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 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.
Domestic
and international patents and patents pending are owned by Barfresh, as well as related trademarks for all of the single serve
products. Patent rights have been granted in 13 jurisdictions including the United States. In addition, the Company has purchased
all of the trademarks related to the patented products.
The
Company conducts sales through several channels, including National Accounts, Regional Accounts, and Broadline Distributors. Barfresh’s
primary broadline distribution arrangement is through an exclusive nationwide agreement with Sysco Corporation (“Sysco”),
the U.S.’s largest broadline distributor, which was entered into during July 2014, and renewed for an additional two year
term on October 2, 2017.
During
2016 and 2017 the Company announced that it had signed supply agreements with several of the major global on-site foodservice
operators. On March 8, 2018, the Company announced that it had signed a new supply agreement with one of the largest of these
foodservice operators, for exclusive distribution of four of Barfresh’s single serve sku’s to approximately one thousand
food service locations. Distribution of product to these locations through SYSCO will begin during April of 2018. This new agreement, marks the culmination of successful in market tests conducted at several locations, and makes Barfresh’s blended beverages
available across many of the most attractive locations of the customer’s diverse customer base.
The
Company also sells to broadline distributors that supply products to the food services market place. Effective July 2, 2014, the
Company entered into an exclusive agreement with Sysco Merchandising and Supply Chain Services, Inc. for resale by the Sysco Corporation
(“Sysco”) to the foodservice industry of the Company’s ready-to-blend smoothies, shakes and frappes. Pursuant
to that agreement, all Barfresh products are included in Sysco’s national core selection of beverage items, making Barfresh
its exclusive single-serve, pre-portioned beverage provider. The agreement is mutually exclusive; however, Barfresh may also sell
the products to other foodservice distributors, but only to the extent required for such foodservice distributors to service multi-unit
chain operators with at least 20 units and where Sysco is not such multi- unit chain operator’s nominated distributor for
our products. On October 2, 2017, the Sysco agreement was extended for an additional two year period, and expanded to cover bulk
easy pour products, on a non-exclusive basis.
On
October 26, 2015, Barfresh signed a five year agreement with PepsiCo North America Beverages, a division of PepsiCo, to become
its exclusive sales representative within the food service channel to present Barfresh’s line of ready-to-blend smoothies
and frozen beverages throughout the United States and Canada. Through this agreement, Barfresh’ products are included as
part of PepsiCo’s offerings to its significant customer base. The agreement facilitates access to potential National customer
accounts, through introductions provided by PepsiCo’s one-thousand plus person foodservice sales team. Barfresh products
have become part of PepsiCo’s customer presentations at national trade shows and similar venues.
Barfresh
utilizes contract manufacturers to manufacture all of 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 Shulze and Burch, located in Arkansas. The Yarnell’s agreement, which was
signed during February, 2016, and secures the capacity to ramp up to an incremental production capacity of 100 million units.
Yarnell’s location enhances the company’s ability to efficiently move product throughout the supply chain to destinations
in the eastern United States, home to many of the country’s large foodservice outlets.
Our
corporate office is located at 8383 Wilshire Blvd., Suite 750, Beverly Hills, CA 90211. 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
beverages, particularly, smoothies, shakes and frappes.
Reorganization
and Recapitalization
During
January, 2012, the Company entered into a series of transactions pursuant to which Barfresh Inc., a Colorado corporation (“Barfresh
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 $999,998, conducted a four for one forward stock split and changed the name of
the Company. The following describes the steps of this reorganization:
|
●
|
Acquisition
of Barfresh 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.
|
|
|
|
|
●
|
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.
|
|
|
|
|
●
|
Financing
transaction
. Immediately following the acquisition of Barfresh, we sold an aggregate of 1,333,332 shares of our common
stock and five-year warrants to purchase 1,333,332 shares of common stock at a per share exercise price of $1.50 in a private
offering for gross proceeds of $999,998, less expenses of $26,895.
|
|
|
|
|
●
|
Change
of name
. Subsequent to the merger, we changed the name of the Company from Moving Box Inc. to Barfresh Food Group Inc.
|
|
|
|
|
●
|
Forward
stock split
. Subsequent to the merger, we conducted a four for one forward stock split of the Company’s common stock.
|
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 products:
Some
of the key benefits of the products for the end consumers that drink the products include:
|
●
|
From
as little as 150 calories (per serving)
|
|
|
|
|
●
|
Real
fruit in every smoothie
|
|
|
|
|
●
|
Dairy
free options
|
|
|
|
|
●
|
Kosher
approved
|
|
|
|
|
●
|
Gluten
Free
|
Customer
Marketing Material
A
wide range of consumer marketing materials has been created to assist customers in selling blended beverages.
Research
and Development
The
Company incurred research and development expenses for the year ended December 31, 2017 in the amount of $574,989 and for the
year ended December 31, 2016 in the amount of $432,146. The increase in Research and Development expenses was primarily attributable
to commissioning of new production lines at our contract manufacturer facilities, and increased activity in creating unique flavors
for potential customers in our national account pipeline.
Competition
There
is significant competition in the smoothie market at both the consumer purchasing level and also the product level.
The
competition at the consumer level is primarily between specialized juice bars (e.g. Jamba Juice) and major fast casual and fast
food restaurant chains (such as McDonalds). Barfresh does not compete specifically at this level but intends to supply its product
to customers that fall within these segments to enable them to compete for consumer demand.
There
may also be new entrants to the smoothie market that may alter the current competitor landscape.
The
existing competition from a product perspective can be separated into three categories:
●
Specialized juice bar products: The product is made in-store and each ingredient is added separately.
●
Syrup based products: The fruit puree is supplied in bulk and not portion controlled for each smoothie. These types of products
still require the addition of juice, milk or water and/or yogurt and ice. While there are a number of competitors for this style
of product, the two dominant competitors are Island Oasis and Minute Maid.
●
Portion pack products: These products contain only the fruit and yogurt and require the addition of juice or milk and ice. The
two dominant competitors are General Mills’ Yoplait Smoothies and Inventure Group’s Jamba Smoothies.
The
Company believes that 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 30 employees and 3 consultants. There are currently 20 employees and 1 consultant selling our products.
We have recently restructured our sales force, eliminating 18 full time positions over a twelve month period, while at the same
time expanding our brokerage network.
Research
and Development
The
Company incurred research and development expenses for the year ended December 31, 2017, in the amount of $574,989, and for the
year ended December 31, 2016 in the amount of $432,146. The increase in Research and Development expenses was primarily attributable
to commissioning of new production lines at our contract manufacturer facilities, and increased activity in creating unique flavors
for potential customers in our national account pipeline.
Item
1A. Risk Factors
An
investment in the Company’s securities involves significant risks, including the risks described below. The risks included
below are not the only ones that the Company faces. Additional risks presently unknown to us or that we currently consider immaterial
or unlikely to occur could also impair our operations. If any of the risks or uncertainties described below or any such additional
risks and uncertainties actually occur, our business, prospects, financial condition or results of operations could be negatively
affected.
Risks
Related to Our Business
We
have a history of operating losses
We
have a history of operating losses and may not achieve or sustain profitability. These operating losses have been generated while
we market to potential customers. We cannot guarantee that we will become profitable. Even if we achieve profitability, given
the competitive and evolving nature of the industry in which we operate, we may be unable to sustain or increase profitability
and our failure to do so would adversely affect the Company’s business, including our ability to raise additional funds.
A
worsening of economic conditions or a decrease in consumer spending may adversely impact our ability to implement our business
strategy.
Our
success depends to a significant extent on discretionary consumer spending, which is influenced by general economic conditions
and the availability of discretionary income. There is no certainty regarding economic conditions in the United States, and credit
and financial markets and confidence in economic conditions could deteriorate at any time. Accordingly, we may experience declines
in revenue during economic turmoil or during periods of uncertainty. Any material decline in the amount of discretionary spending,
leading cost-conscious consumers to be more selective in restaurants visited, could have a material adverse effect on our revenue,
results of operations, business and financial condition.
The
challenges of competing with the many food services businesses may result in reductions in our revenue and operating margins.
We
compete with many well-established companies, food service and otherwise, on the basis of taste, quality and price of product
offered, customer service, atmosphere, location and overall guest experience. Our success depends, in part, upon the popularity
of our products and our ability to develop new menu items that appeal to consumers across all four day parts. Shifts in consumer
preferences away from our products, our inability to develop new menu items that appeal to consumers across all day parts, or
changes in our menu that eliminate items popular with some consumers could harm our business. We compete with other smoothie and
juice bar retailers, specialty coffee retailers, yogurt and ice cream shops, bagel shops, fast-food restaurants, delicatessens,
cafés, take-out food service companies, supermarkets and convenience stores. Our competitors change with each of the four
day parts, ranging from coffee bars and bakery cafés to casual dining chains. Many of our competitors or potential competitors
have substantially greater financial and other resources than we do, which may allow them to react to changes in the market quicker
than we can. In addition, aggressive pricing by our competitors or the entrance of new competitors into our markets, could reduce
our revenue and operating margins. We also compete with other employers in our markets for workers and may become subject to higher
labor costs as a result of such competition.
Fluctuations
in various food and supply costs, particularly fruit and dairy, could adversely affect our operating results.
Supplies
and prices of the various ingredients that we are going to use to can be affected by a variety of factors, such as weather, seasonal
fluctuations, demand, politics and economics in the producing countries.
These
factors subject us to shortages or interruptions in product supplies, which could adversely affect our revenue and profits. In
addition, the prices of fruit and dairy, which are the main ingredients in our products, can be highly volatile. The fruit of
the quality we seek tends to trade on a negotiated basis, depending on supply and demand at the time of the purchase. An increase
in pricing of any fruit that we are going to use in our products could have a significant adverse effect on our profitability.
We cannot assure you that we will be able to secure our fruit supply.
Our
business depends substantially on the continuing efforts of our senior management and other key personnel, and our business may
be severely disrupted if we lose their services.
Our
future success heavily depends on the continued service of our senior management and other key employees. If one or more of our
senior executives is unable or unwilling to continue to work for us in his present position, we may have to spend a considerable
amount of time and resources searching, recruiting, and integrating a replacement into our operations, which would substantially
divert management’s attention from our business and severely disrupt our business. This may also adversely affect our ability
to execute our business strategy.
Our
senior management’s limited experience managing a publicly traded company may divert management’s attention from operations
and harm our business.
