UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended March 31, 2021

 

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

 

For the transition period from ________________ to ___________________

 

Commission File Number: 000-55131

 

BARFRESH FOOD GROUP INC.

(Exact name of registrant as specified in its charter)

 

Delaware		27-1994406
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
3600 Wilshire Blvd., Suite 1720, Los Angeles, California		90010
(Address of principal executive offices)		(Zip Code)

 

310-598-7113

(Registrant’s telephone number, including area code)

 

Not Applicable

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

 

Securities registered pursuant to Section 12(b) of the Act: None

 

Title of each class		Trading Symbol(s)		Name of each exchange on which registered

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [  ]

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes [X] No [  ]

 

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

 

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

 

If an emerging growth company, indicate by the check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [  ]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [  ] No [X]

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 149,133,372 shares as of May 15, 2021.

 

 

 

TABLE OF CONTENTS

 

		Page Number
PART I - FINANCIAL INFORMATION
Item 1.	Financial Statements.	3
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	17
Item 3.	Quantitative and Qualitative Disclosures About Market Risk.	24
Item 4.	Controls and Procedures.	24
PART II - OTHER INFORMATION
Item 1.	Legal Proceedings.	25
Item 1A.	Risk Factors.	25
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	25
Item 3.	Defaults Upon Senior Securities.	25
Item 4.	Mine Safety Disclosures.	25
Item 5.	Other Information.	25
Item 6.	Exhibits.	25
SIGNATURES		26

 

 

Item 1. Financial Statements.

 

Barfresh Food Group Inc.

Condensed Consolidated Balance Sheets

 

		March 31, 2021				December 31, 2020
		(Unaudited)				(Audited)
Assets
Current assets:
Cash		$	1,969,797			$	1,816,887
Restricted cash			142,382				142,382
Accounts receivable, net			578,687				425,029
Inventory, net			764,023				870,190
Prepaid expenses and other current assets			58,649				47,066
Total current assets			3,513,538				3,301,554
Property, plant and equipment, net of depreciation			1,820,243				1,922,912
Operating lease right-of-use assets, net			133,202				147,947
Intangible assets, net of amortization			415,373				430,216
Deposits			14,817				14,817
Total Assets		$	5,897,173			$	5,817,446
Liabilities And Stockholders’ Equity
Current liabilities:
Accounts payable		$	336,684			$	353,046
Accrued expenses			416,780				298,489
Advance payment			401,306				401,306
Accrued payroll			231,720				191,137
Accrued vacation			85,272				117,166
Accrued interest			240,047				68,627
Lease liability			67,223				65,007
Loan payable – Paycheck Protection Program			505,005				410,317
Convertible note - related party, net of discount			200,625				-
Convertible note, net of discount			981,753				158,243
Derivative liabilities			24,688				41,475
Total current liabilities			3,491,103				2,104,813
Long term liabilities:
Accrued interest			-				127,664
Lease liability			76,731				94,170
Loan payable – Paycheck Protection Program			631,257				157,814
Convertible note - related party, net of discount			-				197,804
Convertible note, net of discount			-				810,995
Total liabilities			4,199,091				3,493,260
Commitments and contingencies (Note 6,7,8 and 13)
Stockholders’ equity:
Preferred stock, $0.000001 par value, 5,000,000 shares authorized, none issued or outstanding			-				-
Common stock, $0.000001 par value; 295,000,000 shares authorized; 149,133,372 and 149,133,372 shares issued and outstanding at March 31, 2021 and December 31, 2020, respectively			149				149
Additional paid in capital			53,189,080				53,223,665
Accumulated deficit			(51,491,147	)			(50,899,628	)
Total stockholders’ equity			1,698,082				2,324,186
Total Liabilities and Stockholders’ Equity		$	5,897,173			$	5,817,446

 

See the accompanying notes to the condensed consolidated financial statements

 

 

Barfresh Food Group Inc.

Condensed Consolidated Statements of Operations

For the three months ended March 31, 2021 and 2020

(Unaudited)

 

		2021				2020
Revenue		$	1,014,851			$	733,880
Cost of revenue			659,423				328,634
Depreciation of manufacturing equipment			6,109				8,447
Gross profit			349,319				396,799
Operating expenses:
General and administrative			751,601				1,224,425
Depreciation and amortization			146,933				150,148
Total operating expenses			898,534				1,374,573
Operating loss			(549,215	)			(977,774	)
Other (income)/expenses
Gain from derivative liability			(16,787	)			(150,902	)
Gain on extinguishment of debt			-				(379,200	)
Interest expense			59,091				295,394
Total other (income) expense			42,304				(234,708	)
Net (loss)		$	(591,519	)		$	(743,066	)
Per share information - basic and fully diluted:
Weighted average shares outstanding			149,133,372				130,492,211
Net (loss) per share		$	(0.00	)		$	(0.01	)

 

See the accompanying notes to the condensed consolidated financial statements

 

 

Barfresh Food Group Inc.

