UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

(Mark One)

 

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

 

or

 

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

 

For the transition period from April 1, 2015 to December 31, 2015

 

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.)

 

8530 Wilshire Blvd., Suite 450, Beverly Hills, California   90211
(Address of principal executive offices)   (Zip Code)

 

310-598-7113

(Registrant’s telephone number, including area code)

 

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

 

Securities registered under Section 12(g) of the Act: Common Stock, $0.000001 par value

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [  ] No [X]

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [  ] No [X]

 

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [  ]

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.[  ]

 

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

 

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

 

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

 

The aggregate market value of the voting and non-voting common equity held by non-affiliates (excluding voting shares held by officers and directors) as of September 30, 2015 was $28,628,806.

 

As of March 16, 2016, there were 94,048,285 outstanding shares of common stock of the registrant.

 

 

 

  
 

 

BARFRESH FOOD GROUP INC.

 

FORM 10-K

 

TABLE OF CONTENTS

 

    Page
PART I      
Item 1. Business   3
Item 1A. Risk Factors   9
Item 2. Properties   14
Item 3. Legal Proceedings   14
Item 4. Mine Safety Disclosures   14
       
PART II      
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities   15
Item 6. Selected Financial Data   16
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations   16
Item 7A. Quantitative and Qualitative Disclosures About Market Risk   20
Item 8. Financial Statements   21
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure   21
Item 9A. Controls and Procedures   21
Item 9B. Other Information   22
       
PART III      
Item 10. Directors, Executive Officers and Corporate Governance   23
Item 11. Executive Compensation   26
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters   27
Item 13. Certain Relationships and Related Transactions, and Director Independence   29
Item 14. Principal Accountant Fees and Services   29
       
PART IV      
Item 15. Exhibits, Financial Statement Schedules   31

 

 2 
 

 

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS AND INFORMATION

 

This transition report on Form 10-K (“Transition Report”), the other reports, statements, and information that we have previously filed or that we may subsequently file with the Securities and Exchange Commission (“SEC”) and public announcements that we have previously made or may subsequently make include, may include, incorporate by reference or may incorporate by reference certain statements that may be deemed to be forward-looking statements. The forward-looking statements included or incorporated by reference in this Transition Report and those reports, statements, information and announcements address activities, events or developments that Barfresh Food Group Inc., a Delaware corporation (hereinafter referred to as “we”. “us”, “our”, “Company” or “Barfresh”) expects or anticipates will or may occur in the future. Any statements in this document about expectations, beliefs, plans, objectives, assumptions or future events or performance are not historical facts and are forward-looking statements. These statements are often, but not always, made through the use of words or phrases such as “may”, “should”, “could”, “predict”, “potential”, “believe”, “will likely result”, “expect”, “will continue”, “anticipate”, “seek”, “estimate”, “intend”, “plan”, “projection”, “would”, “outlook” and similar expressions. Accordingly, these statements involve estimates, assumptions and uncertainties, which could cause actual results to differ materially from those expressed in them. Any forward-looking statements are qualified in their entirety by reference to the factors discussed throughout this document. All forward-looking statements concerning economic conditions, rates of growth, rates of income or values as may be included in this document are based on information available to us on the dates noted, and we assume no obligation to update any such forward-looking statements.

 

Management cautions that forward-looking statements are qualified by their terms and/or important factors, many of which are outside of our control, involve a number of risks, uncertainties and other factors that could cause actual results and events to differ materially from the statements made, including, but not limited to, the following risk factors. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements.

 

Certain risks and uncertainties could cause actual results or outcomes to differ materially from those expressed in any forward-looking statements made by us, and you should not place undue reliance on any such forward-looking statements. Actual results or outcomes may differ materially from those expressed in any forward-looking statements made by us, and you should not place undue reliance on any such forward-looking statements. Any forward-looking statement speaks only as of the date on which it is made and we do not undertake any obligation to update any forward-looking statement or statements to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time, and it is not possible for us to predict which will arise. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. See “Risk Factors” set forth in Item 1A.

 

PART I

 

Item 1. Business.

 

Business Overview

 

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

 

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

 

The Company has conducted sales through two channels: National Accounts, and through an exclusive nationwide distribution agreement with Sysco Corporation (“Sysco”), the U.S.’s largest broadline distributor, which was entered into during July 2014.

 

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

 

In addition to the National Accounts, the Company sells to food 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. All Barfresh products will be 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.

 

 3 
 

 

The Company is one of five vendors that was named to Sysco’s “Cutting Edge Solution” (“CES”) Platform during March of 2016. As part of this platform, our products will receive national advertising and marketing, and will be considered a core product. All 72 of SYSCO’s OPCO’s will participate in the CES program, and will be evaluated on their success in moving the CES products. As a direct result the Company, which had already begun shipping products to 37 of the 72 Sysco distribution centers, expects to have its products in all 72 SYSCO Opco’s by the end of the second quarter 2016.

 

On October 26, 2015, Barfresh signed an agreement with PepsiCo North America Beverages, a division of PepsiCo, to become its exclusive sales representative within the food service channel to present Barfresh’s line of ready-to-blend smoothies and frozen beverages throughout the United States and Canada. Through this agreement, Barfresh’ products will be included as part of PepsiCo’s offerings to its significant customer base, which the Company expects to fast track our growth and expedite the test to market process. The agreement gives Barfresh access to PepsiCo’s one-thousand plus person foodservice sales team, with Barfresh products becoming part of PepsiCo’s customer presentations.

 

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

 

Barfresh currently utilizes contract manufacturers to manufacture all of the products in the United States. Ice cream manufacturers are best suited to produce the products and two production lines are currently operational in our Salt Lake City contract manufacturer location. This manufacturer is currently producing products sold to existing customers as well as producing exclusive test products developed for potential National Accounts. Currently annual production capacity with our existing contract manufacturer is 14 million units per year. In February 2016, the Company signed an agreement with Yarnell Operations, LLC, a subsidiary of Schulze and Burch, that secures additional production capacity ahead of expected dramatic sales growth in 2016. Barfresh will have the capacity to ramp up to an incremental production capacity of 100 million units through this agreement. The Yarnell Operations, LLC, subsidiary is strategically located in Arkansas. Yarnell’s location enhances the company’s ability to efficiently move product throughout the supply chain to destinations in the eastern United States, home to many of the country’s large foodservice outlets.

 

Although there currently is not a contract in place with any suppliers for the raw materials needed to manufacture our products, there are a significant number of sources available and the company does not anticipate becoming dependent on any one supplier. As demand for the range of our products grows, we plan to contract a level of raw material requirements to ensure continuity of supply.

 

Corporate History and Background

 

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

 

Reorganization and Recapitalization

 

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

 

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

 

 4 
 

 

Products

 

All of our products are portion controlled beverage ingredient packs, suitable for smoothies, shakes and frappes that can also be utilized for cocktails and mocktails. They 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.

 

 

 5 
 

 

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

 

 

 

 6 
 

 

 

 

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

 

Some of the key product benefits for operators include:

 

  Portion controlled
     
  Zero waste
     
  Product consistency – every time a smoothie, shake or frappe is made
     
  Easy inventory control
     
  Long shelf life (24 months)
     
  Minimal capital investment necessary
     
  Faster and easier to make (less than 60 seconds)
     
  Ability to itemize the ingredients of the beverages on menus
     
  Products require less retail space

 

 7 
 

 

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

 

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

 

Customer Marketing Material

 

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

 

 

Research and Development

 

The Company incurred research and development expenses for the 9 month transitional year ended December 31, 2015 in the amount of $67,341, and for fiscal year ended March 31, 2015 in the amount of $51,465. The increase in Research and Development expenses was primarily attributable to increased activity in creating unique flavors for potential customers in our national account pipeline.

 

Competition

 

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

 

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

 

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

 

 8 
 

 

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

 

  Specialized juice bar products: The product is made in-store and each ingredient is added separately.
     
  Syrup based products: The fruit puree is supplied in bulk and not portion controlled for each smoothie. These types of products still require the addition of juice, milk or water and/or yogurt and ice. While there are a number of competitors for this style of product, the two dominant competitors are Island Oasis and Minute Maid, which are both owned by Coca Cola.
     
  Portion pack products: These products contain only the fruit and yogurt and require the addition of juice or milk and ice. The two dominant competitors are General Mills’ Yoplait Smoothies and Inventure Group’s Jamba Smoothies.

 

The Company believes that ease of use, portion control, premium quality, and minimal capital investment required to enable a customer to begin to carry Barfresh beverage products all add up to represent a very significant competitive advantage that will allow us to quickly gain traction in the market and secure long-term agreements with customers. However, there are other factors that may influence the adoption of a particular product by customers, including their dependence on prior relationships with competition.

 

Intellectual Property

 

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

 

In November 2011, the Company acquired patent applications filed in the United States (Patent Application number 11/660415) and Canada (Patent Application number 2577163) from certain related parties. The United States patent was originally filed on December 4, 2007 and its current status is patent pending. The Canadian patent was originally filed on August 16, 2005 and it has been granted.

 

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

 

Governmental Approval and Regulation

 

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

 

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

 

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

 

Environmental Laws

 

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

 

Employees

 

Currently we have 44 employees and 5 consultants. There are currently 35 employees and 1 consultant selling our products. We have recently hired additional employees, particularly in the sales area, as we roll out our products to all 72 Sysco distribution centers.

 

Item 1A. Risk Factors

 

An investment in the Company’s securities involves significant risks, including the risks described below. The risks included below are not the only ones that the Company faces. Additional risks presently unknown to us or that we currently consider immaterial or unlikely to occur could also impair our operations. If any of the risks or uncertainties described below or any such additional risks and uncertainties actually occur, our business, prospects, financial condition or results of operations could be negatively affected.

 

Risks Related to Our Business

 

We have a history of operating losses

 

We have a history of operating losses and may not achieve or sustain profitability. These operating losses have been generated while we market to potential customers. We cannot guarantee that we will become profitable. Even if we achieve profitability, given the competitive and evolving nature of the industry in which we operate, we may be unable to sustain or increase profitability and our failure to do so would adversely affect the Company’s business, including our ability to raise additional funds.

 

 9 
 

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

 10 
 

 

Product liability exposure may expose us to significant liability.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

 11 
 

 

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

 

Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, or Section 404, we are required to furnish a report by our management on our internal control over financial reporting. As such, our management has conducted this evaluation and, as of December 31, 2015, identified the following material weaknesses in the Company’s internal control over financial reporting:

 

We do not have a fully independent audit committee: We are not currently obligated to have a fully independent audit committee, including a member who is an “audit committee financial expert,” as defined in Item 407 of Regulation S-K, under applicable regulations or listing standards. However, it is management’s view that such a committee is an important internal control over financial reporting, the lack of which may result in ineffective oversight in the establishment and monitoring of internal controls and procedures.
   
We do not have a majority of independent directors on our board of directors, which may result in ineffective oversight in the establishment and monitoring of required internal controls and procedures.
   
Inadequate Segregation of Duties: We have an inadequate number of personnel to properly implement certain control procedures related to segregation of duties.

 

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

 

We are operating with less than a majority of independent directors.

 

We do not have a majority of independent directors. The Company is operated without the oversight of a majority of independent directors and material agreements and transactions, including those with related parties, are not approved with the oversight of a majority of independent directors.