With
the exception of our Chief Financial Officer, our senior management team has relatively limited experience managing a publicly
traded company and complying with federal securities laws, including compliance with recently adopted disclosure requirements
on a timely basis. Our management will be required to design and implement appropriate programs and policies in responding to
increased legal, regulatory compliance and reporting requirements, and any failure to do so could lead to the imposition of fines
and penalties and harm our business.
We
may be unable to attract and retain qualified, experienced, highly skilled personnel, which could adversely affect the implementation
of our business plan.
Our
success depends to a significant degree upon our ability to attract, retain and motivate skilled and qualified personnel. As we
become a more mature company in the future, we may find recruiting and retention efforts more challenging. If we do not succeed
in attracting, hiring and integrating excellent personnel, or retaining and motivating existing personnel, we may be unable to
grow effectively. The loss of any key employee, including members of our senior management team, and our inability to attract
highly skilled personnel with sufficient experience in our industries could harm our business.
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.
We
have identified material weaknesses in our internal control over financial reporting. If we fail to maintain an effective system
of internal control over financial reporting, we may not be able to accurately report our financial results or prevent fraud.
Pursuant
to Section 404 of the Sarbanes-Oxley Act of 2002, or Section 404, we are required to furnish a report by our management on our
internal control over financial reporting. As such, our management has conducted this evaluation and, as of December 31, 2017,
identified the following material weakness in the Company’s internal control over financial reporting:
|
●
|
Inadequate
Segregation of Duties: We have an inadequate number of personnel to properly implement certain control procedures related
to segregation of duties.
|
Management
has concluded that our disclosure controls and procedures are not effective. Effective internal control over financial reporting
is necessary to provide reliable financial reports and effectively prevent fraud. If we cannot provide reliable financial reports
or prevent fraud, our operating results could be harmed. We will need to continue to dedicate internal resources, potentially
engage outside consultants and adopt a detailed work plan to modify and document the adequacy of internal control over financial
reporting, continue steps to improve control processes as appropriate, validate through testing that controls are functioning
as documented and implement a continuous reporting and improvement process for internal control over financial reporting. Continued
identification of one or more material weaknesses in our internal control over financial reporting could result in an adverse
reaction in the financial markets due to a loss of confidence in the reliability of our financial statements.
Failure
to comply with the United States Foreign Corrupt Practices Act could subject us to penalties and other adverse consequences.
As
a Delaware corporation, we are subject to the United States Foreign Corrupt Practices Act, which generally prohibits United States
companies from engaging in bribery or other prohibited payments to foreign officials for the purpose of obtaining or retaining
business. Some foreign companies, including some that may compete with our Company, may not be subject to these prohibitions.
Corruption, extortion, bribery, pay-offs, theft and other fraudulent practices may occur from time-to-time in countries in which
we conduct our business. However, our employees or other agents may engage in conduct for which we might be held responsible.
If our employees or other agents are found to have engaged in such practices, we could suffer severe penalties and other consequences
that may have a material adverse effect on our business, financial condition and results of operations.
Risks
Related to Ownership of Our Common Stock
Our
common stock is quoted on the OTCQB, which may have an unfavorable impact on our stock price and liquidity.
Our
common stock is quoted on the OTCQB, which is a significantly more limited trading market than the New York Stock Exchange, or
the NASDAQ Stock Market. The quotation of the Company’s shares on the OTCQB may result in a less liquid market available
for existing and potential shareholders to trade shares of our common stock, could depress the trading price of our common stock
and could have a long-term adverse impact on our ability to raise capital in the future.
There
is limited liquidity on the OTCQB, which may result in stock price volatility and inaccurate quote information.
When
fewer shares of a security are being traded on the OTCQB, volatility of prices may increase and price movement may outpace the
ability to deliver accurate quote information. Due to lower trading volumes in shares of our common stock, there may be a lower
likelihood of one’s orders for shares of our common stock being executed, and current prices may differ significantly from
the price one was quoted at the time of one’s order entry.
If
we are unable to adequately fund our operations, we may be forced to voluntarily file for deregistration of our common stock with
the SEC.
Compliance
with the periodic reporting requirements required by the SEC consumes a considerable amount of both internal, as well external,
resources and represents a significant cost for us. If we are unable to continue to devote adequate funding and the resources
needed to maintain such compliance, while continuing our operations, we could be forced to deregister with the SEC. After the
deregistration process, our common stock would only be tradable on the “Pink Sheets” and could suffer a decrease in
or absence of liquidity.
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:
|
●
|
actual
or anticipated variations in our operating results;
|
|
|
|
|
●
|
announcements
of developments by us or our competitors;
|
|
|
|
|
●
|
announcements
by us or our competitors of significant acquisitions, strategic partnerships, joint ventures or capital commitments;
|
|
|
|
|
●
|
adoption
of new accounting standards affecting the our industry;
|
|
|
|
|
●
|
additions
or departures of key personnel;
|
|
|
|
|
●
|
introduction
of new products by us or our competitors;
|
|
|
|
|
●
|
sales
of our common stock or other securities in the open market; and
|
|
|
|
|
●
|
other
events or factors, many of which are beyond our control.
|
The
stock market is subject to significant price and volume fluctuations. In the past, following periods of volatility in the market
price of a company’s securities, securities class action litigation has often been initiated against such a company. Litigation
initiated against us, whether or not successful, could result in substantial costs and diversion of our management’s attention
and Company resources, which could harm our business and financial condition.
Investors
may experience dilution of their ownership interests because of the future issuance of additional shares of our common stock.
We
intend to continue to seek financing through the issuance of equity or convertible securities to fund our operations. In the future,
we may also issue additional equity securities resulting in the dilution of the ownership interests of our present shareholders.
We may also issue additional shares of our common stock or other securities that are convertible into or exercisable for our common
stock in connection with hiring or retaining employees, future acquisitions or for other business purposes. The future issuance
of any such additional shares of common stock will result in dilution to our shareholders and may create downward pressure on
the trading price of our common stock.
Provisions
in our corporate charter documents and under Delaware law could make an acquisition of our company, which may be beneficial to
our stockholders, more difficult and may prevent attempts by our stockholders to replace or remove our current management.
Provisions
in our certificate of incorporation and our bylaws may discourage, delay or prevent a merger, acquisition or other change in control
of our company that stockholders may consider favorable, including transactions in which you might otherwise receive a premium
for your shares. These provisions could also limit the price that investors might be willing to pay in the future for shares of
our common stock, thereby depressing the market price of our common stock. In addition, because our board of directors is responsible
for appointing the members of our management team, these provisions may frustrate or prevent any attempts by our stockholders
to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors.
In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General
Corporation Law, which prohibits a person who owns in excess of 15% of our outstanding voting stock from merging or combining
with us for a period of three years after the date of the transaction in which the person acquired in excess of 15% of our outstanding
voting stock, unless the merger or combination is approved in a prescribed manner.
Item
2. Properties.
Our
principal executive offices are located at 8383 Wilshire Blvd., Suite 750, Beverly Hills, CA 90211. Beginning in
September, 2016, We leased this office space pursuant to a sub-lease with the primary tenant for $10,997 per month,
increasing to $11,327 per month as of November 1, 2017. As of March 1, 2018, We lease the same office space pursuant
to a direct lease for $14,488 a month through March 31, 2019.
Item
3. Legal Proceedings.
Neither
the Company nor its subsidiaries are party to or have property that is the subject of any material pending legal proceedings.
We may be subject to ordinary legal proceedings incidental to our business from time to time that are not required to be disclosed
under this Item 1.
Item
4. Mine Safety Disclosures.
Not
applicable.
PART
II
Item
5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market
Information
Our
common stock is currently traded on the OTCQB under the symbol “BRFH”. Our common stock had been quoted on the OTC
Bulletin Board since July 27, 2011 under the symbol MVBX. Effective February 29, 2012, our symbol changed to BRFH based on the
forward split and name change. On March 21, 2012, our common stock was delisted to Pink Sheets. On January 21, 2014, we registered
our common stock under Section 12(g) of the Exchange Act. The following table sets forth the range of high and low bid quotations
for the applicable period. These quotations as reported by the OTCQB reflect inter-dealer prices without retail mark-up, markdown
or commissions and may not necessarily represent actual transactions.
|
|
Bid
Quotation
|
|
Financial
Quarter Ended
|
|
High
($)
|
|
|
Low
($)
|
|
|
|
|
|
|
|
|
December
31, 2017
|
|
|
0.70
|
|
|
|
0.52
|
|
September
30, 2017
|
|
|
0.82
|
|
|
|
0.52
|
|
June
30, 2017
|
|
|
0.82
|
|
|
|
0.57
|
|
March
31, 2017
|
|
|
0.83
|
|
|
|
0.52
|
|
December
31, 2016
|
|
|
0.83
|
|
|
|
0.56
|
|
September
30, 2016
|
|
|
0.76
|
|
|
|
0.55
|
|
June
30, 2016
|
|
|
0.86
|
|
|
|
0.55
|
|
March
31, 2016
|
|
|
0.91
|
|
|
|
0.72
|
|
Holders
At
March 8, 2018, there were 118,701,577 shares of our common stock outstanding. Our shares of common stock are held by 100 stockholders
of record. The number of record holders was determined from the records of our transfer agent and does not include beneficial
owners of common stock whose shares are held in the names of various security brokers, dealers and registered clearing agencies.
Dividends
We
have never declared or paid a cash dividend. Any future decisions regarding dividends will be made by our board of directors.
We currently intend to retain and use any future earnings for the development and expansion of our business and do not anticipate
paying any cash dividends in the foreseeable future. Our board of directors has complete discretion on whether to pay dividends.
Even if our board of directors decides to pay dividends, the form, frequency and amount will depend upon our future operations
and earnings, capital requirements and surplus, general financial condition, contractual restrictions and other factors that the
board of directors may deem relevant.
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 8K.
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, 2017, with respect to equity securities authorized for issuance under
our equity compensation plans:
Plan Category
|
|
Number
of
Securities to be
Issued Upon
Exercise of
Outstanding
Options,
Warrants and
Rights
(a)
|
|
|
Weighted-Average
Exercise Price of
Outstanding
Options, Warrants
and Rights
(b)
|
|
|
Number
of
Securities
Remaining
Available for
Future Issuance
Under Equity
Compensation
Plans (excluding
securities reflected
in Column (a))(c)
|
|
|
|
|
|
|
|
|
|
|
|
Equity compensation plans
approved by security holders
|
|
|
6,715,419
|
|
|
$
|
0.63
|
|
|
|
8,084,581
|
|
Equity compensation plans not approved
by security holders
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
|
|
|
6,715,419
|
|
|
$
|
0.63
|
|
|
|
8,084,581
|
|
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, 2017 and for the fiscal year ended December 31, 2016. 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 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.
