Item
1. Financial Statements.
Barfresh
Food Group Inc.
Condensed
Consolidated Balance Sheets
|
|
September
30, 2018
|
|
|
December
31, 2017
|
|
|
|
(Unaudited)
|
|
|
(Audited)
|
|
Assets
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
316,014
|
|
|
$
|
1,304,916
|
|
Accounts
Receivable
|
|
|
656,728
|
|
|
|
301,012
|
|
Inventory
|
|
|
1,082,665
|
|
|
|
1,415,495
|
|
Prepaid
expenses and other current assets
|
|
|
95,111
|
|
|
|
24,496
|
|
Total
current assets
|
|
|
2,150,518
|
|
|
|
3,045,919
|
|
Property,
plant and equipment, net of depreciation
|
|
|
2,413,003
|
|
|
|
1,760,890
|
|
Intangible
assets, net of amortization
|
|
|
545,558
|
|
|
|
586,943
|
|
Deposits
|
|
|
39,369
|
|
|
|
39,369
|
|
Total
Assets
|
|
$
|
5,148,448
|
|
|
$
|
5,433,121
|
|
|
|
|
|
|
|
|
|
|
Liabilities
And Stockholders’ Equity
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
718,633
|
|
|
$
|
421,176
|
|
Accrued
expenses
|
|
|
1,224,427
|
|
|
|
849,529
|
|
Deferred
rent liability
|
|
|
-
|
|
|
|
495
|
|
Notes
Payable
|
|
|
200,000
|
|
|
|
-
|
|
Total
current liabilities
|
|
|
2,143,060
|
|
|
|
1,271,200
|
|
Long
term liabilities:
|
|
|
|
|
|
|
|
|
Accrued
Interest
|
|
|
162,941
|
|
|
|
-
|
|
Convertible
note - related party, net of discount
|
|
|
613,095
|
|
|
|
-
|
|
Convertible
note, net of discount
|
|
|
1,361,071
|
|
|
|
-
|
|
Derivative
Liabilities
|
|
|
892,794
|
|
|
|
-
|
|
Total
liabilities
|
|
|
5,172,961
|
|
|
|
1,271,200
|
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies (Note 8)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
Additional
paid in capital
|
|
|
39,859,625
|
|
|
|
37,992,799
|
|
Accumulated
deficit
|
|
|
(39,884,259
|
)
|
|
|
(33,830,997
|
)
|
Total
stockholders’ equity
|
|
|
(24,513
|
)
|
|
|
4,161,921
|
|
Total
Liabilities and Stockholders’ Equity
|
|
$
|
5,148,448
|
|
|
$
|
5,433,121
|
|
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, 2018 and 2017
(Unaudited)
|
|
For
the three months ended September 30,
|
|
|
For
the nine months ended September 30,
|
|
|
|
|
2018
|
|
|
|
2017
|
|
|
|
2018
|
|
|
|
2017
|
|
Revenue
|
|
$
|
1,620,214
|
|
|
$
|
679,952
|
|
|
$
|
3,329,451
|
|
|
$
|
1,621,119
|
|
Cost
of revenue
|
|
|
723,719
|
|
|
|
334,376
|
|
|
|
1,521,873
|
|
|
|
822,902
|
|
Gross
profit
|
|
|
896,495
|
|
|
|
345,576
|
|
|
|
1,807,578
|
|
|
|
798,217
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative
|
|
|
2,139,064
|
|
|
|
2,337,634
|
|
|
|
6,462,989
|
|
|
|
7,174,457
|
|
Depreciation
and Amortization
|
|
|
164,602
|
|
|
|
93,975
|
|
|
|
426,692
|
|
|
|
226,576
|
|
Total
operating expenses
|
|
|
2,303,666
|
|
|
|
2,431,609
|
|
|
|
6,889,681
|
|
|
|
7,401,033
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
loss
|
|
|
(1,407,171
|
)
|
|
|
(2,086,033
|
)
|
|
|
(5,082,103
|
)
|
|
|
(6,602,816
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
(income)/expenses /loss from derivative liability
|
|
|
5,911
|
|
|
|
-
|
|
|
|
253,807
|
|
|
|
-
|
|
Warrant
modification
|
|
|
290,300
|
|
|
|
-
|
|
|
|
290,300
|
|
|
|
-
|
|
Interest
|
|
|
196,201
|
|
|
|
-
|
|
|
|
426,297
|
|
|
|
-
|
|
Total
other expense
|
|
|
492,412
|
|
|
|
-
|
|
|
|
970,404
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss)
|
|
$
|
(1,899,583
|
)
|
|
$
|
(2,086,033
|
)
|
|
$
|
(6,052,507
|
)
|
|
$
|
(6,602,816
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per
share information - basic and fully diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding
|
|
|
120,431,103
|
|
|
|
118,382,934
|
|
|
|
119,432,657
|
|
|
|
117,790,039
|
|
Net
(loss) per share
|
|
$
|
(0.02
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(0.05
|
)
|
|
$
|
(0.06
|
)
|
See
the accompanying notes to the condensed consolidated financial statements
Barfresh
Food Group Inc.
