Item
1. Financial Statements.
Barfresh
Food Group Inc.
Condensed
Consolidated Balance Sheets
|
|
June 30, 2014
|
|
|
March 31, 2014
|
|
|
|
(Unaudited)
|
|
|
(Audited)
|
|
Assets
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
2,023,923
|
|
|
$
|
2,632,612
|
|
Accounts Receivable
|
|
|
83,402
|
|
|
|
68,640
|
|
Inventory
|
|
|
73,769
|
|
|
|
76,913
|
|
Prepaid expenses and other current assets
|
|
|
11,970
|
|
|
|
12,007
|
|
Total current assets
|
|
|
2,193,064
|
|
|
|
2,790,172
|
|
Property, plant and equipment, net of depreciation
|
|
|
465,408
|
|
|
|
362,078
|
|
Intangible asset, net of amortization
|
|
|
696,853
|
|
|
|
700,654
|
|
Deposits
|
|
|
16,451
|
|
|
|
14,461
|
|
Total Assets
|
|
$
|
3,371,776
|
|
|
$
|
3,867,365
|
|
|
|
|
|
|
|
|
|
|
Liabilities And Stockholders’ Equity
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
149,011
|
|
|
$
|
175,851
|
|
Accrued expenses
|
|
|
273,118
|
|
|
|
242,820
|
|
Deferred rent liability
|
|
|
1,066
|
|
|
|
1,866
|
|
Short-term notes payable - related party, net of discount
|
|
|
555,201
|
|
|
|
492,015
|
|
Short-term notes payable, net of discount
|
|
|
59,481
|
|
|
|
52,731
|
|
Total current liabilities
|
|
|
1,037,877
|
|
|
|
965,283
|
|
Convertible note - related party, net of discount
|
|
|
25,924
|
|
|
|
22,993
|
|
Convertible note, net of discount
|
|
|
191,759
|
|
|
|
170,066
|
|
Total liabilities
|
|
|
1,255,560
|
|
|
|
1,158,342
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 6)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity:
|
|
|
|
|
|
|
|
|
Preferred stock, $0.000001 par value, 5,000,000 shares authorized,
none issued or outstanding
|
|
|
-
|
|
|
|
-
|
|
Common stock, $0.000001 par value; 95,000,000 shares authorized;
65,871,384 and 65,247,660 shares issued and outstanding at June 30, 2014 and March 31, 2014, respectively
|
|
|
66
|
|
|
|
65
|
|
Additional paid in capital
|
|
|
7,943,117
|
|
|
|
7,739,117
|
|
Accumulated (deficit)
|
|
|
(5,826,967
|
)
|
|
|
(5,030,159
|
)
|
Total stockholders’ equity
|
|
|
2,116,216
|
|
|
|
2,709,023
|
|
Total Liabilities and Stockholders’ Equity
|
|
$
|
3,371,776
|
|
|
$
|
3,867,365
|
|
See
the accompanying notes to the condensed consolidated financial statements
Barfresh
Food Group Inc.
Condensed
Consolidated Statements of Operations
(Unaudited)
|
|
For the three months ended June 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
61,492
|
|
|
$
|
16,325
|
|
Cost of revenue
|
|
|
41,359
|
|
|
|
10,274
|
|
Gross profit
|
|
|
20,133
|
|
|
|
6,051
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
677,231
|
|
|
|
424,906
|
|
Depreciation Amortization
|
|
|
28,720
|
|
|
|
10,568
|
|
Total operating expenses
|
|
|
705,951
|
|
|
|
435,474
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(685,818
|
)
|
|
|
(429,423
|
)
|
|
|
|
|
|
|
|
|
|
Other expenses
|
|
|
|
|
|
|
|
|
Interest
|
|
|
110,990
|
|
|
|
84,210
|
|
|
|
|
|
|
|
|
|
|
Net (loss)
|
|
$
|
(796,808
|
)
|
|
$
|
(513,633
|
)
|
|
|
|
|
|
|
|
|
|
Per share information - basic and fully diluted:
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
65,443,194
|
|
|
|
51,476,550
|
|
Net (loss) per share
|
|
$
|
(0.01
|
)
|
|
$
|
(0.01
|
)
|
See
the accompanying notes to the condensed consolidated financial statements
Barfresh
Food Group Inc.
