consist of ordinary operating expenses such as investor relations, office, telephone, insurance, and stock related costs. We anticipate 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 $5,082,103$1,770,717 and $6,602,816$1,862,526 for the ninethree month periods ended September 30,March 31, 2019 and 2018, and 2017, respectively.

Interest expense in the first quarter of 2019 was $426,297$363,073, and was $30,876 in the first quarter of 2018. Interest for the nine month period ended September 30, 2018. We did not have any interest expense for the nine month period ended September 30, 2017. Interest primarilyfirst quarter of 2019 relates to convertible debt that was issued during March and November of 2018.2018, which bears interest at 10%. Interest for the first quarter of 2018 relates to convertible debt that was issued in March of 2018, which bears interest at 10%, and to a note payable in the amount of $250,000 that was issued on March 5, 2018, which bears interest at 12%. Interest expense in the first quarter of 2019 includes amortization of $263,356 of the value of warrants issued with the convertible debt.

The changedebt in fair valuethe amount of $277,587 in the derivative liability resultedfirst quarter of 2019, and $16,967 in a lossthe first quarter of $253,807 for the nine months ended September 30, 2018, and the warrant modification expense was $290,300.2018.

 

We had net losses of $6,052,507$2,847,262 and $6,602,816$2,338,138 in the ninethree month periods ended September 30, 2018March 31, 2019 and 2017, respectively.

37

Results of Operations

Results of Operation for the Twelve Months Ended December 31, 2017 as Compared to the Twelve Months Ended December 31, 2016

Revenue and Cost of Revenue

Revenue for 2017 was $1,997,012 as compared to $1,457,499 in 2016, an increase of 37%. Our business grew 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 early 2016 had our products in all 72 of Sysco’s Operating Companies. Our business also grew as a result of the introduction of our Bulk Easy Pour product during early 2017.

Cost of revenue for 2017 was $1,085,575 as compared to $772,827 in 2016. Our gross profit was $911,437 or 46%, for 2017 and $684,672 or 47% for 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 2017 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. During the fourth quarter of 2016, and during the fourth quarter of 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.

Primarily as a result of re-aligning our sales force, general and administrative expenses decreased from $10,415,933 in 2016 to $9,492,094 in 2017, a decrease of $923,839, or 9%.

Following is a breakdown of our selling, marketing and general and administrative expenses for 2017 and 2016.

  Twelve months ended  Twelve months ended    
  December 31, 2017  December 31, 2016  Difference 
Personnel costs $4,260,946  $5,560,502  $(1,299,556)
Stock based compensation/options  1,360,688   1,133,149   227,539 
Legal and professional fees  465,737   425,781   39,956 
Travel  422,284   605,920   (183,636)
Rent  142,572   96,151   46,421 
Marketing and selling  696,253   730,142   (33,889)
Consulting fees  203,721   242,668   (38,947)
Director fees  206,296   165,227   41,069 
Research and development  574,989   432,146   142,843 
Shipping Expense and storage  619,871   407,247   212,624 
Other expenses  538,737   617,000   (78,262)
  $9,492,094  $10,415,933  $(923,838)

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 decreased 23%, or $1,299,556, from $5,560,502 in 2016 to $4,260,946 in 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, 2017, we had 30 full time employees, as compared to 34 at December 31, 2016. We do not anticipate any significant change in personnel during 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, increased $227,539 (20%) from $1,133,149 in 2016 to $1,360,688 in 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 are 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 $39,956 (9%) from $425,781 in 2016 to $465,737 in 2017. We anticipate legal fees related to ongoing legal compliance to remain comparable in 2018.

Travel and entertainment expenses decreased $183,636 (30%) from $605,920 in 2016 to $422,284 in 2017. The decrease is due to the re-alignment of our sales force and the related decrease in the number of personnel traveling on company business.

Rent expense increased $46,421 from $96,151 in 2016 to $142,572 in 2017. Rent expense is primarily incurred for our Headquarters location in Beverly Hills, California. During September of 2016 we relocated our Headquarters location to larger sub-leased premises in Beverly Hills, where the monthly rent of $10,997, increased to $11,327 on November 1, 2017. We have entered into a direct lease on the same 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 2018.

Director fees for 2017 were $206,296 as compared with $165,227 in 2016. The increase is primarily due to the full year effect of an increase of the number of our 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.

The Company incurred research and development expenses for the year ended December 31, 2017, in the 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 Research and Development. These expenses relate primarily to the services performed by our Director of 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 national account pipeline. We anticipate this cost continuing in future periods, at an increased rate as compared with 2017.

Shipping 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 expected national account launch in 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 2018 as our business grows.

Operating loss was $8,911,540 in 2017, and $9,939,875 in 2016.

Interest expense was zero in 2017, as compared with $250,850 in 2016. Interest expense for 2016 relates to $2,670,000 of convertible debt that was issued during September 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 10%.

Net loss was $8,911,540 in 2017, and $10,190,725 in 2016.

Liquidity and Capital Resources

 

During the ninethree months ended September 30, 2018,March 31, 2019, we used cash for operations of $3,536,246,$1,873,982, and purchased equipment for $912,102, and incurred spending for trademarks$160,590. We raised cash from the issuance of stock in the amount $6,322. Equipment purchased during the nine months ended September 30, 2018 includes blenders, freezersof $2,400,000 and bulk product blending machines, which are located at the end customer location. No manufacturing equipment was purchased during this period.

We raisedwe received cash fromfor the exercise of warrants in the amount of $550,000,$1,550,310.

During the three months ended March 31, 2018, we used $1,491,691 of cash for operations, $172,231 for the purchase of equipment, and used $50,000 of those proceeds to partially repay a short term note that had originally been issued$2,293 for trademarks. We raised cash in the amount of 250,000. We also raised cash$2,503,200 from the issuance of convertible notes, netand $250,000 from the issuance of issuance costs, in the amount of $2,677,800.

During the nine months ended September 30, 2017, we used $5,224,812 of cash for operations, $412,865 for the purchase of equipment, and $27,684 for trademarks. Equipment purchased during the nine months ended September 30, 2017 includes blenders, freezers and bulk product blending machines, which are located at the end customer location, as well as manufacturing equipment.short term notes.

 

We have a history of operating losses and negative cash flow. As our operations grow, we expect to experience significant increases in our working capital requirements. These conditions raise substantial doubt over the Company’s ability to meet all of its obligations over the twelve months following the filing of this Form 10-Q. Management has evaluated these conditions, and concluded that current plans will alleviate this concern. As of March 31, 2019, we had $2,907,307 of cash on the balance sheet. We have continued to significantly reducedreduce core operating costs beginningexpenses, reducing total General and Administrative Expense in 2016, including reducing2018 by $1.7 million, or 18%, as compared with 2017. In addition, in the numberfirst quarter of 2019, the Company completed $4.3 million of funding efforts. These efforts included a Private Placement Offering for common shares priced at .60 cents per share, resulting in the receipt of capital investment in the amount of $2.4 million and the issuance of 4,000,000 shares. In addition, the Company offered to reduce the exercise price on its I Warrants from $1 to .60 cents, for a limited time. During the time this offer was open, I Warrant holders converted 2,841,454 warrants at .60 cents, resulting in the receipt of capital investment in the amount of $1.7 million. In addition, during the first quarter of 2019, one investor exercised G series warrants, resulting in the receipt of capital investment in the amount of $180,000. In addition, during the first quarter of 2019, the Company settled certain Executive Deferred Compensation payments with a combination of cash and warrants. The total amount of Deferred Executive compensation settled is $771,113. One-third of that total or $243,623, was paid in cash. The remaining balance of $487,246 was settled by granting the Executives warrants exercisable for five years to purchase the Company’s stock at an exercise price of $0.70 per share, the closing price of our employeescommon stock on March 19, 2019, resulting in additional cash savings to the Company.

Net Cash Used For Operating Activities during the first quarter of 2019 was higher than is anticipated on a quarterly basis for the next twelve months. During the first quarter, the Company settled several large vendor payables and also made $243,623 in cash payments to settle a portion of deferred Executive Compensation amounts that had accrued over the prior 18 months. The Company’s forecast for the balance of 2019 reflect a significant improvement in cash flow from 44operations during the next twelve months, as the Company continues to 24increase contracts with school locations, military bases, and anticipates the roll-out of a National Account with over 2,500 locations. Additionally, the Company has implemented numerous cost reduction measures which will reduce cash expenses over the next twelve months, including relocation of its headquarters office, as well as entering into a new contract for personnel related services. These two measures alone will yield $200,000 per year in cash savings, and the Company continues to pursue additional measures to reduce cash expenses. Finally, the Company has received proposed Term Sheets from potential lenders for an ABL facility, and is of the view that an ABL facility will be available on acceptable terms, should the need arise.

The Company has $1.9 million of convertible short term debt coming due in March of 2020. Approximately half of this time period. In addition, we plandebt is held by insiders. The Company expects that if for any reason available cash upon maturity of this debt is not adequate to address this concernrepay the convertible short term debt, that it will be able to refinance such debt, in particular the portion held by raising additional capital. While these plans to raise additional capital have not yet been implemented, managementinsiders.

Management has concluded that it is probable that they will be implemented within one year of the issuance of the financial statements, and that they will mitigatethese actions have mitigated the substantial doubt of our ability to continue as a going concern. However, the Company cannot predict, with certainty, the outcome of its action to generate liquidity, including the availability of additional financing, or whether such actions would generate the expect liquidity as planned.

 

WeAs of April 1, 2019, we lease office space under a non-cancelable operating lease, which expires March 31, 2019.2023.For the first twelve months base rent is $6,175 with annual increases of approximately 3%.

 

The aggregate minimum requirements under non-cancelable leases as of September 30, 2018 is $86,926.April 1, 2019 are $309,928.

 

Off-Balance Sheet Arrangements

 

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

DESCRIPTION OF PROPERTY

 

Our principal executive offices are located at 83833600 Wilshire Blvd.,Boulevard Suite 750, Beverly Hills,1720, Los Angeles, CA 90211. Beginning in September, 2016, we leased this office space pursuant to a sub-lease with the primary tenant for $10,997 per month, increasing to $11,327 per month as of November 1, 2017.90010.. As of March 1, 2018, we lease the same office space pursuant to a direct lease 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 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.

 

Effective March 31, 2019, the Company paid all outstanding Executive Deferred Compensation amounts. The total amount settled is $730,869, comprised of $603,294 outstanding at December 31, 2018, and $127,575 additional deferrals recorded during the first quarter of 2019. One-third of the total outstanding Executive Deferred Compensation amount, or $243,623, was paid in cash. The remaining balance was settled by granting the Executives Series M Warrants exercisable for five years to purchase the Company’s stock at an exercise price of $0.70 per share, the closing price of our common stock on March 19, 2019. The total number of the warrants issued of 1,827,173 was determined using the Black Sholes valuation methodology, and by placing a fifty percent premium on the cash value of the remaining two thirds of total outstanding Executive Deferred Compensation as of March 31, 2019.

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.

 

On September 28, 2016, we closed a private placement to accredited investors of 4,687,504 shares of common stock at $.64 per share, and warrants to purchase up to 2,343,752 shares of common stock, for aggregate proceeds to the Company of $3,000,000. Of the aggregate offering amount, 371,639 shares and 185,819 warrants, 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 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

 

Executive Compensation

The following table summarizes all compensation for the fiscal years ending December 31, 20172018 (“2017”2018”) and December 31, 20162017 (“2016”2017”) received by our “Named Executive Officers”:

 

Name and
Principal
Position
 Period Salary
($)
 Bonus
(1)
($)
 Stock
Awards
($)
 Option
Awards
($)
 Non-Equity
Incentive Plan
Compensation
($)
 Change in
Pension 
Value and
Nonqualified
Deferred
Compensation
Earnings 
($)
 All Other
Compensation
($)
 Total 
($)
  Period Salary ($) 

Bonus

($)

 Stock Awards ($) Option Awards ($) Non-Equity Incentive Plan Compensation ($) 

Change in Pension Value and Nonqualified Deferred Compensation Earnings

($)

 All Other Compensation ($) Total ($) 
Riccardo Delle Coste,
Chief Executive Officer
 2017 350,000(2) - - 105,000(3)               10,800(4) 455,000  2018   350,000(1)  -   -   92,500(2)          10,800(4)  453,300 
 2016 364,583 43,750  57,118(5) 158,750(6)     11,700(4) 624,201  2017   350,000(1)  -   -   105,000(3)          10,800(4)  455,000 
                                                      
Joseph Cugine, President, Barfresh Corp. Inc. a wholly owned subsidiary 2017 300,000(7) - - 105,000(8)       405,000  2018   143,750(5)  -   -   92,500(6)              236,250 
 2016 300,000 25,137 32,818(9) 139,382(10)       497,337  2017   300,000(5)  -       105,000(7)              405,000 
                                                      
Joseph Tesoriero, Chief Financial Officer 2017 290,000(11) - - 253,364(12)       543,364  2018   290,000(8)  -   -   92,500(9)              382,500 
 2016 290,000 19,488 25,443(13) 95,646(14)       430,577  2017   290,000   -   -   253,36410)              543,364 

 

1.Represents discretionary bonuses for fiscal year 2015 that wereOf the salary earned, in 2018 $164,096 was paid during fiscal year 2016.and $185,904 was deferred and in 2017 $294,135 was paid ad $55,865 was deferred.
  
2.OfRepresents a stock option grant 250,000 options shares issued 7/25/2018 with an exercise price of $0.52, which vest ratably over the salary earned, $294,135 was paidnext three years and $55,865 was deferred.are exercisable until 7/25/2026.
  
3.Represents a stock option grant 250,000 options shares issued 9/15/17 with an exercise price of $0.55, which vest ratably over the next three years and are exercisable until 9/15/25.
  
4.Represents the car allowance paid to Mr. Delle Coste
  
5.Represents 121,527 shares of restricted stock valuedOf the trading price on the date of grant. The shares were granted on 11/25/16salary earned, in 2018 $82,115 was paid and vest ratably each year until 2019.$61,635 was deferred and in 2017 $252,115 was paid and $47,885 was deferred.
  
6.Represents twoa stock option grants: (1)grant 250,000 options shares issued 5/7/25/2016,2018 with an exercise price of $0.61,$0.52, which vest ratably over the next three years and are exercisable until 5/7/25/2024 and (2) 125,000 options issued on 11/25/2016, with an exercise price of $0.72, which vest ratably over the next three years and are exercisable until 11/25/2024.2026.
  
7.Of the salary earned, $252,115was paid and $47,885 was deferred.
8.Represents a stock option grant 250,000 options shares issued 9/15/17 with an exercise price of $0.55, which vest ratably over the next three years and are exercisable until 9/15/25.
  
9.8.Represents 69,825 shares of restricted valuedOf the trading price on the date of grant. The shares were granted on 12/12/2016salary earned, in 2018 $142,379 was paid and vest ratably each year until 2019.$147,621 was deferred and in 2017 $243,711 was paid and $46,289 was deferred.
  
10.9.Represents twoa stock option grants: (1)grant 250,000 options shares issued 5/7/25/2016,2018 with an exercise price of $0.61,$0.52, which vest ratably over the next three years and are exercisable until 5/7/25/2024 and (2) 125,000 options issued on 11/25/2016, with an exercise price of $0.72, which vest ratably over the next three years and are exercisable until 11/25/2024.2026.
  
11.Of the salary earned, $243,711was paid and $46,289 was deferred.
12.10.Represents two stock option grants: (1) 300,000 options shares issued 7/5/17, with an exercise price of $0.77, which vest ratably over the next three years and are exercisable until 7/5/2025 and (2) 175,000 options issued on 9/15/2017, with an exercise price of $0.55, which vest ratably over the next three years and are exercisable until 9/5/25.
13.Represents 54,133 shares of restricted stock valued using the Black-Scholes pricing model. The shares were granted on 12/12/ 2016 and vest ratably until 2019.
14.Represents two stock option grants: (1) 175,000 options issued on 5/25/2016, with an exercise price of $0.61, which vest ratably over the next three years and are exercisable until 5/25/2024 and (2) 54,567 options issued on 11/25/2016, with an exercise price of $0.72, which vest ratably over the next three years and are exercisable until 11/25/2024.

