Indicate by check
mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company,
or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,”
“smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
PART
I
Item
1. Business.
Business
Overview
Barfresh
is a leader in the creation, manufacturing and distribution of ready to blend frozen beverages. The current portfolio of products
includes smoothies, shakes and frappes. Products are packaged in two distinct formats.
The
Company’s original single serve format features portion controlled and ready to blend beverage ingredient packs or “beverage
packs”. The beverage packs contain all of the solid ingredients necessary to make the beverage, including the base (either
sorbet, frozen yogurt or ice cream), real fruit pieces, juices and ice – five ounces of water are added before blending.
The
Company’s bulk “Easy Pour” format also contains all of the solid ingredients necessary to make the beverage,
packaged in gallon containers in a concentrated formula that is mixed “one to one” with water. The Company has a “no
sugar added” version of the bulk “Easy Pour” format that is specifically targeted for the USDA national school
meal program, including the School Breakfast Program, the National School Lunch Program, and Smart Snacks in Schools Program.
The Company is currently in contract to sell its bulk Easy Pour products into over three hundred schools. In addition, the Company
received approval from the United States Defense Logistics Agency (“DLA”) to sell its smoothie products into all branches
of the U.S. Armed Forces, and is currently in contract with and selling its bulk Easy Pour products into over one hundred military
bases in the United States and abroad.
Domestic
and international patents and patents pending are owned by Barfresh, as well as related trademarks for all of the single serve
products. Patent rights have been granted in 13 jurisdictions including the United States. In addition, the Company has purchased
all of the trademarks related to the patented products.
The
Company conducts sales through several channels, including National Accounts, Regional Accounts, and Broadline Distributors. Barfresh’s
primary broadline distribution arrangement is through an exclusive nationwide agreement with Sysco Corporation (“Sysco”),
the U.S.’s largest broadline distributor, which was entered into in July 2014.
Pursuant
to that agreement, all Barfresh products are included in Sysco’s national core selection of beverage items, making Barfresh
its exclusive single-serve, pre-portioned beverage provider. The agreement is mutually exclusive; however, Barfresh may also sell
the products to other foodservice distributors, but only to the extent required for such foodservice distributors to service multi-unit
chain operators with at least 20 units and where Sysco is not such multi- unit chain operator’s nominated distributor for
our products. On October 2, 2019, the exclusive distribution agreement with Sysco expired, opening the possibility to expand distribution
with other distributors outside of the Sysco system.
During
2016 and 2017 the Company announced that it had signed supply agreements with several of the major global on-site foodservice
operators. On March 8, 2018, the Company announced that it had signed a new supply agreement with one of the largest of these
foodservice operators, for exclusive distribution of four of Barfresh’s single serve skus. On November 14, 2018,
the Company announced that it had received approval for multiple products to be rolled out to a national restaurant chain with
over 2,500 locations.
On
October 26, 2015, Barfresh signed a five year agreement with PepsiCo North America Beverages, a division of PepsiCo, to become
its exclusive sales representative within the food service channel to present Barfresh’s line of ready-to-blend smoothies
and frozen beverages throughout the United States and Canada. Through this agreement, Barfresh’ products are included as
part of PepsiCo’s offerings to its significant customer base. The agreement facilitates access to potential National customer
accounts, through introductions provided by PepsiCo’s one-thousand plus person foodservice sales team. Barfresh products
have become part of PepsiCo’s customer presentations at national trade shows and similar venues.
Barfresh
utilizes contract manufacturers to manufacture all of its products in the United States. Production lines are currently operational
at two locations. The first location is in Salt Lake City, which currently produces both bulk easy pour and single serve products.
Annual production capacity with this contract manufacturer is 14 million units per year. The second location is with Yarnell Operations,
LLC., a subsidiary of Schulze and Burch Biscuit Co., located in Arkansas. The Yarnell’s agreement, which was signed
during February 2016, and secures the capacity to ramp up to an incremental production capacity of 100 million units. Yarnell’s
location enhances the company’s ability to efficiently move product throughout the supply chain to destinations in the eastern
United States, home to many of the country’s large foodservice outlets.
Our
corporate office is located at 3600 Wilshire Boulevard Suite 1720, Los Angeles, 90010. Our telephone number is (310) 598-7113
and our website is www.barfresh.com.
Corporate
History and Background
The
Company, which was incorporated in Delaware on February 25, 2010, was originally formed to produce movies. As the result of the
reverse merger, more fully described below, the Company is now engaged in the manufacturing and distribution of ready to blend
frozen beverages, including smoothies, shakes and frappes.
Reorganization
and Recapitalization
During
January 2012, the Company entered into a series of transactions pursuant to which Barfresh Inc., a Colorado corporation
(“Barfresh NV”), was acquired, spun-out prior operations to the former principal shareholder, completed a private
offering of securities for an aggregate purchase price of approximately $1,000,000, conducted a four for one forward stock
split and changed the name of the Company. The following describes the steps of this reorganization:
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Acquisition
of Barfresh NV. We acquired all of the outstanding capital stock of Barfresh NV in exchange for the issuance of 37,333,328
shares of our $0.000001 par value common stock pursuant to a Share Exchange Agreement between us, our former principal shareholder,
Barfresh NV and the former shareholders of Barfresh NV. As a result of this transaction, Barfresh NV became our wholly owned
subsidiary and the former shareholders of Barfresh NV became our controlling shareholders.
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Spinout
of prior business. Immediately prior to the acquisition of Barfresh NV, we spun-out our previous business operations to
a former officer, director and principal shareholder, in exchange for all of the shares of our common stock held by that person.
Such shares were cancelled immediately following the acquisition.
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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.
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Change
of name. Subsequent to the merger, we changed the name of the Company from Moving Box Inc. to Barfresh Food Group Inc.
Barfresh Food Group Inc. has two direct subsidiaries; Barfresh Corporation, Inc, (formerly known as Smoothie, Inc.) and Barfresh,
Inc.
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Forward
stock split. Subsequent to the merger, we conducted a four for one forward stock split of the Company’s common stock.
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Products
The
Company’s products are made in two formats. The first is in portion controlled single serving beverage ingredient packs,
suitable for smoothies, shakes and frappes that can also be utilized for cocktails and mocktails. These packs contain all of the
ingredients necessary to make a smoothie, shake or frappe, including the ice. Simply add water, empty the packet into a blender,
blend and serve. The second format is the bulk “Easy Pour” format. The Company’s bulk “Easy Pour”
format also contains all of the solid ingredients necessary to make the beverage, packaged in gallon containers in a concentrated
formula that is mixed “one to one” with water.
The
following flavors are available as part of our standard portfolio of single serve
The
following flavors are available as part of our standard portfolio of bulk products:
Some
of the key benefits of the products for the end consumers that drink the products include:
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From
as little as 150 calories (per serving)
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Real
fruit in every smoothie
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Dairy
free options
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Kosher
approved
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Gluten
Free
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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 year ended December 31, 2019 in the amount of $538,391 and for the
year ended December 31, 2018 in the amount of $674,224. The decrease in Research and Development expenses was primarily attributable
to reduced activity in creating unique flavors for potential customers in our national account pipeline.
Competition
There
is significant competition in the smoothie market at both the consumer purchasing level and also the product level.
The
competition at the consumer level is primarily between specialized juice bars (e.g. Jamba Juice) and major fast casual and fast
food restaurant chains (such as McDonalds). Barfresh does not compete specifically at this level but intends to supply its product
to customers that fall within these segments to enable them to compete for consumer demand.
There
may also be new entrants to the smoothie market that may alter the current competitor landscape.
The
existing competition from a product perspective can be separated into three categories:
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Specialized juice bar products: The product is made in-store and each ingredient is added separately.
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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.
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Portion pack products: These products contain only the fruit and yogurt and require the addition of juice or milk and ice. The
dominant competitor is General Mills’ Yoplait Smoothies.
The
Company believes that its single serve products afford a very significant competitive advantage based on ease of use, portion
control, premium quality, and minimal capital investment required to enable a customer to begin to carry Barfresh beverage products.
The Company also believes that its bulk “Easy Pour” product represents an attractive alternative delivery method for
customers that serve high volume locations, where speed of service over extended periods is a critical requirement. The Company
has recently launched a “no sugar added” version of the bulk “Easy Pour” format that is specifically targeted
for the USDA national school meal program, including the School Breakfast Program, the National School Lunch Program, and Smart
Snacks in Schools Program.
Intellectual
Property
Barfresh
owns the domestic and intellectual property rights to its products’ sealed pack of ingredients used in its single serve
products.
In
November 2011, the Company acquired patent applications filed in the United States (Patent Application number 11/660415) and Canada
(Patent Application number 2577163) from certain related parties. The United States patent was originally filed on December 4,
2007 and it was granted during August of 2017. The Canadian patent was originally filed on August 16, 2005 and it was granted
on May 27, 2014.
On
October 15, 2013, the Company acquired all of the related international patent rights, which were filed pursuant to the Patent
Cooperation Treaty, have been granted in 13 jurisdictions and are pending in the remainder of the jurisdictions that have signed
the PCT. In addition, the Company purchased all of the trademarks related to the patented products.
Governmental
Approval and Regulation
The
Company is not aware of the need for any governmental approvals of its products.
The
Company utilizes contract manufacturers. Before entering into any manufacturing contracts, the Company determines that the manufacturer
meets all government requirements.
Environmental
Laws
The
Company does not believe that it will be subject to any environmental laws, either state or federal. Any laws concerning manufacturing
will be the responsibility of the contract manufacturer.
Employees
The
Company currently has 17 employees and 2 consultants. There are currently 12 employees selling our products.
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.
The
impact of COVID-19 on the Company is evolving rapidly with events unfolding on a daily and weekly basis. The direct impact to
our operations has begun to take affect at the close of the first quarter ended March 31, 2020. Specifically, our business has
been impacted by dining bans targeted at restaurants to reduce the size of public gatherings. We have noted restaurant chains
have closed operations and furloughed employees which would preclude our single serve products from being served at those establishments
for a number of weeks. Furthermore, many school districts have closed regular attendance which could conceivably last to the end
of the school year. This will directly impact the sales of our Bulk Product into that sales channel. Our headquarters are located
in Los Angeles, California, where the entire state has been issued a “shelter in place” order from the Governor of
California. Consequently, our staff in the headquarter office are working remotely until further notice. At this point, we have
not experienced a disruption in the supply chain for manufacturing our products. The developments surrounding COVID-19 remain
fluid and dynamic, and consequently, will require the Company to continue to monitor news headlines from government and health
officials, as well as, the business community.
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.
If
we continue to suffer losses from operations, our working capital may be insufficient to support our ability to expand our business
operations as rapidly as we would deem necessary at any time, unless we are able to obtain additional financing. There can be
no assurance that we will be able to obtain such financing on acceptable terms, or at all. If adequate funds are not available
or are not available on acceptable terms, we may not be able to pursue our business objectives and would be required to reduce
our level of operations, including reducing infrastructure, promotions, sales and marketing programs, personnel and other operating
expenses. These events could adversely affect our business, results of operations and financial condition. If adequate funds are
not available or if they are not available on acceptable terms, our ability to fund the growth of our operations, take advantage
of opportunities, develop products or services or otherwise respond to competitive pressures, could be significantly limited.
We
may need additional financing in the future, which may not be available when needed or may be costly and dilutive.
We
may require additional financing to support our working capital needs in the future. The amount of additional capital we may require,
the timing of our capital needs and the availability of financing to fund those needs will depend on a number of factors, including
our strategic initiatives and operating plans, the performance of our business and the market conditions for debt or equity financing.
Additionally, the amount of capital required will depend on our ability to meet our case sales goals and otherwise successfully
execute our operating plan. We believe it is imperative to meet these sales objectives in order to lessen our reliance on external
financing in the future. Although we believe various debt and equity financing alternatives will be available to us to support
our working capital needs, financing arrangements on acceptable terms may not be available to us when needed. Additionally, these
alternatives may require significant cash payments for interest and other costs or could be highly dilutive to our existing shareholders.
Any such financing alternatives may not provide us with sufficient funds to meet our long-term capital requirements. If necessary,
we may explore strategic transactions that we consider to be in the best interest of the Company and our shareholders, which may
include, without limitation, public or private offerings of debt or equity securities, and other strategic alternatives; however,
these options may not ultimately be available or feasible.
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.
The
recent global coronavirus outbreak could harm our business and results of operations.
In
March 2020 the World Health Organization declared coronavirus COVID-19 a global pandemic. This contagious disease outbreak, which
has continued to spread, and any related adverse public health developments, has adversely affected workforces, customers, economies,
and financial markets globally, potentially leading to an economic downturn. It has also disrupted the normal operations of many
businesses, including ours. This outbreak could decrease spending, adversely affect demand for our product and harm our business
and results of operations. It is not possible for us to predict the duration or magnitude of the adverse results of the outbreak
and its effects on our business or results of operations at this time.
Disruption
within our supply chain, contract manufacturing or distribution channels could have an adverse effect on our business, financial
condition and results of operations.
Our
ability, through our suppliers, business partners, contract manufacturers, independent distributors and retailers, to produce,
transport, distribute and sell products is critical to our success.
Damage
or disruption to our suppliers or to manufacturing or distribution capabilities due to weather, natural disaster, fire or explosion,
terrorism, pandemics such as COVD-19 and influenza, labor strikes or other reasons, could impair the manufacture, distribution
and sale of our products. Many of these events are outside of our control. Failure to take adequate steps to protect against or
mitigate the likelihood or potential impact of such events, or to effectively manage such events if they occur, could adversely
affect our business, financial condition and results of operations.
In
addition, our reliance on a limited number of manufacturers and suppliers could further increase this risk. Most of our suppliers
and manufacturers produce similar products for other companies, and our products may represent a small portion of their businesses.
Further, it takes a newly engaged manufacturer typically up to nine months of retrofitting/ preparation before it can begin producing
our products. We have contracts in place to produce sufficient units to meet projected demand; however, if one of our manufactures
fails to perform, we would be faced with a significant interruption in our supply chain. If one of our manufacturers or suppliers
fails to perform or deliver products, for any reason, our sales and results of operations could be adversely affected. Furthermore,
if we are unable to meet our customers’ demands due to a disruption in our supply chain, we may lose that customer which
could adversely affect our business, financial condition and results of operations.
Our
dependence on independent contract manufacturers could make management of our manufacturing and distribution efforts inefficient
or unprofitable.
We
are expected to arrange for our contract manufacturing needs sufficiently in advance of anticipated requirements, which is customary
in the contract manufacturing industry for comparably sized companies. Based on the cost structure and forecasted demand for the
particular geographic area where our contract manufacturers are located, we continually evaluate which of our contract manufacturers
to use. To the extent demand for our products exceeds available inventory or the production capacity of our contract manufacturing
arrangements, or orders are not submitted on a timely basis, we will be unable to fulfill distributor orders on demand. Conversely,
we may produce more product inventory than warranted by the actual demand for it, resulting in higher storage costs and the potential
risk of inventory spoilage. Our failure to accurately predict and manage our contract manufacturing requirements and our inventory
levels may impair relationships with our independent distributors and key accounts, which, in turn, would likely have a material
adverse effect on our ability to maintain effective relationships with those distributors and key accounts.
If
we do not adequately manage our inventory levels, our operating results could be adversely affected.
We
need to maintain adequate inventory levels to be able to deliver products to distributors on a timely basis. Our inventory supply
depends on our ability to correctly estimate demand for our products. Our ability to estimate demand for our products is imprecise,
particularly for new products, seasonal promotions and new markets. If we materially underestimate demand for our products or
are unable to maintain sufficient inventory of raw materials, we might not be able to satisfy demand on a short-term basis. If
we overestimate distributor or retailer demand for our products, we may end up with too much inventory, resulting in higher storage
costs, increased trade spending and the risk of inventory spoilage. If we fail to manage our inventory to meet demand, we could
damage our relationships with our distributors and retailers and could delay or lose sales opportunities, which would unfavorably
impact our future sales and adversely affect our operating results. In addition, if the inventory of our products held by our
distributors and retailers is too high, they will not place orders for additional products, which would also unfavorably impact
our sales and adversely affect our operating results.
Increases
in costs of packaging, ingredients and contract manufacturing tolling fees may have an adverse impact on our gross margin.
Packaging
costs such as paper and aluminum cans have experienced industry wide price increases in the past and there is always the risk
that the company’s co-packers increase their toll rates based on increases in their fixed and variable costs. If the Company
is unable to pass on these costs, the gross margin will be significantly impacted.
Litigation
or legal proceedings could expose us to significant liabilities and damage our reputation.
We
may become party to litigation claims and legal proceedings. Litigation involves significant risks, uncertainties and costs, including
distraction of management attention away from our business operations. We evaluate litigation claims and legal proceedings to
assess the likelihood of unfavorable outcomes and to estimate, if possible, the amount of potential losses. Based on these assessments
and estimates, we establish reserves and disclose the relevant litigation claims or legal proceedings, as appropriate. These assessments
and estimates are based on the information available to management at the time and involve a significant amount of management
judgment. Actual outcomes or losses may differ materially from those envisioned by our current assessments and estimates. Our
policies and procedures require strict compliance by our employees and agents with all U.S. and local laws and regulations applicable
to our business operations, including those prohibiting improper payments to government officials. Nonetheless, our policies and
procedures may not ensure full compliance by our employees and agents with all applicable legal requirements. Improper conduct
by our employees or agents could damage our reputation or lead to litigation or legal proceedings that could result in civil or
criminal penalties, including substantial monetary fines, as well as disgorgement of profits.