 

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

 

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

 

Risks Related to Ownership of Our Common Stock

 

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

 

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

 

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

 

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

 

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

 

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

 

 12 
 

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

 13 
 

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Item 2. Properties.

 

Our principal executive offices are located at 8530 Wilshire Blvd., Suite 450, Beverly Hills, CA 90121. We lease this space for $7,600 per month.

 

Item 3. 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 4. Mine Safety Disclosures.

 

Not applicable.

 

 14 
 

 

PART II

 

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

 

Market Information

 

Our common stock is currently traded on the OTCQB under the symbol “BRFH”. Our common stock had been quoted on the OTC Bulletin Board since July 27, 2011 under the symbol MVBX. Effective February 29, 2012, our symbol changed to BRFH based on the forward split and name change. On March 21, 2012, our common stock was delisted to Pink Sheets. On January 21, 2014, we registered our common stock under Section 12(g) of the Exchange Act. The following table sets forth the range of high and low bid quotations for the applicable period. These quotations as reported by the OTCQB reflect inter-dealer prices without retail mark-up, markdown or commissions and may not necessarily represent actual transactions.

 

    Bid Quotation 
Financial Quarter Ended   High ($)      Low ($) 
           
December 31, 2015   1.13    0.41 
September 30, 2015   0.79    0.52 
June 30, 2015   0.91    0.50 
March 31, 2015   0.64    0.42 
December 31, 2014   0.72    0.39 
September 30, 2014   0.85    0.57 
June 30, 2014   0.84    0.45 
March 31, 2014   0.84    0.40 

 

Holders

 

At March 16, 2016, there were 94,048,285 shares of our common stock outstanding. Our shares of common stock are held by 91 stockholders of record. The number of record holders was determined from the records of our transfer agent and does not include beneficial owners of common stock whose shares are held in the names of various security brokers, dealers and registered clearing agencies.

 

Dividends

 

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

 

 15 
 

 

Securities Authorized for Issuance Under Equity Compensation Plans

 

The following table provides information, as of December 31, 2015, with respect to equity securities authorized for issuance under our equity compensation plans:

 

Plan Category  Number of
Securities to be
Issued Upon
Exercise of
Outstanding
Options,
Warrants and
Rights
(a)
   Weighted-Average
Exercise Price of
Outstanding
Options, Warrants
and Rights
(b)
   Number of
Securities
Remaining
Available for
Future Issuance
Under Equity
Compensation
 Plans (excluding
securities reflected
in Column (a))(c)
 
                
Equity compensation plans approved by security holders   2,775,000   $0.58    12,225,000 
Equity compensation plans not approved by security holders   800,000   $0.50    0 
                
TOTAL   3,757,000   $0.57    12,225,000 

 

Transfer Agent

 

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

 

Recent Sales of Unregistered Securities

 

There were no unregistered sales of equity securities during the period covered by this Transition Report that were not included in a Quarterly Report on Form 10Q or a Current Report on Form 8K.

 

Item 6. Selected Financial Data.

 

Not applicable because we are a smaller reporting company.

 

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

You should read the following discussion of our financial condition and results of operations in conjunction with the financial statements and the notes thereto included elsewhere in this Transition Report on Form 10-K. The following discussion contains forward-looking statements that are subject to risks and uncertainties. Actual results may differ substantially from those referred to herein due to a number of factors, including but not limited to those discussed below and elsewhere in this report, particularly in the sections entitled ” Cautionary Note Regarding Forward Looking Statements ” and “Risk Factors.”

 

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

 

In this MD&A, when financial results for the 2015 transition period are compared to financial results for the prior year period, the results compare the audited nine-month period ended December 31, 2015 to the unaudited results for the nine-month period ended December 31, 2014.

 

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

 

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

 

 16 
 

 

The Company has conducted sales through two channels: National Accounts, and through an exclusive nationwide distribution agreement with Sysco Corporation (“Sysco”), the U.S.’s largest broadline distributor, which was entered into during July 2014.

 

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

 

In addition to the National Accounts, the Company sells to food 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. All Barfresh products will be 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 operators nominated distributor for our products.

 

The Company is one of five vendors that was named to Sysco’s “Cutting Edge Solution” (“CES”) Platform during March of 2016. As part of this platform, our products will receive national advertising and marketing, and will be considered a core product. All 72 of SYSCO’s Operating Companies (“OPCO”) will participate in the CES program, and will be evaluated on their success in moving the CES products. As a direct result the Company, which had already begun shipping products to 37 of the 72 Sysco distribution centers, expects to have its products in all 72 SYSCO Opco’s by the end of the first quarter 2016.

 

On October 26, 2015, Barfresh signed an agreement with PepsiCo North America Beverages, a division of PepsiCo, to become its exclusive sales representative within the food service channel to present Barfresh’s line of ready-to-blend smoothies and frozen beverages throughout the United States and Canada. Through this agreement, Barfresh’ products will be included as part of PepsiCo’s offerings to its significant customer base, which the Company expects to fast track our growth and expedite the test to market process. The agreement gives Barfresh access to PepsiCo’s one-thousand plus person foodservice sales team, with Barfresh products becoming part of PepsiCo’s customer presentations.

 

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

 

Barfresh currently utilizes contract manufacturers to manufacture all of the products in the United States. Ice cream manufacturers are best suited to produce the products and two production lines are currently operational in our Salt Lake City contract manufacturer location. This manufacturer is currently producing products sold to existing customers as well as producing exclusive test products developed for potential National Accounts. Currently annual production capacity with our existing contract manufacturer is 14 million units per year. In February 2016, the Company signed an agreement with Yarnell Operations, LLC, a subsidiary of Schulze and Burch, that secures additional production capacity ahead of expected dramatic sales growth in 2016. Barfresh will have the capacity to ramp up to an incremental production capacity of 100 million units through this agreement. The Yarnell Operations, LLC, subsidiary is strategically located in Arkansas. Yarnell’s location enhances the company’s ability to efficiently move product throughout the supply chain to destinations in the eastern United States, home to many of the country’s large foodservice outlets.

 

Although there currently is not a contract in place with any suppliers for the raw materials needed to manufacture our products, there are a significant number of sources available and the company does not anticipate becoming dependent on any one supplier. As demand for the range of our products grows, we plan to contract a level of raw material requirements to ensure continuity of supply.

 

Currently we have 44 employees and 5 consultants. There are currently 35 employees and 1 consultant selling our products. We have recently hired additional employees, particularly in the sales area, as we roll out our products to all 72 Sysco distribution centers.

 

Critical Accounting Policies

 

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

 

Revenue Recognition

 

We recognize revenue when there is persuasive evidence of an arrangement, delivery has occurred or services have been rendered, the sales price is determinable, and collection is reasonably assured. Revenue is recorded net of provisions for discounts, slotting fees, and promotion allowances. Our products are sold on various terms. Our credit terms, which are established in accordance with local and industry practices, typically require payment within 30 days of delivery. We recognize revenue upon receipt of our products by our distributors and retail accounts, in accordance with written sales terms, net of provisions for discounts or allowances. Allowances for returns and discounts are made on a case-by-case basis. Historically, neither returns nor discounts have been material.

 

 17 
 

 

Impairments

 

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

 

Share-based Compensation

 

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

 

Convertible 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.

 

Results of Operations

 

Results of Operation for the Nine Months Ended December 31, 2015 as Compared to the Nine Months Ended December 31, 2014

 

Revenue and Cost of Revenue

 

Revenue for 2015 was $ 437,272 as compared to $157,834 in 2014. Our business grew primarily through the expansion of our business relationship with Sysco Corporation (“Sysco”), a major broad line food distributor. We began shipping to Sysco in July 2014, and by the end of 2015 had our products in approximately 37 of Sysco’s 72 Operating Companies. In addition we shipped product directly to a number of quick serve restaurants outside of the Sysco distribution system.

 

Cost of revenue was $251,300 as compared to $ 97,456 in 2014. Our gross profit was $185,972 for 2015 and $60,378 for 2014. There were no significant changes in our selling prices during 2015. During the first quarter of 2016, we increased our selling prices by approximately 8%. We anticipate that our gross profit percentage will improve in the future, as our business gains scale and as we expand our manufacturing operations.

 

Operating Expenses

 

Our operations during 2015 were directed towards increasing sales and creating and finalizing customized flavors for potential customers. The increase in our business relationship with Sysco drove an increase in our selling, marketing, and general and administrative expenses. We have continued to hire additional sales personnel during the year, to support and enhance our business relationship with Sysco, and to work with the PepsiCo North America sales force in gaining new customers and supporting existing customers.

 

Primarily as a result of building our sales force, general and administrative expenses increased from $2,058,929 in 2014 to $5,666,204 in 2015, an increase of $3,607,275 or 175%. We have continued to hire additional sales personnel during the first quarter of 2016, and our sales force at this time includes 35 full time employees. However we do not expect to continue to hire additional sales personnel at a similar rate during the balance of 2016.

 

 18 
 

 

The following is a breakdown of our selling, marketing and general and administrative expenses for 2015 and 2014.

 

   Nine months
ended
December 31, 2015
   Nine months
ended
December 31, 2014
   Difference     
Personnel costs  $2,885,957   $719,704   $2,166,253    301%
Stock based compensation/options   630,395    345,726    284,669    82%
Legal and professional fees   312,670    251,061    61,609    25%
Travel   332,324    153,377    178,947    117%
Rent   85,578    93,734    (8,156)   -9%
Marketing and selling   416,283    115,525    300,758    260%
Investor and public relations   80,163    45,374    34,789    77%
Consulting fees   322,834    105,175    217,659    207%
Director fees   48,096    61,341    (13,245)   -22%
Research and development   67,341    53,526    13,815    26%
Shipping Expense (Freight)   110,953    43,176    67,777    157%
Storage   34,520    14,867    19,653    132%
Other expenses   339,090    56,343    282,747    502%
   $5,666,204   $2,058,929   $3,607,275    175%

 

Personnel cost represents the cost of employees including salaries, employee benefits, car allowances, and employment taxes, and continues to be our largest expense. Personnel costs increased $2,166,253 (301%), from $719,704 in 2014 to $2,885,957 in 2015. At December 31, 2015, we had 33 full time employees, as compared to 7 at December 31, 2014. We currently have 44 full time employees. We anticipate adding additional personnel during the balance of 2016 but at a slower pace than we added employees during 2015 and the first quarter of 2016.

 

Stock based compensation is used as an incentive to attract new employees and to compensate and retain existing employees. Stock based compensation includes stock issued and stock options granted to employees and certain non-employees, and increased $284,669 (82%) from $345,726 in 2014 to $630,695 in 2015. The fair value of the stock grants is based on the trading value of our shares on the date of the grants and are being amortized over applicable vesting periods. We anticipate making additional grants in the future.

 

Legal and professional fees, which include accounting and legal services, increased $61,609 (25%) from $251,061 in 2014 to $312,670 in 2015. We anticipate legal fees related to ongoing legal compliance to remain comparable to 2014 and 2015.

 

Travel and entertainment expenses increased $178,947 (117%) from $153,377 in 2014 to $332,324 in 2015. The increase is due to an increase in business activity and an increase in the number of personnel traveling on company business.

 

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

 

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

 

Rent expense decreased from $93,974 in 2014 to $85,578 in 2015. Rent expense is primarily incurred for our Headquarters location in Beverly Hills, California. The rent for our headquarters location is approximately $7,789 per month. The lease on the headquarters office commenced during October, 2012, expired and was renewed in October 2014, and is now set to expire during November of 2016. Rent expense also includes monthly parking fees and offsite storage. We have been notified that an increase of rent will occur if we decide to extend the current lease for our Headquarters office.