Condensed Consolidated Statements of Cash Flows

For the three months ended March 31, 2021 and 2020

(Unaudited)

 

		2021				2020
Net Cash (used for) operating activities			(394,088	)			(973,554	)
Investing Activities
Purchase of property and equipment			(4,647	)			(16,575	)
Purchase of intangibles			(1,263	)			(1,814	)
Net Cash (used for) investing activities			(5,910	)			(18,389	)
Financing Activities
Cash received for stock			-				2,325,000
Proceeds from note payable			568,131				-
Payments of operating leases			(15,223	)			(13,233	)
Net Cash from financing activities			552,908				2,311,767
Net change in cash and restricted cash			152,910				1,319,824
Cash and restricted cash, beginning of year			1,959,269				1,091,374
Cash and restricted cash, end of year		$	2,112,179			$	2,411,198
Non-cash financing and investing activities
Total property and equipment included in accounts payable		$	23,511			$	-
Executive deferred compensation settled through issuance of warrants		$	-			$	167,892
Net carrying value of convertible notes and accrued interest settled through issurance of stock (debt extinguishment)		$	-			$	1,750,963
Accrued interest settled through issuance of stock		$	-			$	379,350
Debt discount warrant and derivative liability		$	-			$	107,611
Offering and debt issuance costs included in accounts payable		$	-			$	39,208
Offering proceeds receivable		$	-			$	1,500,000

 

See the accompanying notes to the condensed consolidated financial statements

 

 

Barfresh Food Group Inc.

Notes to Condensed Consolidated Financial Statements

March 31, 2021

(Unaudited)

 

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 consolidated 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.

 

Concentration of Credit Risk

 

The amount of cash on deposit with financial institutions can be in excess of the $250,000 federally insured limit. 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.

 

Restricted Cash

 

At March 31, 2021 and December 31, 2020, the Company had $142,382 and $142,382, respectively, in restricted cash related to a co-packing agreement.

 

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.

 

 

Barfresh Food Group Inc.

Notes to Condensed Consolidated Financial Statements

March 31, 2021

(Unaudited)

 

Our financial instruments consist of cash, accounts receivable, accounts payable, advanced payments, restricted cash, PPP loan, convertible notes, and derivative liabilities. The carrying value of our financial instruments approximates their fair value, except for the derivative liability in which carrying value is fair value. The PPP loan and convertible notes approximate fair value as forgiveness and repayment is expected in the near term.

 

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, 2021 and December 31, 2020, the Company’s allowance for doubtful accounts was $133,424 and $133,424, respectively. The allowance was estimated based on evaluation of collectability of outstanding accounts receivable.

 

Inventory

 

Inventory consists of raw materials and 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, 2021 and December 31, 2020, the Company’s inventory reserve was $55,701 and $59,093, 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 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, 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 impairment charges during the periods 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-lined 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 and customer equipment: 3 years to 7 years

Vehicles: 5 years

 

 

Barfresh Food Group Inc.

Notes to Condensed Consolidated Financial Statements

March 31, 2021

(Unaudited)

 

Revenue Recognition

 

In accordance with ASC 606, Revenue from Contracts with Customers, revenue is recognized when a customer obtains ownership of promised goods. 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 services 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 the time of delivery to a customer warehouse. 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.

 

Payments that are received before performance obligations are recorded are shown as current liabilities.

 

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 $68,141 and $85,424, in research and development expenses for the three months ending March 31, 2021 and 2020, respectively.

 

 

Barfresh Food Group Inc.

Notes to Condensed Consolidated Financial Statements

March 31, 2021

(Unaudited)

 

Shipping and Storage Costs

 

Shipping and handling costs are included in general and administrative expenses. For the three months ending March 31, 2021 and 2020, shipping and handling costs totaled $143,735 and $133,108, respectively.

 

Lease:

 

We determine if an arrangement is a lease upon inception. A contract is or contains a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. The right to control the use of an asset includes the right to obtain substantially all of the economic benefits of the underlying asset and the right to direct how and for what purpose the asset is used.

 

After adoption of ASU 2016-02 and related standards, operating lease right-of-use assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. Lease expense is recognized on a straight-line basis over the lease term. As a lessee, the Company leases office space.

 

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.

 

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.

 

 

Barfresh Food Group Inc.

Notes to Condensed Consolidated Financial Statements

March 31, 2021

(Unaudited)

 

Debt Extinguishment

 

The Company evaluates its convertible instruments in accordance with ASC 470-50, “Debt Modifications and Extinguishments.” For all extinguishments of debt, ASC 470-50 requires the difference between the reacquisition price (including any premium) and the net carrying amount of the debt being extinguished (including any deferred debt issuance costs) to be recognized as a gain or loss when the debt is extinguished. Accordingly, the Company recorded a net gain of $0 and $379,200, respectively, non-cash gain on extinguishment of debt in its statements of operations for the three months ended March 31, 2021 and 2020.

 

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, 2021 and 2020 any equivalents would have been anti-dilutive as we had losses for the years 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.

 

Note 2. Inventory

 

Inventory consists of the following at March 31, 2021 and December 31, 2020:

 

		2021				2020
Raw materials		$	126,807			$	130,296
Finished goods, net of reserve			637,216				739,894
Inventory, net		$	764,023			$	870,190

 

The Company has recorded a reserve for slow moving and potentially obsolete inventory. The reserve at March 31, 2021 and December 31, 2020 was $55,701 and $59,093, respectively.