We
have identified a material weakness in our disclosure controls and procedures and internal control over financial reporting. If
not remediated, our failure to establish and maintain effective disclosure controls and procedures and internal control over financial
reporting could result in material misstatements in our financial statements and a failure to meet our reporting and financial
obligations, each of which could have a material adverse effect on our financial condition and the trading price of our common
stock.
Maintaining
effective internal control over financial reporting and effective disclosure controls and procedures are necessary for us to produce
reliable financial statements. As discussed in Item 9A – “Controls and Procedures” of this Form 10-K, we have
re-evaluated our internal control over financial reporting and our disclosure controls and procedures and concluded that they
were not effective as of December 31, 2019, due to inadequate segregation of duties.
A
material weakness is defined as a deficiency, or a combination of deficiencies, in internal control over financial reporting such
that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be
prevented or detected on a timely basis. The material weakness we identified is inadequate segregation of duties.
The
Company is committed to remediating its material weaknesses as promptly as possible. Implementation of the Company’s remediation
plans has commenced and is being overseen by the audit committee. However, there can be no assurance as to when these material
weaknesses will be remediated or that additional material weaknesses will not arise in the future. Even effective internal control
can provide only reasonable assurance with respect to the preparation and fair presentation of financial statements. Any failure
to remediate the material weaknesses or the development of new material weaknesses in our internal control over financial reporting,
could result in material misstatements in our financial statements, which in turn could
have a material adverse effect on our financial condition and the trading price of our common stock and we could fail
to meet our financial reporting obligations.
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.
Our
senior management team has relatively limited experience managing a publicly traded company and complying with federal securities
laws, including compliance with recently adopted disclosure requirements on a timely basis. Our management will be required to
design and implement appropriate programs and policies in responding to increased legal, regulatory compliance and reporting requirements,
and any failure to do so could lead to the imposition of fines and penalties and harm our business.
We
may be unable to attract and retain qualified, experienced, highly skilled personnel, which could adversely affect the implementation
of our business plan.
Our
success depends to a significant degree upon our ability to attract, retain and motivate skilled and qualified personnel. As we
become a more mature company in the future, we may find recruiting and retention efforts more challenging. If we do not succeed
in attracting, hiring and integrating excellent personnel, or retaining and motivating existing personnel, we may be unable to
grow effectively. The loss of any key employee, including members of our senior management team, and our inability to attract
highly skilled personnel with sufficient experience in our industries could harm our business.
Product
liability exposure may expose us to significant liability.
We
may face an inherent business risk of exposure to product liability and other claims and lawsuits in the event that the development
or use of our technology or prospective products is alleged to have resulted in adverse effects. We may not be able to avoid significant
liability exposure. Although we believe our insurance coverage to be adequate, we may not have sufficient insurance coverage,
and we may not be able to obtain sufficient coverage at a reasonable cost. An inability to obtain product liability insurance
at acceptable cost or to otherwise protect against potential product liability claims could prevent or inhibit the commercialization
of our products. A product liability claim could hurt our financial performance. Even if we ultimately avoid financial liability
for this type of exposure, we may incur significant costs in defending ourselves that could hurt our financial performance and
condition.
Our
inability to protect our intellectual property rights may force us to incur unanticipated costs.
Our
success will depend, in part, on our ability to obtain and maintain protection in the United States and internationally for certain
intellectual property incorporated into our products. Our intellectual property rights may be challenged, narrowed, invalidated
or circumvented, which could limit our ability to prevent competitors from marketing similar solutions that limit the effectiveness
of our patent protection and force us to incur unanticipated costs. In addition, existing laws of some countries in which we may
provide services or solutions may offer only limited protection of our intellectual property rights.
Our
products may infringe the intellectual property rights of third parties, and third parties may infringe our proprietary rights,
either of which may result in lawsuits, distraction of management and the impairment of our business.
As
the number of patents, copyrights, trademarks and other intellectual property rights in our industry increases, products based
on our technology may increasingly become the subject of infringement claims. Third parties could assert infringement claims against
us in the future. Infringement claims with or without merit could be time consuming, result in costly litigation, cause product
shipment delays or require us to enter into royalty or licensing agreements. Royalty or licensing agreements, if required, might
not be available on terms acceptable to us, or at all. We may initiate claims or litigation against third parties for infringement
of our proprietary rights or to establish the validity of our proprietary rights. Litigation to determine the validity of any
claims, whether or not the litigation is resolved in our favor, could result in significant expense to us and divert the efforts
of our technical and management personnel from productive tasks. If there is an adverse ruling against us in any litigation, we
may be required to pay substantial damages, discontinue the use and sale of infringing products and expend significant resources
to develop non-infringing technology or obtain licenses to infringing technology. Our failure to develop or license a substitute
technology could prevent us from selling our products.
If
securities or industry analysts do not publish research, or publish inaccurate or unfavorable research, about our business, our
share price and trading volume could decline.
The
trading market for our common stock may be impacted, in part, by the research and reports that securities or industry analysts
publish about our business or us. There can be no assurance that analysts will cover us, continue to cover us or provide favorable
coverage. If one or more analysts downgrade our stock or change their opinion of our stock, our share price may decline. In addition,
if one or more analysts cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in
the financial markets, which could cause our share price or trading volume to decline.
We
will continue to incur increased costs as a result of operating as a public company, and our management will be required to devote
substantial time to compliance initiatives and corporate governance practices.
As
a public company, we will continue to incur significant legal, accounting and other expenses. The Sarbanes-Oxley Act of 2002,
the Dodd-Frank Wall Street Reform and Consumer Protection Act and other applicable securities rules and regulations impose various
requirements on public companies, including establishment and maintenance of effective disclosure and financial controls and corporate
governance practices. Our management and other personnel will need to continue to devote a substantial amount of time to these
compliance initiatives. Moreover, these rules and regulations will increase our legal and financial compliance costs and make
some activities more time-consuming and costly.
We
cannot predict or estimate the amount of additional costs we may incur to continue to operate as a public company, nor can we
predict the timing of such costs. These rules and regulations are often subject to varying interpretations, in many cases due
to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided
by regulatory and governing bodies which could result in continuing uncertainty regarding compliance matters and higher costs
necessitated by ongoing revisions to disclosure and governance practices.
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.
It
is difficult to predict the timing and amount of our sales because our distributors and national accounts may not be required
to place minimum orders with us.
Our
distributors are not required to place minimum monthly or annual orders for our products. Accordingly, we cannot predict the timing
or quantity of purchases by any of our independent distributors or whether any of our distributors will continue to purchase products
from us in the same frequencies and volumes as they may have done in the past. Additionally, our larger distributors and partners
may make orders that are larger than we have historically been required to fill. Shortages in inventory levels, supply of raw
materials or other key supplies could negatively affect us.
If
we do not adequately manage our inventory levels, our operating results could be adversely affected.
We
need to maintain adequate inventory levels to be able to deliver products on a timely basis. Our inventory supply depends on our
ability to correctly estimate demand for our products. Our ability to estimate demand for our products is imprecise, particularly
for new products, seasonal promotions and new markets. If we materially underestimate demand for our products or are unable to
maintain sufficient inventory of raw materials, we might not be able to satisfy demand on a short-term basis. If we overestimate
retailer demand for our products, we may end up with too much inventory, resulting in higher storage costs, increased trade spend
and the risk of obsolete inventory. If we fail to manage our inventory to meet demand, we could damage our relationships with
our retailers and could delay or lose sales opportunities, which would unfavorably impact our future sales and adversely affect
our operating results.
Risks
Related to Ownership of Our Common Stock
Our
common stock is quoted on the OTCQB, which may have an unfavorable impact on our stock price and liquidity.
Our
common stock is quoted on the OTCQB, which is a significantly more limited trading market than the New York Stock Exchange, or
the NASDAQ Stock Market. The quotation of the Company’s shares on the OTCQB may result in a less liquid market available
for existing and potential shareholders to trade shares of our common stock, could depress the trading price of our common stock
and could have a long-term adverse impact on our ability to raise capital in the future.
There
is limited liquidity on the OTCQB, which may result in stock price volatility and inaccurate quote information.
When
fewer shares of a security are being traded on the OTCQB, price volatility may increase and price movement may outpace the ability
to deliver accurate quote information. Due to lower trading volumes in shares of our common stock, there may be a lower likelihood
of one’s orders for shares of our common stock being executed, and current prices may differ significantly from the price
one was quoted at the time of one’s order entry.
If
we are unable to adequately fund our operations, we may be forced to voluntarily file for deregistration of our common stock with
the SEC.
Compliance
with the periodic reporting requirements required by the SEC consumes a considerable amount of both internal, as well external,
resources and represents a significant cost for us. If we are unable to continue to devote adequate funding and the resources
needed to maintain such compliance, while continuing our operations, we could be forced to deregister with the SEC. After the
deregistration process, our common stock would only be tradable on the “Pink Sheets” and could suffer a decrease in
or absence of liquidity.
Because
we became public by means of a “reverse merger”, we may not be able to attract the attention of major brokerage firms.
Additional
risks may exist since we became public through a “reverse merger”. Securities analysts of major brokerage firms may
not provide coverage of us since there is little incentive to brokerage firms to recommend the purchase of our common stock. We
cannot assure you that brokerage firms will want to conduct any secondary offerings on behalf of our Company in the future.
Future
sales of our common stock in the public market could lower the price of our common stock and impair our ability to raise funds
in future securities offerings.
Future
sales of a substantial number of shares of our common stock in the public market, or the perception that such sales may occur,
could adversely affect the then prevailing market price of our common stock and could make it more difficult for us to raise funds
in the future through a public offering of our securities.
Our
common stock is thinly traded, so you may be unable to sell at or near asking prices or at all if you need to sell your shares
to raise money or otherwise desire to liquidate your shares.
Currently,
the Company’s common stock is quoted in the OTCQB and future trading volume may be limited by the fact that many major institutional
investment funds, including mutual funds, as well as individual investors follow a policy of not investing in OTCQB stocks and
certain major brokerage firms restrict their brokers from recommending OTCQB stocks because they are considered speculative, volatile
and thinly traded. The OTCQB market is an inter-dealer market much less regulated than the major exchanges and our common stock
is subject to abuses, volatility and shorting. Thus, there is currently no broadly followed and established trading market for
the Company’s common stock. An established trading market may never develop or be maintained. Active trading markets generally
result in lower price volatility and more efficient execution of buy and sell orders. Absence of an active trading market reduces
the liquidity of the shares traded there.
The
trading volume of our common stock has been and may continue to be limited and sporadic. As a result of such trading activity,
the quoted price for the Company’s common stock on the OTCQB may not necessarily be a reliable indicator of its fair market
value. Further, if we cease to be quoted, holders would find it more difficult to dispose of our common stock or to obtain accurate
quotations as to the market value of the Company’s common stock and as a result, the market value of our common stock likely
would decline.
Our
common stock is subject to price volatility unrelated to our operations.
The
market price of our common stock could fluctuate substantially due to a variety of factors, including market perception of our
ability to achieve our planned growth, quarterly operating results of other companies in the same industry, trading volume in
our common stock, changes in general conditions in the economy and the financial markets or other developments affecting the Company’s
competitors or the Company itself. In addition, the OTCQB is subject to extreme price and volume fluctuations in general. This
volatility has had a significant effect on the market price of securities issued by many companies for reasons unrelated to their
operating performance and could have the same effect on our common stock.
We
are subject to penny stock regulations and restrictions and you may have difficulty selling shares of our common stock.
Our common stock is currently quoted on the
OTCQB. Our common stock is subject to the requirements of Rule 15(g)-9, promulgated under the Securities Exchange Act as long
as the price of our common stock is below $5.00 per share. Under such rule, broker-dealers who recommend low-priced securities
to persons other than established customers and accredited investors must satisfy special sales practice requirements, including
a requirement that they make an individualized written suitability determination for the purchaser and receive the purchaser’s
consent prior to the transaction. The Securities Enforcement Remedies and Penny Stock Reform Act of 1990 also requires
additional disclosure in connection with any trades involving a stock defined as a penny stock. Generally, the Commission defines
a penny stock as any equity security not traded on a national exchange that has a market price of less than $5.00 per share. The
required penny stock disclosures include the delivery, prior to any transaction, of a disclosure schedule explaining the penny
stock market and the risks associated with it. Such requirements could severely limit the market liquidity of the securities and
the ability of purchasers to sell their securities in the secondary market.
Because
we do not intend to pay dividends, shareholders will benefit from an investment in our common stock only if it appreciates in
value.
We
have never declared or paid any cash dividends on our preferred stock or common stock. For the foreseeable future, it is expected
that earnings, if any, generated from our operations will be used to finance the growth of our business, and that no dividends
will be paid to holders of the Company’s common stock. As a result, the success of an investment in our common stock will
depend upon any future appreciation in its value. There can be no guarantee that our common stock will appreciate in value.
The
price of our common stock may become volatile, which could lead to losses by investors and costly securities litigation.
The
trading price of our common stock is likely to be highly volatile and could fluctuate in response to factors such as:
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actual
or anticipated variations in our operating results;
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announcements
of developments by us or our competitors;
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announcements
by us or our competitors of significant acquisitions, strategic partnerships, joint ventures or capital commitments;
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adoption
of new accounting standards affecting our industry;
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additions
or departures of key personnel;
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introduction
of new products by us or our competitors;
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sales
of our common stock or other securities in the open market; and
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other
events or factors, many of which are beyond our control.
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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 3600 Wilshire Boulevard Suite 1720, Los Angeles, 90010. Beginning in April 2019, we
leased this office space pursuant to a direct lease for $6,457 per month through March 31, 2023.
Item
3. Legal Proceedings.
Neither
the Company nor its subsidiaries are party to or have property that is the subject of any material pending legal proceedings.
We may be subject to ordinary legal proceedings incidental to our business from time to time that are not required to be disclosed
under this Item 1.
Item
4. Mine Safety Disclosures.
Not
applicable.
PART
II
Item
5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market
Information
Our
common stock is currently traded on the OTCQB under the symbol “BRFH”. Our common stock had been quoted on the OTC
Bulletin Board since July 27, 2011 under the symbol MVBX. Effective February 29, 2012, our symbol changed to BRFH based on the
forward split and name change. On March 21, 2012, our common stock was delisted to Pink Sheets. On January 21, 2014, we registered
our common stock under Section 12(g) of the Exchange Act. The following table sets forth the range of high and low bid quotations
for the applicable period. These quotations as reported by the OTCQB reflect inter-dealer prices without retail mark-up, markdown
or commissions and may not necessarily represent actual transactions.
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Bid Quotation
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Financial Quarter Ended
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High ($)
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Low ($)
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December 31, 2019
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0.35
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0.26
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September 30, 2019
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0.45
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0.44
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June 30, 2019
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0.68
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0.40
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March 31, 2019
|
|
|
0.70
|
|
|
|
0.58
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December 31, 2018
|
|
|
0.77
|
|
|
|
0.57
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September 30, 2018
|
|
|
0.61
|
|
|
|
0.41
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|
June 30, 2018
|
|
|
0.70
|
|
|
|
0.60
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|
March 31, 2018
|
|
|
0.67
|
|
|
|
0.36
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Holders
At
April 6, 2020, there were 143,247,603 shares of our common stock outstanding. Our shares of common stock are held by 101 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.
Recent
Sales of Unregistered Securities
There
were no sales of equity securities during the period covered by this Annual Report that were not registered under the Securities
Act that were not included in a Quarterly Report on Form 10Q or a Current Report on Form 8-K.
Purchases
of Equity Securities by the Company
There
were no purchases of equity securities made by the Company in the period covered by this report.
Securities
Authorized for Issuance Under Equity Compensation Plans
The
following table provides information, as of December 31, 2019, with respect to equity securities authorized for issuance under
our equity compensation plans:
Plan Category
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Number of
Securities to be
Issued Upon
Exercise of
Outstanding
Options,
Warrants and
Rights
(a)
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Weighted-Average
Exercise Price of
Outstanding
Options, Warrants
and Rights
(b)
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Number of
Securities
Remaining
Available for
Future Issuance
Under Equity
Compensation
Plans (excluding
securities reflected
in Column
(a))(c)
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Equity compensation plans approved by security holders
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7,813,357
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$
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0.60
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6,986,643
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Equity compensation plans not approved by security holders
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-
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$
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-
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-
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TOTAL
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7,813,357
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$
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0.60
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6,986,643
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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.
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.