Condensed
Consolidated Statements of Cash Flows
For
the nine months ended September 30, 2018 and 2017
(Unaudited)
|
|
2018
|
|
|
2017
|
|
Net
Cash (used for) Operating Activities
|
|
|
(3,536,246
|
)
|
|
|
(5,224,812
|
)
|
|
|
|
|
|
|
|
|
|
Investing
Activities
|
|
|
|
|
|
|
|
|
Purchase
of property and equipment
|
|
|
(912,102
|
)
|
|
|
(412,865
|
)
|
Proceeds
from sale of equipment
|
|
|
37,968
|
|
|
|
-
|
|
Purchase
of Intangibles
|
|
|
(6,322
|
)
|
|
|
(27,684
|
)
|
Net
Cash (used for) Investing Activities
|
|
|
(880,456
|
)
|
|
|
(440,549
|
)
|
|
|
|
|
|
|
|
|
|
Financing
Activities
|
|
|
|
|
|
|
|
|
Exercise
of Warrant
|
|
|
550,000
|
|
|
|
35,400
|
|
Issuance
of short term notes
|
|
|
250,000
|
|
|
|
-
|
|
Repayment
of short term notes
|
|
|
(50,000
|
)
|
|
|
-
|
|
Issuance
costs of convertible notes
|
|
|
(27,000
|
)
|
|
|
-
|
|
Issuance
of convertible notes
|
|
|
2,704,800
|
|
|
|
-
|
|
Repayment
of long term debt
|
|
|
-
|
|
|
|
(2,879
|
)
|
Net
Cash from Financing Activities
|
|
|
3,427,800
|
|
|
|
32,521
|
|
|
|
|
|
|
|
|
|
|
Net
Change in Cash and Cash Equivalents
|
|
|
(988,902
|
)
|
|
|
(5,632,840
|
)
|
|
|
|
|
|
|
|
|
|
Cash
and Cash Equivalents, Beginning of Year
|
|
|
1,304,916
|
|
|
|
9,180,947
|
|
|
|
|
|
|
|
|
|
|
Cash
and Cash Equivalents, End of Year
|
|
$
|
316,014
|
|
|
$
|
3,548,107
|
|
|
|
|
|
|
|
|
|
|
Non
Cash
|
|
|
|
|
|
|
|
|
Discount
on convertible notes (warrants & derivative)
|
|
|
964,734
|
|
|
|
-
|
|
Property,
plant and equipment included in Accounts Payable
|
|
|
156,964
|
|
|
|
-
|
|
See
the accompanying notes to the condensed consolidated financial statements
Note
1. Basis 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. The accompanying unaudited condensed consolidated financial statements of Barfresh Food
Group Inc. at September 30, 2018 and December 31, 2017 have been prepared in accordance with generally accepted accounting principles
(“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.
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 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, 2018 and December
31, 2017. However, we believe that the financial institution where the cash on deposit that exceeds $250,000 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, notes payable, convertible notes
and derivative liabilities. The carrying value of our financial instruments approximates fair value, except for the derivative
liability in which carrying value is fair value.
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.
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, which is twenty years from the date of filing the patent applications. In accordance with ASC Topic 350
Intangibles
- 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, 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.