 

 

Barfresh Food Group Inc.

Notes to Condensed Consolidated Financial Statements

March 31, 2021

(Unaudited)

 

Note 3. Property Plant and Equipment

 

Major classes of property and equipment at March 31, 2021 and December 31, 2020:

 

		2021				2020
Furniture and fixtures		$	1,524			$	1,524
Manufacturing Equipment and customer equipment			3,601,685				3,573,528
Leasehold Improvements			4,886				4,886
Vehicles			29,696				29,696
			3,637,791				3,609,634
Less: accumulated depreciation			(2,461,861	)			(2,331,034	)
			1,175,930				1,278,600
Equipment not yet placed in service			644,313				644,312
Property and equipment, net of depreciation		$	1,820,243			$	1,922,912

 

We recorded depreciation expense related to these assets of $130,828 and $134,246 for the three-months ended March 31, 2021 and 2020, respectively. Depreciation expense in Cost of Goods Sold was $6,109 and $8,447 for three-months ended March 31, 2021 and 2020, respectively.

 

Note 4. Intangible Assets

 

As of March 31, 2021, intangible assets consist of patent costs of $768,138, trademarks of $121,173 and accumulated amortization of $473,938.

 

As of December 31, 2020, intangible assets consist of patent costs of $768,138, trademarks of $119,911 and accumulated amortization of $457,833.

 

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 patents, which is December 2025. The amount charged to amortization was $16,105 and $15,902 for the three-months ended March 31, 2021 and 2020, respectively.

 

Estimated future amortization expense related to patents as of March 31, 2020, is as follows:

 

		Total Amortization
Years ending December 31,
2021 (nine months remaining)			48,316
2022			64,421
2023			64,421
2024			64,219
2025			52,823
		$	294,200

 

Note 5. Related Parties

 

As disclosed below in Note 7, members of management and directors invested in the Company’s convertible notes; and in Note 10, members of management and directors have received shares of stock and options in exchange for services.

 

 

Barfresh Food Group Inc.

Notes to Condensed Consolidated Financial Statements

March 31, 2021

(Unaudited)

 

Note 6. Paycheck Protection Program (PPP) loan

 

On May 7, 2020 the Company was granted a $568,131 loan under the PPP administered by a Small Business Administration (SBA) approved partner. The loan, which matures in two years, is uncollateralized and is fully guaranteed by the Federal government. The Company is eligible for loan forgiveness of up to 100% of the loan, upon meeting certain requirements. The Company has recorded a note payable and will record the forgiveness upon being legally released from the loan obligation by the SBA. No forgiveness income has been recorded for the three months ended March 31, 2021. The Company will be required to repay any remaining balance, plus interest accrued at 1 percent, in monthly payments commencing upon notification that the loan will not be forgiven or only partially forgiven. The company has applied for and anticipates the loan to be forgiven in 2021.

 

On January 27, 2021, the Company was granted a second $568,131 loan under the PPP administered by a SBA approved partner. The loan, which matures in five years, at an interest rate of 1%, and is uncollateralized and is fully guaranteed by the Federal government. The deferral period is 24 weeks plus 10 months from the loan note date. The Company is eligible for loan forgiveness of up to 100% of the loan, upon meeting certain requirements. The Company has recorded a note payable and will record the forgiveness upon being legally released from the loan obligation by the SBA. The Company will be required to repay any remaining balance, plus interest accrued at 1 percent, in monthly payments commencing upon notification that the loan will not be forgiven or only partially forgiven.

 

The repayment for the combined PPP loans as of March 31, 2021, are as follows:

 

		Total Repayment
Years ending December 31,
2021 (nine months remaining)			410,317
2022			248,199
2023			154,945
2024			154,945
2025			154,945
Later years			12,911
		$	1,136,262

 

Note 7. Convertible Notes (Related and Unrelated Party)

 

As of March 31, 2021 the principal balance for the convertible notes (CN Notes 1) which mature on March 20, 2022 was $1,071,000 and bears interest at 15% and the convertible notes (CN Notes 2) which mature on November 30, 2021 was $168,000 and bears interest at 10%.

 

The CN Notes 1 consist of the following components as of March 31, 2021 and December 31, 2020:

 

		March 31, 2021				December 31, 2020
Convertible notes		$	1,181,167			$	1,181,167
Less: Debt discount (warrant value)			(92,266	)			(92,266	)
Less: Debt discount (issuance costs paid)			(6,004	)			(6,004	)
Less: Note conversion/settlements			(110,166	)			(110,166	)
Add: Debt discount amortization			50,457				38,173
		$	1,023,188			$	1,010,904

 

 

Barfresh Food Group Inc.