Outstanding Equity Awards at Fiscal Year-End Table

 

Option Awards Stock Awards 
Name Number of
securities
underlying
unexercised options
(#) exercisable
  Equity
incentive
plan
awards:
Number of
securities
underlying
unexercised
unearned
options (#)
  Option
exercise
price ($)
  Option
expiration
date
 Number of
shares or
units of
stock that
have not
vested (#)
  Market
value of
shares or
units of
stock that
have not
vested ($)
 
Riccardo Delle Coste  300,000(1)      0.45  1/21/20        
   83,333(2)  166,667(2)  0.61  5/25/24        
   41,667(3)  83,333(3)  0.72  11/25/24        
   250,000(4)      0.55  9/15/25        
                 81,018   47,801 
                       
Joseph Cugine  300,000(5)  300,000   0.50  5/1/23        
   83,333(2)  166,667   0.61  5/25/24        
   27,930(3)  42,124   0.72  11/25/24        
   250,000(4)      0.55  9/15/25        
                 546,550   322,465 
                       
Joseph Tesoriero  250,000(5)  250,000   0.82  5/1/23        
   58,333(2)  116,667   0.61  5/25/24        
   18,189(3)  36,378   0.72  11/25/24        
   175,000(4)      0.55  9/15/25        
                 286,089   168,793 

Option Awards Stock Awards 
Name  Number of
securities
underlying
unexercised options
(#) exercisable
  Equity
incentive
plan
awards:
Number of
securities
underlying
unexercised
unearned
options (#)
  Option
exercise
price ($)
  Option
expiration
date
 Number of
shares or
units of
stock that
have not
vested (#)
  Market
value of
shares or
units of
stock that
have not
vested ($)
 
Riccardo Delle Coste  300,000(1)      0.45  1/21/20        
   166,666(2)  83,334(2)  0.61  5/25/24        
   83,333(3)  41,667(3)  0.72  11/25/24        
   83,333(4)  166,667(4)  0.55  9/15/25        
       250,000(5)  0.52  7/26/26        
                 40,509   27,951 
                       
Joseph Cugine  600,000(1)      0.50  5/1/23        
   83,333(2)  166,667(2)  0.61  5/25/24        
   27,930(3)  42,124(3)  0.72  11/25/24        
   83,333(4)  166,667(4)  0.55  9/15/25        
       250,000(5)  0.52  7/26/26        
                 23,275   16,059 
                       
Joseph Tesoriero  500,000(1)      0.82  5/1/23        
   58,333(2)  116,667(2)  0.61  5/25/24        
   100,000(6)  200,000(6)  0.77  7/15/25        
   36,378(3)  18,189(3)  0.72  11/25/24        
   58,333(4)  116,667(4)  0.55  9/15/25        
       250,000(5)  1.52  7/26/26        
                 286,089   168,793 

 

1.Fully vested.
  
2.Vest in equal increments on 5/25/2017, 5/25/2018 and 5/25/2019.
  
3.Vest in equal increments on 11/25/2017, 11/25/2018, and 11/25/2019.
  
4.Vest in equal increments on 9/15/18, 9/15/19, and 9/15/20.
  
5.Vest in equal increments on 5/1/20177/15/18, 7/15/19, and 5/1/2018.7/15/19.
6.Vest in equal increments on 7/26/19, 7/26/20, and 7/26/21.

 

Compensation of Directors

 

The following table summarizes the compensation paid to our directors that were not employees for the fiscal year ended December 31, 2017.2018. A director who is a Company employee does not receive any compensation for service as a director. The compensation received by directors that are employees of the Company is shown above in the summary compensation table. We reimburse all directors for expenses incurred in their capacity as directors.

Name Fees
Earned or
Paid in
Cash 
($)
 Stock
Awards 
($)
 Option
Awards 
($)
 Non-Equity
Incentive Plan
Compensation
($)
 Nonqualified
Deferred
Compensation
Earnings
($)
 All Other
Compensation
($)
 Total
($)
  Fees
Earned or
Paid in
Cash
($)
 Stock
Awards
($)
 Option
Awards
($)
 Non-Equity
Incentive Plan
Compensation
($)
 Nonqualified
Deferred
Compensation
Earnings
($)
 All Other
Compensation
($)
 Total
($)
 
Arnold Tinter 50,000                 70,000(1) 120,000   50,000                              12,600(1)  62,600 
Steven Lang     50,000(2)       50,000           50,000               50,000 
Alice Elliot     50,000(3)       50,000       50,000                   50,000 
             50,000                             
Alex Ware   50,000(4)         50,000       50,000(2)                  50,000 
Isabelle Ortiz-Cochet   50,000(5)       50,000           50,000(3)              50,000 

 

(1)Represents consulting fees paid to Mr. Tinter.
  
(2)Mr. Lang elected to receive $25,000 in cash and 40,843 Stock Options in lieu of cash.Ware joined the board on July 13, 2016.
  
(3)Ms. Elliot elected to receive 81,075 Stock Options in lieu of cash.
(4)Mr. Ware elected to receive 95,995 shares of Stock in lieu of cash.
(5)Ms. Ortiz-Cochet joined the board on December 16, 2016. She elected to receive Stock Options for her service beginning in lieu of cash.2017.

Employment Agreements

 

On April 27, 2015, The CompanySmoothie, Inc. entered into an executive employment agreement with Riccardo Delle Coste, its Chief Executive Officer and director. Mr. Delle Coste is also the Chief Executive Officer and Chairman of the Company. Pursuant to the employment agreement, he will receive a base salary of $350,000 and performance bonuses of 75% of his base salary based on mutually agreed upon performance targets. In addition, Mr. Delle Coste will receive up to an additional 500,000 performance options, on an annual basis. All options granted under the employment agreement are subject to the Company’s 2015 Equity Incentive Plan.

 

On April 27, 2015, Smoothie, Inc. entered into an executive employment agreement with Joseph M. Cugine to serve as President of Smoothie, Inc. Pursuant to the employment agreement, Mr. Cugine will receive a base salary of $300,000 and performance bonuses of 75% of his base salary based on mutually agreed upon performance targets. In addition, Mr. Cugine will receive 8-year options to purchase up to 600,000 shares of Barfresh, one-half vesting on each of the second and third anniversaries of the date of Mr. Cugine’s employment agreement. In addition, he will receive up to an additional 500,000 performance options, on an annual basis. All options granted under the employment agreement are subject to the Company’s 2015 Equity Incentive PlanPlan.

 

The Company entered into an executive employment agreement with Joseph S. Tesoriero on May 18, 2015, pursuant to which he agreed to serve as Chief Financial Officer. Pursuant to the employment agreement, Mr. Tesoriero will receivereceived a base salary of $250,000 and performance bonuses of 75% of his base salary, based upon performance targets determined by the Board of Directors. In addition, Mr. Tesoriero was granted 350,000 shares of common stock of Barfresh and 8-year options to purchase up to 500,000 shares of common stock of Barfresh. One-half of each of the share and option grants vests on each of the second and third anniversaries of the date of commencement of Mr. Tesoriero’s employment. Mr. Tesoriero will also receivereceives 8-year performance options to purchase up to an additional 350,000 shares on an annual basis. All shares and options granted under the employment agreement are subject to the Company’s 2015 Equity Incentive Plan.

Effective April 1, 2019, the Company and Mr. Tesoriero entered into an amendment to his employment agreement reducing Mr. Tesoriero’s time commitment and compensation by 60%, in order to more effectively address the Company’s current needs.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

There were no changes in or disagreements with our accountants on accounting and financial disclosure during the last two fiscal years, the fiscal years ending December 31, 20172018 and December 31, 2016 .2017.

 

MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS

 

Market Information

 

Our common stock is currently traded on the OTCQB under the symbol “BRFH”. Our common stock had been quoted on the OTC Bulletin Board since July 27, 2011 under the symbol MVBX. Effective February 29, 2012, our symbol changed to BRFH based on the forward split and name change. On March 21, 2012, our common stock was delisted to Pink Sheets. On January 21, 2014, we registered our common stock under Section 12(g) of the Exchange Act.

 

Holders

 

At October 10, 2018,May 21, 2019, there were 120,756,547130,085,820 shares of our common stock outstanding. Our shares of common stock are held by 100 stockholders of record. The number of record holders was determined from the records of our transfer agent and does not include beneficial owners of common stock whose shares are held in the names of various security brokers, dealers and registered clearing agencies.

 

Dividends

 

We have never declared or paid a cash dividend. Any future decisions regarding dividends will be made by our board of directors. We currently intend to retain and use any future earnings for the development and expansion of our business and do not anticipate paying any cash dividends in the foreseeable future. Our board of directors has complete discretion on whether to pay dividends. Even if our board of directors decides to pay dividends, the form, frequency and amount will depend upon our future operations and earnings, capital requirements and surplus, general financial condition, contractual restrictions and other factors that the board of directors may deem relevant.

 

Purchases of Equity Securities by the Company

 

There were no purchases of equity securities made by the Company in the period covered by this report.

 

Securities Authorized for Issuance Under Equity Compensation Plans

 

The following table provides information, as of December 31, 2017,2018, with respect to equity securities authorized for issuance under our equity compensation plans:

 

Plan Category Number of
Securities to be
Issued Upon
Exercise of
Outstanding
Options,
Warrants and
Rights
(a)
 Weighted-Average
Exercise Price of
Outstanding
Options, Warrants
and Rights
(b)
 Number of
Securities
Remaining
Available for
Future Issuance
Under Equity
Compensation
Plans (excluding
securities reflected
in Column (a))(c)
  Number of
Securities to be
Issued Upon
Exercise of
Outstanding
Options,
Warrants and
Rights
(a)
 Weighted-Average
Exercise Price of
Outstanding
Options, Warrants
and Rights
(b)
 Number of
Securities
Remaining
Available for
Future Issuance
Under Equity
Compensation
Plans (excluding
securities reflected
in Column (a))(c)
 
              
Equity compensation plans approved by security holders 6,715,419 $0.63 8,084,581   7,428,014  $0.55   7,371,986 
Equity compensation plans not approved by security holders - $- -   -  $-   - 
                                     
TOTAL 6,715,419 $0.63 8,084,581   7,428,014  $.55   7,371,986 

 

Transfer Agent

 

Our transfer agent, Action Stock Transfer, is located at 2469 E. Fort Union Blvd, Suite 214, Salt Lake City, Utah 84121, and its telephone number is (801) 274-1088.

WHERE YOU CAN FIND ADDITIONAL INFORMATION

 

We have filed with the SEC a registration statement on Form S-1, including exhibits and schedules, under the Securities Act, with respect to the shares of common stock being offered by this prospectus. This prospectus, which constitutes part of the registration statement, does not contain all of the information in the registration statement and its exhibits. For further about the Company and the common stock offered by this prospectus, we refer you to the registration statement and its exhibits. Statements contained in this prospectus as to the contents of any contract or any other document referred to are not necessarily complete, and in each instance, we refer you to the copy of the contract or other document filed as an exhibit to the registration statement. Each of these statements is qualified in all respects by this reference.

 

We are subject to the information reporting requirements of the Securities Exchange Act of 1934, as amended, and we file quarterly reports on Form 10Q, Annual Reports on Form 10-K, Current Reports on Form 8-K, proxy statements and other required information and reports with the SEC.

 

You can read our SEC filings, including the registration statement, over the Internet at the SEC’s website atwww.sec.govat no cost. You may also request a copy of these filings, at no cost, by writing us at 83833600 Wilshire Blvd.,Boulevard Suite 750, Beverly Hills, CA 902111720, Los Angeles, 90010 or calling us at (310) 598-7113.

 

We also maintain a website atwww.barfresh.com/us/, at which you may access these materials free of charge as soon as reasonably practicable after they are electronically filed with, or furnished to, the SEC. Information contained on or accessible through our website is not a part of this prospectus, and the inclusion of our website address in this prospectus is an inactive textual reference only.

Index to Consolidated Financial Statements

 

Page
  
Interim Financial Statements 
  
Consolidated Balance Sheets as of September 30 ,March 31, 2018 (unaudited)F-1
  
Condensed Consolidated Statements of Operations For the Three and Nine Months Ended SeptemberMarch 30, 20182019 and 20172018 (unaudited)F-2
  
Condensed Consolidated Statements of Cash Flows For the NineThree Months Ended September 30,March 31, 2019 and 2018 and 2017 (unaudited)F-3
  
Notes to Condensed Consolidated Financial Statements (unaudited)F-4 - F-11F-16
  
Annual Financial Statements 
  
Report of Independent Registered Public Accounting FirmF-12F-17
  
Consolidated Balance Sheets as of December 31, 20172018 and 20162017F-13F-18
  
Consolidated Statements of Operations for the Year Ended December 31, 20172018 and the Year Ended December 31, 20162017F-14F-19
 
Consolidated Statements of Stockholders’ Equity for the Year Ended December 31, 20172018F-15F-20
  
Consolidated Statements of Cash Flows for the Year Ended December 31, 20172018 and the Year Ended December 31, 20162017F-16F-21
  
Notes to Consolidated Financial StatementsF-17F-22 - F-25F-32

47

Barfresh Food Group Inc.

Condensed Consolidated Balance Sheets

 

 September 30, 2018 December 31, 2017  March 31, 2019  December 31, 2018 
 (Unaudited) (Audited)  (Unaudited)  (Audited) 
Assets                
Current assets:                
Cash $316,014  $1,304,916  $2,907,307  $1,041,569 
Accounts Receivable  656,728   301,012 
Inventory  1,082,665   1,415,495 
Accounts receivable, net  642,863   357,304 
Inventory, net  1,197,941   1,226,463 
Prepaid expenses and other current assets  95,111   24,496   121,254   98,457 
Total current assets  2,150,518   3,045,919   4,869,365   2,723,793 
Property, plant and equipment, net of depreciation  2,413,003   1,760,890   2,535,129   2,500,254 
Intangible assets, net of amortization  545,558   586,943   521,887   537,789 
Deposits  39,369   39,369   23,462   - 
Total Assets $5,148,448  $5,433,121  $7,949,843  $5,761,836 
                
Liabilities And Stockholders’ Equity                
Current liabilities:                
Accounts payable $718,633  $421,176  $742,875  $1,101,882 
Accrued expenses  1,224,427   849,529   163,259   175,259 
Deferred rent liability  -   495 
Notes Payable  200,000   - 
Total current liabilities  2,143,060   1,271,200 
Long term liabilities:        
Accrued payroll  -   638,706 
Accrued vacation  146,929   155,586 
Accrued Interest  162,941   -   196,842   - 
Convertible note - related party, net of discount  613,095   -   685,756   - 
Convertible note, net of discount  1,361,071   -   866,310   - 
Derivative Liabilities  892,794   - 
Derivative liabilities  973,021   - 
Total current liabilities  3,774,992   2,071,433 
Long term liabilities:        
Accrued interest  45,191   190,475 
Convertible note - related party, net of discount  239,992   841,836 
Convertible note, net of discount  344,217   1,367,487 
Derivative liabilities  758,644   1,325,653 
Total liabilities  5,172,961   1,271,200   5,163,036   5,796,884 
                
Commitments and contingencies (Note 8)        
Commitments and contingencies (Note 5,6,7and 11)        
                
Stockholders’ equity:                
Preferred stock, $0.000001 par value, 5,000,000 shares authorized, none issued or outstanding  -   -   -   - 
Common stock, $0.000001 par value; 300,000,000 shares authorized; 120,756,547 and 118,690,527 shares issued and outstanding at September 30, 2018 and December 31, 2017, respectively  121   119 
Common stock, $0.000001 par value; 300,000,000 shares authorized; 130,085,820 and 122,770,960 shares issued and outstanding at March 31, 2019 and December 31, 2018, respectively  130   123 
Additional paid in capital  39,859,625   37,992,799   46,787,709   41,118,649 
Accumulated deficit  (39,884,259)  (33,830,997)  (44,001,032)  (41,153,820)
Total stockholders’ equity  (24,513)  4,161,921   2,786,807   (35,048)
Total Liabilities and Stockholders’ Equity $5,148,448  $5,433,121  $7,949,843  $5,761,836 

 

See the accompanying notes to the condensed consolidated financial statements

Barfresh Food Group Inc.

