Item
1. Financial Statements.
Barfresh
Food Group Inc.
Condensed
Consolidated Balance Sheets
|
|
June
30, 2018
|
|
|
December
31, 2017
|
|
|
|
|
(Unaudited)
|
|
|
|
(Audited)
|
|
Assets
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
853,868
|
|
|
$
|
1,304,916
|
|
Accounts
Receivable
|
|
|
486,318
|
|
|
|
301,012
|
|
Inventory
|
|
|
1,418,321
|
|
|
|
1,415,495
|
|
Prepaid
expenses and other current assets
|
|
|
42,895
|
|
|
|
24,496
|
|
Total
current assets
|
|
|
2,801,402
|
|
|
|
3,045,919
|
|
Property, plant and
equipment, net of depreciation
|
|
|
2,170,924
|
|
|
|
1,760,890
|
|
Intangible asset, net
of amortization
|
|
|
561,200
|
|
|
|
586,943
|
|
Deposits
|
|
|
39,369
|
|
|
|
39,369
|
|
Total
Assets
|
|
$
|
5,572,895
|
|
|
$
|
5,433,121
|
|
|
|
|
|
|
|
|
|
|
Liabilities And Stockholders’
Equity
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
598,922
|
|
|
$
|
421,176
|
|
Accrued
expenses
|
|
|
1,105,110
|
|
|
|
849,529
|
|
Deferred
rent liability
|
|
|
-
|
|
|
|
495
|
|
Notes
Payable
|
|
|
250,000
|
|
|
|
-
|
|
Total
current liabilities
|
|
|
1,954,032
|
|
|
|
1,271,200
|
|
Long term liabilities:
|
|
|
|
|
|
|
|
|
Accrued
Interest
|
|
|
78,672
|
|
|
|
-
|
|
Convertible
note - related party, net of discount
|
|
|
590,665
|
|
|
|
-
|
|
Convertible
note, net of discount
|
|
|
1,261,952
|
|
|
|
-
|
|
Derivative
Liabilities
|
|
|
886,883
|
|
|
|
-
|
|
Total
liabilities
|
|
|
4,772,204
|
|
|
|
1,271,200
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
(Note 8)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
|
Preferred stock, $0.000001
par value, 5,000,000 shares authorized, none issued or outstanding
|
|
|
-
|
|
|
|
-
|
|
Common stock, $0.000001
par value; 300,000,000 shares authorized; 119,572,513 and 118,690,527 shares issued and outstanding at June 30, 2018 and December
31, 2017, respectively
|
|
|
120
|
|
|
|
119
|
|
Additional paid in
capital
|
|
|
38,785,245
|
|
|
|
37,992,799
|
|
Accumulated
deficit
|
|
|
(37,984,674
|
)
|
|
|
(33,830,997
|
)
|
Total
stockholders’ equity
|
|
|
800,691
|
|
|
|
4,161,921
|
|
Total
Liabilities and Stockholders’ Equity
|
|
$
|
5,572,895
|
|
|
$
|
5,433,121
|
|
See
the accompanying notes to the condensed consolidated financial statements
Barfresh
Food Group Inc.
Condensed
Consolidated Statements of Operations
For
the three and six months ended June 30, 2018 and 2017
(Unaudited)
|
|
For
the three months ended June 30,
|
|
|
For
the six months ended June 30,
|
|
|
|
|
2018
|
|
|
|
2017
|
|
|
|
2018
|
|
|
|
2017
|
|
Revenue
|
|
$
|
1,086,166
|
|
|
$
|
628,997
|
|
|
$
|
1,709,237
|
|
|
$
|
941,167
|
|
Cost of revenue
|
|
|
519,688
|
|
|
|
306,877
|
|
|
|
798,154
|
|
|
|
488,526
|
|
Gross
profit
|
|
|
566,478
|
|
|
|
322,120
|
|
|
|
911,083
|
|
|
|
452,641
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative
|
|
|
2,229,262
|
|
|
|
2,403,293
|
|
|
|
4,323,925
|
|
|
|
4,836,823
|
|
Depreciation
and Amortization
|
|
|
149,623
|
|
|
|
76,570
|
|
|
|
262,090
|
|
|
|
132,601
|
|
Total
operating expenses
|
|
|
2,378,885
|
|
|
|
2,479,863
|
|
|
|
4,586,015
|
|
|
|
4,969,424
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(1,812,407
|
)
|
|
|
(2,157,743
|
)
|
|
|
(3,674,932
|
)
|
|
|
(4,516,783
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (income)/expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Gain)/loss
from derivative liability
|
|
|
(196,841
|
)
|
|
|
-
|
|
|
|
247,896
|
|
|
|
-
|
|
Interest
|
|
|
199,220
|
|
|
|
-
|
|
|
|
230,096
|
|
|
|
-
|
|
Total other expense
|
|
|
2,379
|
|
|
|
-
|
|
|
|
477,992
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss)
|
|
$
|
(1,814,786
|
)
|
|
$
|
(2,157,743
|
)
|
|
$
|
(4,152,924
|
)
|
|
$
|
(4,516,783
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per share information
- basic and fully diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding
|
|
|
119,009,293
|
|
|
|
117,732,465
|
|
|
|
118,845,319
|
|
|
|
117,493,592
|
|
Net
(loss) per share
|
|
$
|
(0.02
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(0.04
|
)
|
See
the accompanying notes to the condensed consolidated financial statements
Barfresh
Food Group Inc.
Condensed
Consolidated Statements of Cash Flows
For
the six months ended June 30, 2018 and 2017
(Unaudited)
|
|
2018
|
|
|
2017
|
|
Net
Cash (used for) Operating Activities
|
|
|
(2,732,466
|
)
|
|
|
(3,293,056
|
)
|
|
|
|
|
|
|
|
|
|
Investing
Activities
|
|
|
|
|
|
|
|
|
Purchase
of property and equipment
|
|
|
(678,287
|
)
|
|
|
(219,655
|
)
|
Proceeds
from sale of equipment
|
|
|
37,968
|
|
|
|
-
|
|
Purchase
of Intangibles
|
|
|
(6,062
|
)
|
|
|
(5,434
|
)
|
Net
Cash (used for) Investing Activities
|
|
|
(646,381
|
)
|
|
|
(225,089
|
)
|
|
|
|
|
|
|
|
|
|
Financing
Activities
|
|
|
|
|
|
|
|
|
Exercise of Warrant
|
|
|
-
|
|
|
|
35,400
|
|
Issuance
of short term notes
|
|
|
250,000
|
|
|
|
-
|
|
Issuance
costs of convertible notes
|
|
|
(27,001
|
)
|
|
|
-
|
|
Issuance
of convertible notes
|
|
|
2,704,800
|
|
|
|
-
|
|
Repayment
of long term debt
|
|
|
-
|
|
|
|
(1,920
|
)
|
Net
Cash from Financing Activities
|
|
|
2,927,799
|
|
|
|
33,480
|
|
|
|
|
|
|
|
|
|
|
Net Change in Cash
and Cash Equivalents
|
|
|
(451,048
|
)
|
|
|
(3,484,665
|
)
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents,
Beginning of Year
|
|
|
1,304,916
|
|
|
|
9,180,947
|
|
|
|
|
|
|
|
|
|
|
Cash
and Cash Equivalents, End of Year
|
|
$
|
853,868
|
|
|
$
|
5,696,282
|
|
|
|
|
|
|
|
|
|
|
Non
Cash
|
|
|
|
|
|
|
|
|
Discount
on convertible notes (warrants & derivative)
|
|
|
966,989
|
|
|
|
-
|
|
See
the accompanying notes to the condensed consolidated financial statements
Barfresh
Food
Group
Inc.