 

 19 
 

 

Research and development expenses increased $13,815, or 26%, from $53,526 in 2014 to $67,341 in 2015. Research and development represents the cost of developing new flavor profiles, both for our general portfolio of products, and for customized profiles for specific customers. We anticipate this cost continuing in future periods, at an increased rate as compared with 2015.

 

Director fees for 2015 were $48,096 as compared with $61,341 in 2014. We currently pay our non-employee directors $12,500 per quarter. These fees can either be paid in cash, or in stock, at the election of the director.

 

Other expenses consist of ordinary operating expenses such as office, telephone, insurance, and other similar expenses. These expenses directly correlate to our overall business activity. We expect these expenses to continue to increase during 2016 as our business grows.

 

Operating losses were $2,093,374 in 2014, and $5,615,726 in 2015.

 

Interest expense was $296,509 in 2015, as compared with $379,279 in 2014. Interest expense primarily relates to convertible debt that was issued in August 2012, and renewed in September 2013, and short term notes that were issued in December 2013 and renewed in December 2014. The stated interest rate on the convertible debt was 12%.

 

Net losses were $2,472,653 in 2014, and $5,920,092 in 2015.

 

Liquidity and Capital Resources

 

As of December 31, 2015, we had a working capital deficit of $206,796.

 

During the nine-month period ended December 31, 2015, we used cash of $5,128,985 in operations, $233,063 for the purchase of equipment, net of sales of equipment, and $11,669 for patents and trademarks

 

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

 

Our liquidity needs will depend on how quickly we ramp up sales through our relationships with Sysco and PepsiCo.

 

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

 

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 capital 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 lease office space under a non-cancellable operating lease, which expires November, 2016. The aggregate minimum requirements under the non-cancellable lease as of December, 2015 is $79,587. We will either renew this lease or find new office space

 

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 7A. Quantitative and Qualitative Disclosures About Market Risk.

 

Not applicable because we are a smaller reporting company.

 

 20 
 

 

Item 8. Financial Statements and Supplementary Data.

 

Our consolidated financial statements are included beginning immediately following the signature page to this report. See Item 15 for a list of the consolidated financial statements included herein.

 

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

 

None.

 

Item 9A. Controls and Procedures.

 

Management’s Annual Report on Internal Control over Financial Reporting

 

Disclosure Controls and Procedures

 

Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Securities and Exchange Act of 1934 Rules 13a-15(f). Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that the Company’s disclosure controls and procedures were not effective as of December 31, 2015.

 

Management’s Annual Report on Internal Control over Financial Reporting

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, for the Company.

 

Internal control over financial reporting includes those policies and procedures that: (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of its management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

 

Management recognizes that there are inherent limitations in the effectiveness of any system of internal control, and accordingly, even effective internal control can provide only reasonable assurance with respect to financial statement preparation and may not prevent or detect material misstatements. In addition, effective internal control at a point in time may become ineffective in future periods because of changes in conditions or due to deterioration in the degree of compliance with our established policies and procedures.

 

Our management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2015. The framework used by management in making that assessment was the criteria set forth in the document entitled “Internal Control – Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in 2013 which assessment identified material weaknesses in internal control over financial reporting. A material weakness is a control deficiency, or a combination of deficiencies in internal control over financial reporting that creates a reasonable possibility that a material misstatement in annual or interim financial statements will not be prevented or detected on a timely basis.

 

Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Securities and Exchange Act of 1934 Rules 13a-15(f). Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that the Company’s disclosure controls and procedures were not effective as of December 31, 2015.

 

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

 

  We do not have an audit committee made up entirely of independent directors. We are not currently obligated to have an audit committee made up entirely of independent directors, including a member who is an “audit committee financial expert,” as defined in Item 407 of Regulation S-K, under applicable regulations or listing standards. However, it is management’s view that such a committee is an important internal control over financial reporting, the lack of which may result in ineffective oversight in the establishment and monitoring of internal controls and procedures.
     
  We do not have a majority of independent directors on our board of directors, which may result in ineffective oversight.
     
  Inadequate Segregation of Duties: We have an inadequate number of personnel to properly implement internal controls over financial reporting.

 

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

 

 21 
 

 

Management recognizes that there are inherent limitations in the effectiveness of any system of internal control, and accordingly, even effective internal control can provide only reasonable assurance with respect to financial statement preparation and may not prevent or detect material misstatements. In addition, effective internal control at a point in time may become ineffective in future periods because of changes in conditions or due to deterioration in the degree of compliance with our established policies and procedures.

 

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

 

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

 

This report shall not be deemed to be filed for purposes of Section 18 of the Exchange Act, or otherwise subject to the liabilities of that section, and is not incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing.

 

Changes in Internal Control over Financial Reporting

 

There have been no changes in our internal control over financial reporting during the fourth quarter of the Transition Period ended December 31, 2015 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

Item 9B. Other Information.

 

None.

 

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PART III

 

Item 10. Directors, Executive Officers and Corporate Governance.

 

Directors and Executive Officers

 

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

 

Name   Age   Position
Riccardo Delle Coste   37   President, Chief Executive Officer and Chairman
Joseph S. Tesoriero   62   Chief Financial Officer
Steven Lang   63   Director
Arnold Tinter   71   Secretary and Director
Joseph M. Cugine   55   President of Barfresh Corporation, Inc., and Director
Alice Elliot   59   Director

 

Riccardo Delle Coste has been the Chairman of our board of directors, President and Chief Executive Officer since January 10, 2012. He has also been the President and Chief Executive Officer of Barfresh Inc., a Colorado corporation and our wholly owned subsidiary (“Barfresh CO”), since its inception. Mr. Delle Coste is the inventor of the patent pending technology and the creator of Smoo Smoothies. Mr. Delle Coste started the business in 2005 and developed a unique system using controlled pre-packaged portions, to deliver a freshly made smoothie that is quick, cost efficient, healthy and with no waste. In building the business, he is responsible for securing new business tenders and maintaining key client relationships. He is also responsible for the development of new product from testing to full-scale production, establishment of the manufacturing facilities that have all necessary accreditation (HACCP, Halal, and Kosher), technology development, product improvement and R&D with new product launches. Mr. Delle Coste also has over five years of investment banking experience. Mr. Delle Coste attended Macquarie University, Sydney, Australia while studying for a Bachelor of Commerce for 3.5 years but left to pursue business interests and did not receive a degree.

 

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

 

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

 

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

 

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

 

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

 

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

 

 23 
 

 

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

 

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

 

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

 

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

 

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

 

Employment Agreements

 

On April 27, 2015, Smoothie, Inc. entered into an executive employment agreement with Riccardo Delle Coste, its Chief Executive Officer and director. The name of Smoothie, Inc. was changed to Barfresh Corporation, Inc., on July 7, 2015. Mr. Delle Coste is also the Chief Executive Officer and Chairman of the Company. Pursuant to the employment agreement, he will receive a base salary of $350,000 and performance bonuses of 75% of his base salary based on mutually agreed upon performance targets. In addition, Mr. Delle Coste will receive up to an additional 500,000 performance options, on an annual basis. All options granted under the employment agreement are subject to the Company’s 2015 Equity Incentive Plan.

 

On April 27, 2015, Smoothie, Inc. entered into an executive employment agreement with Joseph M. Cugine to serve as President of Smoothie, Inc. The name of Smoothie, Inc. was changed to Barfresh Corporation, Inc., on July 7, 2015. Pursuant to the employment agreement, Mr. Cugine will receive a base salary of $300,000 and performance bonuses of 75% of his base salary based on mutually agreed upon performance targets. In addition, Mr. Cugine will receive 8-year options to purchase up to 600,000 shares of Barfresh, one-half vesting on each of the second and third anniversaries of the date of Mr. Cugine’s employment agreement. In addition, he will receive up to an additional 500,000 performance options, on an annual basis. All options granted under the employment agreement are subject to the Company’s 2015 Equity Incentive Plan

 

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

 

Term of Office

 

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

 

 24 
 

 

Director Independence

 

We use the definition of “independence” standards as defined in the NASDAQ Stock Market Rule 5605(a)(2) provides that an “independent director” is a person other than an officer or employee of the company or any other individual having a relationship, which, in the opinion of the Company’s board of directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. We have determined that only one of our directors is independent, which constitutes less than a majority.

 

Board Committees

 

We currently have an audit, and a compensation committee. The audit committee is primarily responsible for reviewing the services performed by our independent auditors and evaluating our accounting policies and our system of internal controls. None of the members of the audit committee are independent, as defined above. In the future we will have an independent member of the committee. The compensation committee is primarily responsible for reviewing and approving our salary and benefits policies (including stock options) and other compensation of our executive officers. The board has discussed the need for a Nominating and Governance Committee and resolved to establish such a committee in the near future.

 

Family Relationships

 

There are no family relationships among any of our officers or directors.

 

 

Legal Proceedings

 

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

 

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

 

Code of Ethics

 

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

 

Section 16(a) Beneficial Ownership Reporting Compliance

 

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

 

To our knowledge, based solely upon a review of Forms 3 and 4 and amendments thereto furnished to Barfresh under 17 CFR 240.16a-3(e) during our most recent fiscal year and Forms 5 and amendments thereto furnished to Barfresh with respect to our most recent fiscal year or written representations from the reporting persons, we believe that during the Transition Period ended December 31, 2015 our directors, executive officers and persons who own more than 10% of our common stock complied with all Section 16(a) filing requirements, with the exception of Riccardo Delle Coste and Arnold Tinter. Mr. Delle Coste and Mr. Tinter have made all required Section 16(a) filings, although not on a timely basis.

 

 25 
 

 

Item 11. Executive Compensation.

 

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

 

Name and
Principal
Position
  Period   Salary
($)
   Bonus
($)
   Stock
Awards
($)
  Option
Awards
($)
   Non-Equity
Incentive Plan
Compensation
($)
   Change in
Pension
Value and
Nonqualified
Deferred
Compensation
Earnings
($)
   All Other
Compensation
($)
   Total
($)
 
Riccardo Delle Coste,
Chief Executive Officer
   12/2015   289,583                        7,200 1   296,783 
    2015    266,666        204,000 2  89,790 3           -    560,456 
                                          
Joseph Cugine, President, Barfresh Corp. Inc. a wholly owned subsidiary   12/2015   212,500        600,000 4  310,420 5           41,667 6   1,164,587 
    2015    -        49,998 7  -             37,500 6   37,500 
                                           
Joseph Tesoriero, Chief Financial Officer   12/2015   156,250       287,000 8  435,403 9                  878,653 
    2015    -                                  

 

  1. Represents the car allowance paid to Mr. Delle Coste.
     
  2. Represents 400,000 shares of restricted stock valued at the aggregate grant date fair value computed in accordance with FASB ASC Topic 718. The market value at the date of grant was $0.51 per share. The shares vested upon issuance.
     
  3. Represents option to purchase 300,000 shares of common stock. The exercise price of the options is $0.45, vested upon issuance, and are exercisable until 1/21/2020. The options are valued in accordance with FASB ASC Topic 718 using the Black-Shoes Option pricing model.
     
