AS
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 26, 2018
REGISTRATION
STATEMENT NO. 333
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
S-1
REGISTRATION
STATEMENT
UNDER
THE
SECURITIES ACT OF 1933
BARFRESH
FOOD GROUP, INC.
(Name
of small business issuer in its charter)
Delaware
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2038
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27-1994406
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(State
or jurisdiction of
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(Primary
Standard Industrial
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(I.R.S.
Employer
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incorporation
or organization)
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Classification
Code Number)
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Identification
No.)
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8383
Wilshire Blvd., Suite 750
Beverly
Hills, California 90211
Telephone:
(310) 598-7113
(Address
and telephone number of principal executive offices and principal place of business)
Copies
to:
Mark
Y. Abdou
Ruba
Qashu
Libertas
Law Group, Inc.
225
Santa Monica Boulevard, 5
th
Floor
Santa
Monica, CA 90401
Telephone:
(310) 359-8742
Facsimile:
(310) 356-1922
Approximate
date of proposed sale to the public:
From
time to time after the effective date hereof.
If
any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under
the Securities Act of 1933, other than securities offered only in connection with dividend or interest reinvestment plans, check
the following box. [X]
If
this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the
following box and list the Securities Act registration statement number of the earlier effective registration statement for the
same offering. [ ]
If
this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list
the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ]
If
this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list
the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ]
If
delivery of the prospectus is expected to be made pursuant to Rule 434 under the Securities Act, check the following box. [ ]
Indicate
by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large
Accelerated filer [ ]
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Accelerated
filer [ ]
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Non-accelerated
filer [ ]
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Smaller
reporting company [X]
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The
Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until
the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become
effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective
on such date as the Commission, acting pursuant to said Section 8(a), may determine.
CALCULATION
OF REGISTRATION FEE
Title of each class of securities to be registered
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Amount to be registered (1)
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Proposed maximum offering price per share
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Proposed maximum aggregate offering Price
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Amount of registration fee
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Common stock, par value $0.000001 per share
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1,100,000
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$
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0. 70
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(2)
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$
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770,000
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Common stock, par value $0.000001 per share underlying Series D Warrant
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1,800,000
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$
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0.70
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(3)
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$
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1,260,000
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Total
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$
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2,030,000
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$
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246.04
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(4)
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(1)
Pursuant to Rule 416 under the Securities Act of 1933, as amended (“Securities Act”), the shares of common stock being
registered hereunder include such indeterminate number of shares of common stock as may be issuable with respect to the shares
of common stock being registered hereunder as a result of stock splits, stock dividends or similar transactions.
(2)
Estimated solely for the purpose of calculating the registration fee under Rule 457(c) under the Securities Act.
(3)
Estimated solely for the purpose of calculating the registration fee under Rule 457(g) under the Securities Act.
(4)
Fee submitted with the filing of this registration statement on Form S-1.
SUBJECT
TO COMPLETION, DATED OCTOBER [ ], 2018
PROSPECTUS
2,900,000 Shares of Common Stock
This prospectus relates to 2,900,000
shares of our common stock, par value $0.000001 per share that may be sold from time to time by the selling shareholders listed
under the caption “Selling Shareholders”, of which 1,800,000 are shares underlying Series D Warrants. All of
the shares, when sold, will be sold by these selling shareholders. The selling shareholders may sell these shares from time to
time in the open market at prevailing prices or in individually negotiated transactions through agents designated from time to
time or through underwriters or dealers. We will not control or determine the price at which the selling shareholders decide to
sell their shares. See “Plan of Distribution”. The selling shareholders may be deemed underwriters of the shares of
common stock that they are offering. We will pay the expenses of registering these shares.
We are not selling any shares of common stock
in this offering and therefore will not receive any proceeds from the sale of common stock hereunder. We will however receive
up to $954,000 from the exercise of Series D Warrants by the Selling Shareholders.
Our common stock is traded on the OTCQB under
the symbol BRFH. On October 22, 2018 the last reported sale price of our common stock was $0.70 per share.