Notes
to
Condensed Consolidated
Financial
S
tatements
June
30, 2018
(Unaudited)
Note
1. Basis of Presentation and Significant Accounting Policies
Throughout
this report, the terms “our”, “we”, “us” and the “Company” refer to Barfresh Food
Group Inc., including its subsidiaries. The accompanying unaudited condensed consolidated financial statements of Barfresh Food
Group Inc. at June 30, 2018 and December 31, 2017 have been prepared in accordance with generally accepted accounting principles
(“GAAP”) for interim financial statements, instructions to Form 10-Q, and Regulation S-X. Accordingly, certain information
and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted.
These condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto
included in our annual report on Form 10-K for the year ended December 31, 2017. In management’s opinion, all adjustments
(consisting only of normal recurring adjustments) considered necessary for a fair presentation to make our financial statements
not misleading have been included. The results of operations for the periods ended June 30, 2018 and 2017 presented are not necessarily
indicative of the results to be expected for the full year. The December 31, 2017 balance sheet has been derived from our audited
financial statements included in our annual report on Form 10-K for the year ended December 31, 2017.
Basis
of Consolidation
The
condensed consolidated financial statements include the financial statements of the Company and our wholly owned subsidiaries
Barfresh Inc. and Barfresh Corporation, Inc.
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 and revenues and expenses during the years reported. Actual results may differ
from these estimates.
Concentration
of Credit Risk
The
amount of cash on deposit with financial institutions exceeds the $250,000 federally insured limit at June 30, 2018 and December
31, 2017. However, we believe that the financial institution where the cash on deposit that exceeds $250,000 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 cash, accounts receivable, accounts payable, accrued expenses, notes payable, convertible notes
and derivative liabilities. The carrying value of our financial instruments approximates fair value, except for the derivative
liability in which carrying value is fair value.
Barfresh
Food
Group
Inc.
Notes
to
Condensed Consolidated
Financial
S
tatements
June
30, 2018
(Unaudited)
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
patents, which is twenty years from the date of filing the patent applications. In accordance with ASC Topic 350
Intangibles
- Goodwill and Other
(“ASC 350”), the costs of internally developing other intangible assets, such as patents,
are expensed as incurred. However, as allowed by ASC 350, legal fees and similar costs relating to patents have been capitalized.
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 deemed to be reasonably assured.
The estimated useful lives used for financial statement purposes are:
Furniture
and fixtures: 5 years
Equipment:
7 years
Leasehold
improvements: 2 years
Vehicle:
5 years
Revenue
Recognition
In
accordance with ASC 606, Revenue from Contracts with Customers, revenue is recognized when a customer obtains ownership of promised
goods. The Company adopted this standard at the beginning of fiscal year 2018, with no significant impact to its financial position
or results of operations, using the modified retrospective method. The amount of revenue recognized reflects the consideration
to which the Company expects to be entitled to receive in exchange for these goods. The Company applies the following five steps:
|
1)
|
Identify
the contract with a customer
|
|
|
A
contract with a customer exists when (i) the Company enters into an enforceable contract with a customer that defines each
party’s rights, (ii) the contract has commercial substance and, (iii) the Company determines that collection of substantially
all consideration for goods or services that are transferred is probable. For the Company, the contract is the approved sales
order, which may also be supplemented by other agreements that formalize various terms and conditions with customers.
|
|
|
|
|
2)
|
Identify
the performance obligation in the contract
|
|
|
Performance
obligations promised in a contract are identified based on the goods or that will be transferred to the customer. For the
Company, this consists of the delivery of frozen beverages, which provide immediate benefit to the customer.
|
|
|
|
|
3)
|
Determine
the transaction price
|
|
|
The
transaction price is determined based on the consideration to which the Company will be entitled in exchange for transferring
goods, and is generally stated on the approved sales order. Variable consideration, which typically includes volume-based
rebates or discounts, are estimated utilizing the most likely amount method.
|
|
4)
|
Allocate
the transaction price to performance obligations in the contract
Since our contracts contain a single performance obligation,
delivery of frozen beverages, the transaction price is allocated to that single performance obligation.
|
|
5)
|
Recognize
Revenue when or as the Company satisfies a performance obligation
|
|
|
The
Company recognizes revenue from the sale of frozen beverages when title and risk of loss passes and the customer accepts the
goods, which generally occurs at delivery. Customer sales incentives such as volume-based rebates or discounts are treated
as a reduction of sales at the time the sale is recognized. Shipping and handling costs are treated as fulfillment costs and
presented in distribution, selling and administrative costs.
|
|
|
|
|
|
The
company evaluated the requirement to disaggregate revenue, and concluded that substantially all of its revenue comes from
a single product, frozen beverages.
|
Barfresh
Food
Group
Inc.
Notes
to
Condensed Consolidated
Financial
S
tatements
June
30, 2018
(Unaudited)
Earnings
per Share
We
calculate net loss per share in accordance with ASC Topic 260,
Earnings per Share
. Basic net loss per share is computed
by dividing net loss by the weighted average number of shares of common stock outstanding for the period, and diluted earnings
per share is computed by including common stock equivalents outstanding for the period in the denominator. At June 30, 2018 and
2017 any equivalents would have been anti-dilutive as we had losses for the periods then ended.
Research
and Development
Expenditures
for research activities relating to product development and improvement are charged to expense as incurred. We incurred $153,329
and $226,002 for the three-month periods ended June 30, 2018 and 2017, respectively, and $343,670 and $340,603 for the six-month
periods ended June 30, 2018 and 2017, 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”).