Notes to Condensed Consolidated Financial Statements

March 31, 2021

(Unaudited)

 

The CN Notes 2 consist of the following components as of March 31, 2021 and December 31, 2020:

 

		March 31, 2021				December 31, 2020
Convertible notes		$	235,200			$	235,200
Less: Debt discount (warrant value)			(1,817	)			(1,817	)
Less: Debt discount (derivative value) (Note 7)			(13,528	)			(13,528	)
Less: Debt discount (issuance costs paid)			(6,004	)			(6,004	)
Less: Note repayment			(67,200	)			(67,200	)
Add: Debt discount amortization			12,539				9,487
		$	159,190			$	156,138

 

The total of the two tables above, net of discount, equals $1,182,378 which is presented on the balance sheet as Current Liabilities: $981,753 Convertible Note, Net of Discount and $200,625 Convertible Note, Related Party, Net of Discount. The total of $1,167,042 shown in the two tables above at December 31, 2020, are presented in the balance sheet as Current Liabilities: $158,243 Convertible Note-Net of Discount and Long-Term Liabilities: $197,804 Convertible Note – related party net of Discount, and $810,095 Convertible Note – net of Discount.

 

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

 

		Total Convertible Notes
Years ending December 31,
2021			168,000
2022			1,071,000
		$	1,139,000

 

Note 8. Derivative Liabilities

 

As discussed in Note 7, Convertible Notes, the Company has $168,000 of principal outstanding in CN Notes 2 that contain 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 Company fair values the variable conversion provisions each reporting period. The fair value gets reported as a derivative liability in the accompanying consolidated balance sheets and the change in value is recorded as a gain or loss in the accompanying consolidated statements of operations.

 

The fair value of the derivative liabilities for CN Notes 2 was calculated using the Black-Scholes model using the following assumptions.

 

		31-Mar-21				31-Dec-20
Expected life			0.67				0.92
Volatility (based on comparable company)			116.81	%			120.38	%
Risk Free interest rate			.05	%			.1	%
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, 2020 to March 31, 2021:

 

December 31, 2020		$	41,475
Net gain from change in value			(16,787	)
For the period ended March 31, 2021		$	24,688

 

 

Barfresh Food Group Inc.

Notes to Condensed Consolidated Financial Statements

March 31, 2021

(Unaudited)

 

The following table presents the Company’s fair value hierarchy for applicable assets and liabilities measured at fair value as of December 31, 2020 and March 31, 2021:

 

		Level 1				Level 2				Level 3				Total
Derivative Liability December 31, 2020		$	-				-				41,475			$	41,475

 

		Level 1				Level 2				Level 3				Total
Derivative Liability March 31, 2021		$	-				-				24,688			$	24,688

 

Note 9. Commitments and Contingencies

 

We lease office space under non-cancelable operating lease which expires on March 31, 2023. Our periodic lease cost was $19,918 and $20,062 for the three months ended March 31, 2021 and 2020, respectively. As of March 31, 2021, our right of use asset and related liability was $133,202 and $143,954.

 

In determining the present value of our operating lease right-of-use asset and liability, we used a 10% discount rate (which approximates our borrowing rate). The remaining term on the lease is 2 years.

 

The following table presents the future operating lease payment as of March 31, 2021.

 

2021 (nine months remaining)			58,945
2022			80,361
2023			20,238
Total Lease payments			159,544
Less: imputed interest			(15,590	)
Total lease liability		$	143,954

 

From time to time, various lawsuits and legal proceedings may arise in the ordinary course of business. However, litigation is subject to inherent uncertainties and an adverse result in these or other matters may arise from time to time that may harm our business. We are currently the defendant in one legal proceeding for an amount less than $100,000. Our legal counsel and management believe a material unfavorable outcome to be remote.

 

Note 10. Stockholders’ Equity

 

During the three months ended March 31, 2021, we issued 250,000 options to purchase our common stock to employees. The exercise price of the options were $0.38-$0.42 per share, with graded vesting over 3 years, and are exercisable for a period of 8 years.

 

The fair value of the options issued ($79,157, in the aggregate) was calculated using the Black-Sholes option pricing model, based on the criteria shown below.

 

Expected life (in years)			8
Volatility			89.36%-89.37	%
Risk Free interest rate			.72	%
Dividend yield (on common stock)			-

 

In addition to the 250,000 options granted we cancelled 450,000 options. The total amount of equity-based compensation included in additional paid in capital was an expense charge of $30,165 offset by a recapture of expenses of $64,750, resulting in a net credit against the expense for $34,585 for the three-months ended March 31, 2021.

 

 

Barfresh Food Group Inc.

Notes to Condensed Consolidated Financial Statements

March 31, 2021

(Unaudited)

 

The following is a summary of outstanding stock options issued to employees and directors as of March 31, 2021:

 

		Number of Options				Exercise price per share $				Average remaining term in years				Aggregate intrinsic value at date of grant $
Outstanding January 1, 2021			7,640,959				.34 - .87				3.48				-
Issued			250,000				.38 - .42				7.83				-
Cancelled/Expired			(450,000	)
Outstanding March 31, 2021			7,440,959				.34 - .87				3.70				-
Exercisable, March 31, 2021			6,227,627				.34 - .87				3.40				-

 

As of March 31, 2021, the Company has $176,923 of total unrecognized share-based compensation expense related to unvested options, which is expected to be amortized over the remaining weighted average period of 1.42 years.