INVESTING
IN OUR COMMON STOCK INVOLVES SUBSTANTIAL RISK. IN REVIEWING THIS PROSPECTUS, YOU SHOULD CAREFULLY CONSIDER THE MATTERS DESCRIBED
UNDER THE HEADING “RISK FACTORS” BEGINNING ON PAGE 5.
Neither
we nor any selling shareholder has authorized any dealer, salesman or other person to give any information or to make any representation
other than those contained or incorporated by reference in this prospectus. You must not rely upon any information or representation
not contained or incorporated by reference in this prospectus.
NEITHER
THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES, OR
DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THIS IS NOT AN
OFFER TO SELL NOR A SOLICITATION OF AN OFFER TO BUY SECURITIES IN ANY JURISDICTION WHERE IT WOULD BE UNLAWFUL.
The
date of this prospectus is October [●], 2018
TABLE
OF CONTENTS
PROSPECTUS
SUMMARY
This
summary highlights selected information contained elsewhere in this prospectus. To understand this offering fully, you should
read the entire prospectus carefully, including the “Risk Factors” section, the financial statements and the notes
to the financial statements. Unless the context otherwise requires, references contained in this prospectus to the “Company”,
“Barfresh”, “we”, “us” or “our” shall mean Barfresh Food Group Inc.
,
a
Delaware corporation.
BARFRESH
FOOD GROUP INC.
Our
Company
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.
RISK
FACTORS
An
investment in the Company’s securities involves significant risks, including the risks described below. You should carefully
consider the risks described below before purchasing the shares. The risks highlighted here are not the only ones that the Company
faces. For example, 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, and you might
lose all or part of your investment.
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:
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Inadequate
Segregation of Duties: We have an inadequate number of personnel to properly implement certain control procedures related
to segregation of duties.
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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:
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actual
or anticipated variations in our operating results;
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announcements
of developments by us or our competitors;
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announcements
by us or our competitors of significant acquisitions, strategic partnerships, joint ventures or capital commitments;
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adoption
of new accounting standards affecting the our industry;
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additions
or departures of key personnel;
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introduction
of new products by us or our competitors;
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sales
of our common stock or other securities in the open market; and
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other
events or factors, many of which are beyond our control.
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The
stock market is subject to significant price and volume fluctuations. In the past, following periods of volatility in the market
price of a company’s securities, securities class action litigation has often been initiated against such a company. Litigation
initiated against us, whether or not successful, could result in substantial costs and diversion of our management’s attention
and Company resources, which could harm our business and financial condition.
Investors
may experience dilution of their ownership interests because of the future issuance of additional shares of our common stock.
We
intend to continue to seek financing through the issuance of equity or convertible securities to fund our operations. In the future,
we may also issue additional equity securities resulting in the dilution of the ownership interests of our present shareholders.
We may also issue additional shares of our common stock or other securities that are convertible into or exercisable for our common
stock in connection with hiring or retaining employees, future acquisitions or for other business purposes. The future issuance
of any such additional shares of common stock will result in dilution to our shareholders and may create downward pressure on
the trading price of our common stock.
Provisions
in our corporate charter documents and under Delaware law could make an acquisition of our company, which may be beneficial to
our stockholders, more difficult and may prevent attempts by our stockholders to replace or remove our current management.
Provisions
in our certificate of incorporation and our bylaws may discourage, delay or prevent a merger, acquisition or other change in control
of our company that stockholders may consider favorable, including transactions in which you might otherwise receive a premium
for your shares. These provisions could also limit the price that investors might be willing to pay in the future for shares of
our common stock, thereby depressing the market price of our common stock. In addition, because our board of directors is responsible
for appointing the members of our management team, these provisions may frustrate or prevent any attempts by our stockholders
to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors.
In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General
Corporation Law, which prohibits a person who owns in excess of 15% of our outstanding voting stock from merging or combining
with us for a period of three years after the date of the transaction in which the person acquired in excess of 15% of our outstanding
voting stock, unless the merger or combination is approved in a prescribed manner.