Derivative
Liability
The
Company evaluates its convertible instruments, options, warrants or other contracts to determine if those contracts or embedded
components of those contracts qualify as derivatives to be separately accounted for under ASC Topic 815, “Derivatives and
Hedging.” The result of this accounting treatment is that the fair value of any derivative is marked-to-market each balance
sheet date and recorded as a liability. In the event that the fair value is recorded as a liability, the change in fair value
is recorded in the statement of operations as gain/loss from derivative liability. Upon conversion or exercise of a derivative
instrument, the instrument is marked to fair value at the conversion date and then that fair value is reclassified to equity.
We analyzed the derivative financial instruments in accordance with ASC 815. The objective is to provide guidance for determining
whether an equity-linked financial instrument is indexed to an entity’s own stock. This determination is needed for a scope
exception which would enable a derivative instrument to be accounted for under the accrual method. The classification of a non-derivative
instrument that falls within the scope of ASC 815-40-05 “Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company’s Own Stock” also hinges on whether the instrument is indexed to an entity’s
own stock. A non-derivative instrument that is not indexed to an entity’s own stock cannot be classified as equity and must
be accounted for as a liability. There is a two-step approach in determining whether an instrument or embedded feature is indexed
to an entity’s own stock. First, the instrument’s contingent exercise provisions, if any, must be evaluated, followed
by an evaluation of the instrument’s settlement provisions. The Company utilized the fair value standard set forth by the
Financial Accounting Standards Board, defined as the amount at which the assets (or liability) could be bought (or incurred) or
sold (or settled) in a current transaction between willing parties, that is, other than in a forced or liquidation sale.
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
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.
Barfresh
Food
Group
Inc.
Notes
to
Condensed Consolidated
Financial
S
tatements
June
30, 2018
(Unaudited)
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.
Note
2. Property Plant and Equipment
Major
classes of property and equipment at June 30, 2018 and December 31, 2017 consist of the following:
|
|
2018
|
|
|
2017
|
|
Furniture
and fixtures
|
|
$
|
1,524
|
|
|
$
|
1,524
|
|
Equipment
|
|
|
2,500,256
|
|
|
|
1,952,538
|
|
Leasehold Improvements
|
|
|
4,886
|
|
|
|
4,886
|
|
Vehicles
|
|
|
29,696
|
|
|
|
29,696
|
|
|
|
|
2,536,362
|
|
|
|
1,988,644
|
|
Less:
accumulated depreciation
|
|
|
(860,773
|
)
|
|
|
(665,657
|
)
|
|
|
|
1,675,589
|
|
|
|
1,322,987
|
|
Equipment
not yet placed in service
|
|
|
495,335
|
|
|
|
437,903
|
|
Property
and equipment, net of depreciation
|
|
$
|
2,170,924
|
|
|
$
|
1,760,890
|
|
We
recorded depreciation expense related to these assets of $133,721 and $61,172 for the three-month periods ended June 30, 2018
and 2017, respectively and $230,285 and $101,804 for the six months ended June 30, 2018 and 2017, respectively.
Note
3. Intangible Assets
As
of June 30, 2018, intangible assets consist of patent costs of $764,891, trademarks of $94,915 and accumulated amortization of
$298,606.
As
of December 31, 2017, intangible assets consist of patent costs of $764,891, trademarks of $88,853 and accumulated amortization
of $266,801.
The
amounts carried on the balance sheet represent cost to acquire, legal fees and similar costs relating to the patents incurred
by the Company. Amortization is calculated through the expiration date of the patent, which is December 2025. The amount charged
to expenses for amortization of the patent costs was $15,902 and $15,398 for the three months ended June 30, 2018 and 2017, respectively,
and $31,805 and $30,797 for the six months ended June 30, 2018 and 2017, respectively.
Estimated
future amortization expense related to patents as of June 30, 2018, is as follows:
|
|
Total
Amortization
|
|
Years
ending December 31,
|
|
|
|
|
2018
|
|
|
31,805
|
|
2019
|
|
|
63,610
|
|
2020
|
|
|
63,610
|
|
2021
|
|
|
63,610
|
|
2022
|
|
|
63,610
|
|
Later
years
|
|
|
180,040
|
|
|
|
$
|
466,285
|
|
Note
4. Related Parties
As
disclosed below in Note 6, members of management and directors invested in company’s convertible notes; and in Note 7, members
of management and directors have received shares of stock and options in exchange for services.
Barfresh
Food
Group
Inc.
Notes
to
Condensed Consolidated
Financial
S
tatements
June
30, 2018
(Unaudited)
Note
5. Short-Term Notes Payable
In
March 31, 2018, we closed an offering of $250,000 in a short-term note payable. The short-term note bear 12% interest per annum
with an original maturity date in September 2018 which subsequent to June 30, 2018 was extended to December 31, 2018.
Note
6. Convertible Notes
During
the three months needed March 31, 2018, we closed an offering of $2,527,500 in convertible notes, of which, management, directors
and significant shareholders have invested $810,000. The convertible notes bear 10% interest per annum and are due and payable
on March 14, 2020. The notes are convertible at any time prior to the due date into our common stock at conversion price of $0.88
per share or 85% of the average closing price of the common stock over the twenty consecutive trading days immediately preceding
the date of note holders’ election; but in no events lower than $0.60 per share. In addition, the interest is convertible
at any time prior to the due dates into our common stock at conversion price of 85% of the average closing price of the common
stock over the twenty consecutive trading days immediately preceding the date of note holders’ election; but in no event
lower than $0.60 per share. There were 1,331,583 warrants issued, in conjunction with the convertible note offering.
The
fair value of the warrants, $0.17 per share ($220,548 in the aggregate), was calculated using the Black-Scholes option pricing
model using the following assumptions.
Expected
life
|
|
|
3
|
|
Volatility
|
|
|
54.816
|
%
|
Risk
Fee interest rate
|
|
|
2.41
|
%
|
Dividend
yield (on common stock)
|
|
|
-
|
|
During
the three months ended June 30, 2018, we offered investors in our March 2018 Convertible Note (“Series CN Notes”)
the opportunity to accelerate the issuance of certain warrants associated with the CN Notes. Pursuant to the acceleration offer,
Series CN Notes investors who invested an additional 10% to 20% of the Series CN Note amount, immediately received an additional
25% warrant coverage on their initial CN Note investment, which would otherwise have been issued after one year. During the current
quarter we closed the CN Note acceleration offer in the amount of $177,300 in convertible notes, of which, management, directors
and significant shareholders have invested $30,000. The CN Note acceleration offer convertible notes bear 10% interest per annum
and are due and payable on March 14, 2020. The notes are convertible at any time prior to the due date into our common stock at
conversion price of $0.88 per share or 85% of the average closing price of the common stock over the twenty consecutive trading
days immediately preceding the date of note holders’ election; but in no events lower than $0.60 per share. In addition,
the interest is convertible at any time prior to the due dates into our common stock at conversion price of 85% of the average
closing price of the common stock over the twenty consecutive trading days immediately preceding the date of note holders’
election; but in no events lower than $0.60 per share. There were 937,373 warrants issued, in conjunction with the CN Note acceleration
offer convertible note offering.