Condensed
Consolidated Statements of Cash Flows
(Unaudited)
|
|
for the three months ended June 30,
|
|
|
|
2014
|
|
|
2013
|
|
Net cash used in operations
|
|
$
|
(480,439
|
)
|
|
$
|
(448,542
|
)
|
|
|
|
|
|
|
|
|
|
Cash flow from investing activities:
|
|
|
|
|
|
|
|
|
Purchase of equipment
|
|
|
(119,594
|
)
|
|
|
(18,354
|
)
|
Purchase of patents
|
|
|
(11,277
|
)
|
|
|
-
|
|
Sale of equipment
|
|
|
2,621
|
|
|
|
-
|
|
Net Cash used in investing activities
|
|
|
(128,250
|
)
|
|
|
(18,354
|
)
|
|
|
|
|
|
|
|
|
|
Cash flow from financing activities:
|
|
|
|
|
|
|
|
|
Issuance of common stock for cash
|
|
|
-
|
|
|
|
400,000
|
|
Net cash provided by financing activities
|
|
|
-
|
|
|
|
400,000
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash
|
|
|
(608,689
|
)
|
|
|
(66,896
|
)
|
Cash at beginning of period
|
|
|
2,632,612
|
|
|
|
85,957
|
|
Cash at end of period
|
|
$
|
2,023,923
|
|
|
$
|
19,061
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
3,182
|
|
|
$
|
-
|
|
Cash paid for income taxes
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Non-cash financing activities:
|
|
|
|
|
|
|
|
|
Common stock issued for services
|
|
$
|
204,000
|
|
|
$
|
-
|
|
See
the accompanying notes to the condensed consolidated financial statements
Barfresh
Food Group Inc.
Notes
to Condensed Consolidated Financial Statements
June
30, 2014 and 2013
(Unaudited)
Note
1. Basis of Presentation and Significant Accounting Policies
Throughout
this report, the terms “our”, “we”, “us” and the “Company” refer to Barfresh Food
Group Inc., including its subsidiaries. The accompanying unaudited condensed financial statements of Barfresh Food Group Inc.
at June 30, 2014 and 2013 have been prepared in accordance with generally accepted accounting principles (“GAAP”)
for interim financial statements, instructions to Form 10-Q, and Regulation S-X. Accordingly, certain information and footnote
disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted. These condensed
financial statements should be read in conjunction with the financial statements and notes thereto included in our annual report
on Form 10-K for the year ended March 31, 2014. In management’s opinion, all adjustments (consisting only of normal recurring
adjustments) considered necessary for a fair presentation to make our financial statements not misleading have been included.
The results of operations for the periods ended June 30, 2014 and 2013 presented are not necessarily indicative of the results
to be expected for the full year. The March 31, 2014 balance sheet has been derived from our audited financial statements included
in our annual report on Form 10-K for the year ended March 31, 2014.
Basis
of Consolidation
The
consolidated condensed financial statements include the financial statements of the Company and our wholly owned subsidiaries
Barfresh Inc. and Smoothie Inc. All inter-company balances and transactions among the companies have been eliminated upon consolidation.
Use of
Estimates
The
preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities in the balance sheets and revenues and expenses during the years reported. Actual
results may differ from these estimates.
Intangible
Assets
Intangible
assets are comprised of patents, net of amortization. The patent costs are being amortized over the life of the patents, which
is twenty years from the date of filing the patent applications. In accordance with ASC Topic 350
Intangibles - Goodwill and
Other
(“ASC 350”), the costs of internally developing other intangible assets, such as patents, are expensed as
incurred. However, as allowed by ASC 350, legal fees and similar costs relating to patents have been capitalized.
Property,
Plant and Equipment
Property,
plant and equipment is stated at cost less accumulated depreciation and accumulated impairment loss, if any. Depreciation is calculated
on a straight line basis over the estimated useful lives of the assets. Leasehold improvements are being amortized over the shorter
of the useful life of the asset or the lease term that includes any expected renewal periods deemed to be reasonably assured.