  4. Represents 1,000,000 shares of restricted stock valued at the aggregate grant date fair value computed in accordance with FASB ASC Topic 718. The shares vest 50% in 2017 and 50% in 2018.
     
  5. Represents option to purchase 600,000 shares of common stock. The exercise price of the options is $0.50, vest 50% in 2017 and 50% in 2018, and are exercisable until 5/1/2023.
     
  6. Represents consulting fees paid to Mr. Cugine prior to becoming an employee.
     
  7. Represents 64,100 shares of restricted stock valued at the aggregate grant date fair value computed in accordance with FASB ASC Topic 718. The shares vested upon issuance.
     
  8. Represents 350,000 shares of restricted stock valued at the aggregate grant date fair value computed in accordance with FASB ASC Topic 718. The shares vest 50% in 2017 and 50% in 2018.
     
  9. Represents option to purchase 500,000 shares of common stock. The exercise price of the options is $0.82, vest 50% in 2017 and 50% in 2018, and are exercisable until 5/1/2023.

 

 26 
 

 

Outstanding Equity Awards at Fiscal Year-End Table

 

Option Awards  Stock Awards 
                               
Name  Number of securities underlying unexercised options (#) exercisable  Number of securities underlying unexercised options (#) exercisable  Equity incentive plan awards: Number of securities underlying unexercised unearned options (#)   Option exercise price ($)   Option expiration date   Number of shares or units of stock that have not vested (#)    Market value of shares or units of stock that have not vested ($)   Equity incentive plan awards: Number of unearned shares, units or other rights that have not vested (#)  Equity incentive plan awards: Market or payout value of unearned shares, units or other rights that have not vested ($)
Riccardo Delle Coste  300,000        0.45   1/21/2020           
                                  
Joseph Cugine    600,0001     0.50   5/1/2023   1,000,000    875,000    
                                  
Joseph Tesoriero    500,0002    0.82   5/1/2023   350,000    306,250    

 

1. 300,000 are exercisable on 5/1/17 and 300,000 are exercisable on 5/1/18

 

2. 250,000 are exercisable on 5/18/17 and 250,000 are exercisable on 5/18/18

 

Compensation of Directors

 

The following table summarizes the compensation paid to our directors for the Transition Period ended December 31, 2015:

 

Name  Fees
Earned or
Paid in
Cash
($)
   Stock
Awards
($)
   Option
Awards
($)
   Non-Equity
Incentive Plan
Compensation
($)
   Nonqualified
Deferred
Compensation
Earnings
($)
   All Other
Compensation
($)
  Total
($)
 
Arnold Tinter   37,500                   52,500 (1)  90,000 
Steven Lang   37,500                           37,500 
Alice Elliot   37,500                           37,500 

 

1.Represents consulting fees paid to Mr. Tinter.

 

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

 

Security Ownership of Certain Beneficial Owners and Management

 

The following table sets forth certain information regarding our shares of common stock beneficially owned as of March 16, 2016 for (i) each shareholder known to be the beneficial owner of 5% or more of our outstanding shares of common stock, (ii) each Named Executive Officer and director, and (iii) all executive officers and directors as a group. A person is considered to beneficially own any shares: (i) over which such person, directly or indirectly, exercises sole or shared voting or investment power, or (ii) of which such person has the right to acquire beneficial ownership at any time within 60 days through an exercise of stock options or warrants or otherwise. Unless otherwise indicated, voting and investment power relating to the shares shown in the table for our directors and executive officers is exercised solely by the beneficial owner or shared by the owner and the owner’s spouse or children.

 

 27 
 

 

For purposes of this table, a person or group of persons is deemed to have “beneficial ownership” of any shares of common stock that such person has the right to acquire within 60 days of March 16, 2016. For purposes of computing the percentage of outstanding shares of our common stock held by each person or group of persons named above, any shares that such person or persons has the right to acquire within 60 days of March 16, 2016 is deemed to be outstanding, but is not deemed to be outstanding for the purpose of computing the percentage ownership of any other person. The inclusion herein of any shares listed as beneficially owned does not constitute an admission of beneficial ownership. Unless otherwise specified, the address of each of the persons set forth below is in care of Barfresh Food Group Inc., 8530 Wilshire Blvd., Suite 450, Beverly Hills, CA 90211.

 

Name and address of beneficial owner (1)  Amount and
nature of
beneficial
ownership
   Percent of class o/s 
Riccardo Delle Coste (2) (3) (4) (5) (6) (7) (8)   20,480,909    21.58%
R.D. Capital Holdings Pty Ltd. (3) (5) (6) (7)   19,780,909    20.91%
Steven Lang (9) (10) (11) (12)   20,399,311    21.41%
Sidra Pty Limited (7) (9)   19,249,310    20.41%
Joseph Tesoriero (13) (14)   121,291    0.13%
Arnold Tinter (15) (16)   950,000    1.01%
Joe Cugine (17) (18) (19)   1,714,100    1.82%
Alice Elliot (20) (21) (22)   490,000    0.52%
All directors and officers as a group (5 persons)   44,155,611    45.78%
           
Lazarus Investment Partners LLLP,3200 Cherry Creek South Drive, Suite 670, Denver, CO 80209   17,237,548    17.52%
           
Wolverine Asset Management, LLC (“WAM”)175 West Jackson Blvd., Suite 340 Chicago, IL 60604 (23)   6,451,528    6.72%

 

1 Unless otherwise specified, the address of each of the persons set forth below is in care of Barfresh Food Group Inc., 8530 Wilshire Blvd., Suite 450, Beverly Hills, CA 90211.
   
2 Mr. Delle Coste is the Chief Executive Officer, President and a Director of the Company
   
3 Includes 18,966,664 shares owned by R.D. Capital Holdings PTY Ltd. and of which Riccardo Delle Coste is deemed to be a beneficial owner.
   
4 Includes 300,000 shares underlying options granted.
   
5 Includes 200,000 shares underlying warrants related to the convertible debt owned by R.D. Capital Holdings PTY Ltd. and of which Riccardo Delle Coste is deemed to be a beneficial owner.
   
6 Includes 282,647 shares underlying warrants issued in connection with a promissory note the holder of which was R.D. Capital Holdings PTY Ltd. And of which Riccardo Delle Coste is deemed to be a beneficial owner.
   
7 Includes 75,000 shares underlying warrants issued in connection with a promissory note the holder of which was R.D. Capital Holdings PTY Ltd. and of which Riccardo Delle Coste is deemed to be a beneficial owner.
   
8 Includes 96,278 shares underlying warrants issued in connection with a promissory note the holder of which was R.D. Capital Holdings PTY Ltd. and of which Riccardo Delle Coste is deemed to be a beneficial owner.
   
9 Mr. Lang is a Director of the Company
   
10 Includes 18,966,664 shares owned by Sidra Pty Limited of which Steven Lang is deemed to be a beneficial owner
   
11 Includes 950,000 shares underlying options granted
   
12 Includes 282,6469shares underlying warrants issued in connection with a promissory note the holder of which is Sidra PTY Limited
   
13 Mr. Tesoriero is the Chief Financial Officer of the Company
   
14 Includes 57,097 shares underlying warrants issued in connection with a promissory note and conversion thereof.
   
15 Mr. Tinter is the Secretary and a Director of the Company
   
16 Includes 150,000 shares underlying options granted
   
17 Mr. Cugine is a Director of the Company
   
18 Includes 500,000 shares owned by Restaurant Consulting Group LLC of which Joe Cugine is deemed to be a beneficial owner.
   
19 Includes 50,000 shares underlying warrants issued in connection with purchase of common shares
   
20 Ms. Elliot is a Director of the Company
   
21 Includes 160,000 shares owned by Elliot-Herbst LP of which Alice Elliot is deemed to be a beneficial owner
   
22 Includes 30,000 shares underlying warrants issued in connection with purchase of common shares
   

23

 

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

 

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Changes in control.

 

None

 

Item 13. Certain Relationships and Related Transactions, and Director Independence.

 

Certain Relationships and Related Transactions

 

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

 

On January 29, 2016, we closed a private placement to accredited investors of $2,670,000 in promissory notes and warrants to purchase up to 1,335,000 shares of common stock of the Company for aggregate gross proceeds to the Company of $2,670,000. Of the aggregate offering amount, $635,000 of the notes and warrants to purchase up to 317,500 shares of common stock were placed with members of the Company’s management, including officers and directors of the Company, and family members of certain officers and directors.

 

Our principal executive offices were located at 90 Madison Street, Suite 701, Denver, Colorado 80206 through March 2015. The executive office was co-located with the office of Corporate Finance Group, a company that is owned by Arnold Tinter, a director and former Chief Financial Officer. We used this property free of charge. We no longer occupy those premises.

 

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

 

Director Independence

 

We use the definition of “independence” standards as defined in the NASDAQ Stock Market Rule 5605(a)(2) provides that an “independent director” is a person other than an officer or employee of the company or any other individual having a relationship, which, in the opinion of the Company’s board of directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. We have determined that only one of our directors is independent, which constitutes less than a majority.

 

Item 14. Principal Accounting Fees and Services.

 

Aggregate fees for professional services rendered to the Company by Eide Bailly LLP for the Transition Period ending December 31, 2015 and fiscal year ended March 31, 2015 were as follows.

 

   Nine month
Transition
Period ending
December 31, 2015
   Fiscal year ended March 31, 2015 
Audit fees  $39,920   $34,588 
Audit related fees   -    - 
Tax fees   -    - 
All other fees   -    - 
Total  $39,920   $34,588 

 

 29 
 

 

As defined by the SEC, (i) “audit fees” are fees for professional services rendered by our principal accountant for the audit of our annual financial statements and review of financial statements included in our Form 10-K, or for services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements for those fiscal years; (ii) “audit-related fees” are fees for assurance and related services by our principal accountant that are reasonably related to the performance of the audit or review of our financial statements and are not reported under “audit fees;” (iii) “tax fees” are fees for professional services rendered by our principal accountant for tax compliance, tax advice, and tax planning; and (iv) “all other fees” are fees for products and services provided by our principal accountant, other than the services reported under “audit fees,” “audit-related fees,” and “tax fees.”

 

Audit Fees. The aggregate fees billed for the Transition Period ending December 31, 2015 and the fiscal year ended March 31, 2015 were for the audits of our financial statements and reviews of our interim financial statements included in our annual and quarterly reports.

 

Audit Related Fees. The aggregate fees billed for the Transition Period ending December 31, 2015 and the fiscal year ended March 31, 2015 were for the audit or review of our financial statements that are not reported under Audit Fees.

 

Tax Fees. Eide Bailly LLP did not provide us with professional services related to tax compliance, tax advice and tax planning for the Transition Period ending December 31, 2015 and the fiscal year ended March 31, 2015.

 

All Other Fees. Eide Bailly LLP did not provide us with professional services related to “Other Fees” for the Transition Period ending December 31, 2015 and the fiscal year ended March 31, 2015.

 

Audit Committee Pre-Approval Policies and Procedures

 

Under the SEC’s rules, an audit committee is required to pre-approve the audit and non-audit services performed by the independent registered public accounting firm in order to ensure that they do not impair the auditors’ independence. The SEC’s rules specify the types of non-audit services that an independent auditor may not provide to its audit client and establish the audit committee’s responsibility for administration of the engagement of the independent registered public accounting firm. The Company has established an Audit Committee. Accordingly, audit services and non-audit services described in this Item 14 were pre-approved by an Audit Committee.