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 deemed to be reasonably assured.
The estimated useful lives used for financial statement purposes are:
Furniture
and fixtures: 5 years
Equipment:
7 years
Leasehold
improvements: 2 years
Vehicle:
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.
|
|
|
|
|
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.
|
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
and $107,324 for the three-month periods ended September 30, 2018 and 2017, respectively, and $493,969 and $447,927 for the nine-month
periods ended September 30, 2018 and 2017, 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”).
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.
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 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, 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 from Contracts with Customers.
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 both
our current and long-term lease liabilities and our fixed assets of our limited number of operating leases that will be converted
to financing leases under the new guidance. The Company does not plan to adopt the standard until the interim period ended March
31, 2019.
Note
2. Property Plant and Equipment
Major
classes of property and equipment at September 30, 2018 and December 31, 2017 consist of the following:
|
|
2018
|
|
|
2017
|
|
Furniture
and fixtures
|
|
$
|
1,524
|
|
|
$
|
1,524
|
|
Equipment
|
|
|
2,867,159
|
|
|
|
1,952,538
|
|
Leasehold
Improvements
|
|
|
4,886
|
|
|
|
4,886
|
|
Vehicles
|
|
|
29,696
|
|
|
|
29,696
|
|
|
|
|
2,903,266
|
|
|
|
1,988,644
|
|
Less:
accumulated depreciation
|
|
|
(1,009,472
|
)
|
|
|
(665,657
|
)
|
|
|
|
1,893,794
|
|
|
|
1,322,987
|
|
Equipment
not yet placed in service
|
|
|
519,210
|
|
|
|
437,903
|
|
Property
and equipment, net of depreciation
|
|
$
|
2,413,003
|
|
|
$
|
1,760,890
|
|
We
recorded depreciation expense related to these assets of $148,700 and $78,576 for the three-month periods ended September 30,
2018 and 2017, 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, 2018, intangible assets consist of patent costs of $764,891, trademarks of $95,175 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.
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 $15,902 and $15,398 for the three months ended September 30, 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, is as follows:
|
|
Total
Amortization
|
|
Years
ending December 31,
|
|
|
|
|
2018
|
|
|
15,903
|
|
2019
|
|
|
63,610
|
|
2020
|
|
|
63,610
|
|
2021
|
|
|
63,610
|
|
2022
|
|
|
63,610
|
|
Later
years
|
|
|
180,040
|
|
|
|
$
|
450,383
|
|
Note
4. Related Parties
As
disclosed below in Note 6, members of management and directors invested in company’s convertible notes; and in Note 7, members
of management and directors have received shares of stock and options in exchange for services.
Note
5. Short-Term Notes Payable
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, of 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 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
|
|
|
3
|
|
Volatility
|
|
|
54.816
|
%
|
Risk
Fee interest rate
|
|
|
2.41
|
%
|
Dividend
yield (on common stock)
|
|
|
-
|
|
During
the three months ended June 30, 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
quarter 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 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
|
|
|
3
|
|
Volatility
|
|
|
55.49
|
%
|
Risk
Fee 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
|
|
Future
maturity of convertible notes are as follow:
|
|
Total
Convertible Notes
|
|
Years
ending December 31,
|
|
|
|
|
2018
|
|
|
-
|
|
2019
|
|
|
-
|
|
2020
|
|
|
2,704,800
|
|
2021
|
|
|
-
|
|
2022
|
|
|
-
|
|
|
|
$
|
2,704,800
|
|
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 current derivative liability of $569,587 at March 14, 2018 related to the Series CN Convertible
notes and $69,400 at April 11, 2018 related to the Series CN Notes Warrant Acceleration. The derivative liability was revalued
at September 30, 2018 with a value of $892,794. The change in fair value of the derivative liability resulted in a loss of $5,911
for the three months ended September 30, 2018, and a loss of $253,807 for the nine months ended September 30, 2018, which has
been reported as loss on fair value of derivative liability in the statements of operations.
The
fair value of the derivative liability 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)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
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 September 30, 2018:
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
|
|
The
following table presents the Company’s fair value hierarchy for applicable assets and liabilities measured at fair value
as of September 30, 2018.