Condensed Consolidated Statements of Operations

For the three and nine months ended September 30,March 31, 2019 and 2018 and 2017

(Unaudited)

 

 For the three months ended September 30, For the nine months ended September 30, 
  2018   2017   2018   2017  2019  2018 
Revenue $1,620,214  $679,952  $3,329,451  $1,621,119  $834,534  $623,071 
Cost of revenue  723,719   334,376   1,521,873   822,902   387,724   278,466 
Depreciation of Manufacturing Equipment  12,106   11,584 
Gross profit  896,495   345,576   1,807,578   798,217   434,704   333,021 
                        
Operating expenses:                        
General and administrative  2,139,064   2,337,634   6,462,989   7,174,457   2,003,444   2,094,664 
Depreciation and Amortization  164,602   93,975   426,692   226,576   201,977   100,883 
Total operating expenses  2,303,666   2,431,609   6,889,681   7,401,033   2,205,421   2,195,547 
                        
Operating loss  (1,407,171)  (2,086,033)  (5,082,103)  (6,602,816)  (1,770,717)  (1,862,526)
                        
Other (income)/expenses        
Other (income)/expenses /loss from derivative liability  5,911   -   253,807   -   406,012   444,736 
Warrant modification  290,300   -   290,300   -   307,460   - 
Interest  196,201   -   426,297   -   363,073   30,876 
Total other expense  492,412   -   970,404   -   1,076,545   475,612 
                        
Net (loss) $(1,899,583) $(2,086,033) $(6,052,507) $(6,602,816) $(2,847,262) $(2,338,138)
                        
Per share information - basic and fully diluted:                        
Weighted average shares outstanding  120,431,103   118,382,934   119,432,657   117,790,039   126,480,323   118,682,325 
Net (loss) per share $(0.02) $(0.02) $(0.05) $(0.06) $(0.02) $(0.02)

 

See the accompanying notes to the condensed consolidated financial statements

Barfresh Food Group Inc.

Condensed Consolidated Statements of Cash Flows

For the ninethree months ended September 30,March 31, 2019 and 2018 and 2017

(Unaudited)

 

 2018 2017  2019 2018 
Net Cash (used for) Operating Activities  (3,536,246)  (5,224,812)  (1,873,982)  (1,491,691)
                
Investing Activities                
Purchase of property and equipment  (912,102)  (412,865)  (160,590)  (172,231)
Proceeds from sale of equipment  37,968   - 
Purchase of Intangibles  (6,322)  (27,684)  -   (2,293)
Net Cash (used for) Investing Activities  (880,456)  (440,549)  (160,590)  (174,524)
                
Financing Activities                
Exercise of Warrant  550,000   35,400 
Cash received for Warrant Exercises  1,500,310   - 
Cash received for Stock  2,400,000     
Issuance of short term notes  250,000   -   -   250,000 
Repayment of short term notes  (50,000)  - 
Issuance costs of convertible notes  (27,000)  - 
Issuance of convertible notes  2,704,800   -   -   2,503,200 
Repayment of long term debt  -   (2,879)
Net Cash from Financing Activities  3,427,800   32,521   3,900,310   2,753,200 
                
Net Change in Cash and Cash Equivalents  (988,902)  (5,632,840)  1,865,738   1,086,985 
                
Cash and Cash Equivalents, Beginning of Year  1,304,916   9,180,947   1,041,569   1,304,916 
                
Cash and Cash Equivalents, End of Year $316,014  $3,548,107  $2,907,307  $2,391,901 
                
Non Cash        
Discount on convertible notes (warrants & derivative)  964,734   - 
Property, plant and equipment included in Accounts Payable  156,964   - 
Non Cash Financing and Investing Activities        
Total property and equipment included in accounts payable  60,130   342,448 
Discount on convertible notes  -   790,135 
Convertible notes principal and interest settled through warrant exercise  384,563   - 

 

See the accompanying notes to the condensed consolidated financial statements

 

F-3

Barfresh Food Group Inc.

Notes to Condensed Consolidated Financial Statements

March 31, 2019

(Unaudited)

Note 1. BasisSummary of Presentation and Significant Accounting Policies

 

Throughout this report, the terms “our”, “we”, “us” and the “Company” refer to Barfresh Food Group Inc., including its subsidiaries. (“we,” “us,” “our,” and the “Company”) was incorporated on February 25, 2010 in the State of Delaware. We are engaged in the manufacturing and distribution of ready to blend beverages, particularly, smoothies, shakes and frappes.

The accompanying unaudited condensed consolidated financial statements of Barfresh Food Group Inc. at September 30, 2018 and December 31, 2017 have been prepared in accordanceconformity with accounting principles generally accepted accounting principlesin the United States of America (“GAAP”) for interim financial statements, instructions to Form 10-Q, and Regulation S-X. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in our annual report on Form 10-K for the year ended December 31, 2017. In management’s opinion, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation to make our financial statements not misleading have been included. The results of operations for the periods ended September 30, 2018 and 2017 presented are not necessarily indicative of the results to be expected for the full year. The December 31, 2017 balance sheet has been derived from our audited financial statements included in our annual report on Form 10-K for the year ended December 31, 2017..

 

Basis of Consolidation

The condensed consolidated financial statements include the financial statements of the Company and our wholly owned subsidiaries, Barfresh Inc. and Barfresh Corporation Inc. (formerly known as Smoothie, Inc.). All inter-company balances and transactions among the companies have been eliminated upon consolidation.

 

Use of Estimates

The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities in the balance sheets and revenues and expenses during the years reported. Actual results may differ from these estimates.

 

Concentration of Credit Risk

The amount of cash on deposit with financial institutions exceeds the $250,000 federally insured limit at September 30, 2018March 31, 2019 and December 31, 2017.2018. However, we believe that the financial institution where the cash on deposit that exceeds $250,000 in the financial institutions is financially sound and the risk of loss is minimal.

 

Fair Value Measurement

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

 

Level 1 - Quoted prices are available in active markets for identical assets or liabilities as of the reported date. The types of assets and liabilities included in Level 1 are highly liquid and actively traded instruments with quoted prices, such as equities listed on the New York Stock Exchange.
Level 2 - Pricing inputs are other than quoted prices in active markets, but are either directly or indirectly observable as of the reported date. The types of assets and liabilities in Level 2 are typically either comparable to actively traded securities or contracts or priced with models using highly observable inputs.
Level 3 - Significant inputs to pricing that are unobservable as of the reporting date. The types of assets and liabilities included in Level 3 are those with inputs requiring significant management judgment or estimation, such as complex and subjective models and forecasts used to determine the fair value of financial transmission rights.

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

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

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

 

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

 

F-4

Barfresh Food Group Inc.

Notes to Condensed Consolidated Financial Statements

March 31, 2019

(Unaudited)

Accounts Receivable

Accounts receivable are typically unsecured. Our credit policy calls for payment generally within 30 days. The credit worthiness of a customer is evaluated prior to a sale. As of March 31, 2019 and December 31, 2018, the company’s allowance for doubtful accounts was $61,788 and $61,788, respectively. The allowance was estimated based on evaluation of collectability of outstanding Accounts Receivable.

Inventory

Inventory consists of finished goods and is carried at the lower of cost or net realizable value on a first in first out basis. The company monitors the remaining useful life of its inventory and establishes a reserve of obsolescence where appropriate. As of March 31, 2019 and December 31, 2018, the Company’s inventory reserve was $31,237 and $31,237, respectively.

 

Intangible Assets

Intangible assets are comprised of patents, net of amortization and trademarks. The patent costs are being amortized over the life of the patents,patent, which is twenty years from the date of filing the patent applications.application. In accordance with ASC Topic 350Intangibles - Goodwill and Other (“ASC 350”), the costs of internally developing other intangible assets, such as patents, are expensed as incurred. However, as allowed by ASC 350, costs associated with the acquisition of patents from third parties, legal fees and similar costs relating to patents have been capitalized.

In accordance with ASC 350 legal costs related to trademarks have been capitalized. We have determined that trademarks have an indeterminable life and therefore are not being amortized.

Long-Lived Assets and Other Acquired Intangible Assets

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

 

Property, Plant, and Equipment

Property, plant, and equipment is stated at cost less accumulated depreciation and accumulated impairment loss, if any. Depreciation is calculated on a straight-line basis over the estimated useful lives of the assets. Leasehold improvements are being amortized over the shorter of the useful life of the asset or the lease term that includes any expected renewal periods that are deemed to be reasonably assured. The estimated useful lives used for financial statement purposes are:

 

Furniture and fixtures: 5 years

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

Leasehold improvements: 2 years

Vehicle:Vehicles 5 years

 

Revenue Recognition

In accordance with ASC 606, Revenue from Contracts with Customers, revenue is recognized when a customer obtains ownership of promised goods. The Company adopted this standard at the beginning of fiscal year 2018, with no significant impact to its financial position or results of operations, using the modified retrospective method. The amount of revenue recognized reflects the consideration to which the Company expects to be entitled to receive in exchange for these goods. The Company applies the following five steps:

 

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

Barfresh Food Group Inc.

Notes to Condensed Consolidated Financial Statements

March 31, 2019

(Unaudited)

 2)Identify the performance obligation in the contract
  Performance obligations promised in a contract are identified based on the goods or that will be transferred to the customer. For the Company, this consists of the delivery of frozen beverages, which provide immediate benefit to the customer.
   
 3)Determine the transaction price
  
The transaction price is determined based on the consideration to which the Company will be entitled in exchange for transferring goods, and is generally stated on the approved sales order. Variable consideration, which typically includes volume-based rebates or discounts, are estimated utilizing the most likely amount method.

 4)Allocate the transaction price to performance obligations in the contractSince our contracts contain a single performance obligation, delivery of frozen beverages, the transaction price is allocated to that single performance obligation.

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

 

Earnings per Share

We calculate net loss per share in accordance with ASC Topic 260,Earnings per Share. Basic net loss per share is computed by dividing net loss by the weighted average number of shares of common stock outstanding for the period, and diluted earnings per share is computed by including common stock equivalents outstanding for the period in the denominator. At September 30, 2018 and 2017 any equivalents would have been anti-dilutive as we had losses for the periods then ended.

Research and Development

Expenditures for research activities relating to product development and improvement are charged to expense as incurred. We incurred $150,299$156,199 and $107,324$190,341, in research and development expenses for the three-months ended March 31, 2019 and 2018, respectively.

Shipping and Handling Costs

Shipping and handling costs are included in general and administrative expenses. For the three-month periods ended September 30,March 31, 2019 and 2018, shipping and 2017, respectively,handling costs totaled $98,339 and $493,969 and $447,927 for the nine-month periods ended September 30, 2018 and 2017,$138,248, respectively.

  

Rent ExpenseIncome Taxes

The provision for income taxes is determined in accordance with the provisions of ASC Topic 740,Accounting for Income Taxes (“ASC 740”). Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted income tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Any effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

 

WeASC 740 prescribes a comprehensive model for how companies should recognize, rent expensemeasure, present, and disclose in their financial statements, uncertain tax positions taken or expected to be taken on a straight-line basis overtax return. Under ASC 740, tax positions must initially be recognized in the reasonably assured lease termfinancial statements when it is more likely than not the position will be sustained upon examination by the tax authorities. Such tax positions must initially and subsequently be measured as defined in the largest amount of tax benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the tax authority assuming full knowledge of the position and relevant facts.

ASC Topic 840,740 requires a valuation allowance to reduce the deferred tax assets reported if, based on the weight of evidence, it is more than likely than not that some portion or all of the deferred tax assets will not be recognized.

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

Leases(“ASC 840”).

F-6

Barfresh Food Group Inc.

Notes to Condensed Consolidated Financial Statements

March 31, 2019

(Unaudited)

Derivative Liability

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

 

Earnings per Share

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

Stock Based Compensation

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

Reclassifications

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

Recent pronouncements

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

 

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

 

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

Barfresh Food Group Inc.

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

March 31, 2019.2019

(Unaudited)

 

Note 2. Property Plant and Equipment

 

Major classes of property and equipment at September 30, 2018March 31, 2019 and December 31, 2017 consist of the following:2018:

 

 2018 2017  2019  2018 
Furniture and fixtures $1,524  $1,524  $1,524  $1,524 
Equipment  2,867,159   1,952,538 
Manufacturing Equipment and customer equipment  3,243,121   3,118,391 
Leasehold Improvements  4,886   4,886   4,886   4,886 
Vehicles  29,696   29,696   29,696   29,696 
  2,903,266   1,988,644   3,279,227   3,154,497 
Less: accumulated depreciation  (1,009,472)  (665,657)  (1,376,921)  (1,190,846)
  1,893,794   1,322,987   1,902,307   1,963,651 
Equipment not yet placed in service  519,210   437,903   632,822   536,605 
Property and equipment, net of depreciation $2,413,003  $1,760,890  $2,535,129  $2,500,254 

 

We recorded depreciation expense related to these assets of $148,700$186,074 and $78,576$96,564 for the three-month periodsthree-months ended September 30,March 31, 2019 and 2018, respectively. Depreciation expense in Cost of Goods Sold was $12,106 and 2017,$11,584 for three-months ended March 31, 2019 and 2018 respectively and $378,985 and $180,380 for the nine months ended September 30, 2018 and 2017, respectively.

 

Note 3. Intangible Assets

 

As of September 30,March 31, 2019, intangible assets consist of patent costs of $764,891, trademarks of $103,309 and accumulated amortization of $346,313.

As of December 31, 2018, intangible assets consist of patent costs of $764,891, trademarks of $95,175$103,309 and accumulated amortization of $314,508.

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

 

The amounts carried on the balance sheet represent cost to acquire, legal fees and similar costs relating to the patents incurred by the Company. Amortization is calculated through the expiration date of the patent,patents, which is December 2025. The amount charged to expenses for amortization of the patent costs was $15,902 and $15,398$15,902 for the three monthsthree-months ended September 30,March 31, 2019 and 2018, and 2017, respectively, and $47,707 and $46,196 for the nine months ended September 30, 2018 and 2017, respectively.

 

Estimated future amortization expense related to patents as of September 30, 2018,March 31, 2019, is as follows:

 

 Total Amortization  Total Amortization 
Years ending December 31,         
2018  15,903 
2019  63,610  $47,708 
2020  63,610  63,610 
2021  63,610  63,610 
2022  63,610  63,610 
2023 63,610 
Later years   180,040   116,430 
 $450,383  $418,578 

 

Note 4. Related Parties

 

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

 

F-8

Barfresh Food Group Inc.

Notes to Condensed Consolidated Financial Statements

March 31, 2019

(Unaudited)

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

 

In March 31, 2018, we closed an offering of $250,000 in a short-term note payable. The short-term note bears 12% interest per annum with an original maturity date in September 2018 which was extended to December 31, 2018. During the three months ended September 30, 2018, the Company paid down $50,000 of the short term note, the balance of the note payable is $200,000.

Note 6. Convertible Notes

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

 

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

assumptions:

 

Expected life (in years)  3 
Volatility (based on a comparable company)  54.81654.82%
Risk FeeFree interest rate  2.41%
Dividend yield (on common stock)  - 

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

 

During the three months ended June 30,In April 2018, we offered investors in our March 2018 Convertible Note (“Series CN Notes”) the opportunity to accelerate the issuance of certain warrants associated with the CN Notes. Pursuant to the acceleration offer, Series CN Notes investors who invested an additional 10% to 20% of the Series CN Note amount, immediately received an additional 25% warrant coverage on their initial CN Note investment, which would otherwise have been issued after one year. During the current quarterApril 2018, we closed the CN Note acceleration offer in the amount of $177,300 in convertible notes, of which, management, directors and significant shareholders have invested $30,000. The CN Note acceleration offer convertible notes bear 10% interest per annum and are due and payable on March 14, 2020. The notes are convertible at any time prior to the due date into our common stock at conversion price of $0.88 per share or 85% of the average closing price of the common stock over the twenty consecutive trading days immediately preceding the date of note holders’ election; but in no events lower than $0.60 per share. In addition, the interest is convertible at any time prior to the due dates into our common stock at conversion price of 85% of the average closing price of the common stock over the twenty consecutive trading days immediately preceding the date of note holders’ election; but in no events lower than $0.60 per share. There were 937,373 warrants issued in conjunction with the Series CN Note acceleration offer convertible note offering.

 

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

 

Expected life (in years)  3 
Volatility (based on a comparable company)  55.49%
Risk FeeFree interest rate  2.45%
Dividend yield (on common stock)  - 

 

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

 

  September 30, 2018 
Convertible notes $2,704,800 
Less: Debt discount (warrant value)  (325,747)
Less: Debt discount (derivative value)  (638,988)
Less: Debt discount (issuance costs paid)  (27,000)
Add: Debt discount amortization  261,101 
  $1,974,166 

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

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

Barfresh Food Group Inc.

Notes to Condensed Consolidated Financial Statements

March 31, 2019

(Unaudited)

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

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

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

The fair value of the warrants, $0.31 per share ($212,763 in the aggregate), was calculated using the Black-Scholes option pricing model using the following assumptions:

Expected life (in years)3
Volatility (based on a comparable company)59.00%
Risk Free interest rate2.83%
Dividend yield (on common stock)-

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

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

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

Barfresh Food Group Inc.