The
fair value of the warrants, $0.25 per share ($235,519 in the aggregate), was calculated using the Black-Scholes option pricing
model using the following assumptions.
Expected
life
|
|
|
3
|
|
Volatility
|
|
|
55.49
|
%
|
Risk
Fee interest rate
|
|
|
2.45
|
%
|
Dividend
yield (on common stock)
|
|
|
-
|
|
The
value of $105,199 was recorded as a debt discount related to the issuance of the warrants as using the fair value would cause
the debt discount to exceed the gross proceeds received.
|
|
June
30, 2018
|
|
Convertible
notes
|
|
$
|
2,704,800
|
|
Less:
Debt discount (warrant value)
|
|
|
(325,747
|
)
|
Less:
Debt discount (derivative value)
|
|
|
(638,988
|
)
|
Less:
Debt discount (issuance costs paid)
|
|
|
(27,000
|
)
|
Add:
Debt discount amortization
|
|
|
139,552
|
|
|
|
$
|
1,852,617
|
|
Barfresh
Food
Group
Inc.
Notes
to
Condensed Consolidated
Financial
S
tatements
June
30, 2018
(Unaudited)
Note
7. Derivative Liabilities
As
discussed in Note 6, Convertible Notes, during the current quarter the Company issued Series CN Note acceleration offer convertible
notes payable that provide variable conversion provisions. The conversion terms of the convertible notes are variable based on
certain factors, such as the future price of the Company’s common stock. The number of shares of common stock to be issued
is based on the future price of the Company’s common stock, therefore the number of shares of common stock issuable upon
conversion of the promissory note is indeterminate.
The
fair values of the Company’s derivative liabilities are estimated at the issuance date and are revalued at each subsequent
reporting date. The Company recognized a current derivative liability of $569,587 at March 14, 2018 related to the Series CN Convertible
notes and $69,400 at April 11, 2018 related to the Series CN Notes Warrant Acceleration. The derivative liability was revalued
at June 30, 2018 with a value of $886,883. The change in fair value of the derivative liability resulted in a gain of $196,841
for the three months ended June 30, 2018, and a loss of $247,896 for the six months ended June 30, 2018, which has been reported
as loss on fair value of derivative liability in the statements of operations.
The
fair value of the derivative liability was calculated using the Black-Scholes opt model using the following assumptions.
|
|
14-Mar-18
|
|
|
11-Apr-18
|
|
|
30-Jun-18
|
|
Expected
life
|
|
|
2
|
|
|
|
1.96
|
|
|
|
1.71
|
|
Volatility
|
|
|
49
|
%
|
|
|
53.93
|
%
|
|
|
52.22
|
%
|
Risk Fee interest rate
|
|
|
2.41
|
%
|
|
|
2.32
|
%
|
|
|
2.52
|
%
|
Dividend yield (on
common stock)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Reconciliation
of the derivative liability measured at fair value on a recurring basis with the use of significant unobservable inputs (level
3) from December 31, 2017 to June 30, 2018:
December
31, 2017
|
$
|
-
|
Initial
value - March 14, 2018
|
|
569,587
|
Initial
value - April 11, 2018
|
|
69,400
|
Change
in value
|
|
247,896
|
For
the period ended June 30, 2018
|
$
|
886,883
|
The
following table presents the Company’s fair value hierarchy for applicable assets and liabilities measured at fair value
as of June 30, 2018.
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
Derivative
Liability
|
|
$
|
-
|
|
|
|
-
|
|
|
|
886,883
|
|
|
$
|
886,883
|
|
Note
8. 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
|
|
|
86,926
|
|
2019
|
|
|
43,462
|
|
|
|
$
|
130,388
|
|
Barfresh
Food
Group
Inc.
Notes
to
Condensed Consolidated
Financial
S
tatements
June
30, 2018
(Unaudited)
Note
9. Stockholders’ Equity
During
the three months ended June 30, 2018, we issued 782,821 shares of common stock, of which 675,000 shares of common stock was issued
in pursuant of executive employee contract, and 109,065 shares was issued related to employee stock options.
The
following is a summary of outstanding stock options issued to employees and directors as of June 30, 2018:
|
|
Number
of
Options
|
|
|
Exercise
price
per share $
|
|
Average
remaining
term
in years
|
|
|
Aggregate
intrinsic value at
date of grant $
|
|
Outstanding December 31,
2017
|
|
|
6,715,419
|
|
|
0.45 –
0.87
|
|
|
5.69
|
|
|
|
-
|
|
Issued
|
|
|
109,065
|
|
|
0.50 – 0.50
|
|
|
7.80
|
|
|
|
|
|
Cancelled
|
|
|
(743,516
|
)
|
|
0.50 – 0.81
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, June
30, 2018
|
|
|
6,080,968
|
|
|
0.45
– 0.87
|
|
|
5.51
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, June
30, 2018
|
|
|
3,478,350
|
|
|
0.40
- 0.87
|
|
|
4.71
|
|
|
|
-
|
|
Note
10. Outstanding Warrants
The
following is a summary of all outstanding warrants as of June 30, 2018:
|
|
Number
of warrants
|
|
|
price
per share
|
|
|
remaining
term in years
|
|
|
intrinsic
value at date of grant
|
|
Warrants issued in connection
with private placements of common stock
|
|
|
23,189,808
|
|
|
$
|
0.50
- $1.00
|
|
|
|
2.33
|
|
|
$
|
-
|
|
Warrants issued in connection with private
placement of notes
|
|
|
2,626,667
|
|
|
$
|
0.45
- $1.00
|
|
|
|
1.51
|
|
|
$
|
64,583
|
|
Warrants issued in connection with convertible
note
|
|
|
2,261,915
|
|
|
$
|
0.60
- $0.88
|
|
|
|
2.71
|
|
|
$
|
-
|
|
Note
11. Income Taxes
We
account for income taxes in interim periods in accordance with ASC Topic 740, Income Taxes (“ASC 740”). We have determined
an estimated annual effective tax rate. The rate will be revised, if necessary, as of the end of each successive interim period
during our fiscal year to our best current estimate. As of June 30, 2018, the estimated effective tax rate for the year will be
zero.
There
are open statutes of limitations for taxing authorities in federal and state jurisdictions to audit our tax returns from 2009
through the current period. Our policy is to account for income tax related interest and penalties in income tax expense in the
statement of operations. There have been no income tax related interest or penalties assessed or recorded.
ASC
740 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a
tax position taken or expected to be taken in a tax return. This pronouncement also provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods, disclosure, and transition.
For
the six-month periods ended June 30, 2018 and 2017, we did not have any interest and penalties associated with tax positions.