The estimated useful lives used for financial statement purposes are:
Furniture
and fixtures: 5 years
Equipment:
7 years
Leasehold
improvements: 2 years
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.
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 June 30, 2014 and
2013 any equivalents would have been anti-dilutive as we had losses for the periods then ended.
Barfresh
Food Group Inc.
Notes
to Condensed Consolidated Financial Statements
June
30, 2014 and 2013
(Unaudited)
Research
and Development
Expenditures
for research activities relating to product development and improvement are charged to expense as incurred. We incurred $5,602
and $3,907 in research and development expenses for the three months ended June 30, 2014 and 2013, 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 $1,066 and $1,866 at June 30, 2014 and March 31, 2014,
respectively, and will be charged to rent expense over the life of the lease.
Recent
Pronouncements
We
have reviewed all recently issued, but not yet effective, accounting pronouncements and do not believe the future adoptions of
any such pronouncements may be expected to cause a material impact on our financial condition or results of operations.
Note
2. Property Plant and Equipment
Major
classes of property and equipment at June 30, 2014 and March 31, 2014:
|
|
June
30, 2014
|
|
|
March
31,2014
|
|
Furniture and fixtures
|
|
$
|
13,331
|
|
|
$
|
13,331
|
|
Equipment
|
|
|
377,585
|
|
|
|
372,617
|
|
Leasehold Improvements
|
|
|
3,300
|
|
|
|
3,300
|
|
|
|
|
394,216
|
|
|
|
389,248
|
|
Less: accumulated depreciation
|
|
|
(100,787
|
)
|
|
|
(87,146
|
)
|
|
|
|
293,429
|
|
|
|
302,102
|
|
Equipment not in service
|
|
|
171,979
|
|
|
|
59,976
|
|
Property and equipment, net of depreciation
|
|
$
|
465,408
|
|
|
$
|
362,078
|
|
We
recorded depreciation expense related to these assets of $13,642 and $10,023 for the three months ended June 30, 2014 and 2013,
respectively.
Note
3. Intangible Assets
As
of June 30, 2014 and March 31, 2014, intangible assets consist primarily of patent costs of $747,925 and $736,648, less accumulated
amortization of $51,072 and $35,994, 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 $15,078 and $545 for the three months ended June 30, 2014 and 2013, respectively.
Barfresh
Food Group Inc.
Notes
to Condensed Consolidated Financial Statements
June
30, 2014 and 2013
(Unaudited)
Estimated
amortization expense related to the patent as of June 30, 2014 is as follows:
Fiscal
Years ending March 31,
|
|
|
Total
Amortization
|
|
2015 (nine months remaining)
|
|
|
$
|
46,119
|
|
2016
|
|
|
|
61,492
|
|
2017
|
|
|
|
61,492
|
|
2018
|
|
|
|
61,492
|
|
2019
|
|
|
|
61,492
|
|
Later years
|
|
|
|
404,766
|
|
|
|
|
$
|
696,853
|
|
Note
4. 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, $100,000 was purchased by an officer, director and significant shareholder and $100,000
was purchased by a director and significant shareholder. The Short-Term Notes bear interest at a rate of 2% per annum and are
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
fair value of the warrant, $0.38 per share, was calculated using the Black-Sholes option pricing model using the following assumptions:
Expected life (in years)
|
|
|
5
|
|
Volatility (based on a comparable company)
|
|
|
97
|
%
|
Risk Free interest rate
|
|
|
1.66
|
%
|
Dividend yield (on common stock)
|
|
|
-
|
|
The
relative value of the warrants was $298,232, which was the amount recorded as debt discount. The amounts recorded as debt discount
will be amortized over the life of the note, one year, and charged to interest expense. We estimated the effective interest rate
as calculated to be approximately 52% but will be paying cash at a rate of 2% per annum.
The
balance at June 30, 2014 was comprised of:
Convertible notes payable, related and unrelated parties
|
|
$
|
775,000
|
|
Unamortized Debt discount
|
|
|
(160,318
|
)
|
|
|
$
|
614,682
|
|
Accrued
expenses include interest of $41,010 at June 30, 2014.