 

The following are changes in stockholders’ equity as of March 31, 2020 and March 31, 2021:

 

										Additional
		Common Stock								paid in				Accumulated
		Shares				Amount				Capital				(Deficit)				Total
Balance January 1, 2020			130,341,737			$	130			$	47,030,716				(46,747,122	)		$	283,724
Issuance of stock for capital raise, net of offering costs of $27,200			7,650,000				8				3,797,792				-				3,797,800
Conversion of debt			4,623,615				5				1,313,757				-				1,313,762
Interest paid in shares			632,251				-				379,350				-				379,350
Issuance of stock for services			-				-				12,500				-				12,500
Equity based compensation			-				-				138,712				-				138,712
Warrants issued to management			-				-				167,892				-				167,892
Warrant Modification			-				-				18,899				-				18,899
Warrant issued for note extension			-				-				75,184				-				75,184
Net (loss) for the year			-				-				-				(743,066	)			(743,066	)
Balance March 31, 2020			143,247,603			$	143			$	52,934,802				(47,490,188	)		$	5,444,757

 

										Additional
		Common Stock								paid in				Accumulated
		Shares				Amount				Capital				(Deficit)				Total
Balance January 1, 2021			149,133,372			$	149			$	53,223,665			$	(50,899,628	)		$	2,324,186
Equity based compensation			-				-				(34,585	)			-				(34,585	)
Net (loss) for the year			-				-				-				(591,519	)			(591,519	)
Balance March 31, 2021			149,133,372			$	149			$	53,189,080			$	(51,491,147	)		$	1,698,082

 

 

Barfresh Food Group Inc.

Notes to Condensed Consolidated Financial Statements

March 31, 2021

(Unaudited)

 

Note 11. Outstanding Warrants

 

The following is a summary of all outstanding warrants as of March 31, 2021:

 

		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			22,020,833			$	0.50 - $1.00				1.20			$	-
Warrants issued in connection with private placement of notes			3,465,501			$	0.60				.13			$	-
Warrants issued in connection with settlement of deferred compensation			3,169,599			$	0.60				3.50			$	-

 

Note 12. Income Taxes

 

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. Accordingly, at this time the Company has placed a valuation allowance on all tax assets. As of March 31, 2021, 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 2017 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.

 

For the three-month periods ended March 31, 2021 and 2020, we did not have any interest and penalties associated with tax positions. As of March 31, 2021, we did not have any significant unrecognized uncertain tax positions.

 

Note 13. Liquidity

 

During the three months ended March 31, 2021, we used cash for operations of $394,088 and purchased equipment for $4,647. During the three months ended March 31, 2020, we used cash for operations of $973,554 and purchased equipment for $16,575.

 

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. Management has evaluated these conditions and concluded that current plans will alleviate this concern.

 

As of March 31, 2021, we had $2,112,179 of restricted and unrestricted cash on the balance sheet. We have continued to significantly reduce core operating expenses, reducing total General and Administrative Expense in the first three months of 2021 by $472,824, or 39%, as compared with the first three months of 2020.

 

The Company’s forecast for the next twelve months reflects a continuation of the improvement in cash flow from operations and is expecting an increase in revenue bouncing back from Covid-19 and its new Twist & Go products. The Company believes this will provide sufficient cash to cover operating expenses and $1,139,000 in debt due over the next 12 months. If there are not sufficient cash flows to cover the debt repayment the Company believes that the debt could be satisfied through refinancing including conversion, raising additional proceeds through issuance of stock or new debt. With the lean initiatives implemented by the business in 2020, liquidity is expected to remain stable with very little change from 2020. Management has concluded that these actions have alleviated 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 expected liquidity as planned.

 

 

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.

 

The Company’s products are made in four 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. The third format is the Company’s new WHIRLZ 100% Juice Concentrates. These new 5:1 juice concentrates are a perfect complement to the company’s current existing 1:1 bulk Easy Pour products used in beverage dispensing equipment. The fourth format is the Company’s new ready-to-drink bottled smoothie, “Twist & Go”™, This sweet fruit and creamy yogurt smoothie contains four ounces of yogurt and a half-cup of fruit/fruit juice and comes in two different flavors.

 

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. 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, 2019, the exclusive distribution agreement with Sysco expired, opening the possibility to expand distribution with other distributors outside of the Sysco system.

 

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 Barfresh single serve SKUs. 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. The Company has multiple SKUs developed and approved by the customer which are awaiting placement on the marketing calendar.

 

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 the Barfresh 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. On May 30, 2019, the Company amended its agreement with Pepsi which included a reduction in the commission fee and a clause which allows either party the right to terminate the agreement upon 90 days written notice. Neither party has exercised its right to terminate the agreement. This agreement remains in effect.

 

 

Barfresh utilizes contract manufacturers to manufacture all of the products in the United States.

 

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, the Company 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 was to be received upon achieving a second milestone, which is entering into a material agreement or series of related agreements with a national account for the sale of its products into approximately 2,500 new locations. During November of 2018 the Company and several of the Convertible Note investors agreed to amend the definition of Milestone 2 to allow for the funding the remaining 40% of the principal amount upon the Company receiving approval from a National Restaurant Chain with over 2,500 for the rollout of its products. Such approval was received during the fourth quarter of 2018, and the Company received an additional $1.4 million of convertible note proceeds.