The
information and financial data discussed below is derived from the audited financial statements of Barfresh for its fiscal year
ended December 31, 2019 and for the fiscal year ended December 31, 2018. The financial statements of Barfresh were prepared and
presented in accordance with generally accepted accounting principles in the United States. The information and financial data
discussed below is only a summary and should be read in conjunction with the historical financial statements and related notes
of Barfresh contained elsewhere in this Annual Report. This discussion and analysis may contain forward-looking statements based
on assumptions about our future business. Our actual results could differ materially from those anticipated in these forward-looking
statements as a result of certain factors. See “Cautionary Note Regarding Forward Looking Statements” above for a
discussion of forward-looking statements and the significance of such statements in the context of this Annual Report.
Barfresh
is a leader in the creation, manufacturing and distribution of ready to blend frozen beverages. The current portfolio of products
includes smoothies, shakes and frappes. Products are packaged in two distinct formats.
The
Company’s original single serve format features portion controlled and ready to blend beverage ingredient packs or “beverage
packs”. The beverage packs contain all of the solid ingredients necessary to make the beverage, including the base (either
sorbet, frozen yogurt or ice cream), real fruit pieces, juices and ice – five ounces of water are added before blending.
The
Company’s bulk “Easy Pour” format also contains all of the solid ingredients necessary to make the beverage,
packaged in gallon containers in a concentrated formula that is mixed “one to one” with water. The Company has a “no
sugar added” version of the bulk “Easy Pour” format that is specifically targeted for the USDA national school
meal program, including the School Breakfast Program, the National School Lunch Program, and Smart Snacks in Schools Program.
The Company is currently in contract to sell its bulk Easy Pour products into over three hundred schools. In addition, the Company
received approval from the United States Defense Logistics Agency (“DLA”) to sell its smoothie products into all branches
of the U.S. Armed Forces, and is currently in contract to sell its bulk Easy Pour products into over one hundred military bases
in the United States and abroad.
Domestic
and international patents and patents pending are owned by Barfresh, as well as related trademarks for all of the single serve
products. Patent rights have been granted in 13 jurisdictions including the United States. In addition, the Company has purchased
all of the trademarks related to the patented products.
The
Company conducts sales through several channels, including National Accounts, Regional Accounts, and Broadline Distributors. Barfresh’s
primary broadline distribution arrangement is through an exclusive nationwide agreement with Sysco Corporation (“Sysco”),
the U.S.’s largest broadline distributor, which was entered into during July 2014. Pursuant to that agreement, all Barfresh
products are included in Sysco’s national core selection of beverage items, making Barfresh its exclusive single-serve,
pre-portioned beverage provider. The agreement is mutually exclusive; however, Barfresh may also sell the products to other foodservice
distributors, but only to the extent required for such foodservice distributors to service multi-unit chain operators with at
least 20 units and where Sysco is not such multi- unit chain operator’s nominated distributor for our products. On October
2, 2019, the exclusive distribution agreement with Sysco expired, opening the possibility to expand distribution with other distributors
outside of the Sysco system.
During
2016 and 2017 the Company announced that it had signed supply agreements with several of the major global on-site foodservice
operators. On March 8, 2018, the Company announced that it had signed a new supply agreement with one of the largest of these
foodservice operators, for exclusive distribution of four Barfresh single serve skus. On November 14, 2018, the Company
announced that it had received approval for multiple products to be rolled out to a national restaurant chain with over 2,500
locations.
On
October 26, 2015, Barfresh signed a five-year agreement with PepsiCo North America Beverages, a division of PepsiCo, to become
its exclusive sales representative within the food service channel to present the Barfresh line of ready-to-blend smoothies and
frozen beverages throughout the United States and Canada. Through this agreement, Barfresh’ products are included as part
of PepsiCo’s offerings to its significant customer base. The agreement facilitates access to potential National customer
accounts, through introductions provided by PepsiCo’s one thousand plus person foodservice sales team. Barfresh products
have become part of PepsiCo’s customer presentations at national trade shows and similar venues.
Barfresh
utilizes contract manufacturers to manufacture all of the products in the United States. Production lines are currently operational
at two locations. The first location is in Salt Lake City, which currently produces both bulk easy pour and single serve products.
Annual production capacity with this contract manufacturer is 14 million units per year. The second location is with Yarnell Operations,
LLC., a subsidiary of Schulze & Burch, located in Arkansas. The Yarnell’s agreement, which was signed during February
2016, and secures the capacity to ramp up to an incremental production capacity of 100 million units. Yarnell’s location
enhances the company’s ability to efficiently move product throughout the supply chain to destinations in the eastern United
States, home to many of the country’s large foodservice outlets.
During
November 2016, the Company received an equity investment from Unibel, the majority shareholder of the Bel Group (“Unibel”).
The Bel Group is headquartered in Paris, France, with global operations in 33 countries, 30 production sites on 4 continents and
nearly 12,000 employees. Its many branded products, including The Laughing Cow®, Mini Babybel® and Boursin®, are sold
in over 130 countries around the world. Pursuant to the securities purchase agreement, Unibel purchased 15,625,000 shares of common
stock at $0.64 per share (“Shares”) and warrants to purchase 7,812,500 shares of common stock (“Warrants”)
for aggregate gross proceeds to Barfresh of $10 million. The Warrants are exercisable for a term of five years at a per share
price of $.88 for cash. Pursuant to the Investor Rights agreement, Barfresh has registered the Shares and the Warrants, and Unibel
was granted a seat on the Barfresh Board. This strategic investment provided Barfresh with necessary capital while leveraging
Unibel’s more than 150 years of industrial expertise, innovative capabilities, world-class marketing and branding expertise
to accelerate our growth in new and existing markets and product channels.
On
February 14, 2018, the Company announced the private placement of convertible notes with gross proceeds of $4.1 million The closing
of the first 60% of this amount occurred between March 12 and 22, 2018, after notice was issued by the Company that it had entered
into a material agreement or series of related agreements with a national account for the sale of its products into approximately
1,000 new locations. The remaining 40% of the principal amount was to be received upon achieving a second milestone, which is
entering into a material agreement or series of related agreements with a national account for the sale of its products into approximately
2,500 new locations. During November of 2018 the Company and several of the Convertible Note investors agreed to amend the definition
of Milestone 2 to allow for the funding the remaining 40% of the principal amount upon the Company receiving approval from a National
Restaurant Chain with over 2,500 for the rollout of its products. Such approval was received during the fourth quarter of 2018,
and the Company received an additional $1.4 million of convertible note proceeds.
The
convertible notes are unsecured and have (i) a two-year term, (ii) a 10% annual coupon to be paid in cash or stock at the Company’s
discretion at a conversion price equal to 85% of the average closing bid prices of the Common Stock over the twenty (20) consecutive
trading day period immediately preceding the payment date, but in no event lower than sixty cents ($0.60) per share of Common
Stock. The investor’s may elect to convert their principal into common stock at a conversion price equal to the lower of:
(i) $0.88 per share of Common Stock, or (ii) 85% of the average closing bid prices of the Common Stock over the twenty (20) consecutive
trading day period immediately preceding the date of investor’s election to convert; but in no event lower than $0.60 per
share of Common Stock. Investors also received warrant coverage of 25% of the number of shares that would be issuable upon a full
conversion of the principal amount at an average of the twenty consecutive trading day period immediately preceding the applicable
closing date. If any principal amount remains outstanding after the one-year anniversary of the closing, investors will be granted
an additional warrant with identical terms. The warrants are exercisable for a period of three years for cash at the greater of
120% of the closing price or $0.70 per share of common stock. After the initial private placement, investors were offered the
opportunity to accelerate the issuance of the additional warrant by increasing their convertible note investment by 10% to 20%.
After the close of the first quarter 2018, a number of investors took advantage of this acceleration opportunity, resulting in
an increase in the amount of the total convertible note by $177,300 and the issuance of 930,332 additional warrants. During the
fourth quarter 2018, four of the convertible note investors elected to convert their notes into stock, with a total of $453,000
of convertible debt, plus accrued interest being converted into stock.
During
the fourth quarter of 2018, one investor exercised 833,333 N warrants for cash, at $0.45 per share. $221,918 of the proceeds of
that transaction were used to pay down a short term note payable, held by the same investor, in the amount of $200,000, plus accrued
interest. The balance of the proceeds of the N warrant exercise, in the amount of $153,082 were received by the Company.
During
the first quarter of 2019, the Company completed additional funding, including a Private Placement Offering for common
shares priced at $0.60 per share, resulting in the receipt of capital investment in the amount of $2.4 million and the issuance
of 4,000,000 shares. In addition, during the first quarter of 2019 the Company offered to reduce the exercise price on its I Warrants
from $1 to $0.60, for a limited time. During the time this offer was open, I Warrant holders converted 2,841,454 warrants at $0.60,
resulting in the receipt of capital investment in the amount of $1.7 million. In addition, during the first quarter of 2019, one
investor exercised G series warrants, resulting in the receipt of capital investment in the amount of $180,000, and the issuance
of 300,000 shares. In total, during the first quarter of 2019 the Company raised $4.3 million and issued 7,141,454 shares, and
no additional warrants were issued.
On
March 23, 2020, the Company completed additional funding, including a Private Placement Offering for common shares priced at $0.50
per share (subject to adjustment) resulting in the receipt of proceeds in the amount of $3.825 million and the issuance
of 7,650,000 shares. The investors of this Private Placement Offering will be granted O warrants to be eligible to purchase an
additional 0.50 shares for every share issued to each purchaser, exercisable for a period of 3 years at an exercise price of $0.60
per share (subject to adjustment). If the volume-weighted average trading price for the 20 consecutive trading
days that conclude upon 6 months after the initial closing (the “Six Month Price”) exceeds or equals $0.50 per share
(the “Target Price”), the per share purchase price will not be adjusted. If the Six Month Price is less than the Target
Price, the per share purchase price will be automatically reduced to the Six Month Price, but in no event less than $0.35 per
share, in which case the Company shall issue to each investor, pro-rata based on such investor’s investment: (a) shares
in a quantity that equals the difference between the number of shares issued to such purchaser at closing and the number of shares
that would have been issued to such purchaser at closing at the Six Month Price; and (b) a warrant for a number of shares of common
stock equal to 50% of the difference between the number of shares issued to such investor at closing and the number of shares
that would have been issued to such investor at closing at the Six Month Price, with an exercise price equal to the sum of $0.10
per share and the Six Month Price, but in no eventless than $0.45 per share. The exercise price per share for each warrant will
automatically adjust to the sum of $0.10 per share and the Six-Month Price, but in no event less than $0.45 per share.
In addition, the Company obtained a 24 month extension on $1,071,000
in principal, and conversion of $720,000 of principal of the Milestone I Convertible Notes at a conversion price of $0.50 per
share. The remaining $110,166 was extended for thirty days. The interest rate on the principal balance of the extended Milestone
I Convertible Notes was amended to 15%. Furthermore, the Company obtained a 12 month extension on $168,000 in principal, and conversion
of $1,128,000 in principal of the Milestone II Convertible Notes. The remaining $67,200 was extended for thirty days. The Convertible
Noteholders of the Milestone I and II Convertible Notes were granted additional interest depending upon their election to convert
or extend their Convertible Notes.
Currently
we have 17 employees and 2 consultants. There are currently 12 employees selling our products.
Critical
Accounting Policies
Our
financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America
(“GAAP”).
Revenue
Recognition
In
accordance with ASC 606, “Revenue from Contracts with Customers”, revenue is recognized when a customer obtains ownership
of promised goods. The amount of revenue recognized reflects the consideration to which the Company expects to be entitled to
receive in exchange for these goods. The Company applies the following five steps:
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1)
|
Identify
the contract with a customer
|
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|
|
|
A
contract with a customer exists when (i) the Company enters into an enforceable contract with a customer that defines each
party’s rights, (ii) the contract has commercial substance and, (iii) the Company determines that collection of substantially
all consideration for goods or services that are transferred is probable. For the Company, the contract is the approved sales
order, which may also be supplemented by other agreements that formalize various terms and conditions with customers.
|
|
|
|
|
2)
|
Identify
the performance obligation in the contract
|
|
|
|
|
|
Performance
obligations promised in a contract are identified based on the goods or that will be transferred to the customer. For the
Company, this consists of the delivery of frozen beverages, which provide immediate benefit to the customer.
|
|
|
|
|
3)
|
Determine
the transaction price
|
|
|
|
|
|
The
transaction price is determined based on the consideration to which the Company will be entitled in exchange for transferring
goods and is generally stated on the approved sales order. Variable consideration, which typically includes volume-based rebates
or discounts, are estimated utilizing the most likely amount method.
|
|
|
|
|
4)
|
Allocate
the transaction price to performance obligations in the contract
Since
our contracts contain a single performance obligation, delivery of frozen beverages, the transaction price is allocated
to that single performance obligation.
|
|
|
|
|
5)
|
Recognize
Revenue when or as the Company satisfies a performance obligation
|
|
|
|
|
|
The
Company recognizes revenue from the sale of frozen beverages when title and risk of loss passes and the customer accepts the
goods, which generally occurs at the time of delivery to a customer warehouse. Customer sales incentives such as volume-based
rebates or discounts are treated as a reduction of sales at the time the sale is recognized. Shipping and handling costs are
treated as fulfillment costs and presented in distribution, selling and administrative costs.
|
|
|
|
|
|
The
company evaluated the requirement to disaggregate revenue and concluded that substantially all of its revenue comes from a
single product, frozen beverages.
|
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.
Derivative
Liability
The
Company evaluates its convertible instruments, options, warrants or other contracts to determine if those contracts or embedded
components of those contracts qualify as derivatives to be separately accounted for under ASC Topic 815, “Derivatives and
Hedging.” The result of this accounting treatment is that the fair value of any derivative is marked-to-market each balance
sheet date and recorded as a liability. In the event that the fair value is recorded as a liability, the change in fair value
is recorded in the statement of operations as gain/loss from derivative liability. Upon conversion or exercise of a derivative
instrument, the instrument is marked to fair value at the conversion date and then that fair value is reclassified to equity.
We analyzed the derivative financial instruments in accordance with ASC 815. The objective is to provide guidance for determining
whether an equity-linked financial instrument is indexed to an entity’s own stock. This determination is needed for a scope
exception which would enable a derivative instrument to be accounted for under the accrual method. The classification of a non-derivative
instrument that falls within the scope of ASC 815-40-05 “Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company’s Own Stock” also hinges on whether the instrument is indexed to an entity’s
own stock. A non-derivative instrument that is not indexed to an entity’s own stock cannot be classified as equity and must
be accounted for as a liability. There is a two-step approach in determining whether an instrument or embedded feature is indexed
to an entity’s own stock. First, the instrument’s contingent exercise provisions, if any, must be evaluated, followed
by an evaluation of the instrument’s settlement provisions. The Company utilized the fair value standard set forth by the
Financial Accounting Standards Board, defined as the amount at which the assets (or liability) could be bought (or incurred) or
sold (or settled) in a current transaction between willing parties, that is, other than in a forced or liquidation sale.
Results
of Operations
Revenue
and cost of revenue
Revenue
increased $71,626, or 2%, from $4,235,159 in 2018 to $4,306,785 in 2019. Our products continue to be distributed through all 72
of Sysco’s U.S. mainland distribution centers, as well as through new customers beyond the Sysco distribution network.
Cost
of revenue for 2019 was $1,928,210 as compared to $2,033,396 in 2018. Our gross profit was $2,313,209 (54%) and $2,144,664 (51%)
for 2019 and 2018, respectively. This improvement was driven by a number of factors, including leverage due to larger scale of
production and product mix. We anticipate that our gross profit percentage for 2020 will be comparable to that of 2019. Depreciation
from manufacturing equipment was $65,366 and $57,099 for December 31, 2019 and 2018, respectively.
Operating
expenses
Our
operations were primarily directed towards increasing sales and expanding our distribution network.
Our
general and administrative expenses decreased $962,859 (12%) from $7,813,425 in 2018 to $6,850,566 in 2019, with the improvement
driven by lower personnel expenses resulting from reduced headcount, reduced stock-based compensation expense from terminated
employees, and reduced marketing and selling expense from a renegotiated distribution agreement. The following is a breakdown
of our general and administrative expenses for the years 2019 and 2018.
|
|
Twelve
months ended
|
|
|
Twelve
months ended
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
December 31, 2018
|
|
|
Change
|
|
|
Percent
|
|
Personnel costs
|
|
$
|
2,837,685
|
|
|
$
|
3,027,548
|
|
|
$
|
(189,863
|
)
|
|
|
(6
|
)%
|
Stock based compensation/options
|
|
|
225,026
|
|
|
|
498,768
|
|
|
|
(273,742
|
)
|
|
|
(55
|
)%
|
Legal and professional fees
|
|
|
305,155
|
|
|
|
463,991
|
|
|
|
(158,836
|
)
|
|
|
(34
|
)%
|
Travel
|
|
|
358,455
|
|
|
|
432,140
|
|
|
|
(73,685
|
)
|
|
|
(17
|
)%
|
Rent
|
|
|
92,608
|
|
|
|
201,100
|
|
|
|
(108,492
|
)
|
|
|
(54
|
)%
|
Marketing and selling
|
|
|
568,107
|
|
|
|
750,059
|
|
|
|
(181,952
|
)
|
|
|
(24
|
)%
|
Consulting fees
|
|
|
118,971
|
|
|
|
60,359
|
|
|
|
58,612
|
|
|
|
97
|
%
|
Director fees
|
|
|
245,386
|
|
|
|
241,000
|
|
|
|
4,386
|
|
|
|
2
|
%
|
Research and development
|
|
|
538,391
|
|
|
|
674,224
|
|
|
|
(135,833
|
)
|
|
|
(20
|
)%
|
Shipping Expense and storage
|
|
|
751,237
|
|
|
|
864,871
|
|
|
|
(113,634
|
)
|
|
|
(13
|
)%
|
Other expenses
|
|
|
809,545
|
|
|
|
599,365
|
|
|
|
210,180
|
|
|
|
35
|
%
|
|
|
$
|
6,850,566
|
|
|
$
|
7,813,425
|
|
|
$
|
(962,859
|
)
|
|
|
(12
|
)%
|
Personnel
cost represents the cost of employees including salaries, bonuses, employee benefits and employment taxes for the years 2019 and
2018 and continues to be our largest cost. Personnel cost decreased $189,863 (6%) from $3,027,548 to $2,837,685. At year end 2018
we had 26 full time employees, and we currently have 17 full time employees.