Notes to Condensed Consolidated Financial Statements

March 31, 2019

(Unaudited)

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

 

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

 

  Total Convertible Notes 
Years ending December 31,    
2018  - 
2019  - 
2020  2,704,800 
2021  - 
2022  - 
  $2,704,800 

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

 

Note 7.6. Derivative Liabilities

 

As discussed in Note 6,5, Convertible Notes, the Company issued Series CN Note acceleration offer convertible notes payable that provide variable conversion provisions. The conversion terms of the convertible notes are variable based on certain factors, such as the future price of the Company’s common stock. The number of shares of common stock to be issued is based on the future price of the Company’s common stock, therefore the number of shares of common stock issuable upon conversion of the promissory note is indeterminate.

 

The fair values of the Company’s derivative liabilities are estimated at the issuance date and are revalued at each subsequent reporting date. The Company recognized a current derivative liability and debt discount of $569,587$569,588 at March 14, 2018 related to the Series CN Convertible notes and1 of 2; $69,400 at April 11, 2018 related to the Series CN Notes Warrant Acceleration.Acceleration; and $697,186 at November 30, 2018 related to the Series CN Convertible note 2 of 2. The derivative liability was revalued at September 30, 2018March 31, 2019 with a value of $892,794.$1,731,665. The change in fair value of the derivative liability resulted inCompany recorded a loss of $5,911$406,012 and $444,736 for the three monthsthree-months ended September 30,March 31, 2019 and March 31, 2018 and a loss of $253,807 forrespectively related to the nine months ended September 30, 2018, which has been reported as loss on fair value of derivative liability in the statements of operations.liability.

 

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

 

  14-Mar-18  11-Apr-18  30-Sep-18 
Expected life  2   1.96   1.45 
Volatility  49%  53.93%  62.51%
Risk Fee interest rate  2.41%  2.32%  2.81%
Dividend yield (on common stock)  -   -   - 

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

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

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

Barfresh Food Group Inc.

Notes to Condensed Consolidated Financial Statements

March 31, 2019

(Unaudited)

 

Reconciliation of the derivative liability measured at fair value on a recurring basis with the use of significant unobservable inputs (level 3) from December 31, 20172018 to September 30, 2018:March 31, 2019:

 

December 31, 2017 $- 
Initial value - March 14, 2018  569,587 
Initial value - April 11, 2018  69,400 
Change in value  253,807 
For the period ended September 30, 2018 $892,794 

December 31, 2018 $1,325,653 
Loss from change in value  406,012 
For the period ended December 31, 2018 $1,731,665 

 

The following table presents the Company’s fair value hierarchy for applicable assets and liabilities measured at fair value as of September 30, 2018.December 31, 2018 and March 31, 2019.

 

  Level 1  Level 2  Level 3  Total 
Derivative Liability $-   -   892,794  $892,794 
  Level 1  Level 2  Level 3  Total 
Derivative Liability December 31, 2018 $      -        -   1,325,653  $1,325,653 

 

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

Note 8.7. Commitments and Contingencies

 

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

 

For years ending December 31,   
2018  43,463 
2019  43,463 
  $86,926 

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

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

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

 

Note 9.8. Stockholders’ Equity

 

During the nine monthsthree-months ended September 30, 2018,March 31, 2019, we issued 183,240134,984 shares of common stock, valued at $100,000, and, and$81,040 for services. We also issued 38,462 shares of our common stock, with a value of $25,000, to certain members of our Board of Directors in lieu of cash payments for Director fees. Also, we issued 227,111161,133 options to purchase our common stock to certain members of the Board of Directors in lieu of cash payments for Director fees.fees, valued at $75,000. The exercise price of the options is $0.50$0.65 per share, vesting is immediate,vest immediately, and they are exercisable for periods of 8 years. In addition, we issued 1,305,000105,000 options to purchase our common stock to employees and executives.employees. The exercise price of the options ranged from $0.52$0.65 to $0.69 per share, vest after 3 years, and are exercisable for periods of 8 years. In addition, we issued 4,000,000 shares of common stock for capital raise, valued at $2,400,000.

Barfresh Food Group Inc.

Notes to Condensed Consolidated Financial Statements

March 31, 2019

(Unaudited)

 

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

 

Expected life (in years)  5.5 to 8 
Volatility (based on a comparable company)  59.82% to 69.8763.83%-64.00%
Risk Free interest rate  2.78% to 2.822.47%-2.54%
Dividend yield (on common stock)  - 

 

The shares of our common stock were valued at the trading price on the date of grant, $0.39$0.66 and $0.595$0.72 per share

 

During the same period, we cancelled 759,51678,000 options to purchase our common stock.

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

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

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

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

The total amount of equity-based compensation included in additional paid in capital for the years ended March 31, 2019 and 2018 was $136,941 and $246,775, respectively,

 

The following is a summary of outstanding stock options issued to employees and directors as of September 30, 2018:March 31, 2019:

 

  Number
of Options
  Exercise
price per share $
  

Average

remaining term

in years

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

  Number of
Options
  Exercise price
per share $
  Average
remaining
term in years
  Aggregate
intrinsic value at
date of grant $
 
Outstanding December 31, 2017  6,715,419   0.45 – 0.87   5.69   - 
Issued  1,532,111   0.50 – 0.50   7.55     
Cancelled  (759,516)  0.50 – 0.81         
Exercised  -             
Outstanding, September 30, 2018  7,488,014   0.45 – 0.87   5.75   - 
                 
Exercisable, September 30, 2018  3,596,396   0.40 - 0.87   4.56   - 

Barfresh Food Group Inc.

Notes to Condensed Consolidated Financial Statements

As of September 30, 2018, the Company has $1,440,039 of total unrecognized share-based compensation expense related to unvested options, which is expected to be amortized over the remaining weighted average period of 5.75 years.March 31, 2019

(Unaudited)

 

The total amountfollowing is Changes in Stockholders’ Equity as of equity based compensation expense for the three-month periods ended September 30,March 31, 2018 and 2017 was $209,082 and $359,949, respectively, and for the nine-month period ended September 30, 2018 and 2017, was $686,027 and $1,032,549, respectively.March 31, 2019:

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

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

F-14

Barfresh Food Group Inc.

Notes to Condensed Consolidated Financial Statements

March 31, 2019

(Unaudited)

 

Note 10.9. Outstanding Warrants

 

The following is a summary of all outstanding warrants as of September 30, 2018:

March 31, 2019:

 

  Number of
warrants
  price per
share
  remaining term
in years
  intrinsic value
at date of grant
 
Warrants issued in connection with private placements of common stock  21,276,808  $0.50 - $1.00   2.54  $- 
Warrants issued in connection with private placement of notes  2,626,667  $0.45 - $1.00   1.25  $64,583 
Warrants issued in connection with convertible note  2,261,915  $0.60 - $0.88   2.45  $- 

During the three month period ended September 30, 2018 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. The warrant modification was revalued at July 31, 2018 with a value of $452,308. The difference in fair value immediately before and after the modification of the warrant resulted in a loss of $290,300.

  Number of
warrants
  

price

per share

  remaining term
in years
  intrinsic value
at date of grant
 
Warrants issued in connection with private placements of common stock  17,888,354  $         0.53 - $1.00   1.70  $        - 
Warrants issued in connection with private placement of notes  1,335,000  $1.00   1.76  $- 
Warrants issued in connection with convertible note  2,4680,259  $0.70   2.16  $- 
Warrants issued in connection with settlement of deferred compensation  1,595,611  $0.70   5.00  $- 

 

Note 11.10. Income Taxes

 

We account for income taxes in interim periods in accordance with ASC Topic 740, Income Taxes (“ASC 740”). We have determined an estimated annual effective tax rate. The rate will be revised, if necessary, as of the end of each successive interim period during our fiscal year to our best current estimate. As of September 30, 2018,March 31, 2019, the estimated effective tax rate for the year will be zero.

 

There are open statutes of limitations for taxing authorities in federal and state jurisdictions to audit our tax returns from 2009 through the current period. Our policy is to account for income tax related interest and penalties in income tax expense in the statement of operations. There have been no income tax related interest or penalties assessed or recorded.

 

ASC 740 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This pronouncement also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition.

 

For the nine-monththree-month periods ended September 30,March 31, 2019 and 2018, and 2017, we did not have any interest and penalties associated with tax positions. As of September 30, 2018,March 31, 2019, we did not have any significant unrecognized uncertain tax positions.

 

Note 12.11. Liquidity

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

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

 

We have a history of operating losses and negative cash flow. As our operations grow, we expect to experience significant increases in our working capital requirements. These conditions raise substantial doubt over the Company’s ability to meet all of its obligations over the twelve months following the filing of this Form 10-Q. Management has evaluated these conditions, and concluded that current plans will alleviate this concern. As of March 31, 2019, we had $2,907,307 of cash on the balance sheet. We have continued to significantly reducedreduce core operating costs beginningexpenses, reducing total General and Administrative Expense in 2016, including reducing2018 by $1.7 million, or 18%, as compared with 2017. In addition, in the numberfirst quarter of 2019, the Company completed $4.3 million of funding efforts. These efforts included a Private Placement Offering for common shares priced at .60 cents per share, resulting in the receipt of capital investment in the amount of $2.4 million and the issuance of 4,000,000 shares. In addition, the Company offered to reduce the exercise price on its I Warrants from $1 to .60 cents, for a limited time. During the time this offer was open, I Warrant holders converted 2,841,454 warrants at .60 cents, resulting in the receipt of capital investment in the amount of $1.7 million. In addition, during the first quarter of 2019, one investor exercised G series warrants, resulting in the receipt of capital investment in the amount of $180,000. In addition, during the first quarter of 2019, the Company settled certain Executive Deferred Compensation payments with a combination of cash and warrants. The total amount of Deferred Executive compensation settled is $771,113. One-third of that total or $243,623, was paid in cash. The remaining balance of $487,246 was settled by granting the Executives warrants exercisable for five years to purchase the Company’s stock at an exercise price of $0.70 per share, the closing price of our employeescommon stock on March 19, 2019, resulting in additional cash savings to the Company.

Barfresh Food Group Inc.

Notes to Condensed Consolidated Financial Statements

March 31, 2019

(Unaudited)

Net Cash Used For Operating Activities during the first quarter of 2019 was higher than is anticipated on a quarterly basis for the next twelve months. During the first quarter, the Company settled several large vendor payables and also made $243,623 in cash payments to settle a portion of deferred Executive Compensation amounts that had accrued over the prior 18 months. The Company’s forecast for the balance of 2019 reflect a significant improvement in cash flow from 44operations during the next twelve months, as the Company continues to 24increase contracts with school locations, military bases, and anticipates the roll-out of a National Account with over 2,500 locations. Additionally, the Company has implemented numerous cost reduction measures which will reduce cash expenses over the next twelve months, including relocation of its headquarters office, as well as entering into a new contract for personnel related services. These two measures alone will yield $200,000 per year in cash savings, and the Company continues to pursue additional measures to reduce cash expenses. Finally, the Company has received proposed Term Sheets from potential lenders for an ABL facility, and is of the view that an ABL facility will be available on acceptable terms, should the need arise.

The Company has $1.9 million of convertible short term debt coming due in March of 2020. Approximately half of this time period. In addition, we plandebt is held by insiders. The Company expects that if for any reason available cash upon maturity of this debt is not adequate to address this concernrepay the convertible short term debt, that it will be able to refinance such debt, in particular the portion held by raising additional capital. While these plans to raise additional capital have not yet been implemented, managementinsiders.

Management has concluded that it is probable that they will be implemented within one year of the issuance of the financial statements, and that they will mitigatethese actions have mitigated the substantial doubt of our ability to continue as a going concern. However, the Company cannot predict, with certainty, the outcome of its action to generate liquidity, including the availability of additional financing, or whether such actions would generate the expect liquidity as planned.

 

Note 13.12. Subsequent Events

 

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

 

F-16

Report of Independent Registered Public Accounting Firm

 

To the Board of Directors and Stockholders
Barfresh Food Group, Inc.
Beverly Hills, California

 

Opinion on the Consolidated Financial Statements

 

We have audited the accompanying consolidated balance sheets of Barfresh Food Group, Inc. (the “Company”) as of December 31, 20172018 and 2016,2017, and the related consolidated statements ofoperations, stockholders’ equity (deficit), and cash flows for the years then ended, and the related notes (collectively referred to as the “financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Barfresh Food Group, Inc. as of December 31, 20172018 and 2016,2017, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

 

Basis for Opinion

 

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to Barfresh Food Group, Inc. in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Barfresh Food Group Inc. is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risk of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

/s/ Eide Bailly LLP

We have served as Barfresh Food Group Inc.’s auditor since 2012.

 

/s/ Eide Bailly LLPDenver, Colorado

 

Denver, ColoradoApril 1, 2019

March 30, 2018

Barfresh Food Group Inc.

Consolidated Balance Sheets

December 31, 20172018 and 20162017

 

  2017  2016 
Assets        
Current assets:        
Cash and cash equivalents $1,304,916  $9,180,947 
Accounts receivable  301,012   131,088 
Inventory  1,415,495   317,948 
Prepaid expenses and other current assets  24,496   25,864 
Total current assets  3,045,919   9,655,847 
Property, plant and equipment, net of depreciation  1,760,890   1,494,478 
Intangible assets, net of amortization  586,943   619,863 
Deposits  39,369   53,202 
Total Assets $5,433,121  $11,823,390 
         
Liabilities and Stockholders’ Equity        
Current liabilities:        
Accounts payable $421,176  $153,756 
Accrued expenses  849,529   746,375 
Deferred rent liability  495   165 
Current portion of long term debt  -   3,849 
Total current liabilities  1,271,200   904,145 
Long term Debt, net of current portion  0   8,958 
Total liabilities  1,271,200   913,103 
         
Stockholders’ equity:        
Preferred stock, $0.000001 par value, 5,000,000 shares authorized, none issued or outstanding  -   - 
Common stock, $0.000001 par value; 300,000,000 shares authorized; 118,690,527 and 117,103,276 shares issued and outstanding at December 31, 2017 and 2016, respectively  119   117 
Additional paid in capital  37,992,799   35,829,627 
Accumulated (deficit)  (33,830,997)  (24,919,457)
Total stockholders’ equity  4,161,921   10,910,287 
Total Liabilities and Stockholders’ Equity $5,433,121  $11,823,390 

  2018  2017 
       
Assets        
Current assets:        
Cash $1,041,569  $1,304,916 
Accounts receivable, net  357,304   301,012 
Inventory, net  1,226,463   1,415,495 
Prepaid expenses and other current assets  98,457   24,496 
Total current assets  2,723,793   3,045,919 
Property, plant and equipment, net of depreciation  2,500,254   1,760,890 
Intangible assets, net of amortization  537,789   586,943 
Deposits  -   39,369 
Total Assets $5,761,836  $5,433,121 
         
Liabilities And Stockholders’ Equity (Deficit)        
Current liabilities:        
Accounts payable $1,101,882  $421,176 
Accrued expenses  175,259   439,032 
Accrued payroll  638,706   161,186 
Accrued vacation  155,586   249,311 
Deferred rent  -   495 
Total current liabilities  2,071,433   1,271,200 
Long term liabilities:        
Accrued interest  190,475   - 
Convertible note - related party, net of discount  841,836   - 
Convertible note, net of discount  1,367,487   - 
Derivative liabilities  1,325,653   - 
Total liabilities  5,796,884   1,271,200 
         
Commitments and contingencies (Note 6,7,8 and 13)        
         
Stockholders’ equity (deficit):        
Preferred stock, $0.000001 par value, 5,000,000 shares authorized, none issued or outstanding  -   - 
Common stock, $0.000001 par value; 300,000,000 shares authorized; 122,770,960 and 118,690,527 shares issued and outstanding at December 31, 2018 and December 31, 2017, respectively  123   119 
Additional paid in capital  41,118,649   37,992,799 
Accumulated deficit  (41,153,820)  (33,830,997)
Total stockholders’ equity (deficit)  (35,048)  4,161,921 
Total Liabilities and Stockholders’ Equity (Deficit) $5,761,836  $5,433,121 

 

See the accompanying notes to the consolidated financial statements

Barfresh Food Group Inc.

Consolidated Statements of Operations

For the years ended December 31, 2018 and 2017

  

 For the year ended For the year ended 
 December 31, 2017 December 31, 2016  2018 2017 
Revenue $1,997,012  $1,457,499  $4,235,159  $1,997,012 
        
Cost of revenue  1,085,575   772,827   2,033,396   1,085,575 
Depreciation of manufacturing equipment  57,099   21,766 
Gross profit  911,437   684,672   2,144,664   889,671 
                
Operating expenses:                
General and administrative  9,492,094   10,415,933   7,813,425   9,492,094 
Depreciation and Amortization  330,883   208,614 
Depreciation and amortization  511,319   309,117 
Total operating expenses  9,822,977   10,624,547   8,324,744   9,801,211 
                
Operating loss  (8,911,540)  (9,939,875)  (6,180,080)  (8,911,540)
                
Other expenses                
Loss from derivative liability  87,630   - 
Warrant modification  290,300   - 
Interest  -   250,850   764,813   - 
Total other expense  1,142,743   - 
                
Net (loss) $(8,911,540) $(10,190,725) $(7,322,823) $(8,911,540)
                
Per share information - basic and fully diluted:                
Weighted average shares outstanding  117,748,411   95,557,640   119,599,191   117,748,411 
Net (loss) per share $(0.08) $(0.11) $(0.06) $(0.08)

 

See the accompanying notes to the consolidated financial statements

Barfresh Food Group, Inc.