Domestic
and international patents and patents pending are owned by Barfresh, as well as related trademarks for all of the single serve
products. Patent rights have been granted in 13 jurisdictions including the United States. In addition, the Company has purchased
all of the trademarks related to the patented products.
The
Company conducts sales through several channels, including National Accounts, Regional Accounts, and Broadline Distributors. Barfresh’s
primary broadline distribution arrangement is through an exclusive nationwide agreement with Sysco Corporation (“Sysco”),
the U.S.’s largest broadline distributor, which was entered into during July 2014, and renewed for an additional two year
term on October 2, 2017.
During
2016 and 2017 the Company announced that it had signed supply agreements with several of the major global on-site foodservice
operators. On March 8, 2018, the Company announced that it had signed a new supply agreement with one of the largest of these
foodservice operators, for exclusive distribution of four of Barfresh’s single serve sku’s to approximately one thousand
food service locations. Distribution of product to these locations through SYSCO will begin during April of 2018. This new agreement marks the culmination of successful in market tests conducted at several locations, and makes Barfresh’s blended beverages
available across many of the most attractive locations of the customer’s diverse customer base.
The
Company also sells to broadline distributors that supply products to the food services market place. Effective July 2, 2014, the
Company entered into an exclusive agreement with Sysco Merchandising and Supply Chain Services, Inc. for resale by the Sysco Corporation
(“Sysco”) to the foodservice industry of the Company’s ready-to-blend smoothies, shakes and frappes. Pursuant
to that agreement, all Barfresh products are included in Sysco’s national core selection of beverage items, making Barfresh
its exclusive single-serve, pre-portioned beverage provider. The agreement is mutually exclusive; however, Barfresh may also sell
the products to other foodservice distributors, but only to the extent required for such foodservice distributors to service multi-unit
chain operators with at least 20 units and where Sysco is not such multi- unit chain operator’s nominated distributor for
our products. On October 2, 2017, the Sysco agreement was extended for an additional two year period, and expanded to cover bulk
easy pour products, on a non-exclusive basis.
On
October 26, 2015, Barfresh signed a five year agreement with PepsiCo North America Beverages, a division of PepsiCo, to become
its exclusive sales representative within the food service channel to present Barfresh’s line of ready-to-blend smoothies
and frozen beverages throughout the United States and Canada. Through this agreement, Barfresh’ products are included as
part of PepsiCo’s offerings to its significant customer base. The agreement facilitates access to potential National customer
accounts, through introductions provided by PepsiCo’s one-thousand plus person foodservice sales team. Barfresh products
have become part of PepsiCo’s customer presentations at national trade shows and similar venues.
Barfresh
utilizes contract manufacturers to manufacture all of the products in the United States. Production lines are currently operational
at two locations. The first location is in Salt Lake City, which currently produces both bulk easy pour and single serve products.
Annual production capacity with this contract manufacturer is 14 million units per year. The second location is with Yarnell Operations,
LLC., a subsidiary of Shulze and Burch, located in Arkansas. The Yarnell’s agreement, which was signed during February,
2016, and secures the capacity to ramp up to an incremental production capacity of 100 million units. Yarnell’s location
enhances the company’s ability to efficiently move product throughout the supply chain to destinations in the eastern United
States, home to many of the country’s large foodservice outlets.
The
Company currently has 30 employees and 3 consultants. There are currently 20 employees and 1 consultant selling our products.
We have recently restructured our sales force, eliminating 18 full time positions over a twelve month period, while at the same
time expanding our brokerage network.
Critical
Accounting Policies
Our
financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America
(“GAAP”).
Revenue
Recognition
We
recognize revenue when there is persuasive evidence of an arrangement, delivery has occurred or services have been rendered, the
sales price is determinable, and collection is reasonably assured. Revenue is recorded net of provisions for discounts and promotion
allowances. Our products are sold on various terms. Our credit terms, which are established in accordance with local and industry
practices, typically require payment within 30 days of delivery. We recognize revenue upon receipt of our products by our distributors
and retail accounts, in accordance with written sales terms, net of provisions for discounts or allowances. Allowances for returns
and discounts are made on a case-by-case basis. Historically, neither returns nor discounts have been material.
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.
Results
of Operations
Results
of Operation for the Twelve Months Ended December 31, 2017 as Compared to the Twelve Months Ended December 31, 2016
Revenue
and Cost of Revenue
Revenue
for 2017 was $1,997,012 as compared to $1,457,499 in 2016, an increase of 37%. Our business grew through the continuing expansion
of our business relationship with Sysco Corporation (“Sysco”), a major broad line food distributor. We began shipping
to Sysco in July 2014, and by early 2016 had our products in all 72 of Sysco’s Operating Companies. Our business also grew
as a result of the introduction of our Bulk Easy Pour product during early 2017.
Cost
of revenue for 2017 was $1,085,575 as compared to $772,827 in 2016. Our gross profit was $911,437 or 46%, for 2017 and $684,672
or 47% for 2016. We anticipate that our gross profit percentage will improve in the future, as our business gains scale and as
we expand our manufacturing operations.
Operating
Expenses
Our
operations during 2017 were directed towards increasing sales and creating and finalizing customized flavors for potential customers.
The increase in our business relationship with Sysco, and the expansion of our product offerings to include Bulk Easy Pour, drove
an increase in our selling, marketing, and general and administrative expenses. During the fourth quarter of 2016, and during
the fourth quarter of 2017, we re-aligned our sales force to a more efficient model, by increasing the number of dedicated sales
brokers that represent our products, and reducing the number of sales force employees.
Primarily
as a result of re-aligning our sales force, general and administrative expenses decreased from $10,415,933 in 2016 to $9,492,094
in 2017, a decrease of $923,839, or 9%.
Following
is a breakdown of our selling, marketing and general and administrative expenses for 2017 and 2016.
|
|
Twelve
months ended
|
|
|
Twelve
months ended
|
|
|
|
|
|
|
|
|
|
December
31, 2017
|
|
|
December
31, 2016
|
|
|
Change
|
|
|
|
|
Personnel costs
|
|
$
|
4,260,946
|
|
|
$
|
5,560,502
|
|
|
$
|
(1,299,556
|
)
|
|
|
(23
|
)%
|
Stock based compensation/options
|
|
|
1,360,688
|
|
|
|
1,133,149
|
|
|
|
227,539
|
|
|
|
20
|
%
|
Legal and professional fees
|
|
|
465,737
|
|
|
|
425,781
|
|
|
|
39,956
|
|
|
|
9
|
%
|
Travel
|
|
|
422,284
|
|
|
|
605,920
|
|
|
|
(183,636
|
)
|
|
|
(30
|
)%
|
Rent
|
|
|
142,572
|
|
|
|
96,151
|
|
|
|
46,421
|
|
|
|
48
|
%
|
Marketing and selling
|
|
|
696,253
|
|
|
|
730,142
|
|
|
|
(33,889
|
)
|
|
|
(5
|
)%
|
Consulting fees
|
|
|
203,721
|
|
|
|
242,668
|
|
|
|
(38,947
|
)
|
|
|
(16
|
)%
|
Director fees
|
|
|
206,296
|
|
|
|
165,227
|
|
|
|
41,069
|
|
|
|
25
|
%
|
Research and development
|
|
|
574,989
|
|
|
|
432,146
|
|
|
|
142,843
|
|
|
|
33
|
%
|
Shipping Expense and storage
|
|
|
619,871
|
|
|
|
407,247
|
|
|
|
212,624
|
|
|
|
52
|
%
|
Other expenses
|
|
|
538,737
|
|
|
|
617,000
|
|
|
|
(78,262
|
)
|
|
|
(13
|
)%
|
|
|
$
|
9,492,094
|
|
|
$
|
10,415,933
|
|
|
$
|
(923,838
|
)
|
|
|
(9
|
)%
|
Personnel
cost represents the cost of employees including salaries, employee benefits, car allowances, and employment taxes, and continues
to be our largest expense. Personnel costs decreased 23%, or $1,299,556, from $5,560,502 in 2016 to $4,260,946 in 2017. During
the fourth quarters of 2016 and 2017, we re-aligned our sales force to a more efficient model, by increasing
the number of dedicated sales brokers that represent our products, and reducing the number of sales force employees. When taking
into consideration start dates for new employees, and separation dates for those employees who left our workforce, we had 43 full
time equivalent employees during 2016. At December 31, 2017, we had 30 full time employees, as compared to 34 at December 31,
2016. We do not anticipate any significant change in personnel during 2018.
Stock
based compensation is used as an incentive to attract new employees and to compensate and retain existing employees. Stock based
compensation includes stock issued and stock options granted to employees and certain non-employees, increased $227,539 (20%)
from $1,133,149 in 2016 to $1,360,688 in 2017
IN PART TO offset SALARY REDUCTIONS.
The fair value of the stock grants is based on the trading value of our shares on the date of the grants and are being
amortized over applicable vesting periods. We anticipate making additional grants in the future.
Legal
and professional fees, which include accounting and legal services, increased $39,956 (9%) from $425,781 in 2016 to $465,737 in
2017. We anticipate legal fees related to ongoing legal compliance to remain comparable in 2018.
Travel
and entertainment expenses decreased $183,636 (30%) from $605,920 in 2016 to $422,284 in 2017. The decrease is due to the re-alignment
of our sales force and the related decrease in the number of personnel traveling on company business.
Rent
expense increased $46,421 from $96,151 in 2016 to $142,572 in 2017. Rent expense is primarily incurred for our Headquarters location
in Beverly Hills, California. During September of 2016 we relocated our Headquarters location to larger sub-leased premises in
Beverly Hills, where the monthly rent of $10,997, increased to $11,327 on November 1, 2017. We have entered into
a direct lease on the same premises beginning on March 1, 2018, expiring March 31, 2019, at a monthly rent of $14,488.
Marketing
and selling expenses decreased $33,889 (5%), from $730,142 in 2016, to $696,253 in 2017. Lower marketing and selling expenses
were primarily due to lower personnel expense and lower sample expense.