Stock
based compensation is used as an incentive to attract new employees and to compensate existing employees. Stock based compensation
includes stock issued and options granted to employees. Stock compensation for the current year was $225,026, a decrease of $273,742,
or 55%, from the year ago expense of $498,768. The decrease is primarily due to reductions in our workforce and the timing of
equity grants. The Company issues additional stock options to its employees from time to time under its Equity Compensation Plan.
Legal
and professional fees decreased 34%, or $158,836, from $463,991 in 2018 to $305,155 in 2019. The decrease was primarily due to
reduced legal services required. We anticipate legal fees related to our business and financing activities to decrease as we have
renegotiated arrangements with existing service providers.
Travel
expenses decreased $73,685 (17%) from $432,140 in 2018 to $358,455 in 2019. The decrease is primarily due to reduced travel associated
with terminated employees. We anticipate that travel expenses for 2020 will be comparable to the current year.
Rent
expense is primarily for our location in Los Angeles, California. Rent expense for the Los Angeles office is approximately $6,500
per month. During 2018 we leased office space at 8383 Wilshire Boulevard, Beverly Hills, California pursuant to a lease that commenced
on November 1, 2016 and expired March 31, 2019, with monthly rent expense of $14,488. Effective April 1, 2019, we have entered
into a new lease for office space located at 3600 Wilshire Boulevard Suite 1720, Los Angeles, 90010.
Marketing
and selling expenses decreased $181,952 (24%) from $750,059 in 2018 to $568,107 in 2019. Lower marketing and selling expenses
were primarily due to lower percentage commission associated with a renegotiated distribution agreement.
Consulting
fees increased $58,612 (97%), from $60,359 in 2018, to $118,971 in 2019. The increase was due primarily to services related to
consulting to improve sales operations. Our consulting fees vary based on needs. We engaged consultants in the areas of sales
operations during the both 2019 and 2018. The need for future consulting services will be variable.
Director
fees increased $4,386, or 2%, from $241,000 in 2018 to $245,386 in 2019 due to director and officer insurance premiums.
Annual director fees are anticipated at $50,000 per non-employee director.
Research
and development expenses decreased $135,833, (20%) from $674,224 in 2018 to $538,391 in 2019 due to reduced product development
activity with national accounts and fewer market tests. These expenses relate to the services performed by our Director of Manufacturing
and Product Development, and consultants supporting that employee. These activities are primarily directed towards to development
of new products.
Shipping
and storage expense decreased $113,634 (13%) from $864,871 in 2018 to $751,237 in 2019. Shipping and storage expense as a percentage
of revenue decreased from 20% in 2018 to 17% in 2019. This improvement is primarily due to the growth of the scale of our business,
and the corresponding cost savings associated with freight movement. We anticipate that shipping and storage expense as a percentage
of sales will continue to reduce in the future, as the Company continues to take advantage of more efficient distribution arrangements.
Other
expenses consist of ordinary operating expenses such as investor relations, office, telephone, insurance, and stock related costs.
Other expense increased $210,180, from $599,364 in 2018 to $809,544 in 2019, driven mainly by equipment repair, recruiting,
and insurance expense.
We
had operating losses of $5,187,204 in 2019 and $6,180,080 in 2018. The improvement of $992,876 or 16%, was primarily due to higher
gross profit margin, and lower G&A expenses.
Interest
expense for 2019 is $1,213,263 relates to “Milestone 1” convertible debt in the amount of $2,704,800 that was issued
on March 14, 2018, which bears interest at 10%, “Milestone 2” convertible debt in the amount of $1,363,200 that was
issued on November 30, 2018, which bears interest at 10%. Of the Milestone 1 convertible debt, $453,000 of principal, and the
accrued interest thereon, was converted into stock during the fourth quarter of 2018. The principal and accrued interest on the
Note Payable in the amount of $250,000 was repaid during the fourth quarter of 2018. Interest expense for 2019 includes amortization
of $881,871 of the value of warrants issued with the Milestone 1 and Milestone 2 convertible debt.
The
change in fair value of the derivative liability resulted in a gain of $1,114,625 for the year ended December 31, 2019. The gain
was driven by the decrease in the stock price of the Company.
The
warrant modification was revalued at February 22, 2019 with a value of $849,505. The difference in fair value immediately before
and after the modification of the warrant resulted in a loss of $307,460.
We
had net losses of $5,593,302 and $7,322,823 for the years 2019 and 2018, respectively. This reduction in net loss, in the amount
of $1,729,521, or 24%, is primarily attributable to the same factors that drove the improvement in operating losses, partially
offset by certain non-cash charges, including higher interest, warrant modification, and gain from derivative liability, in 2019.
Liquidity
and Capital Resources
As
of December 31, 2019, we had a working capital surplus of $146,337 as compared with a working capital surplus of $652,360 at December
31, 2018. The reduction in working capital surplus is primarily due to the reduction in inventory and an increase in accrued interest,
partially offset by a reduction in accrued liabilities.
During
the twelve-month period ended December 31, 2019, we used cash of $3,353,326 in operations, $466,216 for the purchase of equipment,
and $5,324 for patents and trademarks. The Company received $1,500,357 in cash for warrant exercises, $2,400,000 in cash for issuance
of stock and paid $25,686 in operating leases.
Our
liquidity needs will depend on how quickly we are able to profitably ramp up sales, as well as our ability to control and reduce
variable operating expenses, and to continue to control and reduce fixed overhead expense.
On
February 14, 2018, the Company announced the private placement of convertible notes with gross proceeds of $4.1 million The closing
of the first 60% of this amount occurred between March 12 and 22, 2018, after notice was issued by the Company that it had entered
into a material agreement or series of related agreements with a national account for the sale of its products into approximately
1,000 new locations. The remaining 40% of the principal amount was to be received upon achieving a second milestone, which is
entering into a material agreement or series of related agreements with a national account for the sale of its products into approximately
2,500 new locations. During November of 2018 the Company and several of the Convertible Note investors agreed to amend the definition
of Milestone 2 to allow for the funding the remaining 40% of the principal amount upon the Company receiving approval from a National
Restaurant Chain with over 2,500 for the rollout of its products. Such approval was received during the fourth quarter of 2018,
and the Company received an additional $1.4 million of convertible note proceeds.
The
convertible notes are unsecured and have (i) a two-year term, (ii) a 10% annual coupon to be paid in cash or stock at the Company’s
discretion at a conversion price equal to 85% of the average closing bid prices of the Common Stock over the twenty (20) consecutive
trading day period immediately preceding the payment date, but in no event lower than sixty cents ($0.60) per share of Common
Stock. The investor’s may elect to convert their principal into common stock at a conversion price equal to the lower of:
(i) $0.88 per share of Common Stock, or (ii) 85% of the average closing bid prices of the Common Stock over the twenty (20) consecutive
trading day period immediately preceding the date of investor’s election to convert; but in no event lower than $0.60 per
share of Common Stock. Investors also received warrant coverage of 25% of the number of shares that would be issuable upon a full
conversion of the principal amount at an average of the twenty consecutive trading day period immediately preceding the applicable
closing date. If any principal amount remains outstanding after the one-year anniversary of the closing, investors will be granted
an additional warrant with identical terms. The warrants are exercisable for a period of three years for cash at the greater of
120% of the closing price or $0.70 per share of common stock. After the initial private placement, investors were offered the
opportunity to accelerate the issuance of the additional warrant by increasing their convertible note investment by 10% to 20%.
After the close of the first quarter of 2018, a number of investors took advantage of this acceleration opportunity, resulting
in an increase in the amount of the total convertible note by $177,300 and the issuance of 930,332 additional warrants. During
the fourth quarter of 2018, four of the convertible note investors elected to convert their notes into stock, with a total of
$453,000 of convertible debt, plus accrued interest being converted into stock.
During
the fourth quarter of 2018, one investor exercised 833,333 N warrants for cash, at $0.45 per share. $221,918 of the proceeds of
that transaction were used to pay down a short term note payable, held by the same investor, in the amount of $200,000, plus accrued
interest. The balance of the proceeds of the N warrant exercise, in the amount of $153,082 were received by the Company.
During
the first quarter of 2019, the Company completed additional funding including a Private Placement Offering for common
shares priced at $0.60 per share, resulting in the receipt of capital investment in the amount of $2.4 million and the issuance
of 4,000,000 shares. In addition, during the first quarter of 2019 the Company offered to reduce the exercise price on its I Warrants
from $1 to $0.60, for a limited time. During the time this offer was open, I Warrant holders converted 2,841,454 warrants at $0.60,
resulting in the receipt of capital investment in the amount of $1.7 million. In addition, during the first quarter of 2019, one
investor exercised G series warrants, resulting in the receipt of capital investment in the amount of $180,000, and the issuance
of 300,000 shares. In total, during the first quarter of 2019 the Company has raised $4.3 million and issued 7,141,454 shares,
and no additional warrants.
On
March 23, 2020, the Company completed additional funding, including a Private Placement Offering for common shares priced at $0.50
per share (subject to adjustment), resulting in the receipt of proceeds in the amount of $3.825 million and the issuance
of 7,650,000 shares. The investors of this Private Placement Offering will be granted O warrants to be eligible to purchase an
additional 0.50 shares for every share issued to each purchaser, exercisable for a period of 3 years at an exercise price of $0.60
per share (subject to adjustment) but in no event less than $0.45 per share. If the volume-weighted average trading
price for the 20 consecutive trading days that conclude upon 6 months after the initial closing (the “Six Month Price”)
exceeds or equals $0.50 per share (the “Target Price”), the per share purchase price will not be adjusted. If the
Six Month Price is less than the Target Price, the per share purchase price will be automatically reduced to the Six Month Price,
but in no event less than $0.35 per share, in which case the Company shall issue to each investor, pro-rata based on such investor’s
investment: (a) shares in a quantity that equals the difference between the number of shares issued to such purchaser at closing
and the number of shares that would have been issued to such purchaser at closing at the Six Month Price; and (b) a warrant for
a number of shares of common stock equal to 50% of the difference between the number of shares issued to such investor at closing
and the number of shares that would have been issued to such investor at closing at the Six Month Price, with an exercise price
equal to the sum of $0.10 per share and the Six Month Price, but in no eventless than $0.45 per share. The exercise price per
share for each warrant will automatically adjust to the sum of $0.10 per share and the Six-Month Price, but in no event less than
$0.45 per share. In addition, the Company obtained a 24 month extension on $1,071,000 in principal, and conversion of $720,000
of principal of the Milestone I Convertible Notes at a conversion price of $0.50 per share. The remaining $110,166 was extended
for thirty days. The interest rate on the principal balance of the extended Milestone I Convertible Notes was amended to 15%.
Furthermore, the Company obtained a 12 month extension on $168,000 in principal, and conversion of $1,128,000 in principal of
the Milestone II Convertible Notes. The remaining $67,200 was extended for thirty days. The Convertible Noteholders of the Milestone
I and II Convertible Notes were granted additional interest depending upon their election to convert or extend their Convertible
Notes.
The
impact of COVID-19 on the Company is evolving rapidly with events unfolding on a daily and weekly basis. The direct impact to
our operations has begun to take affect at the close of the first quarter ended March 31, 2020. Specifically, our business has
been impacted by dining bans targeted at restaurants to reduce the size of public gatherings. We have noted restaurant chains
have closed operations and furloughed employees which would preclude our single serve products from being served at those establishments
for a number of weeks. Furthermore, many school districts have closed regular attendance which could conceivably last to the end
of the school year. This will directly impact the sales of our Bulk Product into that sales channel. Our headquarters are located
in Los Angeles, California, where the entire state has been issued a “shelter in place” order from the Governor of
California. Consequently, our staff in the headquarter office are working remotely until further notice. At this point, we have
not experienced a disruption in the supply chain for manufacturing our products. The developments surrounding COVID-19 remain
fluid and dynamic, and consequently, will require the Company to continue to monitor news headlines from government and health
officials, as well as, the business community.
Our
operations to date have been financed by the sale of securities, the issuance of convertible debt and the issuance of short-term
debt, including related party advances. If we are unable to generate sufficient cash flow from operations with the capital raised
we will be required to raise additional funds either in the form of equity or in the form of debt. There are no assurances
that we will be able to generate the necessary capital to carry out our current plan of operations.
We
have entered into a direct lease for new premises covering the period April 1, 2019 to March 31, 2023. The aggregate minimum requirements
under the non-cancellable direct lease as of December 31, 2019 is $254,368.
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.
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 Vice President Finance,
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 Vice President Finance concluded that the
Company’s disclosure controls and procedures were not effective as of December 31, 2019, due to inadequate segregation
of duties.
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.
Our
management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2019.
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.
Under
the supervision and with the participation of our management, including our Chief Executive Officer and our Vice President Finance,
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 Vice President Finance concluded that the
Company’s disclosure controls and procedures were not effective as of December 31, 2019.
Management
has identified the following material weakness in our internal control over financial reporting:
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.
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.
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
During
the fourth quarter of the year ended December 31, 2019, there was a significant reduction in headcount, specifically in the areas
of finance, operations and administration. The decrease in staffing gave rise to a material weakness over our internal control
over financial reporting. The Company will evaluate the staffing necessary to reinstate the documentation standards sufficient
to ensure proper implementation of internal control procedures over the coming quarters.
Item
9B. Other Information.
None
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
|
|
42
|
|
President,
Chief Executive Officer and Chairman
|
|
Raffi
Loussararian
|
|
52
|
|
Vice
President Finance
|
|
Steven
Lang
|
|
67
|
|
Director
|
|
Arnold
Tinter
|
|
74
|
|
Secretary
and Director
|
|
Joseph
M. Cugine
|
|
57
|
|
Director
|
|
Isabelle
Ortiz-Cochet
|
|
58
|
|
Director
|
|
Alexander
H. Ware
|
|
58
|
|
Director
|
Riccardo
Delle Coste has been the Chairman of our board of directors, President and Chief Executive Officer since January 10, 2012.
He has also been the President and Chief Executive Officer of Barfresh Inc., a Nevada corporation and our wholly owned subsidiary
(“Barfresh NV”), since its inception. Mr. Delle Coste is the inventor of the patented technology and the creator of
Barfresh. Mr. Delle Coste developed a unique system using controlled pre-packaged portions to deliver a freshly made smoothie
that is quick, cost efficient, healthy and with no waste. In building the business, he is responsible for securing new business
and maintaining key client relationships. He is also responsible for the development of new product from testing to full-scale
production, establishment of the manufacturing facilities that have all necessary accreditations, technology development, product
improvement and R&D with new product launches. Mr. Delle Coste also has over five years of investment banking experience.
Mr. Delle Coste attended Macquarie University, Sydney, Australia while studying for a Bachelor of Commerce for 3.5 years but left
to pursue business interests before receiving a degree.
Qualifications:
Mr. Delle Coste has 17 years of experience within retail, hospitality and dairy manufacturing.
Raffi
Loussararian joined Barfresh as Vice President, Finance on July 29, 2019. He was appointed as the Principal Accounting
Officer on September 11, 2019. Mr. Loussararian has 29 years of progressive finance and accounting experience. Most recently,
Mr. Loussararian served in the role of Vice President of Finance and consulted for various beverage brands including Diabolo Beverage
2011- 2019 and Neurobrands from 2009- 2011. Prior to that, Mr. Loussararian served as Vice President Finance and Controller for
LegalZoom 2006-2008 and eBay Rent.com from 2005-2006. Mr. Loussararian began his career at Ernst & Young from 1991-1995.
Mr.
Loussararian holds a B.S. in Accounting and Finance from California State University, Northridge. Mr. Loussararian is a Certified
Public Accountant in the State of California.
Qualifications:
Mr. Loussararian has over 29 years of experience in corporate finance leadership positions.
Steven
Lang was appointed as Director of the Company on January 10, 2012. Prior to joining Barfresh NV, from 2003 to 2007, Mr.