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
Derivative
Liability
|
|
$
|
-
|
|
|
|
-
|
|
|
|
892,794
|
|
|
$
|
892,794
|
|
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
|
|
|
43,463
|
|
2019
|
|
|
43,463
|
|
|
|
$
|
86,926
|
|
Note
9. Stockholders’ Equity
During
the nine months ended September 30, 2018, we issued 183,240 shares of common stock, valued at $100,000, and, and 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.
The exercise price of the options is $0.50 per share, vesting is immediate, and they are exercisable for 8 years. In addition,
we issued 1,305,000 options to purchase our common stock to employees and executives. The exercise price of the options ranged
from $0.52 per share, vest after 3 years, and are exercisable for periods of 8 years.
The
fair value of the options was calculated using the Black-Sholes option pricing model, based on the criteria shown below.
Expected
life (in years)
|
|
|
5.5
to 8
|
|
Volatility
|
|
|
59.82%
to 69.87
|
%
|
Risk
Free interest rate
|
|
|
2.78%
to 2.82
|
%
|
Dividend
yield (on common stock)
|
|
|
-
|
|
The
shares of our common stock were valued at the trading price on the date of grant, $0.39 and $0.595 per share
During
the same period, we cancelled 759,516 options to purchase our common stock.
The
following is a summary of outstanding stock options issued to employees and directors as of September 30, 2018:
|
|
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
|
|
|
|
-
|
|
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.
The
total amount of equity based compensation expense for the three-month periods ended September 30, 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.
Note
10. Outstanding Warrants
The
following is a summary of all outstanding warrants as of September 30, 2018:
|
|
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.
Note
11. 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, 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-month periods ended September 30, 2018 and 2017, we did not have any interest and penalties associated with tax positions.
As of September 30, 2018, we did not have any significant unrecognized uncertain tax positions.
Note
12. Liquidity
We
have a history of operating losses and negative cash flow. As our operations grow, we expect to experience significant increases
in our working capital requirements. These conditions raise substantial doubt over the Company’s ability to meet all of
its obligations over the twelve months following the filing of this Form 10-Q. Management has evaluated these conditions, and
concluded that current plans will alleviate this concern. We have significantly reduced core operating costs beginning in 2016,
including reducing the number of our employees from 44 to 24 over this time period. In addition, we plan to address this concern
by raising additional capital. While these plans to raise additional capital have not yet been implemented, management has concluded
that it is probable that they will be implemented within one year of the issuance of the financial statements, and that they will
mitigate the substantial doubt of our ability to continue as a going concern. However, the Company cannot predict, with certainty,
the outcome of its action to generate liquidity, including the availability of additional financing, or whether such actions would
generate the expect liquidity as planned.
Note
13. Subsequent Events
Management
has evaluated all activity and concluded that no subsequent events have occurred that would require recognition in the financial
statements or disclosure in the notes to the financial statements.
Item
2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The
following discussion should be read in conjunction with the financial information included elsewhere in this Quarterly Report
on Form 10-Q (this “Report”), including our unaudited condensed consolidated financial statements and the related
notes. References in this Management’s Discussion and Analysis of Financial Condition and Results of Operations section
to “us”, “we”, “our” and similar terms refer to Barfresh Food Group Inc. This discussion includes
forward-looking statements, as that term is defined in the federal securities laws, based upon current expectations that involve
risks and uncertainties, such as plans, objectives, expectations and intentions. Actual results and the timing of events could
differ materially from those anticipated in these forward-looking statements as a result of a number of factors. Words such as
“anticipate”, “estimate”, “plan”, “continuing”, “ongoing”, “expect”,
“believe”, “intend”, “may”, “will”, “should”, “could”
and similar expressions are used to identify forward-looking statements.
We
caution you that these statements are not guarantees of future performance or events and are subject to a number of uncertainties,
risks and other influences, many of which are beyond our control, which may influence the accuracy of the statements and the projections
upon which the statements are based. Any one or more of these uncertainties, risks and other influences could materially affect
our results of operations and whether forward-looking statements made by us ultimately prove to be accurate. Our actual results,
performance and achievements could differ materially from those expressed or implied in these forward-looking statements. We undertake
no obligation to publicly update or revise any forward-looking statements, whether from new information, future events or otherwise.