NOTE
REGARDING FORWARD LOOKING STATEMENTS
This
prospectus, including the sections entitled “Prospectus Summary,” “Risk Factors,” “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” and “Business,” contains forward-looking
statements. We may, in some cases, use words such as “anticipate”, “believe”, “could”, “estimate”,
“expect”, “intend”, “may”, “plan”, “potential”, “predict”,
“project”, “should”, “will”, “would” or the negative of those terms, and similar
expressions that convey uncertainty of future events or outcomes to identify these forward-looking statements. Any statements
contained herein that are not statements of historical facts may be deemed to be forward-looking statements. Forward-looking statements
in this prospectus include, but are not limited to, statements about:
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the
success, cost and timing of our sales and licensing activities;
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our
ability to attract collaborators with development, marketing and commercialization expertise;
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the
size and growth potential of the markets for our products, and our ability to serve those markets;
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the
performance of our third-party suppliers and manufacturers;
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our
ability to attract and retain key management personnel;
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the
accuracy of our estimates regarding expenses, future revenues, capital requirements and needs for additional financing; and
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our
expectations regarding our ability to maintain and protect intellectual property protection for our products.
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These
forward-looking statements reflect our management’s beliefs and views with respect to future events and are based on estimates
and assumptions as of the date of this prospectus and are subject to risks and uncertainties. We discuss many of these risks in
greater detail under “Risk Factors”. In addition, we operate in a very competitive and rapidly changing environment.
New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of
all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially
from those contained in any forward-looking statements we may make. Given these uncertainties, you should not place undue reliance
on these forward-looking statements.
You
should read this prospectus and the documents that we reference in this prospectus and have filed as exhibits to the registration
statement, of which this prospectus is a part, completely and with the understanding that our actual future results may be materially
different from what we expect. We qualify all of the forward-looking statements in this prospectus by these cautionary statements.
Except as required by law, we undertake no obligation to publicly update any forward-looking statements, whether as a result of
new information, future events or otherwise.
USE
OF PROCEEDS
We
will not receive any of the proceeds from the sale of the shares of common stock offered under this prospectus by the selling
shareholders. Rather, the selling shareholders will receive those proceeds directly. We will however receive up to $954,000
from the exercise of Series D Warrants by the Selling Shareholders.
SELLING
SHAREHOLDERS
We
are registering 2,900,000 shares of our common stock, par value $0.000001 per share, of which 1,800,000 are shares underlying
Series D Warrants.
The
shares of common stock being registered include such indeterminate number of shares of common stock as may be issuable with respect
to the shares of common stock being registered hereunder only as a result of stock splits, stock dividends or similar transactions.
The shares of common stock being registered
do not include additional shares of common stock issuable as a result of changes in market price of the common stock, issuance
by us of equity securities below a certain price or other anti-dilutive adjustments or variables not covered by Rule 416. All
shares that may be issued will be restricted securities as that term is defined in Rule 144 under the Securities Act and will
remain restricted unless and until such shares are sold pursuant to this prospectus, or otherwise are sold in compliance with
Rule 144.
No
shareholder may offer or sell shares of our common stock under this prospectus unless such shareholder has notified us of such
shareholder’s intention to sell shares of our common stock and the registration statement of which this prospectus is a
part has been declared effective by the SEC and remains effective at the time such selling shareholder offers or sells such shares.
We are required to amend the registration statement of which this prospectus is a part to reflect material developments in our
business and current financial information. Each time we file a post-effective amendment to our registration statement with the
SEC, it must first become effective prior to the offer or sale of shares of our common stock by the selling shareholders.
The following table sets forth as of October
23, 2018, information regarding the current beneficial ownership of our common stock by the persons identified,
based on information provided to us by them, which we have not independently verified. We have assumed for purposes of the table
that the selling shareholders will sell all of the shares offered by this prospectus. The selling shareholders may, from time
to time, offer all or some of their shares under this prospectus or in another manner. No assurance can be given as to the actual
number of shares that will be resold by the selling shareholders (or any of them). In addition, a selling shareholder may have
already sold or otherwise disposed of shares in transactions exempt from the registration requirements of the Securities Act.
The selling shareholders are not making any representation that the shares covered by this prospectus will be offered for sale.
Except as set forth below, no selling shareholder has held any position nor had any material relationship with our affiliates
or us during the past three years. Except as set forth below, each of the selling shareholders has advised the Company that it
is not a registered broker-dealer or an affiliate of a registered broker-dealer.