 

There were no hours expended on the principal accountant’s engagement to audit the registrant’s financial statements for the most recent fiscal year that were attributed to work performed by persons other than the principal accountant’s full-time, permanent employees.

 

 30 
 

 

PART IV

 

Item 15. Exhibits and Financial Statements

 

(a) 1. Financial Statements

 

See Index to Financial Statements in Item 8 of this Transition Report on Form 10-K, which is incorporated herein by reference.

 

2. Financial Statement Schedules

 

All other financial statement schedules have been omitted because they are either not applicable or the required information is shown in the financial statements or notes thereto.

 

3. Exhibits

 

See the Exhibit Index, which follows the signature page of this Transition Report on Form 10-K, which is incorporated herein by reference.

 

(b) Exhibits

 

See Item 15(a) (3) above.

 

(c) Financial Statement Schedules

 

See Item 15(a) (2) above.

 

 31 
 

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) 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: March 30, 2016 By: /s/ Riccardo Delle Coste
    Riccardo Delle Coste
    Chief Executive Officer
    (Principal Executive Officer)

 

Date: March 30, 2016 By: /s/ Joseph S. Tesoriero
    Joseph S. Tesoriero
    Chief Financial Officer
    (Principal Financial Officer)

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

Signature   Capacity   Date
         
/s/ Riccardo Delle Coste   President, Chief Executive Officer and Director   March 30, 2016
Riccardo Delle Coste   (Principal Executive Officer)    
         
/s/ Arnold Tinter   Secretary and Director   March 30, 2016
Arnold Tinter        
         
/s/ Steven Lang   Director   March 30, 2016
Steven Lang        
         
/s/ Joseph M. Cugine   Director   March 30, 2016
Joseph M. Cugine        

 

/s/ Alice Elliot   Director   March 30, 2016
Alice Elliot        

 

 32 
 

 

Barfresh Food Group Inc.

 

Index to Consolidated Financial Statements

 

    Page
Report of Independent Registered Public Accounting Firm   F-2
     
Consolidated Balance Sheets as of December 31, 2015 and March 31, 2015   F-3
     
Consolidated Statements of Operations for the Nine Months Ended December 31, 2015 and the Year Ended March 31, 2015   F-4
     
Consolidated Statements of Stockholders’ Equity for the Period from April 1, 2014 to December 31, 2015   F-5
     
Consolidated Statements of Cash Flows for the Nine Months Ended December 31, 2015 and the Year Ended March 31, 2015   F-6
     
Notes to Consolidated Financial Statements   F-7

 

 F-1 
 

 

Report of Independent Registered Public Accounting Firm

 

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

Beverly Hills, California

 

We have audited the accompanying consolidated balance sheets of Barfresh Food Group, Inc. as of December 31, 2015 and March 31, 2015 and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the nine-months ended December 31, 2015 and the year ended March 31, 2015. Barfresh Food Group, Inc.’s management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Barfresh Food Group, Inc. as of December 31, 2015 and March 31, 2015, and the results of its operations and its cash flows for the nine-months ended December 31, 2015 and for the year ended March 31, 2015, in conformity with accounting principles generally accepted in the United States of America.

 

As discussed in Note 1 to the financial statements, the Company has adopted the Financial Accounting Standards Board Accounting Standards Update 2015-03, Simplifying the Presentation of Debt Issuance Costs, which changes the presentation of debt issuance costs.

 

/s/ Eide Bailly LLP

 

Greenwood Village, Colorado

March 30, 2016

 

 F-2 
 

 

Barfresh Food Group Inc.

Consolidated Balance Sheets

 

   December 31, 2015   March 31, 2015 
Assets          
Current assets:          
Cash and cash equivalents  $1,986,004   $5,364,657 
Accounts Receivable   28,596    46,096 
Inventory   327,961    165,847 
Prepaid expenses and other current assets   30,524    6,386 
Total current assets   2,373,085    5,582,986 
Property, plant and equipment, net of depreciation   688,772    545,454 
Intangible assets, net of amortization   617,257    651,433 
Deposits   16,451    16,451 
Total Assets  $3,695,565   $6,796,324 
           
Liabilities and Stockholders’ Equity          
Current liabilities:          
Accounts payable  $131,804   $133,254 
Accrued expenses   236,312    424,262 
Deferred rent liability   1,855    1,484 
Short-term notes payable - related party, net of discount   50,000    157,393 
Short-term notes payable   50,000    539,631 
Convertible note - related party, net of discount   119,993    - 
Convertible note, net of discount   1,975,878    325114 
Current portion of long term debt   14,039    7,551 
Total current liabilities   2,579,881    1,588,689 
Long Term Debt, net of current portion   45,992    28,916 
Total liabilities   2,625,873    1,617,605 
           
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; 86,186,453 and 77,720,828 shares issued and outstanding at December 31, 2015 and March 31, 2015, respectively   86    78 
Additional paid in capital   15,798,338    14,034,623 
Accumulated (deficit)   (14,728,732)   (8,808,640)
Unearned services   -    (47,342)
Total stockholders’ equity   1,069,692    5,178,719 
Total Liabilities and Stockholders’ Equity  $3,695,565   $6,796,324 

 

See the accompanying notes to the consolidated financial statements

 

 F-3 
 

 

Barfresh Food Group Inc.

Consolidated Statements of Operations

 

   For the nine
months ended
   For the
year ended
 
   December 31, 2015   March 31, 2015 
Revenue  $437,272   $211,467 
Cost of revenue   251,300    126,804 
Gross profit   185,972    84,663 
           
Operating expenses:          
General and administrative   5,666,204    3,211,908 
Depreciation and Amortization   135,494    134,221 
Total operating expenses   5,801,698    3,346,129 
           
Operating loss   (5,615,726)   (3,261,466)
           
Other expenses          
Interest   296,509    517,015 
Loss on extinguishment of debt   7,857    - 
           
Net (loss)  $(5,920,092)  $(3,778,481)
           
Per share information - basic and fully diluted:          
Weighted average shares outstanding   79,149,995    66,651,993 
Net (loss) per share  $(0.07)  $(0.06)

 

See the accompanying notes to the consolidated financial statements

 

 F-4 
 

 

Barfresh Food Group, Inc.

Statement of Stockholders’ Equity

For the Period from April 1, 2014 to December 31, 2015

 

   Common Stock   Additional paid in   Accumulated   Unearned     
   Shares   Amount   Capital   (Deficit)   services   Total 
                         
Balance, April 1, 2014   65,247,660   $65   $7,739,117   $(5,030,159)  $-   $2,709,023 
Issuance of common stock and warrants for cash, net of expenses of $238,212   11,044,000    11    5,283,777    -    -    5,283,788 
Effect of issuance of warrants in relation to debt (debt discount)   -    -    164,638    -    -    164,638 
Issuance of stock for services to non-employees   155,000    -    113,845    -    -    113,845 
Issuance of stock for services to employee and directors   964,100    1    496,457    -    (41,665)   454,793 
Stock based compensation   -    -    236,790    -    (57,209)   179,581 
Amortization of unearned services   -    -    -    -    51,532    51,532 
Conversion of warrants   310,068    1    (1)   -    -    0 
Net loss for the year ended March 31, 2015   -              (3,778,481)   -    (3,778,481)
Balance March 31, 2015   77,720,828    78    14,034,623    (8,808,640)   (47,342)   5,178,719 
                               
Conversion of warrants   6,695,352    7    2,493    -    -    2,500 
Issuance of stock for services   141,477    -    83,000    -    -    83,000 
Conversion of debt into stock   1,628,796    2    447,197    -    -    447,199 
Effect of issuance of warrants in relation to debt   -    -    600,629    -    -    600,629 
Stock based compensation   -    -    630,395    -    -    630,395 
Amortization of unearned services   -    -    -    -    47,342    47,342 
Net loss for the nine months ended December 31, 2015   -    -    -    (5,920,092)   -    (5,920,092)
    86,186,453   $87   $15,798,337   $(14,728,732)  $0   $1,069,692 

 

See the accompanying notes to the consolidated financial statements

 

 F-5 
 

 

Barfresh Food Group Inc.

Consolidated Statements of Cash Flows

 

   For the nine
month ended
December 31, 2015
   For the
year ended
March 31, 2015
 
Cash flow from operating activities:          
Net (loss)  $(5,920,092)  $(3,778,481)
Adjustments to reconcile net (loss) to net cash (used in) operating activities:          
Depreciation   89,648    72,842 
Equity based compensation   630,395    748,219 
Amortization of intellectual property   45,846    61,379 
Amortization of debt discount   225,363    448,971 
Amortization of unearned services   47,342    51,532 
Reserve for bad debt   -    (65,000)
Purchase of assets for long term debt   -    37,751 
Stock issuance for service   83,000    - 
Change in operating assets and liabilities          
Accounts receivable   17,500    87,544 
Inventory   (162,114)   (88,934)
Prepaid expenses   (24,138)   5,621 
Deposits   -    (1,990)
Accounts payable   (1,450)   (42,597)
Accrued expenses   (160,656)   181,442 
Deferred rent   371    (382)
Net cash (used in) operations   (5,128,985)   (2,282,083)
           
Cash flow from investing activities:          
Purchase of fixed assets   (236,014)   (271,927)
Disposition of fixed assets   2,951    15,709 
Purchase of patent   (11,669)   (12,158)
Net cash (used in) investing activities   (244,732)   (268,376)
           
Cash flow from financing activities:          
Issuance of common stock and warrants for cash   -    5,283,788 
Issuance of convertible notes   2,670,000    - 
Borrowing from long term debt   33,000    (1,284)
Exercise of warrant   2,500    - 
Debt issuance costs   (76,000)   - 
Repayment of short term notes payable   (75,000)   - 
Repayment of short term notes payable -related party   (550,000)   - 
Repayment of long term debt   (9,436)   - 
Net cash provided by financing activities   1,995,064    5,282,504 
           
Net increase (decrease) in cash   (3,378,653)   2,732,045 
Cash and cash equivalents at beginning of period   5,364,657    2,632,612 
Cash and cash equivalents at end of period  $1,986,004   $5,364,657 
           
Supplemental disclosure of cash flow information:          
Cash paid for interest  $57,710   $81,185 
Cash paid for income taxes  $-   $- 
           
Non-cash financing activities:          
Common stock issued for services, stock based Compensation, and conversion of debt  $1,160,592   $847,092 
Fair value of warrants issued with notes payable  $600,629   $164,638 

 

See the accompanying notes to the financial statements

 

 F-6 
 

 

Barfresh Food Group Inc.

Notes to Consolidated Financial Statements

December 31, 2015 and March 31, 2015

 

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.

 

On December 15, 2015 the Company changed its fiscal year end from March 31 to December 31 with immediate effect. As a result the Company is filing a Transition Report on Form 10-K for the nine-month period ending December 31, 2015.

 

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

 

Basis of Consolidation

 

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

 

Use of Estimates

 

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

 

Cash and Cash Equivalents

 

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

 

Concentration of Credit Risk

 

The amount of cash on deposit with financial institutions exceeds the $250,000 federally insured limit at December 31, 2015. However, we believe that cash on deposit that exceeds $250,000 in the financial institutions is financially sound and the risk of loss is minimal.

 

Fair Value Measurement

 

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

 

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

 

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

 

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

 

 F-7 
 

 

Barfresh Food Group Inc.