 

The convertible notes are unsecured and have (i) a two-year term, (ii) a 10% annual coupon to be paid in cash or stock at the Company’s discretion at a conversion price equal to 85% of the average closing bid prices of the Common Stock over the twenty (20) consecutive trading day period immediately preceding the payment date, but in no event lower than sixty cents ($0.60) per share of Common Stock. The investor’s may elect to convert their principal into common stock at a conversion price equal to the lower of: (i) $0.88 per share of Common Stock, or (ii) 85% of the average closing bid prices of the Common Stock over the twenty (20) consecutive trading day period immediately preceding the date of investor’s election to convert; but in no event lower than $0.60 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 2018, 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 2018, 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, 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 raised $4.3 million and issued 7,141,454 shares, and no additional warrants were issued.

 

On March 23, 2020, the Company completed additional funding, including a Private Placement Offering for common shares priced at $0.50 per share (subject to adjustment) resulting in the receipt of proceeds in the amount of $3,825,000 million and the issuance of 7,650,000 shares. The investors of this Private Placement Offering were granted O warrants which are eligible to purchase an additional 0.50 shares for every share issued to each purchaser, exercisable for a period of 3 years at an exercise price of $0.60 per share (subject to adjustment). If the volume-weighted average trading price for the 20 consecutive trading days that conclude upon 6 months after the initial closing (the “Six Month Price”) exceeds or equals $0.50 per share (the “Target Price”), the per share purchase price will not be adjusted. If the Six Month Price is less than the Target Price, the per share purchase price will be automatically reduced to the Six Month Price, but in no event less than $0.35 per share, in which case the Company shall issue to each investor, pro-rata based on such investor’s investment: (a) shares in a quantity that equals the difference between the number of shares issued to such purchaser at closing and the number of shares that would have been issued to such purchaser at closing at the Six Month Price; and (b) a warrant for a number of shares of common stock equal to 50% of the difference between the number of shares issued to such investor at closing and the number of shares that would have been issued to such investor at closing at the Six Month Price, with an exercise price equal to the sum of $0.10 per share and the Six Month Price, but in no eventless than $0.45 per share. The exercise price per share for each warrant will automatically adjust to the sum of $0.10 per share and the Six-Month Price, but in no event less than $0.45 per share. On September 28, 2020, the Company determined the volume-weighted average price was below the $0.35 per share and consequently issued 5,322,868 additional shares in accordance with provisions of the Private Placement Offering. Similarly, the Company issued an additional 2,652,868 Warrants to investors that contributed capital or exercised the conversion of their convertible note. Lastly, the Company issued an additional 459,000 Warrants for convertible noteholders that extended their convertible notes.

 

In addition, the Company obtained a 24 month extension on $1,071,000 in principal, and conversion of $720,000 of principal of the Milestone I Convertible Notes at a conversion price of $0.50 per share. The remaining $110,166 was extended for thirty days. The interest rate on the principal balance of the extended Milestone I Convertible Notes was amended to 15%. Furthermore, the Company obtained a 12 month extension on $168,000 in principal, and conversion of $1,128,000 in principal of the Milestone II Convertible Notes. The Convertible Noteholders of the Milestone I and II Convertible Notes were granted additional interest depending upon their election to convert or extend their Convertible Notes.

 

Currently we have 12 employees and 3 consultants

 

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 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 the time of delivery to a customer warehouse. 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.

 

Stock-based Compensation

 

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

 

Convertible Notes

 

We issue debt that may have separate warrants, conversion features, or no equity-linked attributes. When we issue debt with warrants, we determine the value of the warrants using the Black-Scholes Option Pricing Model (“Black-Scholes”) using the stock price on the date of issuance, the risk free interest rate associated with the life of the debt, and the estimated volatility of our stock. When we issue debt with a conversion feature, we must first assess whether the conversion feature meets the requirements to be treated as a derivative. If the conversion feature within convertible debt meets the requirements to be treated as a derivative, we estimate the fair value of the convertible debt derivative using Black-Scholes upon the date of issuance, using the stock price on the date of issuance, the risk free interest rate associated with the life of the debt, and the estimated volatility of our stock. If the conversion feature is not treated as a derivative, we assess whether it is a beneficial conversion feature (“BCF’). A BCF exists if the conversion price of the convertible debt instrument is less than the stock price on the commitment date. This typically occurs when the conversion price is less than the fair value of the stock on the date the instrument was issued. The value of a BCF is equal to the intrinsic value of the feature, the difference between the conversion price and the common stock into which it is convertible.

 

 

Derivative Liability

 

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

 

Results of Operations

 

Results of Operation for Three Months Ended March 31, 2021 as Compared to the Three Months Ended March 31, 2020

 

Revenue and cost of revenue

 

Revenue increased $280,971 (38%) from $733,880 in 2020 to $1,014,851 in 2021. The overall revenue for the first quarter 2021 was higher due to growing , “Twist & Go”™ revenue and the gradual return of single serve demand.

 

Cost of revenue for 2021 was $659,423 as compared to $328,634 in 2020. Our gross profit was $349,319 (34%) and $396,799 (54%) for 2021 and 2020, respectively. Gross margins decreased in the first quarter primarily due to product mix which includes “Twist & Go”™ at lower product margins. We anticipate margins will improve based on improving Twist and Go margins and having a greater mix of higher margin bulk and single serve revenue. As a result. the gross profit percentage for the remainder of 2021 is expected to be approximately 40%.