We
have the right to extend the due date of the Short-Term Notes to June 19, 2015 with notice to the holders given at least 30 days
and no more than 60 days prior to the initial due date. If we extend the Short-Term Notes the interest rate will increase to 3%
per annum and we will be required to issue additional warrants (“Extension Warrants”). The Extension Warrants will
have a 3 year term and the exercise price will be determined based on the volume weighted average price for the 10 trading days
preceding the original due date of the Short-Term Notes. The number of shares which may be purchased will be computed by dividing
56.25% of the unpaid principal amount of the Short-Term Notes held by the initial exercise price computed as set forth above.
Barfresh
Food Group Inc.
Notes
to Condensed Consolidated Financial Statements
June
30, 2014 and 2013
(Unaudited)
Note
5. Convertible Note (Related and Unrelated)
In
August 2012, we closed an offering of $440,000 of convertible notes, $50,000 of which was purchased by a significant shareholder
of ours. 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 are due and payable on September 6, 2015. In addition the new notes are 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 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 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 will
be amortized over the life of the notes, two years, and charged 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.
The
balance at June 30, 2014 was comprised of:
Convertible notes payable, related and unrelated parties
|
|
$
|
420,000
|
|
Unamortized Debt discount
|
|
|
(202,317
|
)
|
|
|
$
|
217,683
|
|
Accrued
expenses include interest of $4,972 at June 30, 2014.
The
aggregate amount of principal payments due as of June 30, 2014 are as follows:
Fiscal Years ending March 31,
|
|
|
|
|
2015
|
|
|
|
775,000
|
|
2016
|
|
|
|
420,000
|
|
|
|
|
$
|
1,195,000
|
|
Note
6. Commitments and Contingencies
We lease
office space under a non-cancelable operating lease, which expires October 31, 2014.
As
of June 30, 2014 the aggregate minimum requirements under non-cancelable leases as of June 30, 2014 all of which are in the fiscal
year ending March 31, 2015, are $26,660.
Rent expense
was $28,949 and $18,140 for the three months ended June 30, 2014 and 2013, respectively.
Barfresh
Food Group Inc.
Notes
to Condensed Consolidated Financial Statements
June
30, 2014 and 2013
(Unaudited)
Note
7. Stockholders’ Equity
During
the three months ended June 30, 2014 we issued 400,000 shares of common stock to officers and directors of the Company for services
rendered. In accordance with ASC Topic 718, Compensation - Stock Compensation (“ASC 718”), compensation expense in
the amount of $204.000 was recognized in the statement of operations for the three months ended June 30, 2014. The fair value
of the stock was based on the trading value of the shares on the date of grant.
The
following is a summary of outstanding stock options issued to employees as of June 30, 2014
|
|
Number of
Options
|
|
|
Exercise
price
per share
|
|
|
Average
remaining
term in years
|
|
|
Aggregate
intrinsic
value
at date of grant
|
|
Outstanding March 31, 2014
|
|
|
800,000
|
|
|
$
|
0.50
|
|
|
|
2.88
|
|
|
$
|
-
|
|
Issued
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding June 30, 2014
|
|
|
800,000
|
|
|
|
0.50
|
|
|
|
2.55
|
|
|
|
-
|
|
Exercisable
|
|
|
800,000
|
|
|
$
|
0.50
|
|
|
|
2.55
|
|
|
$
|
-
|
|
During
the three month period ended June 30, 2014 holders of 348,520 warrants to purchase shares of our common stock elected to exercise
those warrants. The warrants cashless and were 223,724 shares of our common stock were issued.
Note
8. Outstanding Warrants
The following
is a summary of all outstanding warrants as of June 30, 2014:
|
|
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
|
|
|
16,548,812
|
|
|
$
|
0.25 - 1.50
|
|
|
|
2.64
|
|
|
$
|
1,237,172
|
|
Warrants issued in connection with private placement of convertible
notes
|
|
|
1,680,000
|
|
|
$
|
0.25
|
|
|
|
2.195
|
|
|
$
|
-
|
|
Warrants issued in connection with short-term notes payable
|
|
|
1,291,667
|
|
|
$
|
.45
|
|
|
|
4.48
|
|
|
$
|
64,583
|
|
Note
9. Interest Expense
Interest
expense includes direct interest of $16,430 and $13,200 for the three months ended June 30, 2014 and 2013, respectively, calculated
based on the interest rate stated in our various debt instruments.