Barfresh
is a leader in the creation, manufacturing and distribution of ready to blend frozen beverages. The current portfolio of products
includes smoothies, shakes and frappes. Products are packaged in two distinct formats. The Company’s original single serve
format features portion controlled and ready to blend beverage ingredient packs or “beverage packs”. The beverage
packs contain all of the solid ingredients necessary to make the beverage, including the base (either sorbet, frozen yogurt or
ice cream), real fruit pieces, juices and ice – five ounces of water are added before blending.
The
Company’s bulk “Easy Pour” format also contains all of the solid ingredients necessary to make the beverage,
packaged in gallon containers in a concentrated formula that is mixed “one to one” with water. The Company has 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 300 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 sell its bulk Easy Pour products into over fifty 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.
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.
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 the 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 Group is headquartered in Paris, France, with global operations in 33 countries, 30 production sites on 4 continents and
nearly 12,000 employees. Its many branded products, including The Laughing Cow®, Mini Babybel® and Boursin®, are sold
in over 130 countries around the world. Pursuant to the securities purchase agreement, Unibel purchased 15,625,000 shares of common
stock at $0.64 per share (“Shares”) and warrants to purchase 7,812,500 shares of common stock (“Warrants”)
for aggregate gross proceeds to Barfresh of $10 million. The Warrants are exercisable for a term of five years at a per share
price of $.88 for cash. Pursuant to the Investor Rights agreement, Barfresh has registered the Shares and the Warrants, and Unibel
was granted a seat on the Barfresh Board. This strategic investment 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.
On
February 14, 2018, we announced the private placement of convertible notes with gross proceeds of $4.1 million The closing of
the first 60% of this amount occurred between March 12 and 22, 2018, after notice was issued by the Company that it had entered
into a material agreement or series of related agreements with a national account for the sale of its products into approximately
1,000 new locations. The remaining 40% of the principal amount will be received upon achieving a second milestone, which is entering
into a material agreement or series of related agreements with a national account for the sale of its products into approximately
2,500 new locations.
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.
Currently
we have 24 employees and 2 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
|
|
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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.
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2)
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Identify
the performance obligation in the contract
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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.
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3)
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Determine
the transaction price
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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.
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4)
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Allocate
the transaction price to performance obligations in the contract
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Since
our contracts contain a single performance obligation, delivery of frozen beverages, the transaction price is allocated to
that single performance obligation.
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5)
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Recognize
Revenue when or as the Company satisfies a performance obligation
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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.
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The
company evaluated the requirement to disaggregate revenue, and concluded that substantially all of its revenue comes from
a single product, frozen beverages.
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Impairments
We
periodically evaluate whether the carrying value of long-lived assets has been impaired when circumstances indicate the carrying
value of those assets may not be recoverable. The carrying amount is not recoverable if it exceeds the sum of the undiscounted
cash flows expected to result from the use and eventual disposition of the asset. If the carrying value is not recoverable, the
impairment loss is measured as the excess of the asset’s carrying value over its fair value.
Share-based
Compensation
We
account for share-based employee compensation plans under the fair value recognition and measurement provisions in accordance
with applicable accounting standards, which require all share-based payments to employees, including grants of stock options and
restricted stock units (RSUs), to be measured based on the grant date fair value of the awards, with the resulting expense generally
recognized on a straight-line basis over the period during which the employee is required to perform service in exchange for the
award.
Derivative
Liability
The
Company evaluates its convertible instruments, options, warrants or other contracts to determine if those contracts or embedded
components of those contracts qualify as derivatives to be separately accounted for under ASC Topic 815, “Derivatives and
Hedging.” The result of this accounting treatment is that the fair value of any derivative is marked-to-market each balance
sheet date and recorded as a liability. In the event that the fair value is recorded as a liability, the change in fair value
is recorded in the statement of operations as gain/loss from derivative liability. Upon conversion or exercise of a derivative
instrument, the instrument is marked to fair value at the conversion date and then that fair value is reclassified to equity.