Lang was a director of Vericap Finance Limited, a company that specializes in providing advice to and investing in Australian
companies with international growth potential. From 1990 to 1999, he served as a director of Babcock & Brown’s Australian
operations where he was responsible for international structured finance transactions. Mr. Lang received a Bachelor of Commerce
and a Bachelor of Laws from the University of New South Wales in 1976 and a Master of Laws from the University of Sydney in 1984.
He has been a member of the Institute of Chartered Accountants in Australia and was licensed to practice foreign law in New York.
Qualifications:
Mr. Lang has over 40 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, and served temporarily as Principal Accounting Officer.
Mr. Tinter founded Corporate Finance Group, Inc., a consulting firm located in Denver, Colorado, in 1992, and is its President.
Corporate Finance Group, Inc., is involved in financial consulting in the areas of strategic planning, mergers and acquisitions
and capital formation. He has been the chief financial officer and a director of other public companies: From 2012 to 2016, LifeApps
Digital Media Inc. and Arvana Inc. From 2006 to 2010 he was the chief financial officer of Spicy Pickle Franchising, Inc. In all
of the companies his responsibilities included oversight of all accounting functions, including SEC reporting, strategic planning
and capital formation. From May 2015 to the present, he served as chief financial officer of Bambu Franchising LLC,
LLC, a privately held company that is a franchisor of Vietnamese themed shoppes that serve drinks and deserts. Prior to 1990,
Mr. Tinter was chief executive officer of Source Venture Capital, a holding company with investments in the gaming, printing and
retail industries. Mr. Tinter received a B.S. degree in Accounting in 1967 from C.W. Post College, Long Island University, and
is licensed as a Certified Public Accountant in Colorado.
Qualifications:
Mr. Tinter has over 40 years of experience as a Certified Public Accountant and a financial consultant. During his career he served
as a director of numerous public companies.
Joseph
M. Cugine was appointed as Director of the Company on July 29, 2014 and on April 27, 2015, was appointed president of
our wholly owned subsidiary, Smoothie Inc. Mr. Cugine is the owner and president of Cugine Foods and JC Restaurants, a franchisee
of Taco Bell and Pizza Hut in New York. He is also president and owner of Restaurant Consulting Group LLC. Prior to owning and
operating his own firms, Mr. Cugine held a series of leadership roles with PepsiCo, lastly as chief customer officer and senior
vice president of PepsiCo’s Foodservice division. Mr. Cugine also serves on the board of directors of The Chef’s Warehouse,
Inc., a publicly traded specialty food products distributor in the U.S., as well as Ridgefield Playhouse and R4 Technology. He
received his B.S. degree from St. Joseph’s University in Philadelphia.
Qualifications:
Mr. Cugine’s career in sales, marketing, operations and supply chain spans more than 25 years. He has extensive industry
contacts and proven experience leading and advising numerous successful food distribution companies.
Isabelle
Ortiz-Cochet was appointed as director of the Company on December 16, 2016. She is the Chief Investment Officer for Unibel,
parent company of Bel Group. Bel is an international France-based group, a world leader in branded cheese business and fruit pouches,
with brands such as Laughing Cow, Mini-Babybel, Boursin or GoGo Squeez. In that position since January 2016, Ms. Ortiz-Cochet
drives Unibel diversification strategy, and leads the investment portfolio development. She was previously VP Strategic Development
at Bel Group Form September 2013 to December 2015. From 2007 to 2013, based out of Bel’s New York office, Ms. Ortiz-Cochet
led the development of long term strategies in North and South America, as well as Marketing strategy in the region. Prior to
that position, she held a number of leadership positions in marketing and global strategy at Bel out of the Paris office, at French,
European and corporate levels. Isabelle began her career with Kimberly Clark in France. Isabelle earned a master’s degree
from ESSEC Business School in France, and an executive MBA from HEC Business School, France.
Pursuant
to the investor rights agreement between Barfresh and Unibel dated November 23, 2016, Unibel is entitled to appoint one director
to the board of directors of Barfresh, which director is entitled to sit on each committee of the board of directors selected
by the Unibel, unless Unibel has beneficial ownership of less than: (i) 75.0% of its Shares; and (ii) 5.0% of the company’s
issued and outstanding common stock. Unibel has designated Isabelle Ortiz-Cochet as its board designee. Barfresh has agreed to
call shareholder meetings whenever necessary to ensure Unibel’s designee is elected as a director. At any time that Unibel’s
designee is not a director, Unibel’s designee will be entitled to be a board observer. Riccardo Delle Coste, Steven Lang
and their respective affiliates have agreed to vote their shares in favor of Unibel’s designee.
Alexander
H. Ware was appointed as director of the company on July 13, 2016. Since September 2018, Mr. Ware has served as
President of Foodsby, Inc., a fast-growing meal ordering platform for office buildings. Previously, Mr. Ware served as the
Interim President, Executive Vice President & Chief Financial Officer of Buffalo Wild Wings from 2016 to 2018. From 2012
to 2016, Mr. Ware was Executive Chairman of MStar Holding Corporation. Mr. Ware served as Interim Chief Executive Officer for
MStar Holding Corporation in 2013. Prior to his time at MStar, he served as a Senior Advisor and previously as Executive Vice
President of Strategic Development of Pohlad Companies, a family office, from 2010 to 2015. Starting in 1994, he served in
increasing capacities at PepsiCo, then PepsiAmericas, Inc. culminating as Executive Vice President & Chief Financial
Officer from 2005 to 2010. Previously, he was a Senior Associate at Booz Allen Hamilton, Inc. from 1990-1994. Mr. Ware
received his Bachelor of Arts degree in Economics from Hampden-Sydney College and his Master of Business Administration from
the Darden Graduate School of Business at University of Virginia. Mr. Ware currently serves on the board of MStar Holding
Corporation and on the advisory board of Stonearch Capital.
Qualifications:
Mr. Ware brings over 30 years of experience in leadership, strategic planning and business portfolio management.
Employment
Agreements
On
April 27, 2015, Smoothie, Inc. entered into an executive employment agreement with Riccardo Delle Coste, its Chief Executive Officer
and director. Mr. Delle Coste is also the Chief Executive Officer and Chairman of the Company. Pursuant to the employment agreement,
he will receive a base salary of $350,000 and performance bonuses of 75% of his base salary based on mutually agreed upon performance
targets. In addition, Mr. Delle Coste will receive up to an additional 500,000 performance options, on an annual basis. All options
granted under the employment agreement are subject to the Company’s 2015 Equity Incentive Plan.
On
April 27, 2015, Smoothie, Inc. entered into an executive employment agreement with Joseph M. Cugine to serve as President of Smoothie,
Inc. Pursuant to the employment agreement, Mr. Cugine will receive a base salary of $300,000 and performance bonuses of 75% of
his base salary based on mutually agreed upon performance targets. In addition, Mr. Cugine will receive 8-year options to purchase
up to 600,000 shares of Barfresh, one-half vesting on each of the second and third anniversaries of the date of Mr. Cugine’s
employment agreement. In addition, he will receive up to an additional 500,000 performance options, on an annual basis. Mr.
Cugine has agreed to reduce his salary to $25,000 annually, waived his rights to automatic performance bonuses and options not
yet to be granted. 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 Raffi Loussararian on July 29, 2019, to which he agreed to serve as
Vice President, Finance. Pursuant to the employment agreement, Mr. Loussararian received a base salary of $175,000 and performance
bonuses of 25% of his base salary, based upon performance targets determined by the Board of Directors. In addition, Mr. Loussararian
was granted 3-year options to purchase up to 150,000 shares of common stock of Barfresh. Option grants vest ratably according
to the option schedule on each anniversary of the date of commencement of Mr. Loussararian’s employment. All 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.
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 determined, as of December 31, 2018, that five of our seven directors
are independent, which constitutes a majority. One of our directors, Alice Elliot, resigned effective April 1, 2019, reducing
the current number of directors to six, four of which are independent.
Board
Committees
We
currently have an audit committee, a compensation committee and a nominating and governance committee. The members of the
audit committee are Arnold Tinter, Steven Lang, and Alexander Ware. The audit committee is primarily responsible for
reviewing the services performed by our independent auditors and evaluating our accounting policies and our system of
internal controls. Steven Lang, Arnold Tinter, and Alex Ware are independent members of the audit committee, as defined
above. The members of the
compensation committee are Arnold Tinter, Joe Cugine, and Riccardo Delle Coste. The compensation committee is primarily
responsible for reviewing and approving our salary and benefits policies (including stock options) and other compensation of
our executive officers. The members of the nominating committee are Arnold Tinter, Steven Lang, and Isabelle Ortiz-Cachet.
The nominating and governance committee is primarily responsible for overseeing corporate governance and for identifying,
evaluating and recommending individuals to serve as directors of the company.
Legal
Proceedings
To
the best of our knowledge, none of our executive officers or directors are parties to any material proceedings adverse to the
Company, have any material interest adverse to the Company or have been subject to legal, administrative or judicial orders, proceedings
or decrees required to be disclosed.
Code
of Ethics
Our
Chief Executive Officer, and our Vice President Finance 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, we believe that during the fiscal year ended December 31, 2019 our directors, executive officers and persons who
own more than 10% of our common stock complied with all Section 16(a) filing requirements with the exception of the following:
|
●
|
Joseph
Cugine, late filing of Form 4
|
|
●
|
Joseph
Tesoriero, late filing of Form 4
|
|
●
|
Isabelle
Ortiz-Cochet, late filing of Form 4
|
|
●
|
Alexander
H. Ware, late filing of Form 4
|
|
●
|
Steve
Lang, late filing of Form 4
|
|
●
|
Riccardo
Delle Coste, late filing of Form 4
|
Each
late filing reported one transaction unless otherwise indicated. None of our officers or directors submitted Form 5 filings.
Item
11. Executive Compensation.
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
|
|
|
2019
|
|
|
|
350,000
|
(1)
|
|
|
-
|
|
|
|
-
|
|
|
|
82,500
|
(2)
|
|
|
|
|
|
|
|
|
|
|
10,800
|
(4)
|
|
|
443,300
|
|
|
|
|
2018
|
|
|
|
350,000
|
(1)
|
|
|
-
|
|
|
|
-
|
|
|
|
92,500
|
(3)
|
|
|
|
|
|
|
|
|
|
|
10,800
|
(4)
|
|
|
453,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Raffi Loussararian Vice President Finance
|
|
|
2019
|
|
|
|
74,936
|
|
|
|
|
|
|
|
|
|
|
|
51,000
|
(5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
125,936
|
|
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Joseph Tesoriero, Chief Financial Officer
|
|
|
2019
|
|
|
|
105,738
|
(6)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
105,738
|
|
|
|
|
2018
|
|
|
|
290,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
92,500
|
(7)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
382,500
|
|
1.
|
Of
the salary earned, in 2019 $232,835 was paid and $117,165 was deferred and in 2018 $164,096 was paid and $185,904 was deferred.
|
|
|
2.
|
Represents
a stock option grant 250,000 options shares issued 5/20/19 with an exercise price of $0.45, which vest ratably according to
the option schedule on each anniversary over the next three years and are exercisable until 5/20/27.
|
|
|
3.
|
Represents
a stock option grant 250,000 options shares issued 7/25/18 with an exercise price of $0.52, which vest ratably according to
the option schedule on each anniversary over the next three years and are exercisable until 7/25/26.
|
|
|
4.
|
Represents
the car allowance paid to Mr. Delle Coste
|
|
|
5.
|
Represents
a stock option grant 150,000 shares issued 7/29/19 with an exercise price of .45 which vest ratably according to the option
schedule on each anniversary over the next three years and are exercisable until 7/29/27.
|
|
|
6.
|
Of the salary earned, in 2019 $105,738 was paid and in 2018 $142,379
was paid and $147,621was deferred.
|
|
|
7.
|
Represents a stock option grant 250,000 options shares issued 7/25/2018
with an exercise price of $0.52, which vest ratably according to the option schedule on each anniversary over the next three years
and are exercisable until 7/25/2026.
|
Outstanding
Equity Awards at Fiscal Year-End Table
Option Awards
|
|
Stock Awards
|
Name
|
|
Number of
securities
underlying
unexercised options
(#) exercisable
|
|
|
Equity
incentive
plan
awards:
Number of
securities
underlying
unexercised
unearned
options (#)
|
|
|
Option
exercise
price ($)
|
|
|
Option
expiration
date
|
|
Number of
shares or
units of
stock that
have not
vested (#)
|
|
Market
value of
shares or
units of
stock that
have not
vested ($)
|
|
Riccardo Delle Coste
|
|
|
250,000
|
(1)
|
|
|
|
|
|
|
0.61
|
|
|
5/25/24
|
|
|
|
|
|
|
|
|
|
125,000
|
(1)
|
|
|
|
|
|
|
0.72
|
|
|
11/25/24
|
|
|
|
|
|
|
|
|
|
166,667
|
(2)
|
|
|
83,333
|
(2)
|
|
|
0.55
|
|
|
9/15/25
|
|
|
|
|
|
|
|
|
|
83,333
|
(3)
|
|
|
166,667
|
(3)
|
|
|
0.52
|
|
|
7/26/26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
250,000
|
(4)
|
|
|
0.45
|
|
|
5/20/27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Raffi Loussararian
|
|
|
150,000
|
(5)
|
|
|
|
|
|
|
0.45
|
|
|
7/29/27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Joseph Tesoriero
|
|
|
500,000
|
(1)
|
|
|
|
|
|
|
0.82
|
|
|
5/1/23
|
|
|
|
|
|
|
|
|
|
175,000
|
(1)
|
|
|
|
|
|
|
0.61
|
|
|
5/25/24
|
|
|
|
|
|
|
|
|
|
54,567
|
(1)
|
|
|
|
|
|
|
0.72
|
|
|
11/25/24
|
|
|
|
|
|
|
|
|
|
200,000
|
(1)
|
|
|
|
|
|
|
0.77
|
|
|
7/15/25
|
|
|
|
|
|
|
|
|
|
116,667
|
(1)
|
|
|
|
|
|
|
0.55
|
|
|
9/15/25
|
|
|
|
|
|
|
|
|
|
83,333
|
(1)
|
|
|
|
|
|
|
0.52
|
|
|
7/26/26
|
|
|
|
|
|
|
1.
|
Fully
vested.
|
|
|
2.
|
Vest
ratably in equal increments on 9/15/18, 9/15/19 and 9/15/20.
|
|
|
3.
|
Vest
ratably in equal increments on 7/26/19, 7/26/20, and 7/26/21.
|
|
|
4.
|
Vest
ratably in equal increments on 5/20/20, 5/20/21, and 5/20/22.
|
|
|
5.
|
Vest
ratably in equal increments on 7/29/20, 7/29/21, and 7/29/22.
|
|
|
Compensation
of Directors
The
following table summarizes the compensation paid to our directors that were not employees for the fiscal year ended December 31,
2019. A director who is a Company employee does not receive any compensation for service as a director. The compensation received
by directors that are employees of the Company is shown above in the summary compensation table. We reimburse all directors for
expenses incurred in their capacity as directors.
Name
|
|
Fees
Earned or
Paid in
Cash
($)
|
|
|
Stock
Awards
($)
|
|
|
Option
Awards
($)
|
|
|
Non-Equity
Incentive Plan
Compensation
($)
|
|
|
Nonqualified
Deferred
Compensation
Earnings
($)
|
|
|
All Other
Compensation
($)
|
|
|
Total
($)
|
|
Arnold Tinter
|
|
|
50,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,000
|
(1)
|
|
62,600
|
|
Steven Lang
|
|
|
|
|
|
|
|
|
|
|
50,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50,000
|
|
Isabelle Ortiz-Cochet
|
|
|
|
|
|
|
|
|
|
|
50,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50,000
|
|
Alex Ware
|
|
|
|
|
|
|
50,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50,000
|
|
Alice Elliot
|
|
|
|
|
|
|
|
|
|
|
25,000
|
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,000
|
|
(1)
|
Represents
consulting fees paid to Mr. Tinter.
|
|
|
(2)
|
Alice
Elliot resigned from the Board on April 1, 2019
|
Employment
Agreements
On
April 27, 2015, The Company entered into an executive employment agreement with Riccardo Delle Coste, its Chief Executive Officer
and director. Mr. Delle Coste is also the Chief Executive Officer and Chairman of the Company. Pursuant to the employment agreement,
he will receive a base salary of $350,000 and performance bonuses of 75% of his base salary based on mutually agreed upon performance
targets. In addition, Mr. Delle Coste will receive up to an additional 500,000 performance options, on an annual basis. All options
granted under the employment agreement are subject to the Company’s 2015 Equity Incentive Plan.
On
April 27, 2015, Smoothie entered into an executive employment agreement with Joseph M. Cugine to serve as President of Smoothie,
Inc. Pursuant to the employment agreement, Mr. Cugine will receive a base salary of $300,000 and performance bonuses of 75% of
his base salary based on mutually agreed upon performance targets. In addition, Mr. Cugine will receive 8-year options to purchase
up to 600,000 shares of Barfresh, one-half vesting on each of the second and third anniversaries of the date of Mr. Cugine’s
employment agreement. In addition, he will receive up to an additional 500,000 performance options, on an annual basis. All options
granted under the employment agreement are subject to the Company’s 2015 Equity Incentive Plan. Mr. Cugine has agreed
to reduce his salary to $25,000 and waive his rights to automatic performance bonuses and options not yet granted.