In
addition as more fully described in Notes 4 and 5 above, interest expense includes non-cash amortization of the debt discount
of $94,560 and $71,010 for the three months ended June 30, 2014 and 2013, respectively
Note
10. Income Taxes
We
account for income taxes in interim periods in accordance with ASC Topic 740, Income Taxes (“ASC 740”). We have determined
an estimated annual effective tax rate. The rate will be revised, if necessary, as of the end of each successive interim period
during our fiscal year to our best current estimate. As of June 30, 2014 the estimated effective tax rate for the year will be
zero.
Barfresh
Food Group Inc.
Notes
to Condensed Consolidated Financial Statements
June
30, 2014 and 2013
(Unaudited)
There
are open statutes of limitations for taxing authorities in federal and state jurisdictions to audit our tax returns from 2009
through the current period. Our policy is to account for income tax related interest and penalties in income tax expense in the
statement of operations. There have been no income tax related interest or penalties assessed or recorded.
ASC
740 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a
tax position taken or expected to be taken in a tax return. This pronouncement also provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods, disclosure, and transition.
For
the three months ended June 30, 2014 and 2013 we did not have any interest and penalties associated with tax positions. As of
June 30, 2014 we did not have any significant unrecognized uncertain tax positions.
Note
11. Business Segments
During
the three months ended June 30, 2014 and 2013 we operated in only one business segment.
Note
12. Subsequent Events
Management
has evaluated all activity and concluded that no subsequent events have occurred that would require recognition in the financial
statements or disclosure in the notes to the financial statements.
Item 2. Management’s
Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion should be read
in conjunction with the financial information included elsewhere in this Quarterly Report on Form 10-Q (this “Report”),
including our unaudited condensed consolidated financial statements as of June 30, 2014 and for the nine and three months ended
June 30, 2014 and 2013 and the related notes. References in this Management’s Discussion and Analysis of Financial Condition
and Results of Operations section to “us”, “we”, “our” and similar terms refer to Barfresh
Food Group Inc. This discussion includes forward-looking statements, as that term is defined in the federal securities laws, based
upon current expectations that involve risks and uncertainties, such as plans, objectives, expectations and intentions. Actual
results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result
of a number of factors. Words such as “anticipate”, “estimate”, “plan”, “continuing”,
“ongoing”, “expect”, “believe”, “intend”, “may”, “will”,
“should”, “could” and similar expressions are used to identify forward-looking statements.
We caution you that these statements are
not guarantees of future performance or events and are subject to a number of uncertainties, risks and other influences, many
of which are beyond our control, which may influence the accuracy of the statements and the projections upon which the statements
are based. Factors that may affect our results include, but are not limited to, the risk factors in Item 1A in our Annual Report
on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on June 30, 2014. Any one or more of these
uncertainties, risks and other influences could materially affect our results of operations and whether forward-looking statements
made by us ultimately prove to be accurate. Our actual results, performance and achievements could differ materially from those
expressed or implied in these forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking
statements, whether from new information, future events or otherwise.
We are engaged in the manufacturing and distribution
of ready to blend beverages, particularly, smoothies, shakes and frappes. Our products are portion controlled ready to blend beverage
ingredient packs or “beverage packs”. They contain all of the ingredients necessary to make the beverage, including
the base (either sorbet, frozen yogurt or ice cream), fruit pieces, juices and ice. Ingredients used are natural, no syrups or
powders.
We own the domestic and international patents
and patents pending, as well as related trademarks for our products. In November 2011 we 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, we 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 treaty. In addition,
on October 15, 2013, we purchased all of the trademarks related to the patented products.
We have been developing flavor profiles of
our smoothies that we believe will be appealing to tastes in the United States. We have been in discussions with a number of companies
including both large and small quick service restaurant (“QSR”) chains and national food services companies that serve
alternative venues such as stadiums, arenas and universities with national footprints in the United States and have reached preliminary
agreements with three potential customers to begin testing in the near future. We are in ongoing negotiations with a number of
other companies. In addition to the large retail fast food and fast casual chains, we will sell to food distributors that supply
products to the food services market place. Finally, we intend to monetize the international patents outside of our current area
of operations, North America, by expanding contract manufacturing to other countries and selling either through selling agents
or our own sales personnel or by entering into some form of license or royalty agreements with third parties. We began selling
product to Australia during the final months of our fiscal year ended March 31, 2014.