We analyzed the derivative financial instruments in accordance with ASC 815. The objective is to provide guidance for determining
whether an equity-linked financial instrument is indexed to an entity’s own stock. This determination is needed for a scope
exception which would enable a derivative instrument to be accounted for under the accrual method. The classification of a non-derivative
instrument that falls within the scope of ASC 815-40-05 “Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company’s Own Stock” also hinges on whether the instrument is indexed to an entity’s
own stock. A non-derivative instrument that is not indexed to an entity’s own stock cannot be classified as equity and must
be accounted for as a liability. There is a two-step approach in determining whether an instrument or embedded feature is indexed
to an entity’s own stock. First, the instrument’s contingent exercise provisions, if any, must be evaluated, followed
by an evaluation of the instrument’s settlement provisions. The Company utilized the fair value standard set forth by the
Financial Accounting Standards Board, defined as the amount at which the assets (or liability) could be bought (or incurred) or
sold (or settled) in a current transaction between willing parties, that is, other than in a forced or liquidation sale.
Results
of Operations
Results
of Operation for Three Months Ended September 30, 2018 as Compared to the Three Months Ended September 30,
2017
Revenue
and cost of revenue
Revenue
increased $940,262 (138%) from $679,952 in 2017 to $1,620,214 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 as compared to $334,376 in 2017. Our gross profit was $896,495 (55.3%) and $345,576 (50.8%) 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 2018 will be comparable to the current quarter.
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%) from $2,337,634 in 2017 to $2,139,064 in 2018, with the improvement
primarily driven by lower personnel expenses resulting from the realignment of our sales force. The following is a breakdown of
our general and administrative expenses for the three months ended September 30, 2018 and 2017:
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three
months ended
September 30,
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three
months ended
September 30,
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2018
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2017
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Difference
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Personnel
costs
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$
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724,101
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$
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998,886
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$
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(274,785
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)
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Stock
based compensation/options
|
|
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134,082
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259,949
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(125,867
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)
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Legal
and professional fees
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87,170
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103,729
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(16,559
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)
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Travel
|
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107,223
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84,694
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22,529
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Rent
|
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46,614
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42,674
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3,940
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Marketing
and selling
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382,587
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188,038
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194,549
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Consulting
fees
|
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17,450
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58,870
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(41,420
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)
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Director
fees
|
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75,000
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100,000
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(25,000
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)
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Research
and development
|
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150,299
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107,324
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|
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42,975
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Shipping
and Storage
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259,164
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235,683
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23,481
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Other
expenses
|
|
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155,374
|
|
|
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157,787
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(2,413
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)
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$
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2,139,064
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$
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2,337,634
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$
|
(198,570
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)
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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 $274,785 (28%) from $998,886 to $724,101. During the fourth quarters of 2016 and 2017,
we realigned ours sales force to a more efficient model, by increasing the number of dedicated sales brokers that represent our
products, and reducing the number of sales force employees. When taking into consideration start dates for new employees, and
separation dates for those employees who left our workforce, we had 43 full time employees during 2016, and we currently have
24 full time employees.
Stock
based compensation is used as an incentive to attract new employees and to compensate existing employees. Stock based compensation
includes stock issued and options granted to employees and non-employees. Stock compensation for the current quarter was $134,082,
a decrease of $125,785, or 48%, from the year ago quarter expense of $259,949. 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%) from $103,729 in 2017 to $87,170 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%) from $84,694 in 2017 to $107,223 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 year will be
comparable to the current quarter.
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 lease office space at 8383 Wilshire Boulevard, Beverly Hills, California pursuant to a new lease that commenced
on November 1, 2016 and expires March 31, 2019.
Marketing
and selling expenses increased $194,549 (103%) from $188,038 in 2017 to $382,587 in 2018. Higher marketing and selling expenses
were primarily due to higher sales agent commissions associated with higher sales during the quarter.
Consulting
fees were $17,450 in 2018, as compared with $58,870 in 2017. Our consulting fees vary based on needs. We engaged consultants in
the areas of sales and operations during the quarter. The need for future consulting services will be variable.
Director
fees decreased $25,000 from $100,000 in 2017 to $75,000 in 2018. Annual director fees are anticipated at $50,000 per non-employee
director.