The
Company entered into an executive employment agreement with Raffi Loussararian on July 29, 2019, to which he agreed to serve as
Vice President, Finance. Pursuant to the employment agreement, Mr. Loussararian received a base salary of $175,000 and performance
bonuses of 25% of his base salary, based upon performance targets determined by the Board of Directors. In addition, Mr. Loussararian
was granted 3-year options to purchase up to 150,000 shares of common stock of Barfresh. Option grants vest ratably on each anniversary
of the date of commencement of Mr. Loussararian’s employment. All options granted under the employment agreement are subject
to the Company’s 2015 Equity Incentive Plan.
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 April 2, 2020 for
(i) each shareholder known to be the beneficial owner of 5% or more of our outstanding shares of common stock, (ii) each named
executive officer and director, and (iii) all executive officers and directors as a group. A person is considered to beneficially
own any shares: (i) over which such person, directly or indirectly, exercises sole or shared voting or investment power, or (ii)
of which such person has the right to acquire beneficial ownership at any time within 60 days through an exercise of stock options
or warrants or otherwise. Unless otherwise indicated, voting and investment power relating to the shares shown in the table for
our directors and executive officers is exercised solely by the beneficial owner or shared by the owner and the owner’s
spouse or children.
For
purposes of this table, a person or group of persons is deemed to have “beneficial ownership” of any shares of common
stock that such person has the right to acquire within 60 days of April 6, 2020. As of April 6, 2020, the Company had 143,247,603
shares of common stock outstanding. For purposes of computing the percentage of outstanding shares of our common stock held by
each person or group of persons named above, any shares that such person or persons has the right to acquire within 60 days of
April 6, 2020 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.
The
following table sets forth certain information regarding our shares of common stock beneficially owned as of April 6, 2020 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.
|
|
Common Stock
|
|
Name and address of beneficial owner (1)
|
|
Amount and nature
of beneficial
ownership
|
|
|
Percent of
class o/s
|
|
Riccardo Delle Coste (2) (3) (4) (5) (6)
|
|
|
21,732,234
|
|
|
|
14.99
|
%
|
|
|
|
|
|
|
|
|
|
Steven Lang (7) (8) (9) (10) (11)
|
|
|
21,048,127
|
|
|
|
14.60
|
%
|
|
|
|
|
|
|
|
|
|
Joseph Tesoriero (12) (13) (14)
|
|
|
2,285,574
|
|
|
|
1.58
|
%
|
|
|
|
|
|
|
|
|
|
Arnold Tinter (15)
|
|
|
800,000
|
|
|
|
0.56
|
%
|
|
|
|
|
|
|
|
|
|
Joe Cugine (16) (17) (18)
|
|
|
3,616,506
|
|
|
|
2.50
|
%
|
|
|
|
|
|
|
|
|
|
Alexander Ware (19) (20) (21)
|
|
|
585,072
|
|
|
|
0.41
|
%
|
|
|
|
|
|
|
|
|
|
Isabelle Ortiz-Cochet
2 Allee De Longchamp Suresnes, France (22) (23)
|
|
|
370,883
|
|
|
|
0.26
|
%
|
|
|
|
|
|
|
|
|
|
Raffi Loussararian (24)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Alice Elliot (25) (26) (27) (28)
|
|
|
884,429
|
|
|
|
0.62
|
%
|
|
|
|
|
|
|
|
|
|
All directors and officers as a group (8 persons)
|
|
|
51,322,825
|
|
|
|
34.19
|
%
|
|
|
|
|
|
|
|
|
|
Unibel 2 Allee De Longchamp Suresnes, France 92150 (29) (30) (31)
|
|
|
27,841,658
|
|
|
|
18.23
|
%
|
|
|
|
|
|
|
|
|
|
IBEX Investors LLC (fka) Lazarus Investment Partners LLLP (32) (33)
3200 Cherry Creek South Drive Suite 670 Denver, CO 80209
|
|
|
20,745,766
|
|
|
|
14.08
|
%
|
1
|
The
address of those listed, except as noted is c/o Barfresh Food Group Inc., 3600 Wilshire Blvd., Suite 1720 Los Angeles CA 90010.
|
|
|
2
|
Mr.
Delle Coste is the Chief Executive Officer, President and a Director of the Company.
|
|
|
3
|
Includes
19,438,341 shares owned by R.D. Capital Holdings PTY Ltd. and of which Riccardo Delle Coste is deemed to be a beneficial owner.
|
|
|
4
|
Includes
624,999 shares underlying options granted.
|
|
|
5
|
Includes
154,788 shares underlying warrants issued in connection with promissory notes the holder of which is R.D. Capital Holdings
PTY Ltd. and of which Riccardo Delle Coste is deemed to be a beneficial owner. Also includes 26,614 shares underlying warrants
issued in connection with the conversion of debt.
|
|
|
6
|
Includes
50,000 shares underlying convertible debt
|
|
|
7
|
Mr.
Lang is a Director of the Company.
|
|
|
8
|
Includes
19,127,177 shares owned by Sidra Pty Limited of which Steven Lang is deemed to be a beneficial owner.
|
|
|
9
|
Includes
553,136 shares underlying options granted.
|
|
|
10
|
Includes
190,170 shares underlying warrants issued in connection with a promissory note the holder of which is Sidra PTY Limited. Also
includes 159,683 shares underlying warrants issued in connection with the conversion of debt.
|
|
|
11
|
Includes
300,000 shares underlying convertible debt.
|
|
|
12
|
Mr.
Tesoriero was formerly the Chief Financial Officer of the Company.
|
|
|
13
|
Includes
1,111,378 shares underlying options granted.
|
|
|
14
|
Includes
76,629 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
|
Mr.
Cugine is President of a subsidiary of the Company and a Director.
|
|
|
17
|
Includes
1,183,791 shares underlying options granted.
|
|
|
18
|
Includes
457,830 shares underlying warrants issued in connection with purchase of common shares. Also includes 62,614 shares underlying
warrants issued in connection with the conversion of debt.
|
19
|
Mr.
Ware is a Director of the Company.
|
|
|
20
|
Includes
435,518 shares owned by The Alexander Ware Revocable Trust of which Mr. Ware is deemed to be a beneficial owner.
|
|
|
21
|
Includes
78,125 shares underlying warrants issued to The Alexander Ware Revocable Trust in connection with purchase of common
shares.
|
|
|
22
|
Ms.
Ortiz-Cochet was a Director of the Company
|
|
|
23
|
Includes
370,883 shares underlying options granted.
|
|
|
24
|
Raffi
Loussararian is the Principal Financial Officer of the Company.
|
|
|
25
|
Ms.
Elliot was a Director of the Company. She resigned effective March 31, 2019.
|
26.
|
Includes
360,000 shares owned by Elliot-Herbst LP of which Alice Elliot is deemed to be a beneficial owner.
|
|
|
27
|
Includes
64,599 shares owned by Elliot-Herbst Family LLC of which Ms. Elliot is deemed to be a beneficial owner
|
|
|
28
|
Includes
368,210 shares underlying options granted.
|
|
|
29
|
Includes
7,812,500 shares underlying warrants issued in connection with the purchase of common stock.
|
|
|
30
|
Includes
447,336 shares underlying warrants issued in connection with a convertible promissory note.
|
|
|
31
|
Includes
1,252,274 shares underlying warrants issued in connection with the purchase of common stock
|
|
|
32
|
Includes
2,633,333 and 1,500,000 shares underlying warrants issued in connection with the purchase of common stock.
|
|
|
33
|
Includes
3,000,000 shares owned personally by Justin Borus, who serves as manager of Ibex Investments LLC.
|
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 2019 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.
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 as of December 31, 2019 that four of our six directors
are independent, which constitutes a majority.
Item
14. Principal Accounting Fees and Services.
Aggregate
fees for professional services rendered to the Company by Eide Bailly LLP for the years ended December 31, 2019 and December 31,
2018 were as follows.
|
|
2019
|
|
|
2018
|
|
Audit fees
|
|
$
|
85,195
|
|
|
$
|
71,982
|
|
Audit related fees
|
|
|
-
|
|
|
|
-
|
|
Tax fees
|
|
|
8,375
|
|
|
|
15,181
|
|
All other fees
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
93,570
|
|
|
$
|
87,166
|
|
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 years end December 31, 2019 and December 31, 2018 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. Eide Bailly LLP did not provide us with audit related services for the years ended December 31, 2019 or December
31, 2018, that are not reported under Audit Fees.
Tax
Fees. The aggregate tax fees billed for the years end December 31, 2019 and 2018 related to the preparation of corporate income
tax returns.
All
Other Fees. Eide Bailly LLP did not provide us with professional services related to “Other Fees” for the years
ended December 31, 2019 or December 31, 2018.
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.
Note
1. Summary of Significant Accounting Policies
Barfresh
Food Group Inc., (“we,” “us,” “our,” and the “Company”) was incorporated on February
25, 2010 in the State of Delaware. We are engaged in the manufacturing and distribution of ready to blend beverages, particularly,
smoothies, shakes and frappes.
The
accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United
States of America (“GAAP”).
Basis
of Consolidation
The
consolidated financial statements include the financial statements of the Company and our wholly owned subsidiaries, Barfresh
Inc. and Barfresh Corporation Inc. (formerly known as Smoothie, Inc.). All inter-company balances and transactions among the companies
have been eliminated upon consolidation.
Use
of Estimates
The
preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities in the balance sheets and revenues and expenses during the years reported. Actual
results may differ from these estimates.
Concentration
of Credit Risk
The
amount of cash on deposit with financial institutions exceeds the $250,000 federally insured limit at December 31, 2019 and 2018.
However, we believe that cash on deposit that exceeds $250,000 in the financial institutions is financially sound and the risk
of loss is minimal.
Restricted
Cash
In
the third quarter of 2019, the Company adopted FASB ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (“ASU
2016-18”), which enhances and clarifies the guidance on the classification and presentation of restricted cash in the statement
of cash flows and requires additional disclosures about restricted cash balances. At December 31, 2019, the Company had $91,385
in restricted cash related to our co-packing agreement with Yarnell Operations, LLC.
Fair
Value Measurement
Financial
Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 820, Fair Value
Measurements and Disclosures (“ASC 820”), provides a comprehensive framework for measuring fair value and expands
disclosures which are required about fair value measurements. Specifically, ASC 820 sets forth a definition of fair value and
establishes a hierarchy prioritizing the inputs to valuation techniques, giving the highest priority to quoted prices in active
markets for identical assets and liabilities and the lowest priority to unobservable value inputs. ASC 820 defines the hierarchy
as follows:
Level
1 - Quoted prices are available in active markets for identical assets or liabilities as of the reported date. The types of assets
and liabilities included in Level 1 are highly liquid and actively traded instruments with quoted prices, such as equities listed
on the New York Stock Exchange.
Level
2 - Pricing inputs are other than quoted prices in active markets but are either directly or indirectly observable as of the reported
date. The types of assets and liabilities in Level 2 are typically either comparable to actively traded securities or contracts
or priced with models using highly observable inputs.
Level
3 - Significant inputs to pricing that are unobservable as of the reporting date. The types of assets and liabilities included
in Level 3 are those with inputs requiring significant management judgment or estimation, such as complex and subjective models
and forecasts used to determine the fair value of financial transmission rights.
Our
financial instruments consist of cash, accounts receivable, accounts payable, accrued expenses, derivative liabilities, and convertible
notes. The carrying value of our financial instruments approximates their fair value, except for the derivative liability in which
carrying value is fair value.
Accounts
Receivable
Accounts
receivable are typically unsecured. Our credit policy calls for payment generally within 30 days. The credit worthiness of a customer
is evaluated prior to a sale. As of December 31, 2019 and 2018, the company’s allowance for doubtful accounts was $141,788
and $61,788 respectively. There was $89,397 of bad debt expense recorded for the year ended December 31, 2019 and $61,788 of bad
debt expense for the year ended December 31, 2018. The allowance was applied to certain receivable accounts which are over 95
days.
Inventory
Inventory
consists of finished goods and is carried at the lower of cost or net realizable value on a first in first out basis. The company
monitors the remaining useful life of its inventory and establishes a reserve of obsolescence where appropriate. As of December
31, 2019 and 2018, the Company’s inventory reserve was $100,651 and $31,237 respectively.
Intangible
Assets
Intangible
assets are comprised of patents, net of amortization and trademarks. The patent costs are being amortized over the life of the
patent, which is twenty years from the date of filing the patent application. In accordance with ASC Topic 350 Intangibles
- Goodwill and Other (“ASC 350”), the costs of internally developing other intangible assets, such as patents,
are expensed as incurred. However, as allowed by ASC 350, costs associated with the acquisition of patents from third parties,
legal fees and similar costs relating to patents have been capitalized.
In
accordance with ASC 350 legal costs related to trademarks have been capitalized. We have determined that trademarks have an indeterminable
life and therefore are not being amortized.
Long-Lived
Assets and Other Acquired Intangible Assets
We
evaluate the recoverability of property and equipment and finite-lived intangible assets for possible impairment whenever events
or circumstances indicate that the carrying amount of such assets may not be recoverable. The evaluation is performed at the lowest
level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. Recoverability
of these assets is measured by a comparison of the carrying amounts to the future undiscounted cash flows the assets are expected
to generate. If such review indicates that the carrying amount of property and equipment and intangible assets is not recoverable,
the carrying amount of such assets is reduced to fair value. We have not recorded any impairment charges during the years presented.
Property,
Plant, and Equipment
Property,
plant, and equipment is stated at cost less accumulated depreciation and accumulated impairment loss, if any. Depreciation is
calculated on a straight-line basis over the estimated useful lives of the assets. Leasehold improvements are being amortized
over the shorter of the useful life of the asset or the lease term that includes any expected renewal periods that are deemed
to be reasonably assured. The estimated useful lives used for financial statement purposes are:
Furniture
and fixtures:
|
5
years
|
Manufacturing
equipment and customer equipment:
|
3
years to 7 years
|
Leasehold
improvements:
|
2
years
|
Vehicles:
|
5
years
|
Revenue
Recognition
In
accordance with ASC 606, Revenue from Contracts with Customers, revenue is recognized when a customer obtains ownership of promised
goods. The amount of revenue recognized reflects the consideration to which the Company expects to be entitled to receive in exchange
for these goods. The Company applies the following five steps:
|
1)
|
Identify
the contract with a customer
|
|
|
A
contract with a customer exists when (i) the Company enters into an enforceable contract with a customer that defines each
party’s rights, (ii) the contract has commercial substance and, (iii) the Company determines that collection of substantially
all consideration for goods or services that are transferred is probable. For the Company, the contract is the approved sales
order, which may also be supplemented by other agreements that formalize various terms and conditions with customers.
|
|
|
|
|
2)
|
Identify
the performance obligation in the contract
|
|
|
Performance
obligations promised in a contract are identified based on the goods or services that will be transferred to the customer.
For the Company, this consists of the delivery of frozen beverages, which provide immediate benefit to the customer.
|
|
3)
|
Determine
the transaction price
|
|
|
The
transaction price is determined based on the consideration to which the Company will be entitled in exchange for transferring
goods and is generally stated on the approved sales order. Variable consideration, which typically includes volume-based rebates
or discounts, are estimated utilizing the most likely amount method.
|
|
|
|
|
4)
|
Allocate
the transaction price to performance obligations in the contract
Since
our contracts contain a single performance obligation, delivery of frozen beverages, the transaction price is allocated
to that single performance obligation.
|
|
|
|
|
5)
|
Recognize
Revenue when or as the Company satisfies a performance obligation
|
|
|
The
Company recognizes revenue from the sale of frozen beverages when title and risk of loss passes and the customer accepts the
goods, which generally occurs at the time of delivery to a customer warehouse. Customer sales incentives such as volume-based
rebates or discounts are treated as a reduction of sales at the time the sale is recognized. Shipping and handling costs are
treated as fulfillment costs and presented in distribution, selling and administrative costs.
|
|
|
|
|
|
The
company evaluated the requirement to disaggregate revenue and concluded that substantially all of its revenue comes from a
single product, frozen beverages.
|
Research
and Development
Expenditures
for research activities relating to product development and improvement are charged to expense as incurred. We incurred $538,391
and $674,224, in research and development expenses for the years ended December 31, 2019 and 2018, respectively.
Shipping
and Storage Costs
Shipping
and handling costs are included in general and administrative expenses. For the years ended December 31, 2019 and 2018, shipping
and handling costs totaled $751,237 and $864,871, respectively.
Rent
Expense
As
of January 1, 2019, the Company adopted ASC 842. ASC 842 replaced the prior lease accounting guidance in its entirety. As disclosed
in Note 7, we entered into a new office space lease that took effect on April 1, 2019 and recorded a right-of-use asset and corresponding
liability for amounts that approximate our future commitments of $241,555. Lease expense for finance leases consists of the amortization
of the ROU asset on a straight-line basis over the asset’s estimated useful life and is included in operating expenses in
the consolidated statement of income.