Ibex Investors LLC (“Ibex”) is
a significant shareholder of the Company and beneficially owns 13.17% of the Company’s issued and outstanding common
stock, although Ibex is not an affiliate of the Company.
In
the third quarter of 2018, we entered into a warrant exercise transaction with Ibex. Ibex exercised warrants to purchase 1,100,000
shares of common stock at $.50 per share for aggregate gross proceeds to the Company of $550,000, and we extended the exercise
date on the warrant held by Ibex as to remaining 1,800,000 shares from July 26, 2018 to July 26, 2021. We further adjusted the
exercise price per share to $0.53 and removed provision for cashless exercise. In addition, we used $50,000 of the proceeds from
the warrant exercise to repay $50,000 of the short-term note held by Ibex in the principal amount of $250,000,
and, in return, Ibex agreed to extend the maturity date of the note from September 12, 2018 to December 31 2018.
The number of shares outstanding and the percentages of beneficial
ownership are based on 120,756,547 shares of our common stock issued and outstanding as of October 23, 2018.
Under Rule 13d-3, beneficial ownership includes any shares as
to which a selling shareholder has sole or shared voting power or investment power and also any shares that selling shareholder
has the right to acquire within 60 days of the date of this prospectus through the exercise of any stock option.
The term “selling shareholders” also includes any
pledgees, assignees, or other successors in interest to the selling shareholders named in the table below. Unless otherwise indicated,
to our knowledge, each person named in the table below has sole voting and investment power (subject to applicable community property
laws) with respect to the shares of common stock set forth opposite such person’s name. We will file a supplement to this
prospectus (or a post-effective amendment hereto, if necessary) to name successors to any named selling stockholders who are able
to use this prospectus to resell the common stock registered hereby.
Name
of Selling Shareholder
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Number
of Shares Owned Before Offering (1)
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Number
of
Shares
Being
Offered
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Number
of Shares Owned
After
Offering
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Percent
of Shares Owned After Offering
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Ibex
Microcap Fund LLLP
(2)
(1)
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16,245,766
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2,900,000
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13,345,766
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10.98
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%
(3)
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1.
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Includes warrants to purchase 2,633,333
shares of common stock held by Ibex Microcap Fund LLLP. Includes 3,000 shares of common stock held by Lazarus Macro Micro Partners
LLLP.
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2.
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Ibex Investors LLC is the investment adviser
and general partner of Ibex Microcap and Macro Micro, and consequently may be deemed to have voting control and investment
discretion over the securities owned by Ibex Microcap and Macro Micro. Justin B. Borus is the manager of Ibex Investors LLC.
As a result, Mr. Borus may be deemed to be the beneficial owner of any shares deemed to be beneficially owned by Ibex Investors
LLC. The foregoing should not be construed in and of itself as an admission by Ibex Investors LLC or Mr. Borus as to beneficial
ownership of the shares owned by Ibex Microcap and Macro Micro. Each of Ibex Investors LLC and Mr. Borus disclaims beneficial
ownership of the securities except to the extent of its or his pecuniary interests therein.
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3.
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Warrants
held by Ibex Investors LLC are not exercisable by the holder to the extent (but only
to the extent) that the holder, together with any of its affiliates, would beneficially
own in excess of 9.99% of the Company’s common stock after giving effect to such
exercise and as a result of such exercise. By written notice to the Company, the holder
may increase or decrease this percentage, as applied to the holder, to any other percentage
specified in such notice; provided that any such increase will not be effective until
the 61st day after such notice is delivered to the Company.
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PLAN
OF DISTRIBUTION
We
are registering the shares of common stock previously issued and the shares of common stock issuable upon exercise of the warrants
to permit the resale of these shares of common stock by the holders of the common stock and warrants from time to time after the
date of this prospectus. We will not receive any of the proceeds from the sale by the selling shareholders of the shares of common
stock. We will bear all fees and expenses incident to our obligation to register the shares of common stock.