Statement of Stockholders’ Equity

For the Period from January 1, 20162017 to December 31, 20172018

 

 Common Stock Additional
paid in
 Accumulated    Common Stock Additional
paid in
 Accumulated   
 Shares Amount Capital (Deficit) Total  Shares Amount Capital (Deficit) Total 
                      
Balance January 1, 2016  86,186,453  $87  $15,798,337  $(14,728,732) $1,069,692 
Issuance of stock for cash, net of expenses of $750,019  24,598,674   24   15,707,106   -   15,707,130 
Exercise of warrants  2,464,017   2   714,998   -   715,000 
Exercise of options  50,000   -   25,500   -   25,500 
Conversion of debt into stock  3,502,327   4   2,242,688   -   2,242,692 
Debt settled for stock  176,328   -   112,849   -   112,849 
Issuance of stock for services  125,477   -   95,000   -   95,000 
Equity based compensation  -   -   1,133,149   -   1,133,149 
Net (loss) for the year              (10,190,725)  (10,190,725)
Balance December 31, 2016  117,103,276  $117   35,829,627   (24,919,457)  10,910,287 
Balance January 1, 2017  117,103,276  $117   35,829,627   (24,919,457)  10,910,287 
Exercise of warrants  232,005   -   35,400       35,400   232,005   -   35,400   -   35,400 
Exercise of options  276,171   -   -       -   276,171   -   -   -   - 
Issuance of stock for services  178,733   1   112,250       112,251   178,733   1   112,250   -   112,251 
Equity based compensation  900,342   1   2,015,522       2,015,523   900,342   1   2,015,522   -   2,015,523 
Net (loss) for the year              (8,911,540)  (8,911,540)  -   -   -   (8,911,540)  (8,911,540)
Balance December 31, 2017  118,690,527  $119  $37,992,799  $(33,830,997) $4,161,921   118,690,527  $119  $37,992,799  $(33,830,997) $4,161,921 
Exercise of warrants  2,017,821   2   924,998   -   925,000 
Cashless exercise of options  107,821   -   -   -   - 
Conversion of notes payable  804,396   1   580,853   -   580,854 
Issuance of stock for services  1,150,395   1   190,166   -   190,167 
Equity based compensation  -   -   598,768   -   598,768 
Discount on convertible notes (warrants)  -   -   540,765   -   540,765 
Warrant modification          290,300       290,300 
Net (loss) for the year  -   -   -   (7,322,823)  (7,322,823)
Balance December 31, 2018  122,770,960  $123  $41,118,649  $(41,153,820) $(35,048)

 

See the accompanying notes to the consolidated financial statements

Barfresh Food Group Inc.

Consolidated Statements of Cash Flows

For the years ended December 31, 2018 and 2017

 

  For the year ended
December 31, 2017
  For the year ended
December 31, 2016
 
Cash flow from operating activities:        
Net (loss) $(8,911,540) $(10,190,725)
Adjustments to reconcile net (loss) to net cash (used in) operating activities:        
Depreciation  268,784   147,131 
Equity based compensation  1,550,718   1,133,149 
Amortization of intellectual property  62,099   61,483 
Interest related to debt discount  -   180,707 
Loss on sale of property and equipment  -   63,751 
Stock issuance for service  112,250   95,000 
Change in operating assets and liabilities        
Accounts receivable  (169,924)  (102,492
Inventory  (1,097,547  10,012 
Prepaid expenses  1,368   4,660 
Deposits  13,833   (36,751)
Accounts payable  267,420   21,952 
Accrued expenses  567,960   589,025 
Deferred rent  330   (1,690)
Net cash (used in) operations  (7,334,249)  (8,024,788)
         
Cash flow from investing activities:        
Purchase of fixed assets  (535,196)  (1,053,498)
Proceeds from sale of equipment  -   36,910 
Investment in patent and trademarks  (29,179)  (64,089)
Net cash (used in) investing activities  (564,375)  (1,080,677)
         
Cash flow from financing activities:        
Issuance of common stock and warrants for cash  35,400   16,457,150 
Equity issuance costs  -   (750,020
Exercise of warrant and options  -   740,500 
Repayment of short term notes payable -related party  -   (100,000)
Repayment of long term debt  (12,807)  (47,222)
Net cash provided by financing activities  22,593   16,300,408 
         
Net increase (decrease) in cash  (7,876,031  7,197,943 
Cash and cash equivalents at beginning of period  9,180,947   1,986,004 
Cash and cash equivalents at end of period $1,304,916  $9,180,947 
         
Supplemental disclosure of cash flow information:        
Cash paid for interest $-  $23,370 
Cash paid for income taxes $-  $- 
         
Non-cash financing activities:        
Common stock issued for services, and conversion of debt $   $2,450,541 
Settlement of liability with Equity awards  464,806     
  2018  2017 
Net income $(7,322,823) $(8,911,540)
Adjustments to reconcile net income to net cash from operating activities        
Depreciation  504,808   268,784 
Amortization  63,610   62,099 
Change in allowance for doubtful accounts  61,788   - 
Change in inventory reserve  31,237   - 
Interest expense, amortization of debt discount  519,707   - 
Warrant modification expense  290,300   - 
Stock-Based compensation  598,768   1,550,718 
Loss on derivative  87,630   - 
Gain on sale of assets  (13,118)  - 
Stock and options issued for services  190,167   112,250 
Changes in assets and liabilities        
Receivables - trade  (148,055)  (169,924)
Inventories  213,346   (1,097,547)
Prepaid expenses & other assets  (4,617)  1,368 
Deposits  -   13,833 
Accounts payable  458,507   267,420 
Accrued expenses  120,022   567,960 
Accrued interest  220,934   - 
Deferred rent  (495)  330 
Net Cash (used for) Operating Activities  (4,128,284)  (7,334,249)
         
Investing Activities        
Purchase of property and equipment  (1,106,574)  (535,196)
Proceeds from sale of equipment  37,967   - 
Purchase of intangibles  (14,456)  (29,179)
Net Cash (used for) Investing Activities  (1,083,063)  (564,375)
         
Financing Activities        
Cash received for warrant Exercises  925,000   35,400 
Cash paid for debt offering costs  (45,000)  - 
Issuance of convertible notes  4,318,000   - 
Repayment of long term debt  (250,000)  (12,807)
Net Cash from Financing Activities  4,948,000   22,593 
         
Net Change in Cash and Cash Equivalents  (263,347)  (7,876,031)
         
Cash and Cash Equivalents, Beginning of Year  1,304,916   9,180,947 
         
Cash and Cash Equivalents, End of Year $1,041,569  $1,304,916 
         
Interest Paid $-  $- 
         
Non Cash Financing and Investing Activities        
Settlement of liability with equity awards  -   464,806 
Total property and equipment included in accounts payable  216,768   - 
Discount on convertible notes  1,874,684   - 
Convertible notes principal, interest and derivative liability settled in stock  580,854   - 

 

See the accompanying notes to the financial statements

Notes to Consolidated Financial Statements

Note 1. Summary of Significant Accounting Policies

 

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

 

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

 

Basis of Consolidation

 

The consolidated financial statements include the financial statements of the Company and our wholly owned subsidiaries, Barfresh Inc. and Barfresh Corporation Inc. (formerly known as Smoothie, Inc.). All inter-company balances and transactions among the companies have been eliminated upon consolidation.

 

Use of Estimates

 

The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities in the balance sheets and revenues and expenses during the years reported. Actual results may differ from these estimates.

 

Cash and Cash Equivalents

We consider all highly liquid investments with an original maturity of three months or less, at the time of purchase, to be cash equivalents.

Concentration of Credit Risk

 

The amount of cash on deposit with financial institutions exceeds the $250,000 federally insured limit at December 31, 20172018 and 2016.2017. However, we believe that cash on deposit that exceeds $250,000 in the financial institutions is financially sound and the risk of loss is minimal.

 

Fair Value Measurement

 

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

 

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

 

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

 

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

 

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

 

Accounts Receivable

 

Accounts receivable are typically unsecured. Our credit policy calls for payment generally within 30 days. The credit worthiness of a customer is evaluated prior to a sale. As of December 31, 2018 and 2017, and 2016, there is nothe company’s allowance for doubtful accounts.accounts was $61,788 and $0, respectively. There was bad debt expense for the year ended December 31, 2018 of $61,788 and no bad debt expense for the yearsyear ended December 31, 2017 and 2016.

2017. The allowance was applied to certain receivable accounts which are over 95 days.

Inventory

 

Inventory consists of finished goods and is carried at the lower of cost or net realizable value on a first in first out basis. The company monitors the remaining useful life of its inventory and establishes a reserve of obsolescence where appropriate.As of December 31, 2018 and 2017, the Company’s inventory reserve was $31,237 and $0, respectively.

 

Intangible Assets

 

Intangible assets are comprised of patents, net of amortization and trademarks. The patent costs are being amortized over the life of the patent, which is twenty years from the date of filing the patent application. In accordance with ASC Topic 350Intangibles - Goodwill and Other (“ASC 350”), the costs of internally developing other intangible assets, such as patents, are expensed as incurred. However, as allowed by ASC 350, costs associated with the acquisition of patents from third parties, legal fees and similar costs relating to patents have been capitalized.

 

In accordance with ASC 350 legal costs related to trademarks have been capitalized. We have determined that trademarks have an indeterminable life and therefore are not being amortized.

 

Long-Lived Assets and Other Acquired Intangible Assets

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

Property, Plant, and Equipment

 

Property, plant, and equipment is stated at cost less accumulated depreciation and accumulated impairment loss, if any. Depreciation is calculated on a straight-line basis over the estimated useful lives of the assets. Leasehold improvements are being amortized over the shorter of the useful life of the asset or the lease term that includes any expected renewal periods that are deemed to be reasonably assured. The estimated useful lives used for financial statement purposes are:

 

Furniture and fixtures: 5 years

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

Leasehold improvements: 2 years

Vehicles 5 years

 

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 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:

1)Identify the contract with a customer
A contract with a customer exists when (i) the Company enters into an enforceable contract with a customer that defines each party’s rights, (ii) the contract has commercial substance and, (iii) the Company determines that collection of substantially all consideration for goods or services that are transferred is probable. For the Company, the contract is the approved sales order, which may also be supplemented by other agreements that formalize various terms and conditions with customers.
2)Identify the performance obligation in the contract
Performance obligations promised in a contract are identified based on the goods or that will be transferred to the customer. For the Company, this consists of the delivery of frozen beverages, which provide immediate benefit to the customer.
3)Determine the transaction price
The transaction price is determined based on the consideration to which the Company will be entitled in exchange for transferring goods, and is generally stated on the approved sales order. Variable consideration, which typically includes volume-based rebates or discounts, are estimated utilizing the most likely amount method.
4)Allocate the transaction price to performance obligations in the contractSince our contracts contain a single performance obligation, delivery of frozen beverages, the transaction price is allocated to that single performance obligation.
5)Recognize Revenue when or as the Company satisfies a performance obligation
The Company recognizes revenue from the sale of frozen beverages when title and risk of loss passes and the customer accepts the goods, which generally occurs at delivery. Customer sales incentives such as volume-based rebates or discounts are treated as a reduction of sales at the time the sale is recognized. Shipping and handling costs are treated as fulfillment costs and presented in distribution, selling and administrative costs.
The company evaluated the requirement to disaggregate revenue, and concluded that substantially all of its revenue comes from a single product, frozen beverages.

 

Research and Development

 

Expenditures for research activities relating to product development and improvement are charged to expense as incurred. We incurred $574,989$674,224 and $432,146,$574,989, in research and development expenses for the years ended December 31, 20172018 and 2016,2017, respectively.

Shipping and Storage Costs

Shipping and handling costs are included in general and administrative expenses. For the years ended December 31, 2018 and 2017, shipping and handling costs totaled $864,871 and $619,871, respectively.

Rent Expense

 

We recognize rent expense on a straight-line basis over the reasonably assured lease term as defined in ASC Topic 840,Leases(“ASC 840”). Rent expense is charged to expense beginning with the occupancy date. Deferred rent was $495 and $165 at December 31, 2017 and 2016, respectively, and will be charged to rent expense over the life of the lease. Total amount of rent expense incurred in 2017 was $142,572 and in 2016 was $96,151.

 

Income Taxes

 

The provision for income taxes is determined in accordance with the provisions of ASC Topic 740,Accounting for Income Taxes (“ASC 740”). Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted income tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Any effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

 

ASC 740 prescribes a comprehensive model for how companies should recognize, measure, present, and disclose in their financial statements, uncertain tax positions taken or expected to be taken on a tax return. Under ASC 740, tax positions must initially be recognized in the financial statements when it is more likely than not the position will be sustained upon examination by the tax authorities. Such tax positions must initially and subsequently be measured as the largest amount of tax benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the tax authority assuming full knowledge of the position and relevant facts.

 

ASC 740 requires a valuation allowance to reduce the deferred tax assets reported if, based on the weight of evidence, it is more than likely than not that some portion or all of the deferred tax assets will not be recognized.

 

For the years ended December 31, 20172018 and 20162017 we did not have any interest and penalties or any significant unrecognized uncertain tax positions.

Derivative Liability

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

 

Earnings per Share

 

We calculate net loss per share in accordance with ASC Topic 260,Earnings per Share. Basic net loss per share is computed by dividing net loss by the weighted average number of shares of common stock outstanding for the period, and diluted earnings per share is computed by including common stock equivalents outstanding for the period in the denominator. At December 31, 20172018 and 20162017 any equivalents would have been anti-dilutive as we had losses for the periods then ended.

 

Stock Based Compensation

 

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

 

Reclassifications

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

Recent pronouncements

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

 

In May 2014, the FASB issued ASU Update 2014-09 Revenue from Contracts with Customers (Topic 606), which converged guidance on recognizing revenue in contracts with customers on an effective date after our year ending December 31, 2017. The Company is in the initial stages of evaluating the effect of the standard on our financial statements and continue to evaluate the available transition methods. However, based on our initial evaluation, we do not expect there to be material changes to our current Revenue Recognition policies due to the non-complex contracts with our customers, including the definition of our performance obligations and the transaction prices in our contracts with our customers.

The Company has evaluated the effect of the standard on our financial statements, and based on our evaluation, we do not expect there to be material impact to our financial statement.

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

 

The Company is in the initial stages of evaluatinghas evaluated the effect of the standard on our financial statements and continue to evaluate the available transition methods. However, basedstatements.Based on our initial evaluation, we do not expect therewill have one material lease subject to be material changes to bothadoption of this standard in our current and long-termupcoming fiscal year. As disclosed in Note 14, we entered into a new office space lease liabilities and our fixed assets of our limited number of operating leases that will be convertedtake effect on April 1, 2019 and would expect to financing leases under the new guidance. record a right-of-use asset and corresponding liability for amounts that approximate our future commitments of approximately $300,000.The Company does not plan to adopt the standard until the interim period ended March 31, 2019.

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

Note 2. Property Plant and Equipment

 

Major classes of property and equipment at December 31, 20172018 and 20162017 consist of the following:

 

 2017 2016  2018 2017 
Furniture and fixtures $1,524 $1,524  $1,524  $1,524 
Manufacturing Equipment 1,952,538 1,605,317 
Manufacturing Equipment and customer equipment  3,118,391   1,952,538 
Leasehold Improvements 4,886 4,800   4,886   4,886 
Vehicles  29,696  29,696   29,696   29,696 
 1,988,644 1,641,337   3,154,497   1,988,644 
Less: accumulated depreciation  (665,657)  (396,863)  (1,190,846)  (665,657)
 1,322,987 1,244,474   1,963,651   1,322,987 
Equipment not yet placed in service  437,903  250,004   536,605   437,903 
Property and equipment, net of depreciation $1,760,890 $1,494,478  $2,500,254  $1,760,890 

 

We recorded depreciation expense related to these assets of $268,784$504,808 and $147,131$268,784 for the yearyears ended December 31, 20172018 and 2016,2017, respectively.