Income
Taxes
The
provision for income taxes is determined in accordance with the provisions of ASC Topic 740, Accounting for Income Taxes
(“ASC 740”). Under this method, deferred tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective
tax basis. Deferred tax assets and liabilities are measured using enacted income tax rates expected to apply to taxable income
in the years in which those temporary differences are expected to be recovered or settled. Any effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
ASC
740 prescribes a comprehensive model for how companies should recognize, measure, present, and disclose in their financial statements,
uncertain tax positions taken or expected to be taken on a tax return. Under ASC 740, tax positions must initially be recognized
in the financial statements when it is more likely than not the position will be sustained upon examination by the tax authorities.
Such tax positions must initially and subsequently be measured as the largest amount of tax benefit that has a greater than 50%
likelihood of being realized upon ultimate settlement with the tax authority assuming full knowledge of the position and relevant
facts.
ASC
740 requires a valuation allowance to reduce the deferred tax assets reported if, based on the weight of evidence, it is more
than likely than not that some portion or all of the deferred tax assets will not be recognized.
For
the years ended December 31, 2019 and 2018 we did not have any interest and penalties or any significant unrecognized uncertain
tax positions.
Derivative
Liability
The
Company evaluates its convertible instruments, options, warrants or other contracts to determine if those contracts or embedded
components of those contracts qualify as derivatives to be separately accounted for under ASC Topic 815, “Derivatives and
Hedging.” The result of this accounting treatment is that the fair value of any derivative is marked-to-market each balance
sheet date and recorded as a liability. In the event that the fair value is recorded as a liability, the change in fair value
is recorded in the statement of operations as gain/loss from derivative liability. Upon conversion or exercise of a derivative
instrument, the instrument is marked to fair value at the conversion date and then that fair value is reclassified to equity.
We analyzed the derivative financial instruments in accordance with ASC 815. The objective is to provide guidance for determining
whether an equity-linked financial instrument is indexed to an entity’s own stock. This determination is needed for a scope
exception which would enable a derivative instrument to be accounted for under the accrual method. The classification of a non-derivative
instrument that falls within the scope of ASC 815-40-05 “Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company’s Own Stock” also hinges on whether the instrument is indexed to an entity’s
own stock. A non-derivative instrument that is not indexed to an entity’s own stock cannot be classified as equity and must
be accounted for as a liability. There is a two-step approach in determining whether an instrument or embedded feature is indexed
to an entity’s own stock. First, the instrument’s contingent exercise provisions, if any, must be evaluated, followed
by an evaluation of the instrument’s settlement provisions. The Company utilized the fair value standard set forth by the
Financial Accounting Standards Board, defined as the amount at which the assets (or liability) could be bought (or incurred) or
sold (or settled) in a current transaction between willing parties, that is, other than in a forced or liquidation sale.
Earnings
per Share
We
calculate net loss per share in accordance with ASC Topic 260, Earnings per Share. Basic net loss per share is computed
by dividing net loss by the weighted average number of shares of common stock outstanding for the period, and diluted earnings
per share is computed by including common stock equivalents outstanding for the period in the denominator. At December 31, 2019
and 2018 any equivalents would have been anti-dilutive as we had losses for the periods then ended.
Stock
Based Compensation
We
calculate stock compensation in accordance with ASC Topic 718, Compensation-Stock Based Compensation (“ASC 718”).
ASC 718 requires that the cost resulting from all share-based payment transactions be recognized in the financial statements and
establishes fair value as the measurement objective in accounting for share-based payment arrangements and requires all entities
to apply a fair-value-based measurement method in accounting for share-based payment transactions with employees except for equity
instruments held by employee stock ownership plans
Recent
pronouncements
From
time to time, new accounting pronouncements are issued that we adopt as of the specified effective date. We believe that the impact
of recently issued standards that are not yet effective may have an impact on our results of operations and financial position.
In
February 2016, the FASB issued ASU No. 2016-02, “Leases”, to improve financial reporting about leasing transactions.
This ASU will require organizations that lease assets (“lessees”) to recognize a lease liability and a right-of-use
asset on its balance sheet for all leases with terms of more than twelve months. A lease liability is a lessee’s obligation
to make lease payments arising from a lease, measured on a discounted basis and a right-of-use asset represents the lessee’s
right to use, or control use of, a specified asset for the lease term. The amendments in this ASU leaves the accounting for the
organization that own the assets leased to the lessee (“lessor”) largely unchanged except for targeted improvements
to align it with the lessee accounting model and Topic 606, “Revenue from Contracts with Customers”.
The
Company has evaluated the effect of the standard on our financial statements. Based on our evaluation, we have one material lease
subject to adoption of this standard, effective January 1, 2019. As disclosed in Note 8, we entered into a new office space lease
that took effect on April 1, 2019 and recorded a right-of-use asset and corresponding liability for amounts that approximate our
future commitments of $241,555.
Note
2. Inventory
Inventory
consists of the following at December 31:
|
|
2019
|
|
|
2018
|
|
Raw materials
|
|
$
|
286,027
|
|
|
$
|
43,256
|
|
Finished goods, net of reserve
|
|
|
332,083
|
|
|
|
1,127,656
|
|
Capitalized equipment depreciation
|
|
|
16,636
|
|
|
|
55,551
|
|
Inventory, net
|
|
$
|
634,746
|
|
|
$
|
1,226,463
|
|
The
Company has recorded a reserve for slow moving and potentially obsolete inventory. The reserve at December 31, 2019 and 2018 was
$100,651 and $31,237 respectively.
Note
3. Property Plant and Equipment
Major
classes of property and equipment at December 31, 2019 and 2018 consist of the following:
|
|
2019
|
|
|
2018
|
|
Furniture and fixtures
|
|
$
|
1,524
|
|
|
$
|
1,524
|
|
Manufacturing Equipment and customer equipment
|
|
|
3,521,636
|
|
|
|
3,118,391
|
|
Leasehold Improvements
|
|
|
4,886
|
|
|
|
4,886
|
|
Vehicles
|
|
|
29,696
|
|
|
|
29,696
|
|
|
|
|
3,557,742
|
|
|
|
3,154,497
|
|
Less: accumulated depreciation
|
|
|
(1,787,967
|
)
|
|
|
(1,190,846
|
)
|
|
|
|
1,769,775
|
|
|
|
1,963,651
|
|
Equipment not yet placed in service
|
|
|
636,542
|
|
|
|
536,605
|
|
Property and equipment, net of depreciation
|
|
$
|
2,406,317
|
|
|
$
|
2,500,254
|
|
We
recorded depreciation expense related to these assets of $586,237 and $447,709 for the years ended December 31, 2019 and 2018,
respectively. Depreciation expense in Cost of Goods Sold was $65,366 and $57,099 for the years ended December 31, 2019 and 2018
respectively.
Note
4. Intangible Assets
As
of December 31, 2019, intangible assets consist of patent costs of $764,891, trademarks of $108,632 and accumulated amortization
of $394,020.
As
of December 31, 2018, intangible assets consist of patent costs of $764,891, trademarks of $103,309 and accumulated amortization
of $330,411.
The
amounts carried on the balance sheet represent cost to acquire, legal fees and similar costs relating to the patents incurred
by the Company. Amortization is calculated through the expiration date of the patent, which is December 2025. The amount charged
to expenses for amortization of the patent costs was $63,610 and $63,610 for the years ended December 31, 2019 and 2018, respectively.
Estimated
future amortization expense related to patents as of December 31, 2019, is as follows:
|
|
Total Amortization
|
|
Years ending December 31,
|
|
|
|
|
2020
|
|
$
|
63,610
|
|
2021
|
|
|
63,610
|
|
2022
|
|
|
63,610
|
|
2023
|
|
|
63,610
|
|
Later years
|
|
|
116,431
|
|
|
|
$
|
370,871
|
|
Note
5. Related Parties
As
disclosed below in Note 6, members of management and directors invested in company’s convertible notes; and in Note 9, members
of management and directors have received shares of stock and options in exchange for services.
Note
6. Convertible Notes (Related and Unrelated Party)
In
March 2018, we closed an offering of $2,527,500 in convertible notes, Series CN Note 1 of 2, of which, management, directors and
significant shareholders have invested $840,000. The convertible notes bear 10% interest per annum and are due and payable on
March 14, 2020. The notes are convertible at any time prior to the due date into our common stock at conversion price of $0.88
per share or 85% of the average closing price of the common stock over the twenty consecutive trading days immediately preceding
the date of note holders’ election; but in no event lower than $0.60 per share. In addition, the interest is convertible
at any time prior to the due dates into our common stock at conversion price of 85% of the average closing price of the common
stock over the twenty consecutive trading days immediately preceding the date of note holders’ election; but in no event
lower than $0.60 per share. There were 1,331,583 warrants issued, in conjunction with the convertible note offering.
The
fair value of the warrants, $0.17 per share ($220,548 in the aggregate), was calculated using the Black-Scholes option pricing
model using the following assumptions:
Expected life (in years)
|
|
|
3
|
|
Volatility (based on a comparable company)
|
|
|
54.82
|
%
|
Risk Free interest rate
|
|
|
2.41
|
%
|
Dividend yield (on common stock)
|
|
|
-
|
|
The
value of $220,548 was recorded as a debt discount related to the issuance of the warrants.
In
April 2018, we offered investors in our March 2018 Convertible Note (“Series CN Notes”) the opportunity to accelerate
the issuance of certain warrants associated with the CN Notes. Pursuant to the acceleration offer, Series CN Notes investors who
invested an additional 10% to 20% of the Series CN Note amount, immediately received an additional 25% warrant coverage on their
initial CN Note investment, which would otherwise have been issued after one year. During April 2018, we closed the CN Note acceleration
offer in the amount of $177,300 in convertible notes, of which, management, directors and significant shareholders have invested
$30,000. The CN Note acceleration offer convertible notes bear 10% interest per annum and are due and payable on March 14, 2020.
The notes are convertible at any time prior to the due date into our common stock at conversion price of $0.88 per share or 85%
of the average closing price of the common stock over the twenty consecutive trading days immediately preceding the date of note
holders’ election; but in no event lower than $0.60 per share. In addition, the interest is convertible at any time prior
to the due dates into our common stock at conversion price of 85% of the average closing price of the common stock over the twenty
consecutive trading days immediately preceding the date of note holders’ election; but in no event lower than $0.60 per
share. There were 937,373 warrants issued in conjunction with the Series CN Note acceleration offer convertible note offering.
The
fair value of the warrants, $0.25 per share ($235,519 in the aggregate), was calculated using the Black-Scholes option pricing
model using the following assumptions:
Expected life (in years)
|
|
|
3
|
|
Volatility (based on a comparable company)
|
|
|
55.49
|
%
|
Risk Free interest rate
|
|
|
2.45
|
%
|
Dividend yield (on common stock)
|
|
|
-
|
|
The
value of $105,199 was recorded as a debt discount related to the issuance of the warrants as using the fair value would cause
the debt discount to exceed the gross proceeds received.
In
November and December 2018, three investors elected to convert their convertible note issued on March 14, 2018 into stock. The
total debt converted was $453,000 and $30,459 accrued interest into 804,396 shares of stock.
In
March 2019, an investor elected to exercise I-Warrants by using part of the investor’s convertible note. The total debt
settled was $350,634 of principal and $33,929 of accrued interest.
The
convertible notes consist of the following components as of the year-end:
|
|
31-Dec-19
|
|
|
31-Dec-18
|
|
Convertible notes
|
|
$
|
2,704,800
|
|
|
$
|
2,704,800
|
|
Less: Debt discount (warrant value)
|
|
|
(325,747
|
)
|
|
|
(325,747
|
)
|
Less: Debt discount (derivative value)(Note 7)
|
|
|
(638,988
|
)
|
|
|
(638,988
|
)
|
Less: Debt discount (issuance costs paid)
|
|
|
(27,000
|
)
|
|
|
(27,000
|
)
|
Less: Note conversion
|
|
|
(803,634
|
)
|
|
|
(453,000
|
)
|
Add: Debt discount amortization
|
|
|
898,940
|
|
|
|
481,042
|
|
|
|
$
|
1,808,371
|
|
|
$
|
1,741,107
|
|
The
total of $1,808,371 shown in the table above at December 31, 2019, plus the total of $932,190 from the table below equals the
total presented in the balance sheet of Long Term Liabilities: Convertible Note – related party net of discount, of $1,181,942,
Convertible Note – net of Discount of $1,407,877, and Current Liabilities: Convertible Note – net of Discount 150,742.
The total of $1,741,107 in the table above at December 31, 2018, plus the total of $468,216 from the table below ($2,209,323)
agrees to the total presented in the balance sheet of Long Term Liabilities: Convertible note – related party, net of discount
of $841,836, and Convertible Note, net of discount, of $1,367,487.
In
December 2018, we closed an offering of $1,363,200 in convertible notes, Series CN 2 of 2, of which, management, directors and
significant shareholders have invested $560,000. The convertible notes bear 10% interest per annum and are due and payable on
November 30, 2020. The notes are convertible at any time prior to the due date into our common stock at conversion price of $0.88
per share or 85% of the average closing price of the common stock over the twenty consecutive trading days immediately preceding
the date of note holders’ election; but in no event lower than $0.60 per share. In addition, the interest is convertible
at any time prior to the due dates into our common stock at conversion price of 85% of the average closing price of the common
stock over the twenty consecutive trading days immediately preceding the date of note holders’ election; but in no event
lower than $0.60 per share. There were 678,864 warrants issued, in conjunction with the convertible note offering.
The
fair value of the warrants, $0.31 per share ($212,763 in the aggregate), was calculated using the Black-Scholes option pricing
model using the following assumptions:
Expected life (in years)
|
|
|
3
|
|
Volatility (based on a comparable company)
|
|
|
59.00
|
%
|
Risk Free interest rate
|
|
|
2.83
|
%
|
Dividend yield (on common stock)
|
|
|
-
|
|
The
value of $212,763 was recorded as a debt discount related to the issuance of the warrants.
The
convertible notes consist of the following components as of the year-end:
|
|
31-Dec-19
|
|
|
31-Dec-18
|
|
Convertible notes
|
|
$
|
1,363,200
|
|
|
$
|
1,363,200
|
|
Less: Debt discount (warrant value)
|
|
|
(212,763
|
)
|
|
|
(212,763
|
)
|
Less: Debt discount (derivative value)(Note 7)
|
|
|
(697,186
|
)
|
|
|
(697,186
|
)
|
Less: Debt discount (issuance costs paid)
|
|
|
(23,700
|
)
|
|
|
(23,700
|
)
|
Add: Debt discount amortization
|
|
|
502,639
|
|
|
|
38,665
|
|
|
|
$
|
932,190
|
|
|
$
|
468,216
|
|
The
total shown in the above table of $932,190 at December 31, 2019, plus the total from table above $1,808,371 agrees to the total
presented in the balance sheet of Long Term Liabilities: Convertible Note – related party net of discount, of $1,181,942,
Convertible Note – net of Discount of $1,407,877, and Current Liabilities: Convertible Note – net of discount of 150,742.
The total in the first table above of $1,741,107 at December 31, 2018, plus the total from the second table above of $468,216
($2,209,323) agrees to the total presented in the balance sheet of Long Term Liabilities: Convertible note – related party,
net of discount of $841,836, and Convertible Note, net of discount, of $1,367,487.
As
of December 31, 2019, the outstanding balances due of the Series CN Notes, net of all related debt discount, total $2,740,561.
The Long Term Liabilities of related party convertible notes (net) and unrelated party convertible notes (net) represent $1,181,942
and $1,407,877, respectively as of December 31, 2019. The Current Liabilities of Convertible Notes, (net) represent 150,742 as
of December 31, 2019. Per Note 14, Subsequent Events, the Company restructured its Milestone I and II Convertible Notes through
both conversion and extension. The remaining principal balance outstanding as of March 23, 2020 is $1,407,000.
Future
maturity of convertible notes at face value before effect of all discount, are as follow:
|
|
Total Convertible
Notes
|
|
Years ending December 31,
|
|
|
|
|
2020
|
|
$
|
177,366
|
|
2021
|
|
|
168,000
|
|
2022
|
|
|
1,071,000
|
|
2023
|
|
|
-
|
|
2024
|
|
|
-
|
|
|
|
$
|
1,416,366
|
|
Note
7. Derivative Liabilities
As
discussed in Note 6, Convertible Notes, the Company issued Series CN Note acceleration offer convertible notes payable that provide
variable conversion provisions. The conversion terms of the convertible notes are variable based on certain factors, such as the
future price of the Company’s common stock. The number of shares of common stock to be issued is based on the future price
of the Company’s common stock, therefore the number of shares of common stock issuable upon conversion of the promissory
note is indeterminate.
The
fair values of the Company’s derivative liabilities are estimated at the issuance date and are revalued at each subsequent
reporting date. The Company recognized a derivative liability and debt discount of $569,588 at March 14, 2018 related to the Series
CN Convertible notes 1 of 2; $69,400 at April 11, 2018 related to the Series CN Notes Warrant Acceleration; and $697,186 at November
30, 2018 related to the Series CN Convertible note 2 of 2. The derivative liability was revalued at December 31, 2019 and 2018
with a value of $211,028 and $1,325,653. The Company recorded a net gain of $1,114,625 and a net loss of $87,630 for the years
ended December 31, 2019 and 2018 respectively related to the derivative liability. The 2018 net loss consists of a $110,829 gain
for a portion of the derivative liability being settled upon a noteholders decision to convert their outstanding principal to
equity under the terms of the convertible note agreement, and a loss of $198,459 from the change in fair value.