Consulting
fees decreased from $242,668 in 2016 to $203,721 in 2017, a decrease of $38,947 or 16%. We anticipate consulting costs to continue
to decline during 2018.
Director
fees for 2017 were $206,296 as compared with $165,227 in 2016. The increase is primarily due to the full year effect of an increase
of the number of our directors during the second half of 2016. We currently pay our non-employee directors $50,000 per year. These
fees can either be paid in cash, or in stock or stock options, at the election of the director.
The
Company incurred research and development expenses for the year ended December 31, 2017, in the amount of $574,989 and for
the year ended December 31, 2016 in the amount of $432,146. During the quarter ended September 30, 2016, we re-classified
certain personnel expenses that had previously been included in personnel expense, to Research and Development. These
expenses relate primarily to the services performed by our Director of Manufacturing and Product Development, and supporting
consultant expenses. The re-classification is shown in both the current period and the prior period. The increase in Research
and Development expenses was primarily attributable to increased activity in creating unique flavors for potential customers
in our national account pipeline. We anticipate this cost continuing in future periods, at an increased rate as compared with
2017.
Shipping
and storage expense increased $212,624 (52%), from $407,247 in 2016 to $619,871 in 2017. Shipping and storage expense as a percentage
of revenue increased from 28% in 2016 to 31% in 2017. The higher expense in 2017 is due to a number of factors, including the
continued movement of inventory to new forward warehouse as the company expanded its business into Canada, and building of inventory
levels in preparation for expected national account launch in early 2018.
Other
expenses consist of ordinary operating expenses such as office, telephone, insurance, and other similar expenses. These expenses
directly correlate to our overall business activity. We expect these expenses to continue to increase during 2018 as our business
grows.
Operating
loss was $8,911,540 in 2017, and $9,939,875 in 2016.
Interest
expense was zero in 2017, as compared with $250,850 in 2016. Interest expense for 2016 relates to $2,670,000 of convertible debt
that was issued during September of 2015, the majority of which was converted to equity during the first quarter of 2016. The
stated interest rate on the convertible debt issued during September of 2015 was 10%.
Net
loss was $8,911,540 in 2017, and $10,190,725 in 2016.
Liquidity
and Capital Resources
As
of December 31, 2017, we had a working capital surplus of $1,774,719, as compared with a working capital surplus of $8,751,702
at December 31, 2016. The reduction in working capital surplus is primarily due to the reduction in cash raised from investing
activities, partially offset by a reduction of cash used in operations, and a significant increase in inventory levels.
During
the twelve month period ended December 31, 2017, we used cash of $7,334,239 in operations, $535,196 for the purchase of equipment,
net of sales of equipment, and $29,179 for patents and trademarks
Our
liquidity needs will depend on how quickly we are able 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.
During
2016 we issued 28,277,329 shares of our common stock (“Shares”) and warrants to purchase 14,033,438 Shares (“Warrants”)
for aggregate gross proceeds to the Company of $18,812,690. Of these total amounts 24,598,674 Shares were issued for cash of $16,457,150;
3,502,327 Shares were issued for Conversion of Debt in the amount of $2,242,692; and 176,328 Shares were issued in settlement
of debt in the amount of $112,849. Of the total 14,033,438 Warrants issued during 2016, 3,877,186 are priced at $1,00; 7,812,500
are priced at $0.88, and 2,343,752 are priced at $0.75. The 2016 financing activity occurred in three separate private placements
with accredited investors. In the first transaction, we issued 7,754,373 Shares and five year Warrants priced at $1.00 to purchase
up to 3,877,186 Shares, for aggregate gross proceeds to the Company of $6,203,498. The first transaction consists of two components:
a new equity raise in the amount of $3,570,000 and the conversion into common equity of $2,633,498 of principal and interest of
convertible promissory notes previously issued during the fourth quarter of 2016. In the second transaction, we sold 4,687,504
Shares and five year Warrants priced at $.75 to purchase up to 2,343,752 Shares, for aggregate gross proceeds to the Company of
$3,000,000. In the third transaction we sold 15,625,000 Shares, and five year Warrants priced at $.88 to purchase up to 7,812,500
shares for aggregate gross proceeds to the Company of $10,000,000. During 2016 we also converted $52,613 of debt into 210,455
shares of stock, related to a note that was settled for most investors during 2015.
We
did not issue any additional securities or debt during 2017.
On
February 14, 2018, we announced the private placement of convertible notes with gross proceeds of $4.1 million The closing shall
be no later than five (5) business days after receipt of notice from the Company that it has achieved certain milestones establishing
significant sales to national accounts. One milestone is that the Company shall have 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 This first milestone
was achieved on March 8, 2018. The other milestone is that the Company shall have entered 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.
Upon
achievement of the first milestone, 60% of the principal amount of the convertible notes will be available to the Company, with
the balance of 40% upon achievement of the second milestone. The Company intends to use the proceeds from this financing to fund
the manufacture of inventory, to purchase equipment, and for general corporate purposes.
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. On March 5, 2018, the Company issued a Promissory Note to an existing
investor, in the amount of $250,000. The unsecured note bears interest at 12%, and has a 6 month term Proceeds are being used
to fund the short term working capital needs of the Company. The Company plans to refinance this note upon maturity.
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
lease office space under a non-cancellable operating sub-lease, which expired February 28, 2018, and we have entered into
a direct lease for the same premises covering the period March 1, 2018 to March 31, 2019. The aggregate minimum requirements under
the non-cancellable sub-lease and direct lease as of December, 31 2017 is $210,992.
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 Chief Financial Officer,
we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Securities and Exchange Act
of 1934 Rules 13a-15(f). Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that
the Company’s disclosure controls and procedures were not effective as of December 31, 2017.
Management’s
Annual Report on Internal Control over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is
defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, for the Company.
Internal
control over financial reporting includes those policies and procedures that: (1) pertain to the maintenance of records that,
in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (2) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted
accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of its management
and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use
or disposition of our assets that could have a material effect on the financial statements.
Management
recognizes that there are inherent limitations in the effectiveness of any system of internal control, and accordingly, even effective
internal control can provide only reasonable assurance with respect to financial statement preparation and may not prevent or
detect material misstatements. In addition, effective internal control at a point in time may become ineffective in future periods
because of changes in conditions or due to deterioration in the degree of compliance with our established policies and procedures.
Our
management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2017.
The framework used by management in making that assessment was the criteria set forth in the document entitled “Internal
Control – Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO)
in 2013 which assessment identified material weaknesses in internal control over financial reporting. A material weakness is a
control deficiency, or a combination of deficiencies in internal control over financial reporting that creates a reasonable possibility
that a material misstatement in annual or interim financial statements will not be prevented or detected on a timely basis.
Under
the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer
we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Securities and Exchange Act
of 1934 Rules 13a-15(f). Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that
the Company’s disclosure controls and procedures were not effective as of December 31, 2017.
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.
Management
believes that the material weakness set forth above did not have an effect on the reporting of our financial results.
In
an effort to remediate the identified material weakness and enhance our internal control over financial reporting, we plan to
engage additional financial personnel to help ensure that we are able to properly implement internal control procedures.
This
report shall not be deemed to be filed for purposes of Section 18 of the Exchange Act, or otherwise subject to the liabilities
of that section, and is not incorporated by reference into any filing of the Company, whether made before or after the date hereof,
regardless of any general incorporation language in such filing.
Changes
in Internal Control over Financial Reporting
There
have been no changes in our internal control over financial reporting during the fourth quarter of the year ended December 31,
2017 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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
|
|
37
|
|
President,
Chief Executive Officer and Chairman
|
Joseph
S. Tesoriero
|
|
63
|
|
Chief
Financial Officer
|
Steven
Lang
|
|
64
|
|
Director
|
Arnold
Tinter
|
|
72
|
|
Secretary
and Director
|
Joseph
M. Cugine
|
|
56
|
|
Director
|
Alice
Elliot
|
|
60
|
|
Director
|
Alexander
H. Ware
|
|
55
|
|
Director
|
Isabelle
Ortiz-Cochet
|
|
56
|
|
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.
Joseph
S. Tesoriero
was appointed as Chief Financial Officer of the Company on May 18, 2015. Mr. Tesoriero has served as an independent
director of Smart & Final Stores, Inc. (NYSE: SFS) since July of 2014, where he serves as Chairman of the Audit Committee
and a member of the Nominating and Governance Committee. He was most recently engaged as a financial advisor for Dole Asia Holdings,
Ltd. Pte., a Singapore based wholly owned subsidiary of Itochu Corporation of Japan, from April 2013 to October 2013. Prior to
this consulting engagement, Mr. Tesoriero served as Executive Vice Present and Chief Financial Officer of Dole Food Company Inc.
from February 2010 to April 2013, as its Vice President and Chief Financial Officer from August 2004 to February 2010 and as its
Vice President of Tax from September 2002 to August 2004. Prior to joining Dole, Mr. Tesoriero was Senior Vice President of Tax
of Global Crossing (1998-2002), Vice President of Tax of Coleman Camping Equipment (1997-1998), International Tax Attorney with
Revlon Cosmetics (1989-1997) and Tax Attorney with IBM (1980-1988). Mr. Tesoriero began his career in 1978 as a Tax Associate
with Haskins & Sells (now Deloitte Touche). Mr. Tesoriero holds a B.S. in Accounting from Villanova University, a J.D. from
New York Law School and an LL.M. in Taxation from Boston University. He has been a member of the New York State Bar since 1978.
Qualifications
:
Mr. Tesoriero has over 30 years of experience in corporate finance leadership positions.
Steven
Lang
was appointed as Director of the Company on January 10, 2012. He has also served as Secretary of Barfresh NV since
its inception. 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 35 years of experience in business, accounting, law and finance and served as Chairman of an Australian public
company.
Arnold
Tinter
was appointed as Director, Chief Financial Officer and Secretary of the Company on January 10, 2012. Mr. Tinter
resigned his position as Chief Financial Officer on May 18, 2015 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 2001 to May 2003, he served as chief financial officer of Bayview Technology Group, LLC, a privately
held company that manufactured and distributed energy-efficient products. From May 2003 to October 2004, he also served as that
company’s chief executive officer. Prior to 1990, Mr. Tinter was chief executive officer of Source Venture Capital, a holding
company with investments in the gaming, printing and retail industries. Mr. Tinter 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.