 

Note 3. Intangible Assets

As of December 31, 2018, intangible assets consist of patent costs of $764,891, trademarks of $103,309 and accumulated amortization of $330,411.

 

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

As of December 31, 2016, intangible assets consist of patent costs of $750,640, trademarks of $73,925 and accumulated amortization of $204,702.$266,801.

 

The amounts carried on the balance sheet represent cost to acquire, legal fees and similar costs relating to the patents incurred by the Company. Amortization is calculated through the expiration date of the patent, which is December, 2025. The amount charged to expenses for amortization of the patent costs was $62,099$63,610 and $61,483$62,099 for the yearyears ended December 31, 20172018 and 2016,2017, respectively.

 

Estimated future amortization expense related to intangible propertypatents as of December 31, 2017,2018, is as follows:

 

 Total Amortization  Total Amortization 
Years ending December 31,       
2018 $63,610 
2019 63,610  $63,610 
2020 63,610   63,610 
2021 63,610   63,610 
2022 63,610   63,610 
2023  63,610 
Later years  180,040   116,430 
 $498,090  $434,480 

 

Note 4. Related Parties

 

As disclosed below in Note 6, members of management and directors invested in company’s convertible notes; and in Note 9, members of management and directors have received shares of stock and options in exchange for services.

Note 5. Short-Term Notes Payable

In March 2018, we closed an offering of $250,000 in a short-term note payable. The short-term note bore 12% interest per annum with an original maturity date in September 2018 which was extended to December 31, 2018. During the three months ended September 30, 2018, the Company paid down $50,000 of the short term note, and the balance of $200,000 of the note payable was paid in full during December 2018.

 

Note 5.6. Convertible Notes (Related and Unrelated Party)

In March 2018, we closed an offering of $2,527,500 in convertible notes, Series CN Note 1 of 2, of which, management, directors and significant shareholders have invested $840,000. The convertible notes bear 10% interest per annum and are due and payable on March 14, 2020. The notes are convertible at any time prior to the due date into our common stock at 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 event lower than $0.60 per share. There were 1,331,583 warrants issued, in conjunction with the convertible note offering.

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

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

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

In April 2018, we offered investors in our March 2018 Convertible Note (“Series CN Notes”) the opportunity to accelerate the issuance of certain warrants associated with the CN Notes. Pursuant to the acceleration offer, Series CN Notes investors who invested an additional 10% to 20% of the Series CN Note amount, immediately received an additional 25% warrant coverage on their initial CN Note investment, which would otherwise have been issued after one year. During April 2018, we closed the CN Note acceleration offer in the amount of $177,300 in convertible notes, of which, management, directors and significant shareholders have invested $30,000. The CN Note acceleration offer convertible notes bear 10% interest per annum and are due and payable on March 14, 2020. The notes are convertible at any time prior to the due date into our common stock at conversion price of $0.88 per share or 85% of the average closing price of the common stock over the twenty consecutive trading days immediately preceding the date of note holders’ election; but in no events lower than $0.60 per share. In addition, the interest is convertible at any time prior to the due dates into our common stock at conversion price of 85% of the average closing price of the common stock over the twenty consecutive trading days immediately preceding the date of note holders’ election; but in no events lower than $0.60 per share. There were 937,373 warrants issued in conjunction with the Series CN Note acceleration offer convertible note offering.

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

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

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

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

The convertible notes consist of the following components as of the year-end:

  December 31, 2018 
Convertible notes $2,704,800 
Less: Debt discount (warrant value)  (325,747)
Less: Debt discount (derivative value)(Note 7)  (638,988)
Less: Debt discount (issuance costs paid)  (27,000)
Less: Note conversion  (453,000)
Add: Debt discount amortization  481,042 
  $1,741,107 

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

The fair value of the warrants, $0.31 per share ($212,763 in the aggregate), was calculated using the Black-Scholes option pricing model using the following assumptions:

Expected life (in years)3
Volatility (based on a comparable company)59.00%
Risk Free interest rate2.83%
Dividend yield (on common stock)-

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

The convertible notes consist of the following components as of the year-end:

  December 31, 2018 
Convertible notes $1,363,200 
Less: Debt discount (warrant value)  (212,763)
Less: Debt discount (derivative value)(Note 7)  (697,186)
Less: Debt discount (issuance costs paid)  (23,700)
Add: Debt discount amortization  38,665 
  $468,216 

As of December 31, 2018, the outstanding balances due of the Series CN Notes, net of all related debt discount, total $2,209,323. The related party convertible notes (net) and unrelated party convertible notes (net) represent $841,836 and $1,367,487, respectively as of December 31, 2018.

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

  Total Convertible Notes 
Years ending December 31,   
2019 $- 
2020  3,615,000 
2021  - 
2022  - 
2023  - 
  $3,615,000 

Note 7. Derivative Liabilities

As discussed in Note 6, Convertible Notes, the Company issued Series CN Note acceleration offer convertible notes payable that provide variable conversion provisions. The conversion terms of the convertible notes are variable based on certain factors, such as the future price of the Company’s common stock. The number of shares of common stock to be issued is based on the future price of the Company’s common stock, therefore the number of shares of common stock issuable upon conversion of the promissory note is indeterminate.

The fair values of the Company’s derivative liabilities are estimated at the issuance date and are revalued at each subsequent reporting date. The Company recognized a derivative liability and debt discount of $569,588 at March 14, 2018 related to the Series CN Convertible notes 1 of 2; $69,400 at April 11, 2018 related to the Series CN Notes Warrant Acceleration; and $697,186 at November 30, 2018 related to the Series CN Convertible note 2 of 2. The derivative liability was revalued at December 31, 2018 with a value of $1,325,653. The Company recorded a net loss of $87,630 for the year ended December 31, 2018 related to the derivative liability. The net loss consists of a $110,829 gain for a portion of the derivative liability being settled upon a note holders decision to convert their outstanding principal under the terms of the convertible note agreement to equity and a loss of $198,459 from the change in fair value.

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

  14-Mar-18  11-Apr-18  31-Dec-18 
Expected life  2   1.96   1.20 
Volatility (based on comparable company)  49.00%  53.93%  72.03%
Risk Fee interest rate  2.41%  2.32%  2.48%
Dividend yield (on common stock)  -   -   - 

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

  30-Nov-18  31-Dec-18 
Expected life  2   1.92 
Volatility (based on comparable company)  61.17%  63.70%
Risk Fee interest rate  2.80%  2.48%
Dividend yield (on common stock)  -   - 

Reconciliation of the derivative liability measured at fair value on a recurring basis with the use of significant unobservable inputs (level 3) from December 31, 2017 to December 31, 2018:

December 31, 2017 $- 
Initial value - March 14, 2018  569,588 
Initial value - April 11, 2018  69,400 
Initial value - November 30, 2018  697,186 
Fair value of settlement from debt conversion  (208,980)
Loss from change in value  198,459 
For the period ended December 31, 2018 $1,325,653 

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

  Level 1  Level 2  Level 3  Total 
Derivative Liability $-   -   1,325,653  $1,325,653 

Note 8. Commitments and Contingencies

 

We lease office space under non-cancelable operating leases, which expires on March 31, 2019. The aggregate minimum requirements are as follows:

 

For years ending December 31,      
2018 $167,530 
2019  43,462   43,462 
 $210,992  $43,462 

 

Note 6. Stockholders’ Equity

DuringWe incurred lease expense of $167,530 and $132,620 for the yearyears ended December 31, 2016, the holder of warrants to purchase shares of common stock exercised their rights2018 and purchased 1,250,000 shares of common stock for an aggregate price of $715,000. In addition, the holders of 620,000 warrants exercised their right to a cash-less conversion and received 1,214,017 shares.2017, respectively.

Note 9. Stockholders’ Equity

Also, during the year ended December 31, 2016 we issued 64,599 shares of stock to a member of our board of directors in lieu of $50,000 in director fees due and 60,878 shares of common stock in lieu of cash for legal fees. We valued the shares based on the trading value on the date issued.

In addition, during the year ended December 31, 2016 we issued 50,000 shares of stock at a price of $0.51 per share in exchange for outstanding options.

During the year ended December 31, 2016, we issued 1,893,442 options to purchase our common stock to employees of the Company. In addition, we cancelled 56,000 options to purchase our common stock. The exercise price of the options ranged from $0.6129 to $0.83 per share and are exercisable for a period of 8 years and have varying vesting periods of up to three years.

The fair value of the options ($883,490 in the aggregate) was calculated using the Black-Sholes option pricing model, based on the criteria shown below, and are being expensed over the vesting period of each option.

Expected life (in years)5.5 to 8
Volatility (based on a comparable company)74.09% to 82.65%
Risk Free interest rate1.24% to 1.73%
Dividend yield (on common stock)-

 

During the year ended December 31, 2017, we issued 178,733 shares of common stock, valued at $112,250 for services. We also issued 95,995 shares of our common stock, with a value of $73,560, to a member of our Board of Directors in lieu of cash payments for Director fees. In addition, we issued 439,977 options to purchase our common stock to certain member of the Board of Directors in lieu of cash payments for Director fees. The exercise price of the options ranged from $0.77 to $0.79 per share, vest immediately, and are exercisable for periods of 8 years. In addition, we issued 1,485,000 options to purchase our common stock to employees and executives. The exercise price of the options ranged from $0.55 to $0.68 per share, vest after 3 years, and are exercisable for periods of 8 years. We also issued 95,995 shares of our common stock, with a value of $73,560, to a member of our Board of Directors in lieu of cash payments for Director fees.

 

The fair value of the options issued ($999,682, in the aggregate) was calculated using the Black-Sholes option pricing model, based on the criteria shown below.

 

Expected life (in years)  5.5 to 8 
Volatility (based on a comparable company)  73.9%74.09% to 8982.65%
Risk Free interest rate  2.01%

1.24% to 2.351.73

%
Dividend yield (on common stock)-

During the year ended December 31, 2018, we issued 180,265 shares of common stock, valued at $90,167 for services. We also issued 183,240 shares of our common stock, with a value of $100,000, to certain members of our Board of Directors in lieu of cash payments for Director fees. Also, we have 786,890 shares issued in connection with formerly issued restricted stock grants that vested during 2018. In addition, we issued 227,111 options to purchase our common stock to certain members of the Board of Directors in lieu of cash payments for Director fees, valued at $100,000. The exercise price of the options ranged from $0.50 to $0.595 per share, vest immediately, and are exercisable for periods of 8 years. In addition, we issued 1,315,000 options to purchase our common stock to employees and executives. The exercise price of the options is $0.52 per share, vest after 3 years, and are exercisable for periods of 8 years.

The fair value of the options issued ($543,550, in the aggregate) was calculated using the Black-Sholes option pricing model, based on the criteria shown below.

Expected life (in years)5.5 to 8
Volatility (based on a comparable company)59.82%-70.29%
Risk Free interest rate2.78%-2.93%
Dividend yield (on common stock)  - 

 

The shares of our common stock were valued at the trading price on the date of grant, $0.75$0.47 and $0.79$0.52 per share

 

During the same period, we cancelled 122,000321,183 options to purchase our common stock.

 

Holders of 59,0001,933,333 warrants exercised those warrants for cash proceeds of $35,400. The holders of 950,000 options elected to exercise those options on a cashless basis$925,000 and received 276,1711,933,333 shares of our common stock.

 

Holders of 1,049,847250,000 N warrants elected to exercise those warrant on a cashless basis and received 84,488 shares of our common stock.

Holders of737,887 options elected to exercise those warrants on a cashless basis and received 173,005107,821 shares of our common stock.

 

The total amount of equity-based compensation included in additional paid in capital for the years ended December 31, 2018 and 2017 was $598,768 and 2016 was $1,550,718, and $1,133,149, respectively,

 

The following is a summary of outstanding stock options issued to employees and directors as of December 31, 2017:2018:

 

 Number of Options Exercise price  per share $ Average  remaining term  in years Aggregate intrinsic value at date of grant $  

Number

of Options

 

Exercise

price per share $

 Average remaining term in years 

Aggregate

intrinsic value

at date of

grant $

 
Outstanding January 1, 2016 4,075,000 .45 -.87       - 
Issued 1,893,442 .61 -.83   
Cancelled  (56,000)       
Exercised  (50,000)       
Outstanding December 31, 2016 5,862,442 .45-.87      
Outstanding January 1, 2017  5,862,442   .45 - .87       - 
Issued 1,924,977 .40-.79        1,924,977   .40 - .79         
Cancelled (122,000)         (122,000)            
Exercised  (950,000)         (950,000)            
Outstanding December 31, 2017  6,715,419 .40-.87  5.93     6,715,419   

.40 - .87

         
Issued  1,542,111   .50 - .60         
Cancelled  (321,183)            
Exercised  (508,333)            
Outstanding December 31, 2018  7,428,014   

.40 - .87 

   5.48     
                         
Exercisable, December 31m 2017  2,855,878 .40-.87 4.96 - 
Exercisable , December 31 2018  3,586,396   .40 - .87   4.34   - 

 

As of December 31, 2018, the Company has $698,701 of total unrecognized share-based compensation expense related to unvested options, which is expected to be amortized over the remaining weighted average period of 5.48 years.

Note 7.10. Outstanding Warrants

 

The following is a summary of all outstanding warrants as of December 31, 2017:2018:

 

 Number of Warrants Exercise price per share $ Average remaining term in years Aggregate  intrinsic value at date of grant  Number of
warrants
 price per share remaining term
in years
 intrinsic value
at date of grant
 
Warrants issued in connection with private placements of common stock  23,789,808  .50 - 1.00  0.63   -   21,029,808  $0.53 - $1.00   2.02  $- 
Warrants issued in connection with private placement of notes  2,626,667  .45 - 1.00  2.00  $64,583   1,335,000  $1.00   2.00  $- 
Warrants issued in connection with convertible note  2,940,779  $0.70   2.37  $- 

 

Note 8.11. Income Taxes

 

Income tax provision (benefit) for the years ended December 31, 20172018 and 20162017 is summarized below:

 

 2017 2016  2018 2017 
Current:             
Federal $- $-  $-  $- 
State - -   -   - 
Total current - -   -   - 
Deferred:             
Federal  (746,700)  (2,878,000)  (922,100)  (746,700)
State  (117,200)  (279,300)  (144,700)  (117,200)
Total deferred  (863,900)  (3,157,300)  (1,066,800)  (863,900)
Change in valuation allowance $863,900 $3,157,300  $1,066,800  $863,900 

 

The provision for income taxes differs from the amount computed by applying the statutory federal income tax rate before provision for income taxes. The sources and tax effect of the differences are as follows:

 

 2017 2016  2018 2017 
Income tax provision at the federal statutory rate  34.0%  34.0%  21.0%  34.0%
State income taxes, net of federal benefit 3.3% 3.3%  3.3%  3.3%
Permanent Difference (5.46%) -%  (2.5%)  (5.46%)
Effect of rate change  (41.53%)  -%  -%  (41.53%)
Effect of change in valuation allowance   9.69%  (37.3%)  (21.8%)  9.69%
  -%  -%  -%  -%

 

Components of the net deferred income tax assets at December 31, 20172018 and 20162017 were as follows:

 

 2017 2016  2018 2017 
Net operating loss carryover $6,902,200 $7,766,100  $7,969,000  $6,902,200 
Valuation allowance  (6,902,200)  (7,766,100)  (7,969,000)  (6,902,200)
 $- $-  $-  $- 

 

ASC 740 requires a valuation allowance to reduce the deferred tax assets reported if, based on the weight of evidence, it is more than likely than not that some portion or all of the deferred tax assets will not be recognized. After consideration of all the evidence, both positive and negative, management has determined that a $6,902,200$7,969,000 and $7,766,100$6,902,200 allowance at December 31, 20172018 and 2016,2017, respectively, is necessary to reduce the deferred tax assets to the amount that will more likely than not be realized. The reductionincrease in the valuation allowance for the current period is $863,900.$1,066,800.

 

As of December 31, 2017,2018, we have a net operating loss carry forward of approximately $28,404,200.$32,795,300. The loss will be available to offset future taxable income. If not used, this carry forward will expire as follows:

 

2030 $1,000  $1,000 
2031 $63,800  $63,800 
2032 $345,900  $345,900 
2033 $1,840,300  $1,840,300 
2034 $2,324,100  $2,324,100 
2035 $2,987,300  $2,987,300 
2036 $5,061,700  $5,061,700 
2037 $8,464,700  $8,464,700 
2038 $7,315,400  $7,315,400 
2039 $4,391,100 

 

As of December 31, 2017,2018, we did not have any significant unrecognized uncertain tax positions.

The 2018 net operating loss carry forward of $4,391,100 does not expire under the Tax Cut and Job Act of 2017.