As of June 30, 2018, we did not have any significant unrecognized uncertain tax positions.
Barfresh
Food
Group
Inc.
Notes
to
Condensed Consolidated
Financial
S
tatements
June
30, 2018
(Unaudited)
Note
12. 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-Q. Management has evaluated these conditions, and
concluded that current plans will alleviate this concern. We have significantly reduced core operating costs beginning in 2016,
including reducing the number of our employees from 44 to 28 over this time period. After the end of the second quarter of 2018,
we eliminated an additional three full time sales positions. During the first six months of 2018, we have entered into numerous
contracts in the educational and military channels, which will result in increased revenue over the coming quarters. In addition,
we have addressed this concern by raising additional capital through a loan or loans, and by continuing to reduce core operating
expenses as required. In addition, we plan to raise additional capital through additional loans, and to further reduce core operating
expenses as required. While some of these plans have not yet been implemented, management has concluded that it is probable that
all of these plans can be implemented within one year of the issuance of the financial statements, and that they will mitigate
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 expect liquidity as planned.
Note
13. Subsequent Events
Management
has evaluated all activity and concluded that no subsequent events have occurred that would require recognition in the financial
statements or disclosure in the notes to the financial statements.
After
the close of the second quarter, we extended the exercise date on warrants that were scheduled to expire by July 26, 2018. As
part of the warrant extension transaction, the company received a cash warrant exercise amount of $550,000, and the Company issued
1,100,000 shares of common stock to the warrant holder, at an exercise price of .50 cents a share. The Company extended the maturity
date on the holder’s remaining 1,800,000 by three years, adjusted the exercise price of those warrants to .53 cents, and
converted those warrants into cash only warrants. In addition, the Company used $50,000 of those proceeds to repay $50,000 of
the short term note payable, and the note holder agreed to extend the maturity date of the note from September 12, 2018 to December
31 2018.
Item
2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The
following discussion should be read in conjunction with the financial information included elsewhere in this Quarterly Report
on Form 10-Q (this “Report”), including our unaudited condensed consolidated financial statements and the related
notes. References in this Management’s Discussion and Analysis of Financial Condition and Results of Operations section
to “us”, “we”, “our” and similar terms refer to Barfresh Food Group Inc. This discussion includes
forward-looking statements, as that term is defined in the federal securities laws, based upon current expectations that involve
risks and uncertainties, such as plans, objectives, expectations and intentions. Actual results and the timing of events could
differ materially from those anticipated in these forward-looking statements as a result of a number of factors. Words such as
“anticipate”, “estimate”, “plan”, “continuing”, “ongoing”, “expect”,
“believe”, “intend”, “may”, “will”, “should”, “could”
and similar expressions are used to identify forward-looking statements.
We
caution you that these statements are not guarantees of future performance or events and are subject to a number of uncertainties,
risks and other influences, many of which are beyond our control, which may influence the accuracy of the statements and the projections
upon which the statements are based. Any one or more of these uncertainties, risks and other influences could materially affect
our results of operations and whether forward-looking statements made by us ultimately prove to be accurate. Our actual results,
performance and achievements could differ materially from those expressed or implied in these forward-looking statements. We undertake
no obligation to publicly update or revise any forward-looking statements, whether from new information, future events or otherwise.
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. The Company’s bulk “Easy Pour” product is currently sold to more than 200 school locations
throughout the United States. In addition, the Company recently received approval from the United States Defense Logistics Agency
(“DLA”) to sell its smoothie products into all branches of the U.S. Armed Forces, and has begun to sell its bulk Easy
Pour product into a number of military bases in the United States. The Company’s products are currently sold to more than
45 military locations throughout the United States.
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 began during April of 2018. This new agreement,
which 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 single serve 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.
During
November, 2016, the Company received an equity investment from Unibel, the majority shareholder of the Bel Group (“Unibel”).
The Bel Group is headquartered in Paris, France, with global operations in 33 countries, 30 production sites on 4 continents and
nearly 12,000 employees. Its many branded products, including The Laughing Cow®, Mini Babybel® and Boursin®, are sold
in over 130 countries around the world. Pursuant to the securities purchase agreement, Unibel purchased 15,625,000 shares of common
stock at $0.64 per share (“Shares”) and warrants to purchase 7,812,500 shares of common stock (“Warrants”)
for aggregate gross proceeds to Barfresh of $10 million. The Warrants are exercisable for a term of five years at a per share
price of $.88 for cash. Pursuant to the Investor Rights agreement, Barfresh has registered the Shares and the Warrants, and Unibel
was granted a seat on the Barfresh Board. This strategic investment provided Barfresh with necessary capital while leveraging
Unibel’s more than 150 years of industrial expertise, innovative capabilities, world-class marketing and branding expertise
to accelerate our growth in new and existing markets and product channels.
On
February 14, 2018, we announced the private placement of convertible notes with the potential of gross proceeds up 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, and according to the terms of the note the Company has received 60% of the
principal amount. The remaining 40% of the principal amount will be received upon achieving a second milestone, which is entering
into a material agreement or series of related agreements with a national account for the sale of its products into approximately
2,500 new locations.
The
convertible notes are unsecured and have (i) a two-year term, (ii) a 10% annual coupon to be paid in cash or stock at the Company’s
discretion at a conversion price equal to 85% of the average closing bid prices of the Common Stock over the twenty (20) consecutive
trading day period immediately preceding the payment date, but in no event lower than sixty cents ($0.60) per share of Common
Stock. The investor’s may elect to convert their principal into common stock at a conversion price equal to the lower of:
(i) $0.88 per share of Common Stock, or (ii) 85% of the average closing bid prices of the Common Stock over the twenty (20) consecutive
trading day period immediately preceding the date of investor’s election to convert; but in no event lower than $0.60 per
share of Common Stock. Investors also received warrant coverage of 25% of the number of shares that would be issuable upon a full
conversion of the principal amount at an average of the twenty consecutive trading day period immediately preceding the applicable
closing date. If any principal amount remains outstanding after the one-year anniversary of the closing, investors will be granted
an additional warrant with identical terms. The warrants are exercisable for a period of three years for cash at the greater of
120% of the closing price or $0.70 per share of common stock. After the initial private placement, investors were offered the
opportunity to accelerate the issuance of the additional warrant by increasing their convertible note investment by 10% to 20%.
After the close of the first quarter, a number of investors took advantage of this acceleration opportunity, resulting in an increase
in the amount of the total convertible note by $ 177,300 and the issuance of 937,373 additional warrants.
Currently
we have 25 employees and 3 consultants. There are currently 15 employees and 1 consultant selling our products.
Critical
Accounting Policies
Our
financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America
(“GAAP”).