Alice
Elliot
was appointed as Director of the Company on October 15, 2014. Ms. Elliot is the founder and chief executive of
The Elliot Group, a global retained executive search firm specializing in the hospitality, foodservice, retail and service sectors.
For more than 20 years, Ms. Elliot has hosted the exclusive invitation only ‘Elliot Leadership Conference.’ She was
a co-founder of ‘The Elliot Leadership Institute,’ a nonprofit organization dedicated to leadership development and
advancement in the foodservice industry, and is known for her philanthropic and educational endeavors and contributions. Throughout
her career, Ms. Elliot has received various industry honors, including the Trailblazer Award from the Women’s Foodservice
Forum and induction into the National Restaurant Association Educational Foundation’s College of Diplomates. She was also
recently named to the Nation’s Restaurant News list of the 50 Most Powerful People in Foodservice.
Qualifications
:
Well recognized for the placement of senior-level executives at public and privately held restaurant organizations nationwide,
Ms. Elliot is sought out for their intellectual and strategic thought leadership.
Alexander
H. Ware
was appointed as director of the company on July 13, 2016. Until recently, Mr. Ware served as the Executive Vice
President & Chief Financial Officer of Buffalo Wild Wings since October 2016. Mr. Ware previously served as 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 Holding Corporation, 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 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.
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, with brands
such as Laughing Cow, Mini-Babybel or Boursin. 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 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 the 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.
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. All options
granted under the employment agreement are subject to the Company’s 2015 Equity Incentive Plan.
The
Company entered into an executive employment agreement with Joseph S. Tesoriero on May 18, 2015, pursuant to which he agreed to
serve as Chief Financial Officer. Pursuant to the employment agreement, Mr. Tesoriero will receive a base salary of $250,000 and
performance bonuses of 75% of his base salary, based upon performance targets determined by the Board of Directors. In addition,
Mr. Tesoriero was granted 350,000 shares of common stock of Barfresh and 8-year options to purchase up to 500,000 shares of common
stock of Barfresh. One-half of each of the share and option grants vests on each of the second and third anniversaries of the
date of commencement of Mr. Tesoriero’s employment. Mr. Tesoriero will also receive 8-year performance options to purchase
up to an additional 350,000 shares on an annual basis. All shares and options granted under the employment agreement are subject
to the Company’s 2015 Equity Incentive Plan.
Term
of Office
Directors
are appointed for a one-year term to hold office until the next annual general meeting of shareholders or until removed from office
in accordance with our bylaws. Our officers are appointed by our board of directors and hold office until the earlier of resignation
or removal.
Director
Independence
We
use the definition of “independence” standards as defined in the NASDAQ Stock Market Rule 5605(a)(2) provides that
an “independent director” is a person other than an officer or employee of the company or any other individual having
a relationship, which, in the opinion of the Company’s board of directors, would interfere with the exercise of independent
judgment in carrying out the responsibilities of a director. We have determined that four of our seven directors are independent,
which constitutes a majority.
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 Riccardo Delle Coste. 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 is an independent member of the audit committee, as defined above. In the future we expect to have an audit committee
comprised of all independent members. The members of the compensation committee are Arnold Tinter, Alice Elliot 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, Alice
Elliot and Steven Lang. 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 Chief Financial Officer are bound by a Code of Ethics that complies with Item 406 of Regulation
S-K of the Exchange Act.
Section
16(a) Beneficial Ownership Reporting Compliance
Section
16(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) requires our directors and executive
officers and beneficial holders of more than 10% of our common stock to file with the SEC initial reports of ownership and reports
of changes in ownership of our equity securities.
To
our knowledge, based solely upon a review of Forms 3 and 4 and amendments thereto furnished to Barfresh under 17 CFR 240.16a-3(e)
during our most recent fiscal year and Forms 5 and amendments thereto furnished to Barfresh with respect to our most recent fiscal
year or written representations from the reporting persons, we believe that during the fiscal year ended December 31, 2017 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
|
|
●
|
Alice
Elliot, late filing of Form 4
|
|
●
|
Steve
Lang, late Form 4
|
|
●
|
Riccardo
Delle Coste, late Form 4
|
Item
11. Executive Compensation.
The
following table summarizes all compensation for the fiscal years ending December 31, 2017 (“2017”) and December 31,
2016 (“2016”) received by our “Named Executive Officers”:
Name
and
Principal
Position
|
|
Period
|
|
Salary
($)
|
|
|
Bonus
(1)
($)
|
|
|
Stock
Awards
($)
|
|
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
|
|
2017
|
|
|
350,000
|
(2)
|
|
|
-
|
|
|
|
-
|
|
|
105,000
|
(3)
|
|
|
|
|
|
|
|
|
10,800
|
(4)
|
|
455,000
|
|
|
|
2016
|
|
|
364,583
|
|
|
|
43,750
|
|
|
|
57,118
|
(5)
|
|
158,750
|
(6)
|
|
|
|
|
|
|
|
|
11,700
|
(4)
|
|
624,201
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Joseph
Cugine, President, Barfresh Corp. Inc. a wholly owned subsidiary
|
|
2017
|
|
|
300,000
|
(7)
|
|
|
|
-
|
|
|
|
-
|
|
105,000
|
(8)
|
|
|
|
|
|
|
|
|
|
|
|
405,000
|
|
|
|
2016
|
|
|
300,000
|
|
|
|
25,137
|
|
|
|
32,818
|
(9)
|
|
139,382
|
(10)
|
|
|
|
|
|
|
|
|
|
|
|
497,337
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Joseph
Tesoriero, Chief Financial Officer
|
|
2017
|
|
|
290,000
|
(11)
|
|
|
-
|
|
|
|
|
-
|
|
253,364
|
(12)
|
|
|
|
|
|
|
|
|
|
|
|
543,364
|
|
|
|
2016
|
|
|
290,000
|
|
|
|
19,488
|
|
|
|
25,443
|
(13)
|
|
95,646
|
(14)
|
|
|
|
|
|
|
|
|
|
|
|
430,577
|
|
1.
|
Represents
discretionary bonuses for fiscal year 2015 that were paid during fiscal year 2016.
|
|
|
2.
|
Of
the salary earned, $294,135 was paid and $55,865 was deferred.
|
|
|
3.
|
Represents
a stock option grant 250,000 options shares issued 9/15/17 with an exercise price of $0.55, which vest ratably over the next
three years and are exercisable until 9/15/25.
|
|
|
4.
|
Represents
the car allowance paid to Mr. Delle Coste
|
|
|
5.
|
Represents
121,527 shares of restricted stock valued the trading price on the date of grant. The shares were granted on 11/25/16 and
vest ratably each year until 2019.
|
|
|
6.
|
Represents
two stock option grants: (1) 250,000 options shares issued 5/25/2016, with an exercise price of $0.61, which vest ratably
over the next three years and are exercisable until 5/25/2024 and (2) 125,000 options issued on 11/25/2016, with an exercise
price of $0.72, which vest ratably over the next three years and are exercisable until 11/25/2024.
|
|
|
7.
|
Of
the salary earned, $252,115was paid and $47,885 was deferred.
|
|
|
8.
|
Represents
a stock option grant 250,000 options shares issued 9/15/17 with an exercise price of $0.55, which vest ratably over the next
three years and are exercisable until 9/15/25.
|
|
|
9.
|
Represents
69,825 shares of restricted valued the trading price on the date of grant. The shares were granted on 12/12/2016 and vest
ratably each year until 2019.
|
|
|
10.
|
Represents
two stock option grants: (1) 250,000 options shares issued 5/25/2016, with an exercise price of $0.61, which vest ratably
over the next three years and are exercisable until 5/25/2024 and (2) 125,000 options issued on 11/25/2016, with an exercise
price of $0.72, which vest ratably over the next three years and are exercisable until 11/25/2024.
|
|
|
11.
|
Of
the salary earned, $243,711was paid and $46,289 was deferred.
|
|
|
12.
|
Represents
two stock option grants: (1) 300,000 options shares issued 7/5/17, with an exercise price of $0.77, which vest ratably over
the next three years and are exercisable until 7/5/2025 and (2) 175,000 options issued on 9/15/2017, with an exercise price
of $0.55, which vest ratably over the next three years and are exercisable until 9/5/25.
|
|
|
13.
|
Represents
54,133 shares of restricted stock valued using the Black-Scholes pricing model. The shares were granted on 12/12/ 2016 and
vest ratably until 2019.
|
|
|
14.
|
Represents
two stock option grants: (1) 175,000 options issued on 5/25/2016, with an exercise price of $0.61, which vest ratably over
the next three years and are exercisable until 5/25/2024 and (2) 54,567 options issued on 11/25/2016, with an exercise price
of $0.72, which vest ratably over the next three years and are exercisable until 11/25/2024.
|
Outstanding
Equity Awards at Fiscal Year-End Table
Option
Awards
|
|
Stock
Awards
|
|
Name
|
|
Number
of
securities
underlying
unexercised options
(#) exercisable
|
|
|
Equity
incentive
plan
awards:
Number of
securities
underlying
unexercised
unearned
options (#)
|
|
|
Option
exercise
price ($)
|
|
|
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
|
|
|
300,000
|
(1)
|
|
|
|
|
|
|
0.45
|
|
|
1/21/20
|
|
|
|
|
|
|
|
|
|
|
83,333
|
(2)
|
|
|
166,667
|
(2)
|
|
|
0.61
|
|
|
5/25/24
|
|
|
|
|
|
|
|
|
|
|
41,667
|
(3)
|
|
|
83,333
|
(3)
|
|
|
0.72
|
|
|
11/25/24
|
|
|
|
|
|
|
|
|
|
|
250,000
|
(4)
|
|
|
|
|
|
|
0.55
|
|
|
9/15/25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
81,018
|
|
|
|
47,801
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Joseph
Cugine
|
|
|
300,000
|
(5)
|
|
|
300,000
|
|
|
|
0.50
|
|
|
5/1/23
|
|
|
|
|
|
|
|
|
|
|
83,333
|
(2)
|
|
|
166,667
|
|
|
|
0.61
|
|
|
5/25/24
|
|
|
|
|
|
|
|
|
|
|
27,930
|
(3)
|
|
|
42,124
|
|
|
|
0.72
|
|
|
11/25/24
|
|
|
|
|
|
|
|
|
|
|
250,000
|
(4)
|
|
|
|
|
|
|
0.55
|
|
|
9/15/25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
546,550
|
|
|
|
322,465
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Joseph
Tesoriero
|
|
|
250,000
|
(5)
|
|
|
250,000
|
|
|
|
0.82
|
|
|
5/1/23
|
|
|
|
|
|
|
|
|
|
|
58,333
|
(2)
|
|
|
116,667
|
|
|
|
0.61
|
|
|
5/25/24
|
|
|
|
|
|
|
|
|
|
|
18,189
|
(3)
|
|
|
36,378
|
|
|
|
0.72
|
|
|
11/25/24
|
|
|
|
|
|
|
|
|
|
|
175,000
|
(4)
|
|
|
|
|
|
|
0.55
|
|
|
9/15/25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
286,089
|
|
|
|
168,793
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.