Note 9.12. Business Segments and Customer Concentrations.

 

During the years ended December 31, 20172018 and 2016,2017, we operated in one segment.

The following is a breakdown of customers representing more than 5% of sales for the year ended December 31, 2017:

  Revenue from customer  Percentage of total revenue 
Customer A $1,243,341   62.3%
Customer B  140,028   7.02%
Customer C  110,497   5.54%
  $1,493,866   74.88%

 

The following is a breakdown of customers representing more than 10% of sales for the year ended December 31, 2016:2017:

 

  Revenue from customer  Percentage of total revenue 
Customer A $1,194,960   82.0%
Customer B  161,363   11.1%
  $1,356,323   93.1%
  

Revenue from

customer

  

Percentage

of total

revenue

 
Customer A $1,243,341   62.3%

The following is a breakdown of customers representing more than 10% of sales for the year ended December 31, 2018:

  

Revenue from

customer

  

Percentage

of total

revenue

 
Customer A $1,465,189   32.84%
Customer B  522,512   11.71%

 

Note 10.13. Liquidity

 

We have a history of operating losses and negative cash flow. As our operations grow, we expect to experience significant increases in our working capital requirements. These conditions raise substantial doubt over the Company’s ability to meet all of its obligations over the twelve months following the filing of this Form 10-K. Management has evaluated these conditions, and concluded that current plans will alleviate this concern. As of December 31, 2017,2018, we had no debt. On February 14,$1,041,569 of cash on the balance sheet. We have continued to significantly reduce core operating expenses, reducing total General and Administrative Expense in 2018 we announcedby $1.7 million, or 18%, as compared with 2017. In addition, in the private placementfirst quarter of convertible notes with gross proceeds of $4.1 million. The funding of that note occurs upon the achievement of certain milestones establishing significant sales to national accounts. One milestone is that2019, the Company shall have entered intocompleted $4.3 million of funding efforts. These efforts included a material agreement or seriesPrivate Placement Offering for common shares priced at .60 cents per share, resulting in the receipt of related agreements with a national account for the sale of its products into approximately 1,000 new locations. The first milestone was achieved on March 8, 2018. According to the terms of the Convertible Note, 60% of the gross proceeds, or $2.5 million, was received by the Company within five business days of that Milestone 1 achievement. The other milestone is that the Company shall have entered into a material agreement or series of related agreements with a national account for the sale of its products into approximately 2,500 new locations. We expect the second Milestone to occur during 2018. On March 5, 2018, the Company issued a Promissory Note to an existing investor,capital investment in the amount of $250,000. The unsecured note bears interest at 12%$2.4 million and has a 6 month term Proceeds are being used to fund the short term working capital needsissuance of the Company. The Company plans to refinance this note upon maturity.3,833,333 shares. In addition, we have significantly reduced core operating costs beginningthe Company offered to reduce the exercise price on its I Warrants from $1 to .60 cents, for a limited time. During the time this offer was open, I Warrant holders converted 2,841,454 warrants at .60 cents, resulting in 2016, including reducing the numberreceipt of capital investment in the amount of $1.7 million. In addition, during the first quarter of 2019, one investor exercised G series warrants, resulting in the receipt of capital investment in the amount of $180,000. In addition, during the first quarter of 2019, the Company settled certain Executive Deferred Compensation payments with a combination of cash and warrants. The total amount of Deferred Executive compensation settled is $730,869. One-third of that total or $243,623, was paid in cash. The remaining balance of $487,246 was settled by granting the Executives warrants exercisable for five years to purchase the Company’s stock at an exercise price of $0.70 per share, the closing price of our employees from 44common stock on March 19, 2019, resulting in additional cash savings to 30 over this time period. Members of the senior management team have deferred a portion of their salaries during 2017 and are continuing to defer a portion of their salaries in 2018. Management is prepared to take further similar actions to reduce or defer fixed overhead should that become necessary.Company. Management has concluded that it is probable that the combination of the above described financings whichthese actions have already been achieved and are about to be achieved, along with the described measures available to reduce or defer fixed overhead, alleviatemitigated the substantial doubt of our ability to continue as a going concern. However, the Company cannot predict, with certainty, the outcome of its action to generate liquidity, including the availability of additional financing, or whether such actions would generate the expectedexpect liquidity as planned.

 

Note 11.14. Subsequent Events

 

On February 14, 2018, we announcedDuring the private placementfirst quarter of convertible notes with gross proceeds of $4.1 million The closing shall be no later than five (5) business days after receipt of notice from2019, the Company that it has achieved certain milestones establishing significant sales to national accounts. One milestone is that the Company shall have entered intocompleted additional funding efforts, including a material agreement or series of related agreements with a national accountPrivate Placement Offering for the sale of its products into approximately 1,000 new locations. The first milestone was achieved on March 8, 2018. The other milestone is that the Company shall have entered into a material agreement or series of related agreements with a national account for the sale of its products into approximately 2,500 new locations.

Upon achievement of the first milestone, 60% of the principal amount of the convertible notes will be available to the Company, with the balance of 40% upon achievement of the second milestone. The Company intends to use the proceeds from this financing to fund the manufacture of inventory, to purchase equipment, and for general corporate purposes.

The convertible notes are unsecured and have (i) a two-year term, (ii) a 10% annual coupon to be paid in cash or stockcommon shares priced 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, resulting in the receipt of Common Stock. Investors also received warrant coverage of 25% of the number of shares that would be issuable upon a full conversion of the principal amount at an average of the twenty consecutive trading day period immediately preceding the applicable closing date. If any principal amount remains outstanding after the one-year anniversary of the closing, investors will be granted an additional warrant with identical terms. The warrants are exercisable for a period of three years for cash at the greater of 120% of the closing price or $0.70 per share of common stock.

On March 5, 2018, the Company issued a Promissory Note to an existing investor,proceeds in the amount of $250,000.$2.4 million and the issuance of 3,833,333 shares. In addition, during the first quarter of 2019, the Company offered to reduce the exercise price on its I Warrants from $1 to $0.60, for a limited time. During the time this offer was open, I Warrant holders converted 2,841,454 warrants at $0.60, resulting in the receipt of proceeds in the amount of $1.7 million. In addition, during the first quarter of 2019, one investor exercised G series warrants, resulting in the receipt of proceeds in the amount of $180,000, and the issuance of 300,000 shares. In total, during the first quarter of 2019, the Company has raised $4.3 million and issued 7,141,454 shares, and no additional warrants.

Effective March 31, 2019, the Company paid all outstanding Executive Deferred Compensation amounts. The unsecured note bears interesttotal amount settled is $730,869, comprised of $603,294 outstanding at 12%December 31, 2018, and has a 6 month term Proceeds are being used to fund$127,575 additional deferrals recorded during the short term working capital needsfirst quarter of 2019. One-third of the Company. total outstanding Executive Deferred Compensation amount, or $243,623, was paid in cash. The remaining balance was settled by granting the Executives a warrant exercisable for five years to purchase the Company’s stock at an exercise price of $0.70 per share, the closing price of our common stock on March 19, 2019. The total number of the warrants issued of 1,827,173 was determined using the Black Sholes valuation methodology, and by placing a fifty percent premium on the cash value of the remaining two thirds of total outstanding Executive Deferred Compensation as of March 31, 2019.

The Company plansentered into an agreement to refinance this note upon maturity. lease office space, beginning April 1, 2019 through March 31, 2023. For the first twelve months base rent is $6,175 with annual increases of approximately 3%.

INFORMATION NOT REQUIRED IN PROSPECTUS

 

Item 24. Indemnification of Directors and Officers

 

Section 145 of the Delaware General Corporation Law provides that a corporation may indemnify directors and officers as well as other employees and individuals against expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with any threatened, pending or completed actions, suits or proceedings in which such person is made a party by reason of such person being or having been a director, officer, employee or agent of the corporation. Section 145 of the Delaware General Corporation Law also provides that expenses (including attorneys’ fees) incurred by a director or officer in defending an action may be paid by a corporation in advance of the final disposition of an action if the director or officer undertakes to repay the advanced amounts if it is determined such person is not entitled to be indemnified by the corporation. The Delaware General Corporation Law provides that Section 145 is not exclusive of other rights to which those seeking indemnification may be entitled under any bylaw, agreement, vote of shareholders or disinterested directors or otherwise. The provision does not affect directors’ responsibilities under any other laws, such as the federal securities laws. The Company’s Certificate of Incorporation provides for such indemnification to the fullest extent of Section 145 and states that the indemnification is not exclusive of other rights of those seeking indemnification may be entitled.

 

Section 102(b)(7) of the Delaware General Corporation Law permits a corporation to provide in its certificate of incorporation that a director of the corporation shall not be personally liable to the corporation or its shareholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director’s duty of loyalty to the corporation or its shareholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) for unlawful payments of dividends or unlawful stock repurchases, redemptions or other distributions, or (iv) for any transaction from which the director derived an improper personal benefit. The Company’s Certificate of Incorporation provides for such limitation of liability.

 

The Company has entered into agreements with its directors and executive officers, that require the Company to indemnify such persons to the fullest extent permitted by law, against expenses, judgments, fines, settlements and other amounts incurred (including attorneys’ fees), and advance expenses if requested by such person, in connection with investigating, defending, being a witness in, participating, or preparing for any threatened, pending, or completed action, suit, or proceeding or any alternative dispute resolution mechanism, or any inquiry, hearing or investigation (collectively, a “Proceeding”), relating to any event or occurrence that takes place either prior to or after the execution of the indemnification agreement, related to the fact that such person is or was a director or officer of the Company, or while a director or officer is or was serving at the request of the Company as a director, officer, employee, trustee, agent or fiduciary of another foreign or domestic corporation, partnership, joint venture, employee benefit plan, trust or other enterprise, or was a director, officer, employee or agent of a foreign or domestic corporation that was a predecessor corporation of the Company or of another enterprise at the request of such predecessor corporation, or related to anything done or not done by such person in any such capacity, whether or not the basis of the Proceeding is alleged action in an official capacity as a director, officer, employee or agent or in any other capacity while serving as a director, officer, employee, or agent of the Company. Indemnification is prohibited on account of any Proceeding in which judgment is rendered against such persons for an accounting of profits made from the purchase or sale by such persons of securities of the Company pursuant to the provisions of Section 16(b) of the Securities Exchange Act of 1934, as amended, or similar provisions of any federal, state or local laws. The indemnification agreements also set forth certain procedures that apply in the event of a claim for indemnification thereunder.

The Company maintains insurance on behalf of any person who is or was a director, officer or employee of the Company, or is or was serving at the request of the Company as a director, officer, employee or agent of another company, partnership, joint venture, trust or other enterprise against liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the Company would have the power to indemnify him against liability under the provisions of this section.

 

The right of any person to be indemnified is subject always to the right of the Company by its board of directors, in lieu of such indemnity, to settle any such claim, action, suit or proceeding at the expense of the Company by the payment of the amount of such settlement and the costs and expenses incurred in connection therewith.

 

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 Securities and Exchange Commission, 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.

 

Item 25. Other Expenses of Issuance and Distribution

 

The following table sets forth the costs and expenses payable by us in connection with the offering of the common stock being registered. All amounts other than SEC filing fees are estimates. The selling shareholders will pay none of the expenses set forth below.

 

SEC filing fees $

246

 
Legal fees and expenses  5,000 
Accounting fees and expenses  5,000 
Total $

10,246

 

SEC filing fees $374
Legal fees and expenses  5,000 
Accounting fees and expenses  5,000 
Total $10,374

 

Item 26. Recent Sales of Unregistered Securities

 

The following sets forth all sales of unregistered securities we have completed during the last three years. Except as otherwise indicated below, the following transactions were effected in reliance upon the exemption from registration set forth in Section 4(2) of the Securities Act. We based such reliance upon the following facts and circumstances: (i) the investors were accredited investors, as defined in Rule 501 of the Securities Act and were sophisticated, having sufficient knowledge and experience in financial and business matters to make them capable of evaluating the merits and risks of the investment, (ii) the investors represented that they were purchasing the securities for investment purposes without a view to distribution, (iii) the investors had access to our management and information concerning the Company, its business and financial information and (iv) we conducted the sale of the securities without general solicitation or advertising. Except as otherwise indicated below, no underwriting discounts or commissions were paid in the transactions.

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

Effective March 31, 2019, the Company paid all outstanding Executive Deferred Compensation amounts. The total amount settled is $771,113, comprised of $638,706 outstanding at December 31, 2018, and $132,407 additional deferrals recorded during the first quarter of 2019. One-third of the total outstanding Executive Deferred Compensation amount, or $243,623, was paid in cash. The remaining balance was settled by granting the Executives Series M Warrants exercisable for five years to purchase the Company’s stock at an exercise price of $0.70 per share, the closing price of our common stock on March 19, 2019. The total number of the warrants issued of 1,827,173 was determined using the Black Sholes valuation methodology, and by placing a fifty percent premium on the cash value of the remaining two thirds of total outstanding Executive Deferred Compensation as of March 31, 2019.

On February 14, 2018, we announced the private placement of convertible notes with gross proceeds 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. The closing of the first 60% of this amount occurred in March 2018 upon the Company’s achievement of the first milestone – entry by the Company into a material agreement or series of related agreements with a national account for the sale of its products into approximately 1,000 new locations. After the initial private placement, investors were offered the opportunity to accelerate the issuance of the additional warrant by increasing their convertible note investment by 10% to 20%. After the close of the first quarter, a number of investors took advantage of this acceleration opportunity, resulting in an increase in the amount of the total convertible note by $ 177,300 and the issuance of 930,332 additional warrants. The balance of the principal amount was contingent upon achievement of a second milestone – the Company’s entry into a material agreement or series of related agreements with a national account for the sale of its products into approximately 2,500 new locations. In the fourth quarter, the Company and certain investors agreed to subsequently amend the second milestone such that funding under Milestone 2 was triggered by receipt of the Company of written notification of the approval for the roll-out of its products into a national account with approximately 2,500 new locations in lieu of requiring a binding material agreement(s) for such a roll-out. As such, the Company received funds of an additional $1.4 million in the fourth quarter.

 

The Company intends to use the proceeds from this financing to fund the manufacture of inventory, to purchase equipment, and for general corporate purposes.

 

The convertible notes are unsecured and have (i) a two-year term, (ii) a 10% annual coupon to be paid in cash or stock at the Company’s discretion at a conversion price equal to 85% of the average closing bid prices of the Common Stock over the twenty (20) consecutive trading day period immediately preceding the payment date, but in no event lower than sixty cents ($0.60) per share of Common Stock. The investor’s may elect to convert their principal into common stock at a conversion price equal to the lower of: (i) $0.88 per share of Common Stock, or (ii) 85% of the average closing bid prices of the Common Stock over the twenty (20) consecutive trading day period immediately preceding the date of investor’s election to convert; but in no event lower than $0.60 per share of Common Stock. Investors also received warrant coverage of 25% of the number of shares that would be issuable upon a full conversion of the principal amount at an average of the twenty consecutive trading day period immediately preceding the applicable closing date. If any principal amount 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 March 5, 2018, the Company issued a Promissory Note to an existing investor, in the amount of $250,000. The unsecured note bears interest at 12% and has a 6 month term Proceeds are being used to fund the short term working capital needs of the Company. The Company plans to refinance this note upon maturity.

 

We did not issue any additional securities during 2017.

 

During 2016 we issued 28,277,329 shares of our common stock and warrants to purchase 14,033,438 Shares for aggregate gross proceeds to the Company of $18,812,690. Of these total amounts 24,598,674 shares were issued for cash of $16,457,150; 3,502,327 shares were issued for conversion of debt in the amount of $2,242,692; and 176,328 shares were issued in settlement of debt in the amount of $112,849. Of the total 14,033,438 warrants issued during 2016, 3,877,186 are priced at $1,00; 7,812,500 are priced at $0.88, and 2,343,752 are priced at $0.75. The 2016 financing activity occurred in three separate private placements with accredited investors. In the first transaction, we issued 7,754,373 shares and five year warrants priced at $1.00 to purchase up to 3,877,186 shares, for aggregate gross proceeds to the Company of $6,203,498. The first transaction consists of two components: a new equity raise in the amount of $3,570,000 and the conversion into common equity of $2,633,498 of principal and interest of convertible promissory notes previously issued during the fourth quarter of 2016. In the second transaction, we sold 4,687,504 shares and five year warrants priced at $.75 to purchase up to 2,343,752 shares, for aggregate gross proceeds to the Company of $3,000,000. In the third transaction we sold 15,625,000 shares, and five-year warrants priced at $.88 to purchase up to 7,812,500 shares for aggregate gross proceeds to the Company of $10,000,000. During 2016 we also converted $52,613 of debt into 210,455 shares of stock, related to a note that was settled for most investors during 2015.