The
selling shareholders may sell or dispose of the securities in one or more of the following ways (or in any combination) from time
to time:
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through
underwriters or dealers;
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directly
to a limited number of purchasers or to a single purchaser (including block transactions);
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through
agents; or
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an
offering of shares by way of a distribution to shareholders, partners or members.
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If
the selling shareholders use underwriters in the sale, the securities will be acquired by the underwriters for their own account(s)
and may be resold from time to time in one or more transactions, including:
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negotiated
transactions;
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at
a fixed public offering price or prices, which may be changed;
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at
market prices prevailing at the time of sale;
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at
prices related to prevailing market prices; or
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at
negotiated prices.
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Broker-dealers
engaged by the selling shareholders may arrange for other broker-dealers to participate in sales. Broker-dealers may receive commissions
or discounts from the selling shareholders (or, if any broker-dealer acts as agent for the purchaser of shares of common stock,
from the purchaser) in amounts to be negotiated, but, except as set forth in a supplement to this prospectus, in the case of an
agency transaction, not in excess of a customary brokerage commission in compliance with FINRA Rule 2440; and in the case of a
principal transaction a markup or markdown in compliance with FINRA IM-2440.
The
obligations of the underwriters to purchase any securities will be conditioned on customary closing conditions and the underwriters
will be obligated to purchase all of such series of securities, if any are purchased.
The
selling shareholders may sell the securities through agents from time to time. Generally, any agent will be acting on a best-efforts
basis for the period of its appointment.
The
selling shareholders may enter into hedging transactions with broker-dealers or other financial institutions. In connection with
such transactions, broker-dealers or other financial institutions may engage in short sales of our common stock in the course
of hedging the positions they assume with the selling shareholders. The selling shareholders may also enter into options or other
transactions with broker-dealers or other financial institutions which require the delivery to such broker-dealer or other financial
institution of shares offered hereby, which shares such broker-dealer or other financial institution may resell pursuant to this
prospectus (as supplemented or amended to reflect such transaction).
The
selling shareholders and any broker-dealers or agents that are involved in selling the shares of common stock may be deemed to
be “underwriters” within the meaning of the Securities Act in connection with such sales. In such event, any commissions
received by such broker-dealers or agents and any profit on the resale of the shares of common stock purchased by them may be
deemed to be underwriting commissions or discounts under the Securities Act. Each selling shareholder has informed us that it
does not have any written or oral agreement or understanding, directly or indirectly, with any person to distribute the shares
of common stock. In no event shall any broker-dealer receive fees, commissions and markups, which, in the aggregate, would exceed
eight percent (8%).
Because
selling shareholders may be deemed to be “underwriters” within the meaning of the Securities Act, they will be subject
to the prospectus delivery requirements of the Securities Act including Rule 172 thereunder. In addition, any shares of common
stock covered by this prospectus that qualify for sale pursuant to Rule 144 under the Securities Act may be sold under Rule 144
rather than under this prospectus. The selling shareholders have advised us that there is no underwriter or coordinating broker
acting in connection with the proposed sale of the shares of common stock by the selling shareholders.
As
used herein, “selling shareholders” includes donees, pledgees, distributees, transferees or other successors-in-interest
selling shares received after the date of this prospectus from a named selling shareholder as a gift, pledge, partnership distribution
or other non-sale related transfer.
Underwriters
and agents may be entitled under agreements entered into with the selling shareholders, if applicable, to indemnification by the
selling shareholders, if applicable, against certain civil liabilities, including liabilities under the Securities Act of 1933,
or to contribution with respect to payments which the underwriters or agents may be required to make.
Under
applicable rules and regulations under the Exchange Act, any person engaged in the distribution of the shares of common stock
may not simultaneously engage in market making activities with respect to the common stock for the applicable restricted period,
as defined in Regulation M, prior to the commencement of the distribution. In addition, the selling shareholders will be subject
to applicable provisions of the Exchange Act and the rules and regulations thereunder, including Regulation M, which may limit
the timing of purchases and sales of our securities by the selling shareholders or any other person. We will make copies of this
prospectus available to the selling shareholders and have informed them of the need to deliver a copy of this prospectus to each
purchaser at or prior to the time of the sale (including by compliance with Rule 172 under the Securities Act). In addition, in
certain states, the resale securities covered hereby may not be sold unless they have been registered or qualified for sale in
the applicable state or an exemption from the registration or qualification requirement is available and is complied with.