|
Fully
vested.
|
|
|
2.
|
Vest
in equal increments on 5/25/2017, 5/25/2018 and 5/25/2019.
|
|
|
3.
|
Vest
in equal increments on 11/25/2017, 11/25/2018, and 11/25/2019.
|
|
|
4.
|
Vest
in equal increments on 9/15/18, 9/15/19, and 9/15/20.
|
|
|
5.
|
Vest
in equal increments on 5/1/2017 and 5/1/2018.
|
Compensation
of Directors
The
following table summarizes the compensation paid to our directors that were not employees for the fiscal year ended December 31,
2017. 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
70,000
|
(1)
|
|
|
120,000
|
|
Steven
Lang
|
|
|
|
|
|
|
|
|
|
50,000
|
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50,000
|
|
Alice
Elliot
|
|
|
|
|
|
|
|
|
|
50,000
|
(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50,000
|
|
Alex
Ware
|
|
|
|
|
|
50,000
|
(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50,000
|
|
Isabelle
Ortiz-Cochet
|
|
|
|
|
|
|
|
|
|
50,000
|
(5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50,000
|
|
(1)
|
Represents
consulting fees paid to Mr. Tinter.
|
(2)
|
Mr.
Lang elected to receive $25,000 in cash and 40,843 Stock Options in lieu of cash.
|
|
|
(3)
|
Ms.
Elliot elected to receive 81,075 Stock Options in lieu of cash.
|
|
|
(4)
|
Mr.
Ware elected to receive 95,995 shares of Stock in lieu of cash.
|
|
|
(5)
|
Ms.
Ortiz-Cochet elected to receive Stock Options in lieu of cash.
|
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
The
Company entered into an executive employment agreement with Joseph S. Tesoriero on May 18, 2015, pursuant to which he agreed to
serve as Chief Financial Officer. Pursuant to the employment agreement, Mr. Tesoriero will receive a base salary of $250,000 and
performance bonuses of 75% of his base salary, based upon performance targets determined by the Board of Directors. In addition,
Mr. Tesoriero was granted 350,000 shares of common stock of Barfresh and 8-year options to purchase up to 500,000 shares of common
stock of Barfresh. One-half of each of the share and option grants vests on each of the second and third anniversaries of the
date of commencement of Mr. Tesoriero’s employment. Mr. Tesoriero will also receive 8-year performance options to purchase
up to an additional 350,000 shares on an annual basis. All shares and options granted under the employment agreement are subject
to the Company’s 2015 Equity Incentive Plan.
Item
12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Security
Ownership of Certain Beneficial Owners and Management
The
following table sets forth certain information regarding our shares of common stock beneficially owned as of March 8, 2018 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 March 8, 2018. As of March 8, 2018, the Company had 118,701,577
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
March 8, 2018 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 March 8, 2018, 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) (7)
|
|
|
20,585,085
|
|
|
|
17.24
|
%
|
|
|
|
|
|
|
|
|
|
Steven
Lang
(8) (9) (10) (11)
|
|
|
19,917,082
|
|
|
|
16.71
|
%
|
|
|
|
|
|
|
|
|
|
Joseph
Tesoriero
(12) (13) (14)
|
|
|
681,263
|
|
|
|
0.57
|
%
|
|
|
|
|
|
|
|
|
|
Arnold
Tinter
(15) (16)
|
|
|
950,000
|
|
|
|
0.80
|
%
|
|
|
|
|
|
|
|
|
|
Joe
Cugine
(17) (18) (19)
|
|
|
1,823,291
|
|
|
|
1.53
|
%
|
|
|
|
|
|
|
|
|
|
Alice
Elliot
(20) (21) (22) (23) (24)
|
|
|
918,701
|
|
|
|
0.77
|
%
|
|
|
|
|
|
|
|
|
|
Alexander
Ware
(25) (26) (27)
|
|
|
379,973
|
|
|
|
0.32
|
%
|
|
|
|
|
|
|
|
|
|
Isabelle
Ortiz-Cochet
(28) (29)
2 Allee De Longchamp Suresnes, France
|
|
|
112,809
|
|
|
|
0.09
|
%
|
|
|
|
|
|
|
|
|
|
All
directors and officers as a group (8 persons)
|
|
|
45,368,204
|
|
|
|
37.32
|
%
|
|
|
|
|
|
|
|
|
|
Unibel
2 Allee De Longchamp Suresnes, France 92150
(30)
|
|
|
23,437,500
|
|
|
|
18.53
|
%
|
|
|
|
|
|
|
|
|
|
IBEX
Investors LLC (fka) Lazarus Investment Partners LLLP 3200 Cherry Creek South Drive Suite 670 Denver, CO 80209
(31)
|
|
|
16,242,766
|
|
|
|
13.27
|
%
|
|
|
|
|
|
|
|
|
|
Wolverine
Asset Management, LLC (“WAM”) 175 West Jackson Blvd. Suite 340 Chicago, IL 60604
(32) (33)
|
|
|
6,501,600
|
|
|
|
5.39
|
%
|
1
|
The
address of those listed, except as noted is c/o Barfresh Food Group Inc., 8383 Wilshire Blvd., Beverly Hills, CA 90211.
|
|
|
2
|
Mr.
Delle Coste is the Chief Executive Officer, President and a Director of the Company.
|
|
|
3
|
Includes
19,471,779 shares owned by R.D. Capital Holdings PTY Ltd. and of which Riccardo Delle Coste is deemed to be a beneficial owner.
|
|
|
4
|
Includes
405,000 shares underlying options granted.
|
5
|
Includes
166,667 shares underlying warrants issued in connection with a promissory note the holder of which was R.D. Capital Holdings
PTY Ltd. And of which Riccardo Delle Coste is deemed to be a beneficial owner.
|
|
|
6
|
Includes
25,000 shares underlying warrants issued in connection with a promissory note the holder of which was R.D. Capital Holdings
PTY Ltd. and of which Riccardo Delle Coste is deemed to be a beneficial owner.
|
|
|
7
|
Includes
76,130 shares underlying warrants issued in connection with the purchase of common shares, the holder of which was R.D. Capital
Holdings PTY Ltd. and of which Riccardo Delle Coste is deemed to be a beneficial owner.
|
|
|
8
|
Mr.
Lang is a Director of the Company.
|
|
|
9
|
Includes
19,072,451 shares owned by Sidra Pty Limited of which Steven Lang is deemed to be a beneficial owner
|
|
|
10
|
Includes
356,990 shares underlying options granted
|
|
|
11
|
Includes
282,646 shares underlying warrants issued in connection with a promissory note the holder of which is Sidra PTY Limited
|
|
|
12
|
Mr.
Tesoriero is the Chief Financial Officer of the Company.
|
|
|
13
|
Includes
308,333 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
|
Includes
150,000 shares underlying options granted
|
|
|
17
|
Mr.
Cugine is President of a subsidiary of the Company and a Director
|
|
|
18
|
Includes
397,857 shares underlying options granted.
|
19
|
Includes
96,020 shares underlying warrants issued in connection with purchase of common shares.
|
|
|
20
|
Ms.
Elliot is a Director of the Company
|
|
|
21
|
Includes
360,000 shares owned by Elliot-Herbst LP of which Alice Elliot is deemed to be a beneficial owner
|
|
|
22
|
Includes
64,599 shares owned by Elliot-Herbst Family LLC of which Ms. Elliot is deemed to be a beneficial owner.
|
|
|
23
|
Includes
314,499 shares underlying options granted
|
|
|
24
|
Includes
130,000 shares underlying warrants issued in connection with purchase of common shares
|
|
|
25
|
Mr.
Ware is a Director of the Company
|
|
|
26
|
Includes
301,848 shares owned by The Alexander Ware Revocable Trust of which Mr. Ware is deemed to be a beneficial owner
|
|
|
27
|
Includes
78,125 shares underlying warrants issued to The Alexander Ware Revocable Trust in connection with purchase of common stock.
|
|
|
28
|
Ms.
Ortiz-Cochet is a Director of the Company
|
29
|
Includes
33,603 shares underlying options granted.
|
|
|
30
|
Includes
7,812,500 shares underlying warrants issued in connection with the purchase of common stock.
|
|
|
31
|
Includes
3,733,333 shares underlying warrants issued in connection with the purchase of common stock.
|
|
|
32
|
Wolverine
Asset Management, LLC (“WAM”) is the investment manager of Wolverine Flagship Fund Trading Limited and has voting
and dispositive power over these securities. The sole member and manager of WAM is Wolverine Holdings, L.P. (“Wolverine
Holdings”). Robert R. Bellick and Christopher L. Gust may be deemed to control Wolverine Trading Partners, Inc., the
general partner of Wolverine Holdings.
|
|
|
33
|
Includes
2,000,000 shares underlying warrants issued in connection with the purchase of common stock.
|
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 2017 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.
There
were no related party transactions for the year ended December 31, 2017, that meet the criteria described in the paragraph above.
The
Company’s policy with regard to related party transactions requires any related party loans that are (i) non-interest bearing
and in excess of $100,000 or (ii) interest bearing, irrespective of amount, must be approved by the Company’s board of directors.
All issuances of securities by the Company must be approved by the board of directors, irrespective of whether the recipient is
a related party. Each of the foregoing transactions, if required by its terms, was approved in this manner.