Notes to Consolidated Financial Statements

December 31, 2015 and March 31, 2015

 

Our financial instruments consist of accounts receivable, accounts payable, accrued expenses, notes payable, and convertible notes. The carrying value of our financial instruments approximates their fair value due to their relative short maturities.

 

Accounts Receivable

 

Accounts receivable are typically unsecured. Our credit policy calls for payment generally within 30 days. The credit worthiness of a customer is evaluated prior to a sale. As of December 31, 2015, and March 31, 2015 there is an Allowance for Doubtful Accounts of approximately $65,000. Bad Debt Expense for the period ended March 31, 2015 was $65,000, and there was no Bad Debt Expense for the period ended December 31, 2015.

 

Inventory

 

Inventory consists of finished goods and is carried at the lower of cost or market on a first in first out basis.

 

Intangible Assets

 

Intangible assets are comprised of patents, net of amortization. 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.

 

Property, Plant and Equipment

 

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

 

Furniture and fixtures: 5 years

Manufacturing Equipment: 7 years

Leasehold improvements: 2 years

Vehicles 5 years

 

Revenue Recognition

 

We recognize revenue when there is persuasive evidence of an arrangement, delivery has occurred or services have been rendered, the sales price is determinable, and collection is reasonably assured. Revenue is recorded net of provisions for discounts, slotting fees, and promotion allowances. Our products are sold on various terms. Our credit terms, which are established in accordance with local and industry practices, typically require payment within 30 days of delivery. We recognize revenue upon receipt of our products by our distributors and retail accounts, in accordance with written sales terms, net of provisions for discounts or allowances. Allowances for returns and discounts are made on a case-by-case basis. Historically, neither returns nor discounts have been material.

 

Research and Development

 

Expenditures for research activities relating to product development and improvement are charged to expense as incurred. We incurred $67,341 and $51,465, in research and development expenses for the nine months ended December 31, 2015 and the year ended March 31, 2015, 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”). In addition, our lease agreement provides for rental payments commencing at a date other than the date of initial occupancy. We include the rent holidays in determination of straight-line rent expense. Therefore, rent expense is charged to expense beginning with the occupancy date. Deferred rent was $1,855 and $1,484 at December 31, 2015 and March 31, 2015, respectively, and will be charged to rent expense over the life of the lease.

 

 F-8 
 

 

Barfresh Food Group Inc.

Notes to Consolidated Financial Statements

December 31, 2015 and March 31, 2015

 

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.

 

For the nine months ended December 31, 2015 and for the year ended March 31, 2015 we did not have any interest and penalties or any significant unrecognized uncertain tax positions.

 

Earnings per Share

 

We calculate net loss per share in accordance with ASC Topic 260, Earnings per Share. Basic net loss per share is computed by dividing net loss by the weighted average number of shares of common stock outstanding for the period, and diluted earnings per share is computed by including common stock equivalents outstanding for the period in the denominator. At December 31, 2015 and March 31, 2015 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

 

Recent pronouncements

 

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

 

 F-9 
 

 

Barfresh Food Group Inc.

Notes to Consolidated Financial Statements

December 31, 2015 and March 31, 2015

 

ASU Update 2014-09 Revenue from Contracts with Customers (Topic 606) issued May 28, 2014 by FASB and IASB converged guidance on recognizing revenue in contracts with customers on an effective date after December 31, 2017 will be evaluated as to impact and implemented accordingly.

 

ASU Update 2014-15 Presentation of Financial Statements-Going Concern (Sub Topic 205-40) issued August 27, 2014 by FASB defines managements responsibility to evaluate whether there is a substantial doubt about an organizations ability to continue as a going concern. The additional disclosure required is effective after December 31, 2015 and will be evaluated as to impact and implemented accordingly.

 

In April 2015, the FASB issued ASU 2015-03, Interest-Imputation of Interest: Simplifying the Presentation of Debt Issuance Cost. The guidance requires an entity to present debt issuance costs in the balance sheet as a direct reduction from the carrying amount of the debt liability, consistent with debt discounts, rather than as an asset. Amortization of debt issuance costs will continue to be reported as interest expense. Debt issuance costs related to revolving credit arrangements, however, will continue to be presented as an asset and amortized ratably over the term of the arrangement. ASU 2015-03 is effective for reporting periods beginning after December 15, 2015 including interim periods within those annual periods. Early application is permitted, and upon adoption, ASU 2015-03 should be applied on a retrospective basis. We have adopted ASU 2015-03 and it has not had a material impact on our Consolidated Financial Statements.

 

In July 2015, the FASB issued ASU 2015-11, Inventory, which simplifies the measurement principle of inventories valued under the First-In, First-Out (“FIFO”) or weighted average methods from the lower of cost or market to the lower of cost and net realizable value. ASU 2015-11 is effective for reporting periods beginning after December 15, 2016 including interim periods within those annual periods. We do not expect the standard to have a material impact on our Consolidated Financial Statements.

 

In November 2015, the FASB issued ASU 2015-17, Balance Sheet Classification of Deferred Taxes, which requires that deferred tax assets and liabilities be classified as noncurrent on the consolidated balance sheet. ASU 2015-17 is effective for annual periods beginning after December 15, 2016, including interim periods within those annual periods. Early adoption is permitted as of the beginning of an interim or annual reporting period. Upon adoption, ASU 2015-17 may be applied either prospectively or retrospectively. We do not expect the adoption of this guidance to have a material impact on our Consolidated Financial Statements.

 

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 simplify the accounting for sale and leaseback transactions primarily because lessees must recognize lease assets and lease liabilities. This ASU leaves the accounting for the organizations 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 amendments in ASU 2016-02 are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition approach. The Company is evaluating the potential impact of ASU 2016-02 on its Consolidated Financial Statements.

 

 F-10 
 

 

Barfresh Food Group Inc.

Notes to Consolidated Financial Statements

December 31, 2015 and March 31, 2015

 

Note 2. Property Plant and Equipment

 

Major classes of property and equipment at December 31, 2015 and March 31, 2015 consist of the following:

 

   December 31, 2015   March 31, 2015 
Furniture and fixtures  $13,604   $10,794 
Manufacturing Equipment   705,782    632,596 
Leasehold Improvements   3,300    3,300 
Vehicles   116,752    58,752 
    839,438    705,442 
Less: accumulated depreciation   (249,732)   (159,988)
    589,706    545,454 
Equipment not yet placed in service   99,066    - 
Property and equipment, net of depreciation  $688,772   $545,454 

 

We recorded depreciation expense related to these assets of $89,648 and $72,103 for the nine months ended December 31, 2015 and the year ended March 31, 2015, respectively.

 

Note 3. Intangible Assets

 

During the year ended March 31, 2014, we acquired at a cost of $672,157, all of the international patent rights for a pre-portioned, ready to blend packet for beverages, particularly, smoothies, shakes and frappes.

 

As of December 31, 2015 and March 31, 2015, intangible assets primarily consists of patent costs of $760,475 and $748,806, less accumulated amortization of $143,218 and $97,373, respectively.

 

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 $45,846 and $61,378 for the nine months ended December 31, 2015 and the year ended March 31, 2015, respectively.

 

Estimated future amortization expense related to intangible property as of December 31, 2015 is as follows:

 

Years ending December 31,  Total Amortization 
2016  $61,328 
2017  $61,328 
2018  $61,328 
2019  $61,328 
2020  $61,328 
Later years  $310,617 
   $617,257 

 

Note 4. Related Parties

 

As disclosed below in Note 5, there remains outstanding $50,000 in Short-Term Notes Payable to related parties, a significant shareholder and a company controlled by a director and significant shareholder.

 

 F-11 
 

 

Barfresh Food Group Inc.

Notes to Consolidated Financial Statements

December 31, 2015 and March 31, 2015

 

As disclosed below in Note 6, members of management, directors, and members of their families, participated in $635,000 of the total $2,670,000 convertible notes offering.

 

As disclosed below in Note 9, members of management and directors have received shares of stock and options in exchange for services.

 

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

 

In December 2013, we closed an offering of $775,000 in short-term notes payable (“Short-Term Notes”), $500,000 of which was purchased by a significant shareholder and $100,000 was purchased by a company controlled by a director and significant shareholder. The Short-Term Notes bear interest at a rate of 2% per annum and were due and payable on December 20, 2014. We also issued 1,291,667 warrants to the Short-Term Note holders for the right to purchase shares of our common stock. Each warrant entitles the holder to purchase one share of our common stock at a price of $0.45 per share, may be exercised on a cashless basis and are exercisable for a period of five years.

 

In accordance with the guidance in ASC Topic 470-20 Debt with Conversion and Other Options (“ASC 470”), we first calculated the fair value of the warrants issued and then determined the relative value of the Short-Term Notes.

 

The relative value of the warrants was $298,232, which was the amount recorded as debt discount to the short term notes. The amounts recorded as debt discount were amortized over the one year term, and accreted to interest expense. We estimated the effective interest rate as calculated to be approximately 52% but paid cash at a rate of 2% per annum.

 

We exercised our right to extend the due date of the Short-Term Notes to June 20, 2015. The extended Short-Term Notes bear at the rate of 3% per annum and required us to issue additional warrants (“Extension Warrants”). We issued 898,842 Extension Warrants to the Short-Term Note holders for the right to purchase shares of our common stock. Each Extension Warrant entitles the holder to purchase one share of our common stock at a price of $0.485 per share, may be exercised on a cashless basis and are exercisable for a period of three years.

 

As discussed above, we accounted for the warrants as per the guidance in ASC 470. The relative value of the Extension Warrants, $164,638, was the amount recorded as the new debt discount. The amounts recorded as debt discount were being amortized over the six-month term of the note, and accreted to interest expense. We estimated the effective interest rate as calculated to be approximately 53% but pay cash at a rate of 3% per annum.

 

The fair value of the Extension Warrant, $0.23 per share, was calculated using the Black-Sholes option pricing model using the following assumptions:

 

Expected life (in years)   3 
Volatility (based on a comparable company)   76.88%
Risk Free interest rate   1.10%
Dividend yield (on common stock)   -%

 

 F-12 
 

 

Barfresh Food Group Inc.

Notes to Consolidated Financial Statements

December 31, 2015 and March 31, 2015

 

On June 20, 2015, some of the Short-Term Notes were amended again, and some of the Short-Term Notes were redeemed. Short-Term Notes totaling $700,000 were amended to provide for repayment on June 20, 2015 of 50% of the face value, plus accrued interest to that date ($10,500), and extension of the remaining balance until September 20, 2015, and the interest rate on the notes that were extended was adjusted to 10%. The remaining Short-Term Notes were fully redeemed on June 20, 2015. One such note in the amount of $25,000 was redeemed for cash, and one such note in the amount of $50,000 was redeemed for 71,429 shares of our common stock. As a result of the above described amendments and redemptions of the Short-Term Notes, all remaining unamortized debt discount was expensed as of June 20, 2015.

 

Of the balance of the notes due that were payable on September 20, 2015, one note for $250,000 was repaid on October 1, 2015, and one note to related parties totaling $50,000 were extended until June 30, 2016, with 10% interest.

 

Interest expenses includes direct interest of $15,068 and $17,644 and amortization of debt discounts of $77,976 and $316,917 for the nine months ended December 31, 2015, and for the year ended March 31, 2015, respectively, for this note.