LEGAL
PROCEEDINGS
We
are not party to any lawsuits or legal proceedings, the adverse outcome of which, in management’s opinion, individually
or in the aggregate, would have a material adverse effect on our results of operations and financial position, and have no knowledge
of any threatened or potential lawsuits or legal proceedings against us. From time to time, we may be involved in litigation relating
to claims arising out of operations in the ordinary course of business.
DIRECTORS,
EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS
The
following sets forth information about our directors and executive officers as of the date hereof:
Name
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Age
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Position
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Riccardo
Delle Coste
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37
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President,
Chief Executive Officer and Chairman
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Joseph
S. Tesoriero
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63
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Chief
Financial Officer
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Steven
Lang
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64
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Director
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Arnold
Tinter
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72
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Secretary
and Director
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Joseph
M. Cugine
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56
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Director
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Alice
Elliot
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60
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Director
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Alexander
H. Ware
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55
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Director
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Isabelle
Ortiz-Cochet
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56
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Director
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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 Chairman 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. Mr. Ware is President of Foodsby, Inc., a leading
meal ordering platform serving the office marketplace, since September 2018. Previously, he served as Interim President,
Executive Vice President & Chief Financial Officer of Buffalo Wild Wings since October 2016. From 2012 through 2016, Mr. Ware
was Executive Chairman of MStar Holding Corporation (MicroStar), in addition, he served as Interim Chief Executive Officer in
2013. Prior to MicroStar, he served as a Senior Advisor and previously as Executive Vice President of Strategic Development of
Pohlad Companies, a family office, from 2010 to 2015. Starting in 1994, he served in increasing capacities at PepsiCo, then PepsiAmericas,
Inc. culminating as Executive Vice President & Chief Financial Officer from 2005 to 2010. Previously, he was a Senior Associate
at Booz Allen Hamilton, Inc. from 1990-1994. Mr. Ware received his Bachelor of Arts degree in Economics from Hampden-Sydney College
and his Master of Business Administration from the Darden Graduate School of Business at University of Virginia. In addition to
Barfresh, 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
|
Legal
Proceedings
To
the best of our knowledge, none of our executive officers or directors are parties to any material proceedings adverse to the
Company, have any material interest adverse to the Company or have, during the past ten years:
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|
been
convicted in a criminal proceeding or been subject to a pending criminal proceeding (excluding traffic violations and other
minor offenses);
|
|
|
|
|
●
|
had
any bankruptcy petition filed by or against him/her or any business of which he/she was a general partner or executive officer,
either at the time of the bankruptcy or within two years prior to that time;
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|
|
|
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●
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been
subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction,
permanently or temporarily enjoining, barring, suspending or otherwise limiting his/her involvement in any type of business,
securities, futures, commodities or banking activities;
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|
|
|
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●
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been
found by a court of competent jurisdiction (in a civil action), the Securities and Exchange Commission or the Commodity Futures
Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed,
suspended, or vacated;
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|
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●
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been
subject to, or party to, any judicial or administrative order, judgment, decree , or finding, not subsequently reversed, suspended
or vacated, relating to an alleged violation of (i) any Federal or State securities or commodities law or regulation, (ii)
any law or regulation respecting financial institutions or insurance companies including, but not limited to, a temporary
or permanent injunction, order of disgorgement or restitution, civil money penalty or temporary or permanent cease-and-desist
order, or removal or prohibition order or (iii) any law or regulation prohibiting mail or wire fraud or fraud in connection
with any business entity; or been the subject of, or a party to, any sanction or order, not subsequently reversed, suspended
or vacated, of any self-regulatory organization (as defined in Section 3(a)(26) of the Exchange Act (15 U.S.C. 78c(a)(26))),
any registered entity (as defined in Section 1(a)(29) of the Commodity Exchange Act (7 U.S.C. 1(a)(29))), or any equivalent
exchange, association, entity or organization that has disciplinary authority over its members or persons associated with
a member.