Director
Independence
We
use the definition of “independence” standards as defined in the NASDAQ Stock Market Rule 5605(a)(2) provides that
an “independent director” is a person other than an officer or employee of the company or any other individual having
a relationship, which, in the opinion of the Company’s board of directors, would interfere with the exercise of independent
judgment in carrying out the responsibilities of a director. We have determined that four of our seven 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, 2017 and December 31,
2016 were as follows.
|
|
2017
|
|
|
2016
|
|
Audit
fees
|
|
$
|
66,439
|
|
|
$
|
53,208
|
|
Audit
related fees
|
|
|
|
|
|
|
|
|
Tax
fees
|
|
|
13,300
|
|
|
|
13,700
|
|
All
other fees
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
79,739
|
|
|
$
|
66,908
|
|
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, 2017 and December 31, 2016 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, 2017 or December
31, 2016, that are not reported under Audit Fees.
Tax
Fees.
The aggregate tax fees billed for the year end December 31, 2017 and December 31, 2016 were 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, 2017 or December 31, 2016.
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. All inter-company balances and transactions among the companies have been eliminated upon consolidation.
Use
of Estimates
The
preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities in the balance sheets and revenues and expenses during the years reported. Actual
results may differ from these estimates.
Cash
and Cash Equivalents
We
consider all highly liquid investments with an original maturity of three months or less, at the time of purchase, to be cash
equivalents.
Concentration
of Credit Risk
The
amount of cash on deposit with financial institutions exceeds the $250,000 federally insured limit at December 31, 2017 and 2016.
However, we believe that cash on deposit that exceeds $250,000 in the financial institutions is financially sound and the risk
of loss is minimal.
Fair
Value Measurement
Financial
Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 820,
Fair Value
Measurements and Disclosures
(“ASC 820”), provides a comprehensive framework for measuring fair value and expands
disclosures which are required about fair value measurements. Specifically, ASC 820 sets forth a definition of fair value and
establishes a hierarchy prioritizing the inputs to valuation techniques, giving the highest priority to quoted prices in active
markets for identical assets and liabilities and the lowest priority to unobservable value inputs. ASC 820 defines the hierarchy
as follows:
Level
1 - Quoted prices are available in active markets for identical assets or liabilities as of the reported date. The types of assets
and liabilities included in Level 1 are highly liquid and actively traded instruments with quoted prices, such as equities listed
on the New York Stock Exchange.
Level
2 - Pricing inputs are other than quoted prices in active markets but are either directly or indirectly observable as of the reported
date. The types of assets and liabilities in Level 2 are typically either comparable to actively traded securities or contracts
or priced with models using highly observable inputs.
Level
3 - Significant inputs to pricing that are unobservable as of the reporting date. The types of assets and liabilities included
in Level 3 are those with inputs requiring significant management judgment or estimation, such as complex and subjective models
and forecasts used to determine the fair value of financial transmission rights.
Our
financial instruments consist of accounts receivable, accounts payable, accrued expenses and notes payable. The carrying value
of our financial instruments approximates their fair value due to their relative short maturities.
Accounts
Receivable
Accounts
receivable are typically unsecured. Our credit policy calls for payment generally within 30 days. The credit worthiness of a customer
is evaluated prior to a sale. As of December 31, 2017, and 2016, there is no allowance for doubtful accounts. There was no bad
debt expense for the years ended December 31, 2017 and 2016.
Inventory
Inventory
consists of finished goods and is carried at the lower of cost or net realizable value on a first in first out basis.
Intangible
Assets
Intangible
assets are comprised of patents, net of amortization and trademarks. The patent costs are being amortized over the life of the
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.
Property,
Plant, and Equipment
Property,
plant, and equipment is stated at cost less accumulated depreciation and accumulated impairment loss, if any. Depreciation is
calculated on a straight-line basis over the estimated useful lives of the assets. Leasehold improvements are being amortized
over the shorter of the useful life of the asset or the lease term that includes any expected renewal periods that are deemed
to be reasonably assured. The estimated useful lives used for financial statement purposes are:
Furniture
and fixtures: 5 years
Manufacturing
Equipment: 7 years
Leasehold
improvements: 2 years
Vehicles
5 years
Revenue
Recognition
We
recognize revenue when there is persuasive evidence of an arrangement, delivery has occurred or services have been rendered, the
sales price is determinable, and collection is reasonably assured. Revenue is recorded net of provisions for discounts and promotion
allowances. Our products are sold on various terms. Our credit terms, which are established in accordance with local and industry
practices, typically require payment within 30 days of delivery. We recognize revenue upon receipt of our products by our distributors
and retail accounts, in accordance with written sales terms, net of provisions for discounts or allowances. Allowances for returns
and discounts are made on a case-by-case basis. Historically, neither returns nor discounts have been material.
Research
and Development
Expenditures
for research activities relating to product development and improvement are charged to expense as incurred. We incurred $574,989
and $432,146, in research and development expenses for the years ended December 31, 2017 and 2016, respectively.
Rent
Expense
We
recognize rent expense on a straight-line basis over the reasonably assured lease term as defined in ASC Topic 840,
Leases
(“ASC 840”). Rent expense is charged to expense beginning with the occupancy date. Deferred rent was $495 and
$165 at December 31, 2017 and 2016, respectively, and will be charged to rent expense over the life of the lease. Total amount
of rent expense incurred in 2017 was $142,572 and in 2016 was $96,151.
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, 2017 and 2016 we did not have any interest and penalties or any significant unrecognized uncertain
tax positions.
Earnings
per Share
We
calculate net loss per share in accordance with ASC Topic 260,
Earnings per Share
. Basic net loss per share is computed
by dividing net loss by the weighted average number of shares of common stock outstanding for the period, and diluted earnings
per share is computed by including common stock equivalents outstanding for the period in the denominator. At December 31, 2017
and 2016 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 not yet effective may have an impact on our results of operations and financial position.
In
May 2014, the FASB issued ASU Update 2014-09 Revenue from Contracts with Customers (Topic 606), which converged guidance on recognizing
revenue in contracts with customers on an effective date after our year ending December 31, 2017. The Company is in the initial
stages of evaluating the effect of the standard on our financial statements and continue to evaluate the available transition
methods. However, based on our initial evaluation, we do not expect there to be material changes to our current Revenue Recognition
policies due to the non-complex contracts with our customers, including the definition of our performance obligations and the
transaction prices in our contracts with our customers.
The
Company has evaluated the effect of the standard on our financial statements, and based on our evaluation, we do not expect there
to be material impact to our financial statement.
In
February 2016, the FASB issued ASU No. 2016-02, Leases, to improve financial reporting about leasing transactions. This ASU will
require organizations that lease assets (“lessees”) to recognize a lease liability and a right-of-use asset on its
balance sheet for all leases with terms of more than twelve months. A lease liability is a lessee’s obligation to make lease
payments arising from a lease, measured on a discounted basis and a right-of-use asset represents the lessee’s right to
use, or control use of, a specified asset for the lease term. The amendments in this ASU leaves the accounting for the organization
that own the assets leased to the lessee (“lessor”) largely unchanged except for targeted improvements to align it
with the lessee accounting model and Topic 606, Revenue from Contracts with Customers.
The
Company is in the initial stages of evaluating the effect of the standard on our financial statements and continue to evaluate
the available transition methods. However, based on our initial evaluation, we do not expect there to be material changes to both
our current and long-term lease liabilities and our fixed assets of our limited number of operating leases that will be converted
to financing leases under the new guidance. The Company does not plan to adopt the standard until the interim period ended March
31, 2019.
In
August 2014, the FASB issued FASB ASU2014-15,
Presentation of Financial Statements - Going Concern (Subtopic 205-40): Disclosure
of Uncertainties about an Entities Ability to Continue as a Going Concern
. FASB ASU 2015-15 changes the disclosure requirements
of uncertainties about an entity’s ability to continue as a going concern. FASB ASU2014-15 is effective for annual periods
ending after December 15, 2016, and for interim periods within annual periods beginning after that date. These changes require
an entity’s management to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial
doubt about an entities ability to continue as a going concern within one year after the date the financial statements are issued.
If management has concluded that substantial doubt exists, then the following disclosures should be made in the financial statements:
(i) principal conditions or events that raised the substantial doubt; (ii) management’s evaluation of the significance of
those conditions or events in relation to the entities ability to meet those obligations; (iii) management’s plans that
alleviated the initial substantial doubt or, if substantial doubt was not alleviated, management’s plans that are intended
to at least mitigate the conditions or events that raise the substantial doubt, and (iv) if management’s plans did not alleviate
the substantial doubt, an explicit statement that there is a substantial doubt. These changes are reflected in the disclosure
included in Note 10.
Note
2. Property Plant and Equipment
Major
classes of property and equipment at December 31, 2017 and 2016 consist of the following:
|
|
2017
|
|
|
2016
|
|
Furniture
and fixtures
|
|
$
|
1,524
|
|
|
$
|
1,524
|
|
Manufacturing
Equipment
|
|
|
1,952,538
|
|
|
|
1,605,317
|
|
Leasehold
Improvements
|
|
|
4,886
|
|
|
|
4,800
|
|
Vehicles
|
|
|
29,696
|
|
|
|
29,696
|
|
|
|
|
1,988,644
|
|
|
|
1,641,337
|
|
Less:
accumulated depreciation
|
|
|
(665,657
|
)
|
|
|
(396,863
|
)
|
|
|
|
1,322,987
|
|
|
|
1,244,474
|
|
Equipment
not yet placed in service
|
|
|
437,903
|
|
|
|
250,004
|
|
Property
and equipment, net of depreciation
|
|
$
|
1,760,890
|
|
|
$
|
1,494,478
|
|
We
recorded depreciation expense related to these assets of $268,784 and $147,131 for the year ended December 31, 2017 and 2016,
respectively.
Note
3. Intangible Assets
As
of December 31, 2017, intangible assets consist of patent costs of $764,891, trademarks of $88,853 and accumulated amortization
of $266,801
As
of December 31, 2016, intangible assets consist of patent costs of $750,640, trademarks of $73,925 and accumulated amortization
of $204,702.
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 $62,099 and $61,483 for the year ended December 31, 2017 and 2016, respectively.
Estimated
future amortization expense related to intangible property as of December 31, 2017, is as follows:
|
|
Total
Amortization
|
|
Years
ending December 31,
|
|
|
|
2018
|
|
$
|
63,610
|
|
2019
|
|
|
63,610
|
|
2020
|
|
|
63,610
|
|
2021
|
|
|
63,610
|
|
2022
|
|
|
63,610
|
|
Later
years
|
|
|
180,040
|
|
|
|
$
|
498,090
|
|
Note
4. Related Parties
As
disclosed below in Note 6, members of management and directors have received shares of stock and options in exchange for services.