Revenue
Recognition
In
accordance with ASC 606, Revenue from Contracts with Customers, revenue is recognized when a customer obtains ownership of promised
goods. The Company adopted this standard at the beginning of fiscal year 2018, with no significant impact to its financial position
or results of operations, using the modified retrospective method. The amount of revenue recognized reflects the consideration
to which the Company expects to be entitled to receive in exchange for these goods. The Company applies the following five steps:
|
1)
|
Identify
the contract with a customer
|
|
|
A
contract with a customer exists when (i) the Company enters into an enforceable contract with a customer that defines each
party’s rights, (ii) the contract has commercial substance and, (iii) the Company determines that collection of substantially
all consideration for goods or services that are transferred is probable. For the Company, the contract is the approved sales
order, which may also be supplemented by other agreements that formalize various terms and conditions with customers.
|
|
|
|
|
2)
|
Identify
the performance obligation in the contract
|
|
|
Performance
obligations promised in a contract are identified based on the goods or that will be transferred to the customer. For the
Company, this consists of the delivery of frozen beverages, which provide immediate benefit to the customer.
|
|
|
|
|
3)
|
Determine
the transaction price
|
|
|
The
transaction price is determined based on the consideration to which the Company will be entitled in exchange for transferring
goods, and is generally stated on the approved sales order. Variable consideration, which typically includes volume-based
rebates or discounts, are estimated utilizing the most likely amount method.
|
|
|
|
|
4)
|
Allocate
the transaction price to performance obligations in the contract
|
|
|
Since
our contracts contain a single performance obligation, delivery of frozen beverages, the transaction price is allocated to
that single performance obligation.
|
|
|
|
|
5)
|
Recognize
Revenue when or as the Company satisfies a performance obligation
|
|
|
The
Company recognizes revenue from the sale of frozen beverages when title and risk of loss passes and the customer accepts the
goods, which generally occurs at delivery. Customer sales incentives such as volume-based rebates or discounts are treated
as a reduction of sales at the time the sale is recognized. Shipping and handling costs are treated as fulfillment costs and
presented in distribution, selling and administrative costs.
|
|
|
|
|
|
The
company evaluated the requirement to disaggregate revenue, and concluded that substantially all of its revenue comes from
a single product, frozen beverages.
|
Impairments
We
periodically evaluate whether the carrying value of long-lived assets has been impaired when circumstances indicate the carrying
value of those assets may not be recoverable. The carrying amount is not recoverable if it exceeds the sum of the undiscounted
cash flows expected to result from the use and eventual disposition of the asset. If the carrying value is not recoverable, the
impairment loss is measured as the excess of the asset’s carrying value over its fair value.
Share-based
Compensation
We
account for share-based employee compensation plans under the fair value recognition and measurement provisions in accordance
with applicable accounting standards, which require all share-based payments to employees, including grants of stock options and
restricted stock units (RSUs), to be measured based on the grant date fair value of the awards, with the resulting expense generally
recognized on a straight-line basis over the period during which the employee is required to perform service in exchange for the
award.
Derivative
Liability
The
Company evaluates its convertible instruments, options, warrants or other contracts to determine if those contracts or embedded
components of those contracts qualify as derivatives to be separately accounted for under ASC Topic 815, “Derivatives and
Hedging.” The result of this accounting treatment is that the fair value of any derivative is marked-to-market each balance
sheet date and recorded as a liability. In the event that the fair value is recorded as a liability, the change in fair value
is recorded in the statement of operations as gain/loss from derivative liability. Upon conversion or exercise of a derivative
instrument, the instrument is marked to fair value at the conversion date and then that fair value is reclassified to equity.
We analyzed the derivative financial instruments in accordance with ASC 815. The objective is to provide guidance for determining
whether an equity-linked financial instrument is indexed to an entity’s own stock. This determination is needed for a scope
exception which would enable a derivative instrument to be accounted for under the accrual method. The classification of a non-derivative
instrument that falls within the scope of ASC 815-40-05 “Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company’s Own Stock” also hinges on whether the instrument is indexed to an entity’s
own stock. A non-derivative instrument that is not indexed to an entity’s own stock cannot be classified as equity and must
be accounted for as a liability. There is a two-step approach in determining whether an instrument or embedded feature is indexed
to an entity’s own stock. First, the instrument’s contingent exercise provisions, if any, must be evaluated, followed
by an evaluation of the instrument’s settlement provisions. The Company utilized the fair value standard set forth by the
Financial Accounting Standards Board, defined as the amount at which the assets (or liability) could be bought (or incurred) or
sold (or settled) in a current transaction between willing parties, that is, other than in a forced or liquidation sale.
Results
of Operations
Results
of Operation for Three Months Ended June 30, 2018 as Compared to the Three Months Ended
June 30, 2017
Revenue
and cost of revenue
Revenue
increased $457,169 (73%) from $628,997 in 2017 to $1,086,166 in 2018. The increase in revenue is primarily the result of the rollout
of our new bulk Easy Pour product which began during the first quarter of 2017 and has continued to gain momentum during the balance
of 2018, especially in the school and Military channels. Our product continues to be distributed through all 72 of Sysco’s
U.S. mainland distribution centers, as well as through new customers beyond the Sysco distribution network.
Cost
of revenue for 2018 was $519,688 as compared to $306,877 in 2017. Our gross profit was $566,478 (52.2%) and $322,120 (51.2%) for
2018 and 2017, respectively. The strong gross profit margin is attributable to a number factors, including leverage due to larger
scale of production and product mix. We anticipate that our gross profit percentage for the remainder of 2018 will be approximately
50%.
Operating
expenses
Our
operations were primarily directed towards increasing sales and expanding our distribution network.