During the three months ended September 30, 2015 we granted 80,000 options to purchase shares of our common stock to officers, directors and employees. The exercise prices range from $0.47 to $0.72.

 

During the three months ended June 30, 2015 we granted the right to 1,000,000 shares of restricted common stock to a director of the Company who during the period became an officer of the Company. The stock vests 50% on each of the second and third anniversary of the issuance. In addition, we granted the right to 350,000 shares of restricted to another officer in connection with an employment agreement entered into during the three-month period ended June 30, 2015.

 

During the three months ended June 30, 2015, we issued 1,740,000 options to purchase our common stock to officers and employees of the Company. The exercise price of the options ranged from $0.50 to $0.82 per share, and the options are exercisable for periods of between 5 and 8 years. The options vest under a variety of vesting schedules. Two hundred sixty-five thousand (265,000) of the options vest on the first anniversary of issuance, 675,000 of the options vest on the second anniversary of issuance, 675,000 of the options vest on the third anniversary of issuance, and 125,000 of the options vest on the third anniversary of issuance.

 

During the year ended March 31, 2015 we completed two offerings of common stock units at a price of $0.50 per unit. Each unit consists of one share of common stock and a five-year warrant to purchase one-half (1/2) share of our common stock at an exercise price of $0.60 per share. We sold a total of 11,044,000 units representing 11,044,000 shares and warrants to purchase 5,522,000 shares for total consideration of $5,522,000.

 

During the year ended March 31, 2015 we issued 900,000 shares of restricted common stock to an officer and two employees of the Company for services rendered.

 

Also during the year ended March 31, 2015, we issued 155,000 shares of our restricted common stock to legal counsel and a consultant to the Company.

 

Additionally, during the year ended March 31, 2015, we issued 64,100 shares of our common stock to a director. The shares vest over a one-year period. We also issued options to purchase 600,000 shares of our common stock at an exercise price of $0.45 per share to two officers and directors and a director of the Company. The options vested immediately and are exercisable for a period of 5 years from the date of issuance, January 21, 2014.

50

Item 27. Exhibits

 

(b)

Exhibits required by Item 601 of Regulation S-K

Exhibit Index

 

Exhibit
Number
 Description
2.1 Share Exchange Agreement dated January 10, 2012 by and among Moving Box Inc., Andreas Wilcken, Jr., Barfresh Inc. and the shareholders of Barfresh Inc. (incorporated by reference to Exhibit 2.1 to Current Report on Form 8-K as filed January 17, 2012
3.1 Certificate of Incorporation of Moving Box Inc. dated February 25, 2010 (incorporated by reference to Exhibit 3.1 to Form S-1 (Registration No. 333-168738) as filed August 11, 2010)
3.2 Amended and Restated Bylaws of Barfresh Food Group Inc. (incorporated by reference to Exhibit 3.1 to Current Report on Form 8-K as filed August 4, 2014)
3.3 Certificate of Amendment of Certificate of Incorporation of Moving Box Inc. dated February 13, 2012 (incorporated by reference to Exhibit 3.1 to Current Report on Form 8-K as filed February 17, 2012)
3.4 Certificate of Amendment of Certificate of Incorporation of Smoothie Holdings Inc. dated February 16, 2012 (incorporated by reference to Exhibit 3.2 to Current Report on Form 8-K as filed February 17, 2012)
4.1 Form of Series A Warrant (incorporated by reference to Exhibit 10.3 to Current Report on Form 8-K as filed January 17, 2012)
4.2 Form of Series B Warrant (incorporated by reference to Exhibit 4.2 to Form 10K for the period ending March 31, 2014, as filed June 30, 2014)
4.3 Form of Series C Warrant (incorporated by reference to Exhibit 4.3 to Form 10K for the period ending March 31, 2014, as filed June 30, 2014)
4.4 Form of Series D Warrant (incorporated by reference to Exhibit 4.4 to Form 10K for the period ending March 31, 2014, as filed June 30, 2014)
4.5 Form of Series PA Warrant (incorporated by reference to Exhibit 4.5 to Form 10K for the period ending March 31, 2014, as filed June 30, 2014)
4.6 Form of Series CN Warrant (incorporated by reference to Exhibit 4.6 to Form 10K for the period ending March 31, 2014, as filed June 30, 2014)
4.7 Form of Series EN Warrant (incorporated by reference to Exhibit 4.7 to Registration Statement on Form S-1 (Registration No. 333-211019) as filed April 29, 2016)
4.8 Form of Series E Warrant (Incorporated by reference to Exhibit 3.8 to Registration Statement on Form S-1 (Registration No. 333-203340) as filed April 10, 2015)
4.9 Form of Series G Warrant (incorporated by reference to Exhibit 4.1 to Current Report on Form 8-K as filed February 16, 2015)
4.10 Form of Series H Warrant (incorporated by reference to Exhibit 4.10 to Registration Statement on Form S-1 (Registration No. 333-211019) as filed April 29, 2016)
4.11 Form of Series I Warrant (incorporated by reference to Exhibit 4.11 to Registration Statement on Form S-1 (Registration No. 333-211019) as filed April 29, 2016)
4.12 Form of Convertible Promissory Note dated January 29, 2016 by Barfresh Food Group Inc. in favor of certain investors (incorporated by reference to Exhibit 4.12 to Registration Statement on Form S-1 (Registration No. 333-211019) as filed April 29, 2016)
4.13 Form of warrant dated December 1, 2013 (incorporated by reference to Exhibit 4.13 to Registration Statement on Form S-1 (Registration No. 333-211019) as filed April 29, 2016)
4.14 Form of Series K Warrant (Incorporated(incorporated by reference to Exhibit 4.14 to Registration Statement ofon Form S-1 (Registration No. 333-203340)333-333-215322) as filed December 23, 2016)
4.15 Form of Series J Warrant (Incorporated(incorporated by reference to Exhibit 4.15 to Registration Statement ofon Form S-1 (Registration No. 333-203340)333-333-215322) as filed December 23, 2016)
4.16 

Repayment of Debt Agreement dated July 26, 2018 by and between Barfresh Food Group, Inc. and Ibex Investors LLC *(incorporated by reference to Exhibit 4.16 to Registration Statement on Form S-1, No.333-228030)

4.17 

Form of Series L Warrant *(incorporated by reference to Exhibit 4.17 to Registration Statement on Form S-1, No.333-228030)

4.18 

Form of 10% Convertible Promissory Note dated March 5, 2018 issued by Barfresh Food Group Inc. in favor of Ibex Investors LLC *(incorporated by reference to Exhibit 4.18 to Registration Statement on Form S-1, No.333-228030)

4.19 Form of 12% Convertible Promissory Note issued by Barfresh Food Group, Inc. in favor of certain investors in February 2018 *(incorporated by reference to Exhibit 4.19 to Registration Statement on Form S-1, No.333-228030)
4.20Form of Series M Warrant, filed herewith.
5.1 

Opinion and Consentconsent of Libertas Law Group, Inc. *, filed herewith.

10.1 Form of Registration Rights Agreement dated February 16, 2016 (incorporated by reference to Exhibit 10.1 to Registration Statement on Form S-1 (Registration No. 333-211019) as filed April 29, 2016)
10.2 Intellectual Property Sale Deed by and between National Australia Bank Limited and Barfresh Inc. dated October 15, 2013 (incorporated by reference to Exhibit 10.1 to Quarterly Report on Form 10-Q as filed November 20, 2013)
10.3 Form of Securities Purchase Agreement dated February 16, 2016 by and between Barfresh Food Group Inc. and certain investors. (incorporated by reference to Exhibit 10.3 to Registration Statement on Form S-1 (Registration No. 333-211019) as filed April 29, 2016)
10.4 Form of Investor Rights Agreement dated November 23, 2016 by and between Barfresh Food Group, Inc. and Unibel (Incorporated by reference to Exhibit 10.4 to Registration Statement of Form S-1 No. 333-203340)
10.5 Form of Securities Purchase Agreement dated November 23, 2016 by and between Barfresh Food Group, Inc. and Unibel (Incorporated(incorporated by reference to Exhibit 10.5 to Registration Statement ofon Form S-1 (Registration No. 333-203340)333-215322) as filed December 23, 2016)
10.6 Form of Securities Purchase Agreement dated September 28, 2016 by and between Barfresh Food Group, Inc. and certain investors (Incorporated(incorporated by reference to Exhibit 10.6 to Registration Statement ofon Form S-1 (Registration No. 333-203340)333-215322) as filed December 23, 2016)
10.7 Form of Registration Rights Agreement dated September 28, 2016 by and between Barfresh Food Group, Inc. and certain investors (Incorporated(incorporated by reference to Exhibit 10.7 to Registration Statement ofon Form S-1 (Registration No. 333-203340)333-215322) as filed December 23, 2016)
10.8 Barfresh Food Group, Inc. 2014 Equity Incentive Plan (incorporated by reference to Exhibit 10.10 to Annual Report Form 10-K filed June 30, 2014)+
10.9 Barfresh Food Group, Inc. 2015 Equity Incentive Plan (incorporated by reference to Exhibit 10.10 to Annual Report Form 10-K filed July 7, 2015)+
10.10 Executive Employment Agreement by and between Smoothie, Inc. and Riccardo Delle Coste dated April 27, 2015 (incorporated by reference to Exhibit 10.11 to Annual Report Form 10-K filed July 7, 2015)+
10.11 Executive Employment Agreement by and between Smoothie, Inc. and Joseph M. Cugine dated April 27, 2015 (incorporated by reference to Exhibit 10.12 to Annual Report Form 10-K filed July 7, 2015)+
10.12 Executive Employment Agreement by and between Barfresh Food Group, Inc. and Joseph S. Tesoriero dated May 18, 2015 (incorporated by reference to Exhibit 10.13 to Annual Report Form 10-K filed July 7, 2015)+
10.13 

Form of Series D Warrant Exercise Offer dated July 25, 2018 *(incorporated by reference to Exhibit 10.13 to Registration Statement on Form S-1, No. 333-228030)

10.14 Form of Securities Purchase Agreement dated February 14, 2018 by and between Barfresh Food Group, Inc. and certain investors *(incorporated by reference to Exhibit 10.14 to Registration Statement on Form S-1, No.333-228030)
21.1
10.15 Form of Securities Purchase Agreement dated on or about February 12, 2019 by and between Barfresh Food Group Inc. and certain investors, filed herewith.
10.16Form of Registration Rights Agreement dated on or about February 12, 2019 and between Barfresh Food Group Inc. and certain investors, filed herewith.

21.1

Subsidiaries (Incorporated by reference to Exhibit 21.1 to Transitional Report on Form 10KT for the transitional period from April 1, 2015 to December 31, 2015, filed on March 30, 2016)

23.1

 Consent of Eide Bailly LLP, filed herewith.
23.2Consent of Libertas Law Group, Inc. (included in Exhibit 5.1) *
   
 

23.2

 

*previously filed with this registration statement on Form S-1Consent of Libertas Law Grouup, Inc. (included in Exhibit 5.1)

Item 28. Undertakings

 

The undersigned registrant hereby undertakes:

 

1. To file, during any period in which offers or sales are being made, a post-effective amendment to this Registration Statement:

 

a. To include any prospectus required by Section 10(a)(3) of the Securities Act;

 

b. To reflect in the prospectus any facts or events which, individually or together, represent a fundamental change in the information in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in the volume and rise represent no more than a 20% change in the maximum aggregate offering price set forth in the “Calculation of Registration Fee” table in the effective registration statement; and

 

c. To include any material information with respect to the plan of distribution not previously disclosed in this Registration Statement or any material changes to such information in the Registration Statement.

 

2. For determining liability under the Securities Act, treat each post-effective amendment as a new registration statement of the securities offered, and the offering of the securities at that time to be the initial bona fide offering.

 

3. To file a post-effective amendment to remove from registration any of the securities that remain unsold at the end of the offering.

 

4. For determining liability of the undersigned issuer under the Securities Act to any purchaser in the initial distribution of the securities, the undersigned issuer undertakes that in a primary offering of securities of the undersigned issuer pursuant to this registration statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of the following communications, the undersigned issuer will be a seller to the purchaser and will be considered to offer or sell such securities to such purchaser:

 

i. Any preliminary prospectus or prospectus of the undersigned issuer relating to the offering required to be filed pursuant to Rule 424;

 

ii. Any free writing prospectus relating to the offering prepared by or on behalf of the undersigned issuer or used or referred to by the undersigned issuer;

 

iii. The portion of any other free writing prospectus relating to the offering containing material information about the undersigned issuer or its securities provided by or on behalf of the undersigned issuer; and

 

iv. Any other communication that is an offer in the offering made by the undersigned issuer to the purchaser.

5. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission 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 by the Registrant of expenses incurred or paid by a director, officer of controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a 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.

 

6. For determining any liability under the Securities Act, treat the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant under Rule 424(b)(1) or (4) or 497(h) under the Securities Act as part of this registration statement as of the time the Commission declared it effective.

 

7. For determining any liability under the Securities Act, treat each post-effective amendment that contains a form of prospectus as a new registration statement for the securities offered in the registration statement, and that offering of the securities at that time as the initial bona fide offering of those securities.

 

8. That, for the purpose of determining liability under the Securities Act to any purchaser:

 

a. If the issuer is relying on Rule 430B:

 

1. Each prospectus filed by the undersigned issuer pursuant to Rule 424(b)(3) shall be deemed to be part of the registration statement as of the date the filed prospectus was deemed part of and included in the registration statement; and

 

2. Each prospectus required to be filed pursuant to Rule 424(b)(2), (b)(5), or (b)(7) as part of a registration statement in reliance on Rule 430B relating to an offering made pursuant to Rule 415(a)(1)(i), (vii), or (x) for the purpose of providing the information required by section 10(a) of the Securities Act shall be deemed to be part of and included in the registration statement as of the earlier of the date such form of prospectus is first used after effectiveness or the date of the first contract of sale of securities in the offering described in the prospectus. As provided in Rule 430B, for liability purposes of the issuer and any person that is at that date an underwriter, such date shall be deemed to be a new effective date of the registration statement relating to the securities in the registration statement to which that prospectus relates, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. Provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such effective date, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such effective date; or

 

b. If the issuer is subject to Rule 430C: Each prospectus filed pursuant to Rule 424(b) as part of a registration statement relating to an offering, other than registration statements relying on Rule 430B or other than prospectuses filed in reliance on Rule 430A, shall be deemed to be part of and included in the registration statement as of the date it is first used after effectiveness. Provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such first use, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such date of first use.

SIGNATURES

 

In accordance with the requirements of the Securities Act of 1933, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements of filing on Form S-1 and authorized this registration statement to be signed on its behalf by the undersigned, in the City of Beverly Hills, State of California, on December 17 , 2018.

May 28, 2019.

 

 BARFRESH FOOD GROUP, INC.
  
 /s/ Riccardo Delle Coste
 Riccardo Delle Coste
 Chief Executive Officer

 

POWER OF ATTORNEY

 

Each person whose signature appears below constitutes and appoints Riccardo Delle Coste and Joseph Tesoriero as his true and lawful attorneys-in-fact and agents, each acting alone, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any or all amendments (including post-effective amendments) to the Registration Statement, and to sign any registration statement for the same offering covered by this Registration Statement that is to be effective upon filing pursuant to Rule 462(b) under the Securities Act of 1933, as amended, and all post-effective amendments thereto, and to file the same, with all exhibits thereto, and all documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, each acting alone, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

 

In accordance with the requirements of the Securities Act of 1933, this registration statement was signed by the following persons in the capacities and on the dates stated.

 

Signature Title Date
     
/s/ Riccardo Delle Coste Chief Executive Officer and Director 

December 17, 2018

May 28, 2019
Riccardo Delle Coste (Principal Executive Officer)  
     
/s/ Joseph Tesoriero Chief Financial Officer December 17, 2018May 28, 2019
Joseph Tesoriero (Principal Financial Officer; Principal Accounting Officer)  
     
/s/ Arnold Tinter Director December 17, 2018May 28, 2019
Arnold Tinter    
     

/s/ Alice ElliotAlexander Ware

 Director 

December 17, 2018

May 28, 2019
Alice Elliot
/s/ Joseph M. CugineDirectorDecember 17, 2018
Joseph M. CugineAlexander Ware    
     

/s/ Isabelle Ortiz-CochetSteven Lang

 Director May 28, 2019

December 17, 2018Steven Lang

/s/ Isabelle Ortiz-CochetDirectorMay 28, 2019
Isabelle Ortiz-Cochet