 

Note 6. Convertible Notes (Related and Unrelated)

 

In August 2012, we closed an offering of $440,000 of convertible notes. The notes bear interest at a rate of 12% per annum and were due and payable on September 6, 2013. In addition, the notes were convertible, at any time after the original issue date until the notes are no longer outstanding, into our common stock at a conversion price of $0.372 per share. We also issued 956,519 warrants to the note holders for the right to purchase shares of our common stock. Each warrant entitled the holder to purchase one share of our common stock at a price of $0.46 per share for a term of seven years.

 

When the convertible notes were due, we settled the notes by repaying $40,000 of the notes in cash, issuing new convertible notes in the amount of $400,000 and received payment for another note in the amount of $20,000. The new notes bear interest at a rate of 12% per annum and were due and payable on September 6, 2015. In addition, the new notes were convertible at any time after the original issue date until the new notes are no longer outstanding, into our common stock at a conversion price of $0.25 per share. We also issued warrants to the new note holders for the right to purchase shares of our common stock. Each warrant entitles the holder to purchase one share of our common stock at a price of $0.25 per share. There were 1,680,000 warrants issued. The warrants issued with the original notes were cancelled.

 

In accordance with the guidance in ASC 470, we first calculated the fair value of the warrants issued and then determined the relative value of the notes and determined that there was a beneficial conversion feature.

 

The fair value of the warrants, $0.13 per share ($216,531 in the aggregate), was calculated using the Black-Sholes option pricing model using the following assumptions:

 

Expected life (in years)   3 
Volatility (based on a comparable company)   85%
Risk Free interest rate   0.91%
Dividend yield (on common stock)   - 

 

The relative value of the warrants to the notes was $142,873, which was the amount recorded as a portion of the debt discount. We also recorded a beneficial conversion feature on the convertible notes of $125,905. The amounts recorded as debt discount are being amortized over the two year term, and accreted to interest expense. We estimated the effective interest rate as calculated to be approximately 74% but will be paying cash at a rate of 12% per annum.

 

As of December 31, 2015, all debt discount has been amortized.

 

During September 2015, all of the holders of the convertible notes elected to convert the then outstanding $420,000 of notes, and accumulated interest of $21,955 to our common stock. We issued 1,557,367 shares of our common stock prior to December 31, 2015, and have issued the remaining 210,455 shares after December 31, 2015.

 

 F-13 
 

 

Barfresh Food Group Inc.

Notes to Consolidated Financial Statements

December 31, 2015 and March 31, 2015

 

Interest expenses include direct interest of $21,955 and $50,400 and amortization of debt discount of $95,249 and $132,054 for nine month ended December 31, 2015 and for the year ended March 31, 2015 respectively for this note.

 

During the nine months ended December 31, 2015, we raised $2,670,000 through the issuance of convertible promissory notes. The notes bear interest at a rate of 10% and mature in one year. In the event we complete an equity financing prior to the maturity date of the notes, the holders shall have the right to convert all outstanding principal and accrued and unpaid interest under the notes into the class of equity issued in such financing on the same terms as the other investors concurrently with the closing of such financing. We also issued 1,335,000 warrants to the note holders for the right to purchase shares of our common stock. Each warrant entitled the holder to purchase one share of our common stock at a price of $1.00 per share for a term of five years. Of the aggregate offering amount, $635,000 of the notes and warrants to purchase up to 317,500 shares of common stock were placed with members of the Company’s management, including officers and directors of the Company, and family members of certain officers and directors.

 

We elected early adoption of ASU 2015-03, accordingly issuance cost paid has been recorded as debt discount. The following is a breakdown of the convertible promissory note 

 

   December 31, 2015   March 31, 2015 
Convertible notes (including related party)  $2,720,000   $420,000 
Less: Debt discount (warrant value)   (554,462)   (94,886)
Less: Debt discount (issuance costs paid)   (69,667)   - 
  $2,095,871   $325,114 

  

We did not record any discount for beneficial conversion as the conversion terms were unknown at December 31, 2015.

 

Interest expenses includes direct interest of $26,671 and amortization of debt discount of $52,500 for nine month ended December 31, 2015 for this note.

 

The fair value of the warrants, $0.586 per share ($782,863 in the aggregate), was calculated using the Black-Sholes option pricing model using the following assumptions:

 

Expected life (in years)   3 
Volatility (based on a comparable company)   77.5%
Risk Free interest rate   1.73%
Dividend yield (on common stock)   - 

 

The relative value of the warrants to the notes was $600,629, which was the amount recorded as a portion of the debt discount. The amount recorded as debt discount are being amortized over the one year term of the notes, one years, and accreted to interest expense. We estimated the effective interest rate as calculated to be approximately 34% but will be paying cash at a rate of 10% per annum.

 

Subsequent to December 31, 2015, we had an equity financing and holders of all of the convertible notes except for $100,000 exercised their right to convert. See Note 14 for additional disclosure.

 

Note 7. Long term Debt

 

Long term debt at December 31, 2015 consists of installment agreements on four vehicles maturing on different dates through June 2020. The installment agreements, are with one financial institution and bear no interest. Monthly payments are $1,171 per month.

 

The annual maturities of long term debt as of December 31, 2015 are as follows:

 

For years ending December 31,    
2016  $14,039 
2017   14,051 
2018   14,051 
2019   14,051 
2020   3,839 
   $60,031 

 

 F-14 
 

 

Barfresh Food Group Inc.

Notes to Consolidated Financial Statements

December 31, 2015 and March 31, 2015

 

Note 8. Commitments and Contingencies

 

We lease office space under a non-cancelable operating lease, which expires on November 7, 2016. The aggregate minimum requirements through December 31, 2016 total $79,587

 

Note 9. Stockholders’ Equity

 

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

 

The fair value of the warrants, $1,842,613, was estimated at the date of grant using the Black-Scholes option pricing model, with an allocation of the proceeds applied to the warrants. The difference between the warrant allocation and the proceeds was allocated to the shares of common stock issued. The fair value of the warrants has been included in the total additional paid in capital. The following assumptions were used in the Black-Scholes option pricing model:

 

Expected life (in years)   5 
Volatility (based on a comparable company)   100%
Risk Free interest rate   0.36%
Dividend yield (on common stock)   - 

 

During the year ended March 31, 2015, we issued 900,000 shares of common stock to an officer and two employees of the Company for services rendered. In accordance with ASC Topic 718, Compensation - Stock Compensation (“ASC 718”), compensation expense in the amount of $446,460 was recognized in the statement of operations.

 

Also during the year ended March 31, 2015, we issued 155,000 shares of our restricted common stock to legal counsel and a consultant to the Company. In accordance with ASC Topic 505, Equity-Based Payments to Non-Employees (“ASC 505”), expense in the amount of $113,845 was recognized in the statement of operations.

 

Additionally, during the year ended March 31, 2015, we issued 64,100 shares of our Common Stock to a Director. The fair value of the stock was based on the trading value of the shares on the date of grant. The shares vest over a one-year period and are being amortized over that period. The unamortized balance is shown as Unearned Services in the equity section of the Balance Sheet.

 

We also issued options to purchase 600,000 shares of our common stock at an exercise price of $0.45 per share to two officers and directors and a director of the Company. The options vested immediately and are exercisable for a period of 5 years from the date of issuance, January 21, 2014. The fair value of the options, $179,581, which was charged to expenses, was estimated at the date of grant using the Black-Scholes option pricing model with the following assumptions:

 

Expected life (in years)   5 
Volatility (based on a comparable company)   91%
Risk Free interest rate   1.35%
Dividend yield (on common stock)   - 

 

During the year ended March 31, 2015, we issued 150,000 options to a director of the Company. The exercise price of the options is $0.54 per share, which was the fair market value of the option on the date of grant and is exercisable for a period of 5 years. The options vest on the first anniversary of the issuance, October 14, 2015. The unamortized balance is shown as Unearned Services in the equity section of the Balance Sheet.

 

 F-15 
 

 

Barfresh Food Group Inc.

Notes to Consolidated Financial Statements

December 31, 2015 and March 31, 2015

 

The fair value of the option, $0.3814 per share, ($57,209 in the aggregate) was calculated using the Black-Sholes option pricing model using the following assumptions and is being written off over a one-year period:

 

Expected life (in years)   5 
Volatility (based on a comparable company)   91.8%
Risk Free interest rate   1.45%
Dividend yield (on common stock)   - 

 

During the nine months ended December 31, 2015, we increased our authorized capitalization to 300,000,000 shares of stock, consisting of 295,000,000 shares of common stock, par value $0.000001per share, and 5,000,000 shares of blank check preferred stock, par value $0.000001. During the nine-months ended December 31, 2015, our Board of Directors also unanimously approved and adopted the Barfresh Food Group, Inc. 2015 Equity Incentive Plan (the “Plan”). The maximum number of shares that may be issued pursuant to awards under the Plan is 15,000,000 shares.

 

During the nine months ended December 31, 2015, we issued 141,477 shares of common stock, valued at $83,000, for services.

 

During the nine-months ended December 31, 2015 we granted the right to 1,000,000 shares of restricted common stock to a director of the Company who during the period became an officer of the Company. The stock vests 50% on each of the second and third anniversary of the issuance. In accordance with ASC Topic 718, Compensation - Stock Compensation (“ASC 718”), compensation expense in the amount of $166,667 for the nine months ended December 31, 2015, was recognized in the statement of operations. In addition, we granted the right to 450,000 shares of restricted stock to two other officers in connection with employment agreements entered into during the nine months ended December 31, 2015. In accordance with ASC Topic 718, Compensation - Stock Compensation (“ASC 718”), compensation expense in the amount of $78,467 for the nine months ended December 31, 2015 was recognized in the statement of operations.

 

During the nine months ended December 31, 2015, we issued 1,985,000 options to purchase our common stock to officers and employees of the Company. In addition, we cancelled 10,000 options to purchase our common stock. The exercise price of the options ranged from $0.50 to $0.82 per share, and are exercisable for periods of between 5 and 8 years. The options vest under a variety of vesting schedules. Seventy thousand (70,000) of the options vest on the first anniversary of issuance, 850,000 of the options vest on the second anniversary of issuance, and 870,000 of the options vest on the third anniversary of issuance.

 

The fair value of the options ($1,345,317 in the aggregate) was calculated using the Black-Sholes option pricing model, based on the criteria shown below, and are being written off the life of each option.

 

Expected life (in years)    4.5 to 8 
Volatility (based on a comparable company)    78% to 99%
Risk Free interest rate    1.38% to 2.11%
Dividend yield (on common stock)   - 

 

 F-16 
 

 

Barfresh Food Group Inc.