Our
general and administrative expenses decreased $174,031 (7%) from $2,403,293 in the second quarter of 2017 to $2,229,262 in the
second quarter of 2018, with the improvement primarily driven by lower personnel expenses resulting from the ongoing realignment
of our sales force. The following is a breakdown of our general and administrative expenses for the three months ended June 30,
2018 and 2017:
|
|
three
months
ended
June 30,
|
|
|
three
months
ended
June 30,
|
|
|
|
|
|
|
2018
|
|
|
2017
|
|
|
Difference
|
|
Personnel
costs
|
|
$
|
839,866
|
|
|
$
|
998,798
|
|
|
$
|
(158,930
|
)
|
Stock based compensation/options
|
|
|
117,670
|
|
|
|
272,036
|
|
|
|
(154,366
|
)
|
Legal and professional
fees
|
|
|
132,353
|
|
|
|
143,218
|
|
|
|
(10,865
|
)
|
Travel
|
|
|
127,312
|
|
|
|
135,539
|
|
|
|
(8,227
|
)
|
Rent
|
|
|
46,677
|
|
|
|
33,557
|
|
|
|
13,120
|
|
Marketing and selling
|
|
|
305,634
|
|
|
|
146,584
|
|
|
|
159,050
|
|
Consulting fees
|
|
|
17,925
|
|
|
|
47,556
|
|
|
|
(29,631
|
)
|
Director fees
|
|
|
50,000
|
|
|
|
18,796
|
|
|
|
31,204
|
|
Research and development
|
|
|
153,329
|
|
|
|
226,002
|
|
|
|
(72,673
|
)
|
Shipping and Storage
|
|
|
293,274
|
|
|
|
169,115
|
|
|
|
124,159
|
|
Other
expenses
|
|
|
145,222
|
|
|
|
212,092
|
|
|
|
(66,870
|
)
|
|
|
$
|
2,229,262
|
|
|
$
|
2,403,293
|
|
|
$
|
(174,031
|
)
|
Personnel
cost represents the cost of employees including salaries, bonuses, employee benefits and employment taxes and continues to be
our largest cost. Personnel cost decreased $158,930 (16%) from $998,798 to $839,868. During the fourth quarters of 2016 and 2017,
we realigned ours 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 employees during 2016, and at June 30, 2018 we
had 28 full time employees. We expect these restructurings to result in estimated annualized savings of $2.2 to $2.7 million.
After the close of the second quarter 2018, we eliminated three additional positions in our sales force, resulting in approximately
$300,000 of additional annualized savings.
Stock
based compensation is used as an incentive to attract new employees and to compensate existing employees. Stock based compensation
includes stock issued and options granted to employees and non-employees. Stock compensation for the current quarter was $117,670,
a decrease of $154,366, or 57%, from the year ago quarter expense of $272,036. The decrease is primarily due to the reductions
in our work force and the timing of equity grants. The Company issues additional stock options to its employees from time to time
under its Equity Compensation Plan.
Legal
and professional fees decreased $10,865 (8%) from $143,218 in 2017 to $132,353 in 2018. The decrease was primarily due to a timing
of legal services required. We anticipate legal fees related to our business and financing activities to increase as our business
continues to grow.
Travel
expenses decreased $8,227 (6%) from $135,539 in 2017 to $127,312 in 2018. The decrease is primarily due to reduction in travel
costs associated with terminated employees. We anticipate that quarterly travel expenses for the balance of this year will be
about $15,000 lower than the current quarter due to the additional work force reduction that occurred after the close of the second
quarter.
Rent
expense is primarily for our location in Beverly Hills, California. Rent expense for the Beverly Hills office is approximately
$14,488 per month. We lease office space at 8383 Wilshire Boulevard, Beverly Hills, California pursuant to a new lease that commenced
on November 1, 2016 and expires March 31, 2019.
Marketing
and selling expenses increased $159,050 (109%) from $146,584 in 2017 to $305,634 in 2018. Higher marketing and selling expenses
were primarily due to higher sales agent commissions associated with higher sales during the quarter.
Consulting
fees were $17,925 in 2018, as compared with $47,556 in 2017. Our consulting fees vary based on needs. We engaged consultants in
the areas of sales and operations during the quarter. The need for future consulting services will be variable.
Director
fees increased $31,204 from $18,796 in 2017 to $50,000 in 2018. Annual director fees are anticipated at $50,000 per non-employee
director.
Research
and development expenses decreased $72,673, (32%) from $226,002 in 2017 to $153,329 in 2018. These expenses relate to the services
performed by our Director of Manufacturing and Product Development, and consultants supporting that employee. The reduction in
research and development expense was primarily driven by lower commissioning expense at manufacturing facilities in the current
quarter, as our manufacturing processes have continued to mature.
Shipping
and storage expense increased $124,159 (73%) from $169,115 in 2017 to $293,794 in 2018. Shipping and storage expense as a percentage
of revenue was comparable at 27% in both 2017 and in 2018. We anticipate that shipping and storage expense as a percentage of
sales will reduce during the balance of the year, as the Company is able to take advantage of more efficient distribution arrangements.
Other
expenses consist of ordinary operating expenses such as investor relations, office, telephone, insurance, and stock related costs.
We anticipate these expenses to be comparable for the balance of the year.
We
had operating losses of $1,812,407 and $2,157,743 for the three month periods ended June 30, 2018 and 2017, respectively. The
improvement of $345,336, or 16%, was primarily due to higher gross profit margin on higher sales, and lower G&A expenses.
Interest
expense for the three months ended June 30, 2018 is $199,220. Interest relates to convertible debt in the amount of $2,527,500
that was issued on March 14, 2018, which bears interest at 10%, and to a note payable in the amount of $250,000 that was issued
on March 5, 2018, which bears interest at 12%, and to acceleration notes in the amount of $177,300, issued on April 11,2018, which
bear interest at 10%. Interest expense includes amortization of $124,840 of the value of warrants issued with the convertible
debt.
We
had net losses of $1,814,786 and $2,157,743 in the three month periods ended June 30, 2018 and 2017.
Results
of Operation for Six Months Ended June 30, 2018 as Compared to the Six Months Ended
June 30, 2017
Revenue
and cost of revenue
Revenue
increased $768,070 (82%) from $941,167 in 2017 to $1,709,237 in 2018. The increase in revenue is primarily the result of the rollout
of our new bulk Easy Pour product which began during the first quarter of 2017 which has continued to gain momentum during the
first half of 2018, especially in the school and Military channels. Our product continues to be distributed through all 72 of
Sysco’s U.S. mainland distribution centers, as well as through new customers beyond the Sysco distribution network.
Cost
of revenue for 2018 was $798,154 as compared to $488,526 in 2017. Our gross profit was $911,083 (53%) and $452,641 (48%) for 2018
and 2017, respectively. We anticipate that our gross profit percentage for the remainder of 2018 will be approximately 50%.
Operating
expenses
Our
operations were primarily directed towards increasing sales and expanding our distribution network.
Our
general and administrative expenses decreased $512,898 (11%) from $4,836,823 in the first half of 2017 to $4,323,925 in the first
half of 2018, with the improvement primarily driven by lower personnel expenses resulting from the realignment of our sales force.