|
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 October 10, 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 October 10, 2018. As of October 10, 2018, the Company had 120,756,547
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
October 23, 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.
|
|
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)
|
|
|
20,744,573
|
|
|
|
17.06
|
%
|
|
|
|
|
|
|
|
|
|
Steven
Lang
(6) (7) (8) (9)
|
|
|
20,040,849
|
|
|
|
16.51
|
%
|
|
|
|
|
|
|
|
|
|
Joseph
Tesoriero
(10) (11) (12)
|
|
|
1,200,829
|
|
|
|
0.99
|
%
|
|
|
|
|
|
|
|
|
|
Arnold
Tinter
(13) (14)
|
|
|
950,000
|
|
|
|
0.79
|
%
|
|
|
|
|
|
|
|
|
|
Joe
Cugine
(15) (16) (17)
|
|
|
2,743,305
|
|
|
|
2.25
|
%
|
|
|
|
|
|
|
|
|
|
Alice
Elliot
(18) (19) (20)
|
|
|
960,718
|
|
|
|
0.79
|
%
|
|
|
|
|
|
|
|
|
|
Alexander
Ware
(23) (24) (25)
|
|
|
421,990
|
|
|
|
0.35
|
%
|
|
|
|
|
|
|
|
|
|
Isabelle
Ortiz-cochet
(26) (27)
2
Allee De Longchamp
Suresnes,
France
|
|
|
171,832
|
|
|
|
0.14
|
%
|
|
|
|
|
|
|
|
|
|
All
directors and officers as a group (8 persons)
|
|
|
47,234,096
|
|
|
|
37.90
|
%
|
|
|
|
|
|
|
|
|
|
Unibel
(28) (29)
2
Allee De Longchamp
Suresnes,
France 92150
|
|
|
24,187,500
|
|
|
|
18.70
|
%
|
|
|
|
|
|
|
|
|
|
IBEX
Investors LLC (fka) Lazarus Investment Partners LLLP
(30)
3200
Cherry Creek South Drive Suite 670
Denver,
CO 80209
|
|
|
16,245,766
|
|
|
|
13.17
|
%
|
|
|
|
|
|
|
|
|
|
Wolverine
Asset Management, LLC (“WAM”)
(31) (32)
175
West Jackson Blvd. Suite 340
Chicago,
IL 60604
|
|
|
6,501,600
|
|
|
|
5.30
|
%
|
(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 508,333 shares underlying options granted.
|
(5)
Includes 283,444 shares underlying warrants issued in connection with promissory notes the holder of which is R.D. Capital
Holdings PTY Ltd. And of which Riccardo Delle Coste is deemed to be a beneficial owner.
|
(6)
Mr. Lang is a Director of the Company
|
(7)
Includes 19,072,451 shares owned by Sidra Pty Limited of which Steven Lang is deemed to be a beneficial owner
|
(8)
Includes 480,757 shares underlying options granted
|
(9)
Includes 166,668 shares underlying warrants issued in connection with a promissory note the holder of which is Sidra PTY Limited
|
(10)
Mr. Tesoriero is the Chief Financial Officer of the Company
|
(11)
Includes 634,855 shares underlying options granted.
|
(12)
Includes 76,629 shares underlying warrants issued in connection with a promisory note and conversion thereof.
|
(13)
Mr. Tinter is the Secretary and a Director of the Company
|
(14)
Includes 150,000 shares underlying options granted
|
(15)
Mr. Cugine is President of a subsidiary of the Company and a Director
|
(16)
Includes 794,596 shares underlying options granted.
|
(17)
Includes 96,020 shares underlying warrants issued in connection with purchase of common shares.
|
(18)
Ms. Elliot is a Director of the Company
|
(19)
Includes 360,000 shares owned by Elliot-Herbst LP of which Alice Elliot is deemed to be a beneficial owner
|
(20)
Includes 64,599 shares owned by Elliot-Herbst Family LLC of which Ms. Elliot is deemed to be a beneficial owner
|
(21)
Includes 314,499 shares underlying options granted
|
(22)
Includes 130,000 shares underlying warrants issued in connection with purchase of common shares
|
(23)
Mr. Ware is a Director of the Company
|
(24)
Includes 301,848 shares owned by The Alexander Ware Revocable Trust of which Mr. Ware is deemed to be a beneficail owner
|
(25)
Includes 78,125 shares underlying warrants issued to The Alexander Ware Revocable Trust in connection with purchase
of common stock.