To date, we have funded our operations through
the sale of our equity securities, issuance of convertible debt, issuance of promissory notes and advances from related parties.
The acquisition of the international patents
and trademarks on October 15, 2013 was funded through an advance of $672,157 from an affiliate of a director and significant shareholder.
Two hundred thousand ($200,000) of the advance was satisfied through the participation in the Company’s December 20, 2013
private placement of notes and warrants by the affiliate of the aforementioned director and significant shareholder and also an
affiliate of an officer and director and significant shareholder. The net proceeds to the Company from the private placement that
closed on December 20, 2013, including the aforementioned $200,000, was $775,000. The $775,000 in notes bears interest at a rate
of 2% per annum and is due and payable on December 20, 2014, with certain provisions for extension. Warrants to purchase 1,291,667
shares of the Company’s common stock were issued to these investors and the warrants have an exercise price of $0.45 per
share. In addition to the related parties discussed above, $500,000 of notes was purchased by a significant shareholder. All of
the related parties participated in the offering upon the same terms offered to other investors. The balance of the remaining
loan for the acquisition of the patents and trademarks, including interest, was paid in cash, in full by the Company.
Our plan is to utilize contract manufacturers
to manufacture our products in the United States. Ice cream manufacturers are best suited for our products. Our first production
line has been installed and commissioned in Salt Lake City and is currently producing products being sold to our customers as
well as new product development for new large customers.
Although we do not have a contract with any
suppliers for the raw materials needed to manufacture smoothie packs we believe that there are a significant number of sources
available and we do not anticipate becoming dependent on any one supplier. As demand for our range of products grows, we will
look to contract a level of our raw material requirements to ensure continuity of supply.
We currently have two employees selling our
product. The process of obtaining orders from potential customers will likely follow the following process:
●
|
Meeting with and introducing products to customer
|
|
|
●
|
Developing flavor profiles for the specific customer
|
|
|
●
|
Participating in test marketing of the product with
the flavors developed for the customer
|
|
|
●
|
Agreeing to a roll out schedule for the customer.
|
Although we have agreements with potential
customers representing approximately 10,000 outlets to develop flavors and test our products and have begun to develop flavor
profiles for others, we have no assurance that we will supply any chain with our products. During the year ended March 31, 2014
we began shipping our products to one of the customers with whom we have contracts and to a number of smaller customers.
In addition to the large retail fast food
and fast casual chains, we will sell to food distributors that supply products to the food services market place. Effective July
2, 2014 we entered into an 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. Our 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; provided however, we may supply our 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. We have begun shipping to Sysco
under this agreement
There can be no assurance that we will not
become dependent on one or a few major customers.
We intend to monetize the international patents
outside of our current area of operations, North America, by expanding contract manufacturing to other countries and selling either
through selling agents or our own sales personnel or by entering into some form of license or royalty agreements with third parties.
Most recently, as part of our expansion due to the acquisition of the international patents, we engaged a leading regional Australian
food ingredient supply and product developer as our wholesaler and distributor. Our first order was shipped to Australia in January
2014.
Critical accounting Policies
Our financial statements have been prepared
in conformity with accounting principles generally accepted in the United States of America (“GAAP”).
Basis of Consolidation
The consolidated condensed financial statements
include the financial statements of the Company and our wholly owned subsidiaries Barfresh Inc. and Smoothie Inc. All inter-company
balances and transactions among the companies have been eliminated upon consolidation.
Use of Estimates
The preparation of financial statements in
accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities
in the balance sheets and revenues and expenses during the years reported. Actual results may differ from these estimates.
Intangible Assets
Intangible assets are comprised of patents,
net of amortization. The patent costs are being amortized over the life of the patents, which is twenty years from the date of
filing the patent applications. In accordance with ASC Topic 350
Intangibles - Goodwill and Other
(“ASC 350”),
the costs of internally developing other intangible assets, such as patents, are expensed as incurred. However, as allowed by
ASC 350, legal fees and similar costs relating to patents have been capitalized.