The following is a breakdown of our general and administrative expenses for the six months ended June 30, 2018 and 2017:
|
|
six
months
ended
June 30,
|
|
|
six
months
ended
June 30,
|
|
|
|
|
|
|
2018
|
|
|
2017
|
|
|
Difference
|
|
Personnel
costs
|
|
$
|
1,737,671
|
|
|
$
|
2,277,490
|
|
|
$
|
(539,819
|
)
|
Stock
based compensation/options
|
|
|
364,445
|
|
|
|
616,304
|
|
|
|
(251,859
|
)
|
Legal
and professional fees
|
|
|
239,724
|
|
|
|
256,232
|
|
|
|
(16,508
|
)
|
Travel
|
|
|
211,160
|
|
|
|
228,400
|
|
|
|
(17,240
|
)
|
Rent
|
|
|
100,583
|
|
|
|
87,798
|
|
|
|
12,785
|
|
Marketing
and selling
|
|
|
466,014
|
|
|
|
265,242
|
|
|
|
200,772
|
|
Consulting
fees
|
|
|
35,659
|
|
|
|
96,501
|
|
|
|
(60,842
|
)
|
Director
fees
|
|
|
112,500
|
|
|
|
56,296
|
|
|
|
56,204
|
|
Research
and development
|
|
|
343,670
|
|
|
|
340,603
|
|
|
|
3,067
|
|
Shipping
and Storage
|
|
|
459,345
|
|
|
|
233,269
|
|
|
|
226,076
|
|
Other
expenses
|
|
|
253,154
|
|
|
|
378,688
|
|
|
|
(125,534
|
)
|
|
|
$
|
4,323,925
|
|
|
$
|
4,836,823
|
|
|
$
|
(512,898
|
)
|
Personnel
cost represents the cost of employees including salaries, bonuses, employee benefits and employment taxes and continues to be
our largest cost. Personnel cost decreased $539,819 (24%) from $2,277,490 to $1,737,671. During the fourth quarters of 2016 and
2017, we realigned ours 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 employees during 2016, and at June 30, 2018
we had 28 full time employees. We expect these restructurings to result in estimated annualized savings of $2.2 to $2.7 million.
After the close of the second quarter 2018, we eliminated three additional positions in our sales force, resulting in approximately
$300,000 of additional annualized savings.
Stock
based compensation is used as an incentive to attract new employees and to compensate existing employees. Stock based compensation
includes stock issued and options granted to employees and non-employees. Stock compensation for the six months ended June 30,
2018 was $364,445, a decrease of $251,859, or 41%, from the year ago period expense of $616,304. The decrease is primarily due
to the reductions in our work force and the timing of equity grants. The Company issues additional stock options to its employees
from time to time under its Equity Compensation Plan.
Legal
and professional fees decreased $16,508 (6%) from $256,232 in 2017 to $239,724 in 2018. The decrease was primarily due to a timing
of legal services required. We anticipate legal fees related to our business and financing activities to increase as our business
continues to grow.
Travel
expenses decreased $17,240 (8%) from $228,400 in 2017 to $211,160 in 2018. The decrease is primarily due to reduction in travel
costs associated with terminated employees. We anticipate that travel expenses for the balance of this year will be about $30,000
lower than the first half of this year due to the additional work force reduction.
Rent
expense is primarily for our location in Beverly Hills, California. Rent expense for the Beverly Hills office is approximately
$14,488 per month. We lease office space at 8383 Wilshire Boulevard, Beverly Hills, California pursuant to a new lease that commenced
on November 1, 2016 and expires March 31, 2019.
Marketing
and selling expenses increased $200,772 (76%) from $265,242 in 2017 to $466,014 in 2018. Higher marketing and selling expenses
were primarily due to higher sales agent commissions associated with higher sales during the period.
Consulting
fees were $35,659 in 2018, as compared with $96,501 in 2017. Our consulting fees vary based on needs. We engaged consultants in
the areas of sales and operations during the period. The need for future consulting services will be variable.
Director
fees increased $56,204 from $56,296 in 2017 to $112,500 in 2018. Annual director fees are $50,000 per non-employee director.
Research
and development expenses increased $3,067 (1%) from $340,603 in 2017 to $343,670 in 2018. These expenses relate to the services
performed by our Director of Manufacturing and Product Development, consultants supporting that employee, and certain commissioning
expenses at our contract manufacturing locations
Shipping
and storage expense increased $226,076 (97%) from $233,269 in 2017 to $459,345 in 2018. Shipping and storage expense as a percentage
of revenue was comparable at 25% in 2017 and 27% in 2018. We anticipate that shipping and storage expense as a percentage of sales
will reduce during the balance of the year, as the Company is able to take advantage of more efficient distribution arrangements.
Other
expenses consist of ordinary operating expenses such as investor relations, office, telephone, insurance, and stock related costs.
We anticipate these expenses to be comparable for the balance of the year.
We
had operating losses of $3,674,932 and $4,516,783 for the six month periods ended June 30 2018 and 2017, respectively. The improvement
of $841,851, or 19%, was primarily due to higher gross margin percent on higher sales, and lower G&A expenses.
Interest
expense for the six months ended June 30, 2018 was $230,096. Interest relates to convertible debt in the amount of $2,527,500
that was issued on March 14, 2018, which bears interest at 10%, and to a note payable in the amount of $250,000 that was issued
on March 5, 2018, which bears interest at 12%, and to acceleration notes in the amount of $177,300, issued on April 11
,
2018,
which bear interest at 10%. Interest expense includes amortization of $141,807 of the value of warrants issued with the convertible
debt.
We
had net losses of $4,152,424 and $4,516,783 in the six month periods ended June 30, 2018 and 2017.
Liquidity
and Capital Resources
During
the six months ended June 30, 2018, we used cash for operations of $2,732,466, purchased equipment for $678,287, and incurred
spending for trademarks in the amount $6,062. We raised cash from issuance of convertible notes, net of issuance cost, in the
amount of $2,677,799 plus we issued a short term note in the amount of $250,000.
During
the six months ended June 30, 2017, we used $3,293,056 of cash for operations, $219,655 for the purchase of equipment, and $5,434
for trademarks.
After
the close of the second quarter, we extended the exercise date on warrants that were scheduled to expire by July 26, 2018. As
part of the warrant extension transaction, the company received a cash warrant exercise amount of $550,000, and the Company issued
1,100,000 shares of common stock to the warrant holder, at an exercise price of .50 cents a share. The Company extended the maturity
date on the holder’s remaining 1,800,000 by three years, adjusted the exercise price of those warrants to .53 cents, and
converted those warrants into cash only warrants. In addition, the Company used $50,000 of those proceeds to repay $50,000 of
the short term note payable, and the note holder agreed to extend the maturity date of the note from September 12, 2018 to December
31 2018.
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-Q. Management has evaluated these conditions, and
concluded that current plans will alleviate this concern. We have significantly reduced core operating costs beginning in 2016,
including reducing the number of our employees from 44 to 28 over this time period. In addition, we plan to address this concern
by raising additional capital through an additional loan or loans, and by continuing to reduce core operating expenses as required.
While these plans have not yet been implemented, management has concluded that it is probable that they will be implemented within
one year of the issuance of the financial statements, and that they will mitigate 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 expect liquidity as planned.
We
lease office space under a non-cancelable operating lease, which expires March 31, 2019.
The
aggregate minimum requirements under non-cancelable leases as of June 30, 2018 is $130,388.
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.