Notes to Consolidated Financial Statements

December 31, 2015 and March 31, 2015

 

The following is a summary of outstanding stock options issued to employees and directors as of December 31, 2015:

 

   Number of
Options
   Exercise
price
per share
$
   Average
remaining term
in years
   Aggregate
intrinsic
value at date
of grant
$
 
Outstanding April 1, 2014   800,000    0.50    -    - 
                     
Issued   800,000    .45-.54    4.25    - 
Cancelled   -    -    -    - 
Outstanding March 31, 2015   1,600,000    .45 -.54    4.25    - 
                     
Issued   1,985,000    .47 -.87    6.42      
Cancelled   (10,000)   .50    7.25      
Outstanding December 31, 2015   3,575,000         4.84      
                     
Exercisable   1,600,000    .45 - .54    2.53    - 

 

Note 10. Outstanding Warrants

 

The following is a summary of all outstanding warrants as of December 31, 2015:

 

   Number of
Warrants
   Exercise price
per share
$
   Average
remaining
term
in years
   Aggregate
intrinsic value at
date of grant
 
Warrants issued in connection with private placements of common stock   11,213,332    0.25 - 1.50    1.69   $262,700 
Warrants issued in connection with private placement of convertible notes   1,680,000    0.25    1.45   $- 
Warrants issued in connection with short-term notes payable   2,190,509    .45    3.23   $64,583 
Warrants issued in connection with convertible short-term notes payable   1,310,000    1.00    5    $ 

 

Note 11. Income Taxes

 

Income tax provision (benefit) for the nine months ended December 31, 2015 and the year ended March 31, 2015 is summarized below:

 

   December 31, 2015   March 31, 2015 
Current:          
Federal  $-   $- 
State   -    - 
Total current   -    - 
Deferred:          
Federal   (1,712,000)   (1,015,700)
State   (167,000)   (98,600)
Total deferred   (1,888,000)   (1,114,300)
Increase in valuation allowance   1,888,000    1,114,300 

 

 F-17 
 

 

Barfresh Food Group Inc.

Notes to Consolidated Financial Statements

December 31, 2015 and March 31, 2015

 

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

 

   December 31, 2015   March 31, 2015 
Income tax provision at the federal statutory rate   34.0%   34.0%
State income taxes, net of federal benefit   3.3%   3.3%
Effect of net operating loss   (37.3%)   (37.3%)
    -%   -%

 

Components of the net deferred income tax assets at December 31, 2015 and March 31, 2015 were as follows:

 

   December 31, 2015   March 31, 2015 
Net operating loss carryover  $4,708,800   $2,820,800 
Valuation allowance   (4,708,800)   (2,820,800)
   $-   $- 

 

ASC 740 requires a valuation allowance to reduce the deferred tax assets reported if, based on the weight of evidence, it is more than likely than not that some portion or all of the deferred tax assets will not be recognized. After consideration of all the evidence, both positive and negative, management has determined that a $4,708,800 and $2,820,800 allowance at December 31, 2015 and March 31, 2015, respectively, is necessary to reduce the deferred tax assets to the amount that will more likely than not be realized. The change in the valuation allowance for the current period is $1,888,000.

 

As of December 31, 2015, we have a net operating loss carry forward of approximately $12,624,100. The loss will be available to offset future taxable income. If not used, this carry forward will expire as follows:

 

2030  $1,000 
2031  $63,800 
2032  $345,900 
2033  $1,840,300 
2034  $2,324,100 
2035  $2,987,300 
2036  $5,061,700 

 

As of December 31, 2015 we did not have any significant unrecognized uncertain tax positions.

 

Note 12. Business Segments

 

During the nine months ended December 31, 2015 and the year ended March 31, 2015, we operate in only one segment and sold to two geographic locations as follows:

 

   December 31, 2015   March 31, 2015 
Australia  $    $6,968 
United States   437,272    204,499 
   $437,272   $211,467 

 

All of our assets are located in the United States.

 

 F-18 
 

 

Barfresh Food Group Inc.

Notes to Consolidated Financial Statements

December 31, 2015 and March 31, 2015

 

The following is a breakdown of customers representing more than 10% of sales for the nine months ended December 31, 2015:

 

   Revenue from
customer
   Percentage of total
revenue
 
Customer A  $373,190    85.3%
Customer B   37,276    8.5%
Customer C   18,144    4.1%
   $428,610    98.0%

 

The following is a breakdown of customers representing more than 10% of sales for the year ended March 31, 2015:

 

   Revenue from
customer
   Percentage of total
revenue
 
Customer A  $58,911    28.0%
Customer B   52,195    24.8%
Customer C   24,234    11.5%
   $135,340    64.3%

 

Note 13. Transitional Reporting Year – Comparison of audited results for the nine months ended December 31, 2015 to the unaudited results for the nine months ended December 31, 2014.

  

   2015   2014 
       (unaudited) 
Revenue  $437,272   $157,834 
Cost of revenue   251,300    97,456 
Gross profit   185,972    60,378 
           
Operating expenses:          
General and administrative   5,666,204    2,058,929 
Depreciation and Amortization   135,494    94,823 
Total operating expenses   5,801,698    2,153,752 
           
Operating loss   (5,615,726)   (2,093,374)
           
Other expenses          
Interest   296,509    379,279 
Loss on extinguishment of debt   7,857    - 
           
Net (loss)  $(5,920,092)  $(2,472,653)
           
Per share information - basic and fully diluted:          
Weighted average shares outstanding   79,149,995    66,281,522 
Net (loss) per share  $(0.07)  $(0.04)

 

Note 14. 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 except as for the following:

 

On February 26, 2016 the Company, pursuant to a securities purchase agreement between the Company and certain accredited investors, sold 7,379,371 shares of its common stock (“Shares”) and warrants to purchase up to 3,689,686 Shares (“Warrants”) for aggregate gross proceeds to the Company of $5,903,498. The financing consists of two components: a new equity raise in the amount of $3,270,000 and the conversion into common equity of $2,633,498 of principal and interest of convertible promissory notes previously issued. See discussion in Note 6. The Warrants are exercisable for a term of five-years at a per Share price of $1.00.

 

 F-19 
 

 

Exhibit Index

 

Exhibit
Number
  Description
     
2.1   Share Exchange Agreement dated January 10, 2012 by and among Moving Box Inc., Andreas Wilcken, Jr., Barfresh Inc. and the shareholders of Barfresh Inc. (incorporated by reference to Exhibit 2.1 to Current Report on Form 8-K as filed January 17, 2012
     
3.1   Certificate of Incorporation of Moving Box Inc. dated February 25, 2010 (incorporated by reference to Exhibit 3.1 to Form S-1 (Registration No. 333-168738) as filed August 11, 2010)
     
3.2   Amended and Restated Bylaws of Barfresh Food Group Inc. (incorporated by reference to Exhibit 3.1 to Current Report on Form 8-K as filed August 4, 2014)
     
3.3   Certificate of Amendment of Certificate of Incorporation of Moving Box Inc. dated February 13, 2012 (incorporated by reference to Exhibit 3.1 to Current Report on Form 8-K as filed February 17, 2012)
     
3.4   Certificate of Amendment of Certificate of Incorporation of Smoothie Holdings Inc. dated February 16, 2012 (incorporated by reference to Exhibit 3.2 to Current Report on Form 8-K as filed February 17, 2012)
     
4.1   Form of Series A Warrant (incorporated by reference to Exhibit 10.3 to Current Report on Form 8-K as filed January 17, 2012)
     
4.2   Form of Series B Warrant (incorporated by reference to Exhibit 4.2 to Form 10K for the period ending March 31, 2014, as filed June 30, 2014)
     
4.3   Form of Series C Warrant (incorporated by reference to Exhibit 4.3 to Form 10K for the period ending March 31, 2014, as filed June 30, 2014)
     
4.4   Form of Series D Warrant (incorporated by reference to Exhibit 4.4 to Form 10K for the period ending March 31, 2014, as filed June 30, 2014)
     
4.5   Form of Series PA Warrant (incorporated by reference to Exhibit 4.5 to Form 10K for the period ending March 31, 2014, as filed June 30, 2014)
     
4.6   Form of Series CN Warrant (incorporated by reference to Exhibit 4.6 to Form 10K for the period ending March 31, 2014, as filed June 30, 2014)
     
4.7   Form of Series N Warrant**
     
4.8   Form of Series E Warrant**
     
4.9   Form of Series G Warrant (incorporated by reference to Exhibit 4.1 to Current Report on Form 8-K as filed February 16, 2015)
     
4.10   Form of Note dated December 20, 2013 by Barfresh Food Group Inc. in favor of certain investors (incorporated by reference to Exhibit 4.1 to Form 10Q for the period ending December 31, 2013, as filed February 13, 2014)
     
5.1   Opinion and Consent of Libertas Law Group, Inc. *
     
10.1   Form of Registration Rights Agreement dated December 20, 2013 (incorporated by reference to Exhibit 4.2 to Form 10Q for the period ending December 31, 2013, as filed February 13, 2014)
     
10.2   Intellectual Property Sale Deed by and between National Australia Bank Limited and Barfresh Inc. dated October 15, 2013 (incorporated by reference to Exhibit 10.1 to Quarterly Report on Form 10-Q as filed November 20, 2013)
     
10.3   Agreement of Sale, dated January 10, 2012, by and among Moving Box Inc. and Andreas Wilcken, Jr. (incorporated by reference to Exhibit 10.1 of Current Report on Form 8-K as filed January 17, 2012)
     
10.4   Form of Subscription Agreement dated January 10, 2012 by and between Moving Box, Inc. and certain investors. (incorporated by reference to Exhibit 10.2 of Current Report on Form 8-K as filed January 17, 2012)
     
10.5   Form of Lock Up Agreement dated January 10, 2012 (incorporated by reference to Exhibit 10.4 to Current Report on Form 8-K as filed January 17, 2012)

 

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10.6   Amendment No. 2, dated January 10, 2012 to Agreement dated March 21, 2010, by and among Moving Box Inc., Moving Box Entertainment LLC, Garrett LLC, Ian McKinnon, Brad Miller, Andreas Wilckin, Jr. and Uptone Pictures, Inc. (incorporated by reference to Exhibit 10.5 to Current Report on Form 8-K, as filed January 17, 2012)
     
10.7   Investor Release dated January 10, 2012, by and among Moving Box Inc., Andreas Wilcken, Jr., Garrett LLC, Ian McKinnon and Brad Miller (incorporated by reference to Exhibit 10.4 to Current Report on Form 8-K as filed January 17, 2012)
     
10.8   Form of Registration Rights Agreement dated March 13, 2015 (incorporated by reference to Exhibit 10.2 to Current Report on Form 8-K as filed February 16, 2015)
     
10.9   Barfresh Food Group, Inc. 2014 Equity Incentive Plan (incorporated by reference to Exhibit 10.10 to Annual Report Form 10-K filed June 30, 2014)+
     
10.10   Barfresh Food Group, Inc. 2015 Equity Incentive Plan (incorporated by reference to Exhibit 10.10 to Annual Report Form 10-K filed July 7, 2015)+
     
10.11   Executive Employment Agreement by and between Smoothie, Inc. and Riccardo Delle Coste dated April 27, 2015 (incorporated by reference to Exhibit 10.11 to Annual Report Form 10-K filed July 7, 2015)+
     
10.12   Executive Employment Agreement by and between Smoothie, Inc. and Joseph M. Cugine dated April 27, 2015 (incorporated by reference to Exhibit 10.12 to Annual Report Form 10-K filed July 7, 2015)+
     
10.13   Executive Employment Agreement by and between Barfresh Food Group, Inc. and Joseph S. Tesoriero dated May 18, 2015 (incorporated by reference to Exhibit 10.13 to Annual Report Form 10-K filed July 7, 2015)+
     
21.0   Subsidiaries*
     
31.1   Certification of Principal Executive Officer, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)
     
31.2   Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)
     
32.1   Certification of Principal Executive Officer of the Company, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
     
32.2   Certification of Principal Financial Officer of the Company, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
     
*   Filed herewith
     
+   Compensatory plan

 

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

 

Furnished herewith. 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.

 

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