Research
and development expenses increased $42,975, (40%) from $107,324 in 2017 to $150,299 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%) from $235,683 in 2017 to $259,164 in 2018. Shipping and storage expense as a percentage
of revenue decreased from 35% in 2017 to 16% 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 during the balance of the year, 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, 2018 and 2017, respectively.
The improvement of $678,862, or 32.5%, was primarily due to higher gross profit margin on higher sales, and lower G&A expenses.
Interest
expense in the third quarter of 2018 is $196,201. Interest relates to convertible debt in the amount of $2,527,500 that was issued
on March 14, 2018, which bears interest at 10%, and to a note payable in the amount of $200,000 that was issued on March 5, 2018,
which bears interest at 12%. Interest expense includes amortization of $121,508 of the value of warrants issued with the convertible
debt.
The
change in fair value of the derivative liability resulted in a loss of $5,911 for the three months ended September 30, 2018, and
the warrant modification expense was $290,300.
We
had net losses of $1,899,583 and $2,086,033 in the three month periods ended September 30, 2018 and 2017.
Results
of Operation for Nine Months Ended September 30, 2018 as Compared to the Nine Months Ended September 30,
2017
Revenue
and cost of revenue
Revenue
increased $1,708,372 (105%) from $ 1,621,119 in 2017 to $ 3,329,451 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 $ 1,521,873 as compared to $ 822,902 in 2017. Our gross profit was $ 1,807,578 (54.3%) and $ 798,217 (49.2%)
for 2018 and 2017, respectively. We anticipate that our gross profit percentage for the remainder of 2018 will be approximately
50%.
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%) from $7,174,457 in 2017 to $6,462,989 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 nine months ended September 30, 2018 and 2017:
|
|
nine
months ended
September 30,
|
|
|
nine
months ended
September 30,
|
|
|
|
|
|
|
2018
|
|
|
2017
|
|
|
Difference
|
|
Personnel
costs
|
|
$
|
2,461,772
|
|
|
$
|
3,276,377
|
|
|
$
|
(814,605
|
)
|
Stock
based compensation/options
|
|
|
498,527
|
|
|
|
876,253
|
|
|
|
(377,726
|
)
|
Legal
and professional fees
|
|
|
326,894
|
|
|
|
359,961
|
|
|
|
(33,067
|
)
|
Travel
|
|
|
318,383
|
|
|
|
313,094
|
|
|
|
5,289
|
|
Rent
|
|
|
147,197
|
|
|
|
130,472
|
|
|
|
16,725
|
|
Marketing
and selling
|
|
|
848,601
|
|
|
|
453,280
|
|
|
|
395,321
|
|
Consulting
fees
|
|
|
53,109
|
|
|
|
155,371
|
|
|
|
(102,262
|
)
|
Director
fees
|
|
|
187,500
|
|
|
|
156,296
|
|
|
|
31,204
|
|
Research
and development
|
|
|
493,969
|
|
|
|
447,927
|
|
|
|
46,042
|
|
Shipping
and Storage
|
|
|
718,509
|
|
|
|
468,952
|
|
|
|
249,557
|
|
Other
expenses
|
|
|
408,528
|
|
|
|
536,474
|
|
|
|
(127,946
|
)
|
|
|
$
|
6,462,989
|
|
|
$
|
7,174,457
|
|
|
$
|
(711,468
|
)
|
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%) from $3,276,377 to $ 2,461,772. During 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 remaining sales force to more effectively focus on pursuing
larger accounts, while our expanded brokerage network will support and expand our “up and down the street” business.
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 2018
was $ 498,527 a decrease of $ 377,726, or 43%, as compared with the first nine months of 2017, which was $876,523. The decrease
in stock based compensation expense was 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 $ 33,067 (9.2%) from $ 359,961 in 2017 to $326,894 in 2018. We anticipate that legal fees related
to our business and financing activities will increase as our business continues to grow.