 

 

Operating expenses

 

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

 

Our general and administrative expenses decreased $472,824 (39%) from $1,224,425 in 2020 to $751,601 in 2021, with the improvement primarily driven by personnel and marketing and selling expenses resulting from lower headcount and the renegotiation of certain sales commission agreements. The following is a breakdown of our general and administrative expenses for the three months ended March 31, 2021 and 2020:

 

		Three months ended March 31, 2021				Three months ended March 31, 2020				Difference
Personnel costs			311,556				420,180				(108,624	)
Stock based compensation/options			(34,585	)			138,712				(173,297	)
Legal and professional fees			63,675				92,462				(28,787	)
Travel			5,321				38,919				(33,598	)
Rent			19,918				20,062				(144	)
Marketing and selling			41,033				78,975				(37,942	)
Consulting fees			12,497				25,567				(13,070	)
Director fees			77,130				50,000				27,130
Research and development			68,141				85,424				(17,283	)
Shipping and storage			143,735				133,108				10,627
Other expenses			43,180				141,016				(97,836	)
			751,601				1,224,425				(472,824	)

 

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 $108,624 (26%) from $420,180 to $311,556. We had 16 full time employees at the end of the first quarter of 2020, and we currently have 12 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 based compensation for the current quarter was ($34,585) due to the departure of 2 key employees, a decrease of $173,297, or 125%, from the year ago quarter expense of $138,712. The Company issues additional stock options to its employees from time to time under its Equity Compensation Plan.

 

Legal and professional fees decreased $28,787 (31%) from $92,462 in 2020 to $63,675 in 2021. The decrease was primarily due to renegotiated fees for legal services. We anticipate legal fees related to our business and financing activities to decrease as we have renegotiated arrangements with existing service providers.

 

Travel expenses decreased $33,598 (86%) from $38,919 in 2020 to $5,321 in 2021. The decrease is primarily due to reduction in travel costs associated with terminated employees, tighter controls over sales territories, and reduced travel due to COVID-19. We anticipate that travel expenses for the remainder of this year will gradually pick up and for the second half of 2021 comparable to 2019 trends.

 

Rent expense remained flat for the three months ended March 31, 2020 compared to the three months ended March 31, 2021. Rent expense is for our location in Los Angeles, California. Rent expense for the Los Angeles office is approximately $6,500 per month. We lease office space at 3600 Wilshire Boulevard, Los Angeles, California pursuant to a new lease that commenced on April 1, 2019 and expires March 31, 2023.

 

Marketing and selling expenses decreased $37,942 (48%) from $78,975 in 2020 to $41,033 in 2021. Lower marketing and selling expenses were primarily due to changes that were made to certain sales commission agreements.

 

Consulting fees were $12,497 in 2021, as compared with $25,567 in 2020, a decrease of $13,070. Our consulting fees vary based on needs. We engaged consultants in the areas of finance during the quarter due to reduced headcount. The need for future consulting services will be variable.

 

Director fees increased $27,130 from $50,000 in 2020 to $ 77,130 in 2021. Annual director fees are anticipated at $50,000 per non-employee director of which two additional directors will be compensated in 2021.

 

 

Research and development expenses decreased $17,283 (20%) from $85,424 in 2020 to $68,141 in 2021. These expenses relate to the services performed by our Director of Manufacturing and Product Development, and consultants supporting that employee. The reduction is primarily due to a reduction in labor hours for our development staff.

 

Shipping and storage expense increased $10,627 (8%) from $133,108 in 2020 to $143,735 in 2021. We anticipate that shipping and storage expense as a percentage of sales will reduce during the balance of the year, as the Company is able to take advantage of more efficient distribution arrangements as well as an increased volume per load due to higher sales volume in 2021.

 

Other expenses decreased $97,836 from $141,016 in 2020 to $43,180 in 2021, primarily due to lower insurance expense and the results of vendor payables reconciliation resulting in the correction of vendor liabilities. 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 to 2020 for the balance of the year.

 

We had operating losses of $549,215 and $977,774 for the three-month periods ended March 31, 2021 and 2020, respectively. The decrease of $428,559 or 44%, was primarily due to lower General and Administrative expenses.

 

The change in the value of the derivative liability is based upon the Black-Scholes model from one period to another. The gain is a result of the change in components of the Black-Scholes model. Components include the Company’s stock price, conversion price, remaining term, volatility, and current discount rate.

 

Interest expense for the three months ended March 31, 2021 was $59,091, as compared with $295,394 for the three months ended March 31, 2020. Interest relates to the unconverted portion of convertible debt of $1,071,000 that was issued on March 14, 2018, and in the unconverted portion of convertible debt in the amount of $168,000 that was issued on November 30, 2018. This compares to the unconverted portion of convertible debt of $2,244,300 and in the unconverted portion of convertible debt of $1,363,200 as of March 31, 2020.

 

We had net losses of $591,519 and $743,066 in the three-month periods ended March 31, 2021 and 2020, respectively.