Property, Plant and Equipment
Property, plant and equipment is stated at
cost less accumulated depreciation and accumulated impairment loss, if any. Depreciation is calculated on a straight line basis
over the estimated useful lives of the assets. Leasehold improvements are being amortized over the shorter of the useful life
of the asset or the lease term that includes any expected renewal periods deemed to be reasonably assured. The estimated useful
lives used for financial statement purposes are:
Furniture and fixtures: 5 years
Equipment: 7 years
Leasehold improvements: 2 years
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.
Research and Development
Expenditures for research activities relating
to product development and improvement are charged to expense as incurred. We incurred $5,602 and $3,907 in research and development
expenses for the three months ended June 30, 2014 and 2013, 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 $1,066 and $1,866 at June 30, 2014 and March 31, 2014, respectively, and will be charged to
rent expense over the life of the lease.
Results of Operations
Results of Operation for Three Months
Ended June 30, 2014 as Compared to the Three Months Ended June 30, 2013
(References to 2014 and 2013 are to the
three months ended June 30, 2014 and 2013 respectively, unless otherwise specified.)
Revenue and cost of revenue
Revenue for 2014 was $61,492 as compared to
$16,325 in 2013. We began shipping to new customers in 2014 whereas in 2013 only a limited number of customers were testing our
products.
Cost of revenue for 2014 was $41,359 as compared
to $10,274 in 2013. Our gross profit was $20,133 (33%) and $6,051 (37%) for 2014 and 2013, respectively. There were no significant
change in our cost and gross profit relates primarily to selling prices. Our selling prices to overseas customers yields higher
gross profit. We anticipate that our gross profit percentage in 2014 is indicative of our expected results going forward.
Operating expenses
Our operations during 2014 and 2013 were directed
towards increasing sales and finalizing flavor profiles. We are currently evaluating our needs in regards to increased overhead
as a result of the agreement with Sysco.
Our general and administrative expenses increased
$252,325 as we grew the business and is not necessarily indicative of the rate of future increases.
The following is a breakdown of our general
and administrative expenses for the three months ended June 30, 2014 and 2013:
|
|
2014
|
|
|
2013
|
|
|
Difference
|
|
Personnel costs
|
|
$
|
242,126
|
|
|
$
|
230,384
|
|
|
$
|
11,742
|
|
Stock based compensation/options
|
|
|
204,000
|
|
|
|
(103,488
|
)
|
|
|
307,488
|
|
Legal and professional fees
|
|
|
61,011
|
|
|
|
38,164
|
|
|
|
22,847
|
|
Travel and entertainment
|
|
|
32,574
|
|
|
|
37,761
|
|
|
|
(5,187
|
)
|
Rent
|
|
|
23,949
|
|
|
|
18,140
|
|
|
|
5,809
|
|
Marketing and selling
|
|
|
25,057
|
|
|
|
14,599
|
|
|
|
10,458
|
|
Investor and public relations
|
|
|
22,338
|
|
|
|
44,799
|
|
|
|
(22,461
|
)
|
Consulting fees
|
|
|
10,000
|
|
|
|
114,095
|
|
|
|
(104,095
|
)
|
Director fees
|
|
|
12,500
|
|
|
|
0
|
|
|
|
12,500
|
|
Research and development
|
|
|
5,603
|
|
|
|
3,907
|
|
|
|
1,696
|
|
Other expenses
|
|
|
38,073
|
|
|
|
26,545
|
|
|
|
11,528
|
|
|
|
$
|
677,231
|
|
|
$
|
424,906
|
|
|
$
|
252,325
|
|
Personnel cost represents the cost of employees
including salaries, employee benefits and employment taxes and continues to be are largest cost. Personnel cost increased $11,742
(5.1%) from $230,384 to $242,126. We currently have six full time employees. We anticipate personnel cost to increase in the future
as we add more staff.
Stock based compensation, which includes stock
issued and options granted to employee, and non-employees. The amount in 2014 represents a stock grant made to an officer and
director. Stock based compensation is used as an incentive to attract new employees and to compensate existing employees. In 2013,
certain previously granted restricted stock rights and stock options were subject to performance conditions. As a result of the
employee termination the performance conditions will not be met. In accordance with ASC Topic 718,
Compensation - Stock Compensation
(“ASC 718”), previously recognized unvested equity based compensation cost of $103,488, was reversed during 2013.