Travel
expenses increased $ 5,289 (1.7%) from $ 313,094 in 2017 to $318,383 in 2018. The change is primarily due to the net effect of
a reduction in travel costs associated with terminated employees, offset by an increase in per employee travel costs as remaining
employees have been assigned larger territories. We anticipate that travel expenses for the balance of this year will be comparable
to the quarterly expense for the first nine months of this 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 have entered into a new lease for office space at 8383 Wilshire Boulevard, Beverly Hills, California. The
new lease commenced on November 1, 2016 and expires March 31, 2019.
Marketing
and selling expenses increased $ 395,321 (87.2%) from $ 453,280 in 2017 to $ 848,601 in 2018. Higher marketing and selling expenses
were primarily due to higher sales commissions associated with higher sales revenue.
Consulting
fees decreased $102,262 (65.8%) from $ 155,371 in 2017 to $53,109 in 2018. Our consulting fees vary based on needs. We engage
consultants in the areas of sales, operations and accounting. The need for future consulting services will be variable
Director
fees increased $31,204 from $156,296 in 2017 to $187,500 in 2018. Annual director fees are anticipated at $50,000 per non-employee
director.
Research
and development expenses increased $46,042 (10.3%) from $447,927 in 2017 to $493,969 in 2018. The increase in Research and Development
Expense is being driven by an increased need for research and development services, as we continue to expand product offerings,
both for our standard SKU’s, and for National Accounts, and commissioning costs at our third party production facility in
Searcy, Arkansas.
Shipping
and storage expense increased $249,547 (53.2%) from $468,952 in 2017 to $718,509 in 2018. Shipping and storage expense as a percentage
of revenue was 21.5% for the first nine months of 2018 and 28.9% for the first nine months of 2017. The higher expense in the
first nine months of 2018 is primarily due to expansion of our business. We anticipate that shipping and storage expense as a
percentage of sales will continue to reduce during the balance of the year, as the Company is able to take advantage of more efficient
distribution arrangements.
Other
expenses consist of ordinary operating expenses such as investor relations, office, telephone, insurance, and stock related costs.
We anticipate increases in certain of these expenses, as our business continues to grow.
We
had operating losses of $5,082,103 and $6,602,816 for the nine month periods ended September 30, 2018 and 2017, respectively.
Interest
expense was $426,297 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 primarily relates to convertible debt that was issued during March of 2018. Interest
expense includes amortization of $263,356 of the value of warrants issued with the convertible debt.
The
change in fair value of the derivative liability resulted in a loss of $253,807 for the nine months ended September 30, 2018,
and the warrant modification expense was $290,300.
We
had net losses of $6,052,507 and $6,602,816 in the nine month periods ended September 30, 2018 and 2017, respectively
Liquidity
and Capital Resources
During
the nine months ended September 30, 2018, we used cash for operations of $3,536,246, purchased equipment for $912,102, and incurred
spending for trademarks in the amount $6,322. Equipment purchased during the nine months ended September 30, 2018 includes blenders,
freezers and bulk product blending machines, which are located at the end customer location. No manufacturing equipment was purchased
during this period.
We
raised cash from the exercise of warrants in the amount of $550,000, and used $50,000 of those proceeds to partially repay a short
term note that had originally been issued in the amount of 250,000. We also raised cash from the issuance of convertible notes,
net 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.
We
have a history of operating losses and negative cash flow. As our operations grow, we expect to experience significant increases
in our working capital requirements. These conditions raise substantial doubt over the Company’s ability to meet all of
its obligations over the twelve months following the filing of this Form 10-Q. Management has evaluated these conditions, and
concluded that current plans will alleviate this concern. We have significantly reduced core operating costs beginning in 2016,
including reducing the number of our employees from 44 to 24 over this time period. In addition, we plan to address this concern
by raising additional capital. While these plans to raise additional capital have not yet been implemented, management has concluded
that it is probable that they will be implemented within one year of the issuance of the financial statements, and that they will
mitigate the substantial doubt of our ability to continue as a going concern. However, the Company cannot predict, with certainty,
the outcome of its action to generate liquidity, including the availability of additional financing, or whether such actions would
generate the expect liquidity as planned.
We
lease office space under a non-cancelable operating lease, which expires March 31, 2019.
The
aggregate minimum requirements under non-cancelable leases as of September 30, 2018 is $86,926.
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.