 

Liquidity and Capital Resources

 

As of March 31, 2021, we had a working capital surplus of $22,435 as compared with a working capital surplus of $1,196,741 at December 31, 2020. The decrease in working capital surplus is primarily due to convertible debt net of discount of $1,182,378 coming due in the next 12 months and higher accrued interest offset by higher cash and accounts receivables.

 

In 2020, the Company was granted a $568,131 loan under the PPP administered by a Small Business Administration (SBA) approved partner. The loan, which matures in two years, is uncollateralized and is fully guaranteed by the Federal government. The Company is eligible for loan forgiveness of up to 100% of the loan, upon meeting certain requirements. The Company has recorded a note payable and will record the forgiveness upon being legally released from the loan obligation by the SBA. No forgiveness income has been recorded for the three months ended March 31, 2021. The Company will be required to repay any remaining balance, plus interest accrued at 1 percent, in monthly payments commencing upon notification that the loan will not be forgiven or only partially forgiven. The company has applied for and anticipates the loan to be forgiven in 2021.

 

On January 27, 2021, the Company was granted a $568,131 loan under the PPP administered by a SBA approved partner. The loan, which matures in five years, at an interest rate of 1%, and is uncollateralized and is fully guaranteed by the Federal government. The deferral period is 24 weeks plus 10 months from the loan note date. The Company is eligible for loan forgiveness of up to 100% of the loan, upon meeting certain requirements. The Company has recorded a note payable and will record the forgiveness upon being legally released from the loan obligation by the SBA. The Company will be required to repay any remaining balance, plus interest accrued at 1 percent, in monthly payments commencing upon notification that the loan will not be forgiven or only partially forgiven.

 

 

During the three months ended March 31, 2021, we used cash of $394,088 in operations, $4,647 for the purchase of equipment, and $1,263 for patents and trademarks.

 

Our liquidity needs will depend on how quickly we are able to profitably ramp up sales, as well as our ability to control and reduce variable operating expenses, and to continue to control and reduce fixed overhead expense.

 

Our operations to date have been financed by the sale of securities, the issuance of convertible debt and the issuance of short-term debt, including related party advances. If we are unable to generate sufficient cash flow from operations with the capital raised we will be required to raise additional funds either in the form of equity or in the form of debt. There are no assurances that we will be able to generate the necessary capital to carry out our current plan of operations.

 

We have entered into a direct lease for premises covering the period April 1, 2019 to March 31, 2023. The aggregate minimum requirements under the non-cancellable direct lease as of March 31, 2021 is $143,954.

 

Off-Balance Sheet Arrangements

 

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

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

 

Not required because we are a smaller reporting company.

 

Item 4. Controls and Procedures.

 

Evaluation of Disclosure Controls and Procedures

 

Under the supervision and with the participation of our management, including our Chief Executive Officer (who is presently also serving as our interim principal financial officer) and our Controller, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Securities and Exchange Act of 1934 Rule 15(d)-15(e). Disclosure controls and procedures are designed to provide reasonable assurance that the information required to be disclosed in the reports that we file or submit under the Exchange Act has been appropriately recorded, processed, summarized and reported on a timely basis and are effective in ensuring that such information is accumulated and communicated to the Company’s management, as appropriate to allow timely decisions regarding required disclosure. Based on this evaluation, our Chief Executive Officer and our Controller concluded that as of March 31, 2021, our disclosure controls and procedures are not effective.

 

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

 

Management has concluded that there is a material weakness due to the control environment. The control environment is impacted due to the company’s inadequate segregation of duties.

 

In an effort to remediate the identified material weakness and enhance our internal control over financial reporting, we have hired additional personnel and are reassigning control responsibilities to help ensure that we are able to properly implement internal control procedures.

 

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

 

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

 

Changes in Internal Control over Financial Reporting

 

There have been no changes in the Company’s internal control over financial reporting during the three months ended March 31, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 

PART II-OTHER INFORMATION

 

Item 1. Legal Proceedings.

 

Neither the Company nor its subsidiaries are party to or have property that is the subject of any material pending legal proceedings. We may be subject to ordinary legal proceedings incidental to our business from time to time that are not required to be disclosed under this Item 1.

 

Item 1A. Risk Factors.

 

Not required because we are a smaller reporting company.

 

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

 

None.

 

Item 3. Defaults Upon Senior Securities.

 

None.

 

Item 4. Mine Safety Disclosures.

 

Not applicable.

 

Item 5. Other Information.

 

None.

 

Item 6. Exhibits.

 

Exhibit No.		Description
31.1		Rule 15d-14(a) Certification (filed herewith)
32.1		Certification pursuant to 18 U.S.C. Section 1350 (filed herewith)
101.INS		XBRL Instance Document*
101.SCH		XBRL Taxonomy Extension Schema Document*
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document*
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document*
101.LAB		XBRL Taxonomy Extension Label Linkbase Document*
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document*

 

		*XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.
		In accordance with SEC Release 33-8238, Exhibit 32.1 is furnished and not filed.

 

 

SIGNATURES

 

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

 

	BARFRESH FOOD GROUP INC.
Date: May 17, 2021	By:	/s/ Riccardo Delle Coste
		Riccardo Delle Coste Chief Executive Officer (Principal Executive Officer)
Date: May 17, 2021	By:	/s/ Eric Narimatsu
		Controller (Principal Accounting Officer)