The
fair value of the derivative liability for CN Convertible Note 1 of 2 and CN Note Warrant Acceleration was calculated using the
Black-Scholes model using the following assumptions.
|
|
31-Dec-19
|
|
|
31-Dec-18
|
|
Expected life
|
|
|
0.21
|
|
|
|
1.2
|
|
Volatility (based on comparable company)
|
|
|
86.4
|
%
|
|
|
72.03
|
%
|
Risk Free interest rate
|
|
|
1.58
|
%
|
|
|
2.48
|
%
|
Dividend yield (on common stock)
|
|
|
-
|
|
|
|
-
|
|
The
fair value of the derivative liability for CN Convertible Note 2 of 2 was calculated using the Black-Scholes model using the following
assumptions.
|
|
31-Dec-19
|
|
|
31-Dec-18
|
|
Expected life
|
|
|
0.93
|
|
|
|
1.92
|
|
Volatility (based on comparable company)
|
|
|
104.89
|
%
|
|
|
63.7
|
%
|
Risk Free interest rate
|
|
|
1.58
|
%
|
|
|
2.48
|
%
|
Dividend yield (on common stock)
|
|
|
-
|
|
|
|
-
|
|
Reconciliation
of the derivative liability measured at fair value on a recurring basis with the use of significant unobservable inputs (level
3) from December 31, 2018 to December 31, 2019:
January 1, 2018
|
|
$
|
-
|
|
Initial value - March 14, 2018
|
|
|
569,588
|
|
Initial value - April 18, 2018
|
|
|
69,400
|
|
Initial value – November 30, 2018
|
|
|
697,186
|
|
Fair value of settlement from debt conversion
|
|
|
(208,980
|
)
|
Loss from change in value
|
|
|
198,459
|
|
For the period ended December 31, 2018
|
|
$
|
1,325,653
|
|
Loss from change in value
|
|
|
(1,114,625
|
)
|
For the period ended December 31, 2019
|
|
$
|
211,028
|
|
The
following table presents the Company’s fair value hierarchy for applicable assets and liabilities measured at fair value
as of December 31, 2019 and December 31, 2018.
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Derivative Liability December 2019
|
|
$
|
-
|
|
|
|
-
|
|
|
|
211,028
|
|
|
$
|
211,028
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Derivative Liability December 2018
|
|
$
|
-
|
|
|
|
-
|
|
|
|
1,325,653
|
|
|
$
|
1,325,653
|
|
Note
8. Commitments and Contingencies
We
lease office space under non-cancelable operating lease which expires on March 31, 2023. We incurred lease expense of $92,608
and $167,530 for the years ended December 31, 2019 and 2018, respectively. As of December 31, 2019, our right of use asset and
related liability was $203,287 and $215,689, respectively.
In
determining the present value of our operating lease right-of-use asset and liability, we used a 10% discount rate (which approximates
our borrowing rate). The remaining term on the lease is 3.25 years.
The
following table presents the future operating lease payment as of December 31, 2019.
2020
|
|
$
|
75,748
|
|
2021
|
|
|
78,021
|
|
2022
|
|
|
80,361
|
|
2023
|
|
|
20,238
|
|
Total Lease payments
|
|
|
254,368
|
|
Less: imputed interest
|
|
|
(38,499
|
)
|
Total lease liability
|
|
$
|
215,869
|
|
Note
9. Stockholders’ Equity
During
the year ended December 31, 2018, we issued 180,265 shares of common stock, valued at $90,167 for services. We also issued 183,240
shares of our common stock, with a value of $100,000, to certain members of our Board of Directors in lieu of cash payments for
Director fees. Also, we have 786,890 shares issued in connection with formerly issued restricted stock grants that vested during
2018. In addition, we issued 227,111 options to purchase our common stock to certain members of the Board of Directors in lieu
of cash payments for Director fees, valued at $100,000. The exercise price of the options ranged from $0.50 to $0.595 per share,
vest immediately, and are exercisable for periods of 8 years. In addition, we issued 1,315,000 options to purchase our common
stock to employees and executives. The exercise price of the options is $0.52 per share, vest after 3 years, and are exercisable
for periods of 8 years.
The
fair value of the options issued ($543,550, in the aggregate) was calculated using the Black-Sholes option pricing model, based
on the criteria shown below.
Expected life (in years)
|
|
|
5.5 to 8
|
|
Volatility (based on a comparable company)
|
|
|
59.82%-70.29
|
%
|
Risk Free interest rate
|
|
|
2.78%-2.93
|
%
|
Dividend yield (on common stock)
|
|
|
-
|
|
During
the year ended December 31, 2019, we issued 282,944 shares of common stock, valued at $169,040 for services. We also issued 91,653
shares of our common stock, with a value of $50,000, to a member of our Board of Directors in lieu of cash payments for Director
fees. In addition, we issued 281,343 options to purchase our common stock to certain member of the Board of Directors in lieu
of cash payments for Director fees valued at $116,874. The exercise price of the options ranged from $0.47 to $0.65 per share,
vest immediately, and are exercisable for periods of 8 years. In addition, we issued 875,000 options to purchase our common stock
to employees and executives. The exercise price of the options ranged from $0.45 to $0.73 per share, vest after 3 years, and are
exercisable for periods of 8 years.
The
fair value of the options issued ($237,850, in the aggregate) was calculated using the Black-Sholes option pricing model, based
on the criteria shown below.
Expected
life (in years)
|
|
|
5.5
to 8
|
|
Volatility
(based on a comparable company)
|
|
|
59.82%
to 77.19
|
%
|
Risk
Free interest rate
|
|
|
1.79%
to 2.78
|
%
|
Dividend
yield (on common stock)
|
|
|
-
|
|
The
shares of our common stock were valued at the trading price on the date of grant, $0.45 and $0.73 per share
During
the same period, we cancelled 1,387,333 options to purchase our common stock, which was primarily driven by the resignation
of executives.
The
Holders of 2,841,454 I warrants elected to exercise those warrant on a cash basis of $1,320,313 and cashless basis of $384,563
to offset convertible note and accrued interest; and received 2,841,454 shares of our common stock.
The
Holder of 300,000 G warrants elected to exercise those warrant on a cash basis of $180,000 and received 300,000 shares of our
common stock.
During
the first quarter of 2019, the Company completed additional funding including a Private Placement Offering for common
shares priced at $0.60 per share, resulting in the receipt of proceeds in the amount of $2.4 million and the issuance of 4,000,000
shares.
During
the first quarter of 2019, the Company settled certain Executive Deferred Compensation payments with a combination of cash and
warrants. The total amount of Deferred Executive compensation settled is $771,113. One-third of that total or $243,623, was paid
in cash. The remaining balance of $487,246 was settled by granting the Executives warrants exercisable for five years to purchase
the Company’s stock at an exercise price of $0.70 per share.
The
total amount of equity-based compensation included in additional paid in capital for the years ended December 31, 2019 and 2018
was 225,026 and $598,768, respectively,
The
following is a summary of outstanding stock options issued to employees and directors as of December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
Aggregate
|
|
|
|
Number
|
|
|
Exercise
price per
|
|
|
Average
remaining term
|
|
|
intrinsic value
at date of
|
|
|
|
of Options
|
|
|
share $
|
|
|
in years
|
|
|
grant $
|
|
Outstanding January 1, 2018
|
|
|
6,715,419
|
|
|
|
.40 - .87
|
|
|
|
5.48
|
|
|
|
|
|
Issued
|
|
|
1,542,111
|
|
|
|
.50 - .60
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(321,183
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(508,333
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding December 31, 2018
|
|
|
7,428,014
|
|
|
|
.40 - .87
|
|
|
|
5.48
|
|
|
|
-
|
|
Issued
|
|
|
1,156,343
|
|
|
|
.45 - .73
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(1,387,333
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding December 31, 2019
|
|
|
7,197,024
|
|
|
|
.40 - .87
|
|
|
|
4.55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, December 31 2019
|
|
|
3,706,606
|
|
|
|
.40 - .87
|
|
|
|
3.45
|
|
|
|
-
|
|
As
of December 31, 2019, the Company has $967,826 of total unrecognized share-based compensation expense related to unvested options,
which is expected to be amortized over the remaining weighted average period of 4.55 years.
Note
10. Outstanding Warrants
The
following is a summary of all outstanding warrants as of December 31, 2019:
|
|
Number of
|
|
|
price
|
|
|
remaining term
|
|
|
intrinsic value
|
|
|
|
warrants
|
|
|
per share
|
|
|
in years
|
|
|
at date of grant
|
|
Warrants issued in connection with private placements of common stock
|
|
|
17,902,957
|
|
|
$
|
0.53 - $1.00
|
|
|
|
1.30
|
|
|
$
|
-
|
|
Warrants issued in connection with private placement of notes
|
|
|
1,335,000
|
|
|
$
|
1.00
|
|
|
|
1.00
|
|
|
$
|
-
|
|
Warrants issued in connection with convertible note
|
|
|
2,468,259
|
|
|
$
|
0.70
|
|
|
|
1.40
|
|
|
$
|
-
|
|
Warrants issued in connection with settlement of deferred compensation
|
|
|
1,595,611
|
|
|
$
|
0.70
|
|
|
|
4.25
|
|
|
$
|
-
|
|
Note
11. Income Taxes
Income
tax provision (benefit) for the years ended December 31, 2019 and 2018 is summarized below:
|
|
2019
|
|
|
2018
|
|
Current:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
-
|
|
|
$
|
-
|
|
State
|
|
|
-
|
|
|
|
-
|
|
Total current
|
|
|
-
|
|
|
|
-
|
|
Deferred:
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(937,500
|
)
|
|
|
(922,100
|
)
|
State
|
|
|
(1,488,500
|
)
|
|
|
(144,700
|
)
|
Total deferred
|
|
|
(2,426,000
|
)
|
|
|
(1,066,800
|
)
|
Change in valuation allowance
|
|
$
|
2,426,000
|
|
|
$
|
1,066,800
|
|
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:
|
|
2019
|
|
|
2018
|
|
Income tax provision at the federal statutory rate
|
|
|
21.0
|
%
|
|
|
21.0
|
%
|
State income taxes, net of federal benefit
|
|
|
6.9
|
%
|
|
|
3.3
|
%
|
Permanent Difference
|
|
|
(2.5
|
%)
|
|
|
(2.5
|
%)
|
Effect of rate change
|
|
|
-
|
%
|
|
|
-
|
%
|
Effect of change in valuation allowance
|
|
|
(21.8
|
%)
|
|
|
(21.8
|
)%
|
|
|
|
-
|
%
|
|
|
-
|
%
|
Components
of the net deferred income tax assets at December 31, 2019 and 2018 were as follows:
|
|
2019
|
|
|
2018
|
|
Net operating loss carryover
|
|
$
|
10,395,000
|
|
|
$
|
7,969,000
|
|
Valuation allowance
|
|
|
(10,395,000
|
)
|
|
|
(7,969,000
|
)
|
|
|
$
|
-
|
|
|
$
|
-
|
|
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 $10,395,000 and $7,969,000 allowance at December 31, 2019
and 2018, respectively, is necessary to reduce the deferred tax assets to the amount that will more likely than not be realized.
The increase in the valuation allowance for the current period is $2,426,000.
As
of December 31, 2019, we have a net operating loss carry forward of approximately $37,259,800. 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
|
|
2037
|
|
$
|
8,464,700
|
|
2038
|
|
$
|
7,315,400
|
|
2039
|
|
$
|
4,391,100
|
|
2040
|
|
$
|
4,464,500
|
|
As
of December 31, 2019, we did not have any significant unrecognized uncertain tax positions. The 2019 net operating loss carry
forward of $4,464,500 does not expire under the Tax Cut and Job Act of 2017.
Note
12. Business Segments and Customer Concentrations.
During
the years ended December 31, 2019 and 2018, we operated in one segment.
The
following is a breakdown of customers representing more than 10% of sales for the year ended December 31, 2019:
|
|
|
|
|
Percentage
|
|
|
|
Revenue from
|
|
|
of total
|
|
|
|
customer
|
|
|
revenue
|
|
Customer A
|
|
$
|
1,641,333
|
|
|
|
38.14
|
%
|
Customer B
|
|
$
|
739,956
|
|
|
|
17.19
|
%
|
The
following is a breakdown of customers representing more than 10% of sales for the year ended December 31, 2018:
|
|
Revenue from
customer
|
|
|
Percentage
of total
revenue
|
|
Customer A
|
|
$
|
1,465,189
|
|
|
|
32.84
|
%
|
Customer B
|
|
|
522,512
|
|
|
|
11.71
|
%
|
Note
13. Liquidity
We
have a history of operating losses and negative cash flow. As our operations grow, we expect to experience significant increases
in our working capital requirements. These conditions raise substantial doubt over the Company’s ability to meet all of
its obligations over the twelve months following the filing of this Form 10-K. Management has evaluated these conditions, and
concluded that current plans will alleviate this concern. As of December 31, 2019, we had $1,091,374 of cash on the balance sheet.
We have continued to significantly reduce core operating expenses, reducing total General and Administrative Expense in 2019 by
$962,859, or 12%, as compared with 2018. In addition, in the first quarter of 2020, the Company completed $3.825 million of funding.
These financings included a Private Placement Offering for common shares priced at $0.50 cents per share. Moreover, on
March 23, 2020 the Company obtained extensions or conversion of its Milestone I and II Convertible Notes as described in Note
14.
Management
has concluded that these actions have alleviated the substantial doubt of our ability to continue as a going concern. However,
the Company cannot predict, with certainty, the outcome of its action to generate liquidity, including the availability of additional
financing, or whether such actions would generate the expected liquidity as planned.
Note
14. Subsequent Events
On
March 23, 2020, the Company completed additional funding including a Private Placement Offering for common shares priced at $0.50
per share (subject to adjustment), resulting in the receipt of proceeds in the amount of $3.825 million and the issuance
of 7,650,000 shares. The investors of this Private Placement Offering will be granted O warrants to be eligible to purchase an
additional 0.50 shares for every share issued to each purchaser, exercisable for a period of 3 years at an exercise price of $0.60
per share, (subject to adjustment). If the volume-weighted average trading price for the 20 consecutive trading days
that conclude upon 6 months after the initial closing (the “Six Month Price”) exceeds or equals $0.50 per share (the
“Target Price”), the per share purchase price will not be adjusted. If the Six Month Price is less than the Target
Price, the per share purchase price will be automatically reduced to the Six Month Price, but in no event less than $0.35 per
share, in which case the Company shall issue to each investor, pro-rata based on such investor’s investment: (a) shares
in a quantity that equals the difference between the number of shares issued to such purchaser at closing and the number of shares
that would have been issued to such purchaser at closing at the Six Month Price; and (b) a warrant for a number of shares of common
stock equal to 50% of the difference between the number of shares issued to such investor at closing and the number of shares
that would have been issued to such investor at closing at the Six Month Price, with an exercise price equal to the sum of $0.10
per share and the Six Month Price, but in no eventless than $0.45 per share. The exercise price per share for each warrant will
automatically adjust to the sum of $0.10 per share and the Six-Month Price, but in no event less than $0.45 per share. In
addition, the Company obtained a 24 month extension on $1,071,000 in principal, and conversion of $720,000 of principal of the
Milestone I Convertible Notes at a conversion price of $0.50 per share. The remaining $110,166 was extended for thirty days. The
interest rate on the principal balance of the extended Milestone I Convertible Notes was amended to 15%. Furthermore, the Company
obtained a 12 month extension on $168,000 in principal, and conversion of $1,128,000 in principal of the Milestone II Convertible
Notes. The remaining $67,200 was extended for thirty days. The Convertible Noteholders of the Milestone I and II Convertible Notes
were granted additional interest depending upon their election to convert or extend their Convertible Notes.
The
impact of COVID-19 on the Company is evolving rapidly with events unfolding on a daily and weekly basis. The direct impact to
our operations has begun to take affect at the close of the first quarter ended March 31, 2020. Specifically, our business has
been impacted by dining bans targeted at restaurants to reduce the size of public gatherings. We have noted restaurant chains
have closed operations and furloughed employees which would preclude our single serve products from being served at those establishments
for a number of weeks. Furthermore, many school districts have closed regular attendance which could conceivably last to the end
of the school year. This will directly impact the sales of our Bulk Product into that sales channel. Our headquarters are located
in Los Angeles, California, where the entire state has been issued a “shelter in place” order from the Governor of
California. Consequently, our staff in the headquarter office are working remotely until further notice. At this point, we have
not experienced a disruption in the supply chain for manufacturing our products. The developments surrounding COVID-19 remain
fluid and dynamic, and consequently, will require the Company to continue to monitor news headlines from government and health
officials, as well as, the business community.