Legal and professional fees increase $22,847
(59.9%) from $38,164 in 2013 to $61,011 in 2014, as a result of cost associated with negotiating two supply agreements, one of
which has been entered into. We anticipate legal fees related to ongoing Securities and Exchange Commission reporting to remain
the same and additional Legal fees to be related to the number of contract we are negotiating.
Travel and entertainment expenses decreased
$5,187 (13.7%) from $37,761 in 2013 to $32,574 in 2014. The decrease is due to timing. We anticipate that travel and entertainment
cost will increase as we increase the number of customers that we are selling to.
Rent expense is primarily for our location
in Beverly Hills, California. Our rent expense is approximately $6,800 per month. The lease on the office commenced in October
2012 and expires in October 2014. We are currently negotiating with our landlord to extend the lease. In 2014 we incurred rent
expense on storage facilities.
Marketing and selling expenses increased $10,458
(71.6%) from $14,599 in 2013 to $25,057 in 2014. The increase relates primarily to overall sales and marketing activities.
Investor and public relation expenses decreased
$22,461 (50.1%) from $44,799 in 2013 to $22,338 in 2014. We are currently using one IR/PR firm to assist us with our investor
and public relations needs. We used three IR/PR firms in 2013. We anticipate continuing the use of an outside IR/PR firm and attending
investor conferences in the future.
Consulting fees decreased by $104,095 (91.2%)
from $114,095 in 2013 to $10,000 in 2014. During 2013, we had five consultants providing services to us. During 2014 we had only
one consultant providing services. Future consulting fees will be variable depending on our needs.
We had no director fees in 2013. We will incur
director fees in the future. We approved a fee of $12,500 per quarter for all non employee directors. We currently have two non
employee directors who will receive payments in the future.
Research and development expenses were not
significant in either period. Research and development represents the cost of developing flavor profiles of our products and the
development of future equipment. We anticipate cost continuing in future periods, the amounts of which cannot be estimated at
this point in time. Our research and development cost will be dependent on new formulations and new flavor profiles as our customer
base increases.
Other expenses consist of ordinary operating
expenses such as office, telephone, insurance, and stock related costs. These costs have increased as our business has grown.
We anticipate additional increases in these expenses.
We had operating losses of $685,818 and $429,423
for 2014 and 2013, respectively.
Interest expense increased $26,780 (31.8%)
from $84,210 in 2013 to $110,990 in 2014. Interest primarily relates to convertible debt that was issued in August 2013 and renewed
in September 2013 and short term notes that were issued in December 2013. The stated interest rate on the convertible debt is
12%. After giving effect to the debt discount the effective rate of interest on the short term debt is estimated to be approximately
72% and approximately 74% on the convertible notes.
Interest expense includes direct interest
of $16,430 and $13,200 in 2014 and 2013, respectively, calculated based on the interest rate stated in our various debt instruments.
In addition, interest expense includes non-cash
amortization of the debt discount of $94,560 and $71,010, for 2014 and 2013, respectively.
We had net losses of $796,808 and $513,633
for 2014 and 2013, respectively.
Liquidity and Capital Resources
As of June 30, 2014 we had working capital
of $1,155,187.
During the three months ended June 30, 2014
we used cash of $480,439 in operations, $119,594 for the purchase of equipment and $11,277 for patents and trademarks.
We had no financing activity during the three
months ended June 30, 2014.
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 debt. There are no assurances that we will be able to generate the necessary capital or
debt to carry out our current plan of operations.
As of June 30, 2014 the aggregate minimum
requirements under non-cancelable leases as of June 30, 2014 all of which are in the fiscal year ending March 31, 2015, are $26,660.
The aggregate amount of principal payments
due as of June 30, 2014 are as follows:
Fiscal Years ending March 31,
|
|
|
|
|
2015
|
|
|
|
775,000
|
|
2016
|
|
|
|
420,000
|
|
|
|
|
$
|
1,195,000
|
|
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.