Note
5. Commitments and Contingencies
We
lease office space under non-cancelable operating leases, which expires on March 31, 2019. The aggregate minimum requirements
are as follows:
For years ending December 31,
|
|
|
|
2018
|
|
$
|
167,530
|
|
2019
|
|
|
43,462
|
|
|
|
$
|
210,992
|
|
Note
6. Stockholders’ Equity
During
the year ended December 31, 2016, the holder of warrants to purchase shares of common stock exercised their rights and purchased
1,250,000 shares of common stock for an aggregate price of $715,000. In addition, the holders of 620,000 warrants exercised their
right to a cash-less conversion and received 1,214,017 shares.
Also,
during the year ended December 31, 2016 we issued 64,599 shares of stock to a member of our board of directors in lieu of $50,000
in director fees due and 60,878 shares of common stock in lieu of cash for legal fees. We valued the shares based on the trading
value on the date issued.
In
addition, during the year ended December 31, 2016 we issued 50,000 shares of stock at a price of $0.51 per share in exchange for
outstanding options.
During
the year ended December 31, 2016, we issued 1,893,442 options to purchase our common stock to employees of the Company. In addition,
we cancelled 56,000 options to purchase our common stock. The exercise price of the options ranged from $0.6129 to $0.83 per share
and are exercisable for a period of 8 years and have varying vesting periods of up to three years.
The
fair value of the options ($883,490 in the aggregate) was calculated using the Black-Sholes option pricing model, based on the
criteria shown below, and are being expensed over the vesting period of each option.
Expected
life (in years)
|
|
|
5.5
to 8
|
|
Volatility
(based on a comparable company)
|
|
|
74.09%
to 82.65
|
%
|
Risk
Free interest rate
|
|
|
1.24%
to 1.73
|
%
|
Dividend
yield (on common stock)
|
|
|
-
|
|
During
the year ended December 31, 2017, we issued 178,733 shares of common stock, valued at $112,250 for services. In addition, we issued
439,977 options to purchase our common stock to certain member of the Board of Directors in lieu of cash payments for Director
fees. The exercise price of the options ranged from $0.77 to $0.79 per share, vest immediately, and are exercisable for periods
of 8 years. In addition, we issued 1,485,000 options to purchase our common stock to employees and executives. The exercise price
of the options ranged from $0.55 to $0.68 per share, vest after 3 years, and are exercisable for periods of 8 years. We also issued
95,995 shares of our common stock, with a value of $73,560, to a member of our Board of Directors in lieu of cash payments for
Director fees.
The
fair value of the options issued ($999,682, 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)
|
|
|
73.9%
to 89
|
%
|
Risk
Free interest rate
|
|
|
2.01%
to 2.35
|
%
|
Dividend
yield (on common stock)
|
|
|
-
|
|
The
shares of our common stock were valued at the trading price on the date of grant, $0.75 and $0.79 per share
During
the same period, we cancelled 122,000 options to purchase our common stock.
Holders
of 59,000 warrants, exercised those warrants for cash proceeds of $35,400. The holders of 950,000 options elected to exercise
those options on a cashless basis and received 276,171 shares of our common stock.
Holders
of 1,049,847 warrants, elected to exercise those warrants on a cashless basis and received 173,005 shares of our common stock.
The
total amount of equity-based compensation included in additional paid in capital for the years ended December 31, 2017 and 2016
was $1,550,718 and $1,133,149, respectively,
The
following is a summary of outstanding stock options issued to employees and directors as of December 31 2017:
|
|
Number
of Options
|
|
|
Exercise
price per share $
|
|
|
Average
remaining term in years
|
|
|
Aggregate
intrinsic value at date of grant $
|
|
Outstanding
January 1, 2016
|
|
|
4,075,000
|
|
|
|
.45
-.87
|
|
|
|
|
|
|
|
-
|
|
Issued
|
|
|
1,893,442
|
|
|
|
.61
-.83
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(56,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(50,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
December 31, 2016
|
|
|
5,862,442
|
|
|
|
.45-.87
|
|
|
|
|
|
|
|
|
|
Issued
|
|
|
1,924,977
|
|
|
|
.40-.79
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(122,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(950,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
December 31, 2017
|
|
|
6,715,419
|
|
|
|
.40-.87
|
|
|
|
5.93
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable,
December 31m 2017
|
|
|
2,855,878
|
|
|
|
.40-.87
|
|
|
|
4.96
|
|
|
|
-
|
|
Note
7. Outstanding Warrants
The
following is a summary of all outstanding warrants as of December 31, 2017:
|
|
Number of Warrants
|
|
|
Exercise price per share $
|
|
Average remaining term in years
|
|
|
Aggregate intrinsic value at date of grant
|
|
Warrants issued in connection with private placements of common stock
|
|
|
23,789,808
|
|
|
.50 - 1.00
|
|
|
0.63
|
|
|
|
-
|
|
Warrants issued in connection with private placement of notes
|
|
|
2,626,667
|
|
|
.45 - 1.00
|
|
|
2.00
|
|
|
$
|
64,583
|
|
Note
8. Income Taxes
Income
tax provision (benefit) for the years ended December 31, 2017 and 2016 is summarized below:
|
|
2017
|
|
|
2016
|
|
Current:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
-
|
|
|
$
|
-
|
|
State
|
|
|
-
|
|
|
|
-
|
|
Total
current
|
|
|
-
|
|
|
|
-
|
|
Deferred:
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(746,700
|
)
|
|
|
(2,878,000
|
)
|
State
|
|
|
(117,200
|
)
|
|
|
(279,300
|
)
|
Total
deferred
|
|
|
(863,900
|
)
|
|
|
(3,157,300
|
)
|
Change
in valuation allowance
|
|
$
|
863,900
|
|
|
$
|
3,157,300
|
|
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:
|
|
2017
|
|
|
2016
|
|
Income
tax provision at the federal statutory rate
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
State
income taxes, net of federal benefit
|
|
|
3.3
|
%
|
|
|
3.3
|
%
|
Permanent
Difference
|
|
|
(5.46
|
%)
|
|
|
-
|
%
|
Effect
of rate change
|
|
|
(41.53
|
%)
|
|
|
-
|
%
|
Effect
of change in valuation allowance
|
|
|
9.69
|
%
|
|
|
(37.3
|
%)
|
|
|
|
-
|
%
|
|
|
-
|
%
|
Components
of the net deferred income tax assets at December 31, 2017 and 2016 were as follows:
|
|
2017
|
|
|
2016
|
|
Net
operating loss carryover
|
|
$
|
6,902,200
|
|
|
$
|
7,766,100
|
|
Valuation
allowance
|
|
|
(6,902,200
|
)
|
|
|
(7,766,100
|
)
|
|
|
$
|
-
|
|
|
$
|
-
|
|
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 $6,902,200 and $7,766,100 allowance at December 31, 2017
and 2016, respectively, is necessary to reduce the deferred tax assets to the amount that will more likely than not be realized.
The reduction in the valuation allowance for the current period is $863,900.
As
of December 31, 2017, we have a net operating loss carry forward of approximately $28,404,200. 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
|
|
As
of December 31, 2017, we did not have any significant unrecognized uncertain tax positions.
Note
9. Business Segments and Customer Concentrations.
During
the years ended December 31, 2017 and 2016, we operated in one segment.
The
following is a breakdown of customers representing more than 5% of sales for the year ended December 31, 2017:
|
|
Revenue
from customer
|
|
|
Percentage
of total revenue
|
|
Customer
A
|
|
$
|
1,243,341
|
|
|
|
62.3
|
%
|
Customer
B
|
|
|
140,028
|
|
|
|
7.02
|
%
|
Customer
C
|
|
|
110,497
|
|
|
|
5.54
|
%
|
|
|
$
|
1,493,866
|
|
|
|
74.88
|
%
|
The
following is a breakdown of customers representing more than 10% of sales for the year ended December 31, 2016:
|
|
Revenue
from customer
|
|
|
Percentage
of total revenue
|
|
Customer
A
|
|
$
|
1,194,960
|
|
|
|
82.0
|
%
|
Customer
B
|
|
|
161,363
|
|
|
|
11.1
|
%
|
|
|
$
|
1,356,323
|
|
|
|
93.1
|
%
|
Note
10. 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, 2017, we had no debt. On February 14, 2018, we announced
the private placement of convertible notes with gross proceeds of $4.1 million. The funding of that note occurs upon the achievement
of certain milestones establishing significant sales to national accounts. One milestone is that the Company shall have 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 first milestone was achieved on March 8, 2018. According to the terms of the Convertible Note, 60% of
the gross proceeds, or $2.5 million, was received by the Company within five business days of that Milestone 1 achievement. The
other milestone is that the Company shall have entered 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. We expect the second Milestone to occur during 2018.
On March 5, 2018, the Company issued a Promissory Note to an existing investor, in the amount of $250,000. The unsecured note
bears interest at 12%, and has a 6 month term Proceeds are being used to fund the short term working capital needs of the Company.
The Company plans to refinance this note upon maturity. In addition, we have significantly reduced core operating costs beginning
in 2016, including reducing the number of our employees from 44 to 30 over this time period. Members of the senior management
team have deferred a portion of their salaries during 2017, and are continuing to defer a portion of their salaries in 2018. Management
is prepared to take further similar actions to reduce or defer fixed overhead should that become necessary. Management has concluded
that it is probable that the combination of the above described financings which have already been achieved and are about to be
achieved, along with the described measures available to reduce or defer fixed overhead, alleviate 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
11. Subsequent Events
On
February 14, 2018, we announced the private placement of convertible notes with gross proceeds of $4.1 million The closing shall
be no later than five (5) business days after receipt of notice from the Company that it has achieved certain milestones establishing
significant sales to national accounts. One milestone is that the Company shall have 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 first milestone
was achieved on March 8, 2018. The other milestone is that the Company shall have entered 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.
Upon
achievement of the first milestone, 60% of the principal amount of the convertible notes will be available to the Company, with
the balance of 40% upon achievement of the second milestone. The Company intends to use the proceeds from this financing to fund
the manufacture of inventory, to purchase equipment, and for general corporate purposes.
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.
On
March 5, 2018, the Company issued a Promissory Note to an existing investor, in the amount of $250,000. The unsecured note bears
interest at 12%, and has a 6 month term Proceeds are being used to fund the short term working capital needs of the Company. The
Company plans to refinance this note upon maturity.