|
(26)
Ms. Ortiz-cochet is a Director of the Company
|
(27)
Includes 171,832 shares underlying options granted
|
(28)
Includes 7,812,500 shares underlying warrants issued in connection with the purchase of common stock.
|
(29)
Includes750,000 shares underlying warrants issued in connection with a convertible promissory note
|
(30)
Includes 2,633,333 shares underlying warrants issued in connection with the purchase of common stock.
|
(31)
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.
|
(32)
Includes 2,000,000 shares underlying warrants issued in connection with the purchase of common stock.
|
DESCRIPTION
OF SECURITIES
Authorized
Capital Stock
Our
authorized share capital consists of 295,000,000 shares of common stock, par value $0.000001 per share and 5,000,000 shares of
preferred stock, par value $0.000001 per share. As of October 10, 2018, 120,756,547 shares of our common stock were outstanding.
Common
Stock
Each
share of our common stock entitles its holder to one vote in the election of each director and on all other matters voted on generally
by our shareholders, other than any matter that (i) solely relates to the terms of any outstanding series of preferred stock or
the number of shares of that series and (ii) does not affect the number of authorized shares of preferred stock or the powers,
privileges and rights pertaining to the common stock. No share of our common stock affords any cumulative voting rights. This
means that the holders of a majority of the voting power of the shares voting for the election of directors can elect all directors
to be elected if they choose to do so. Holders of our common stock will be entitled to dividends in such amounts and at such times
as our board of directors in its discretion may declare out of funds legally available for the payment of dividends. We currently
intend to retain our entire available discretionary cash flow to finance the growth, development and expansion of our business
and do not anticipate paying any cash dividends on the common stock in the foreseeable future. Any future dividends will be paid
at the discretion of our board of directors after taking into account various factors, including:
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general
business conditions;
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●
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industry
practice;
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●
|
our
financial condition and performance;
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●
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our
future prospects;
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●
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our
cash needs and capital investment plans;
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●
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our
obligations to holders of any preferred stock we may issue;
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●
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income
tax consequences; and
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●
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the
restrictions Delaware and other applicable laws and our credit arrangements then impose.
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If
we liquidate or dissolve our business, the holders of our common stock will share ratably in all our assets that are available
for distribution to our shareholders after our creditors are paid in full and the holders of all series of our outstanding preferred
stock, if any, receive their liquidation preferences in full.
Our
common stock has no preemptive rights and is not convertible or redeemable or entitled to the benefits of any sinking or repurchase
fund.
LEGAL
MATTERS
The
validity of the common stock to be sold under this prospectus will be passed upon for us by Libertas Law Group, Inc. Libertas
Law Group, Inc. and its principal, Mark Y. Abdou, beneficially own 1,523,091 shares of the Company’s common stock, including
30,000 shares underlying Series G Warrants, 54,805 shares underlying Series J Warrants and 75,102 shares underlying Series L warrants
and 81,818 underlying convertible notes. Libertas Law Group, Inc. is a selling shareholder under the prospectus.
EXPERTS
Our
financial statements, as of December 31, 2017 and 2016 and for the years then ended appearing in the prospectus,
have been audited by Eide Bailly LLP, an independent registered public accounting firm, to the extent and for the periods indicated
in their report appearing herein, which report expresses an unqualified opinion, and are included in reliance upon such report
and upon authority of such firm as experts in accounting and auditing.
DISCLOSURE
OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
The
Company’s directors and executive officers are indemnified as provided by the Delaware General Corporation Law and the Company’s
Certificate of Incorporation. These provisions state that the Company’s directors may cause the Company to indemnify a director
or former director against all costs, charges and expenses, including an amount paid to settle an action or satisfy a judgment,
actually and reasonably incurred by him as a result of him acting as a director. The indemnification of costs can include an amount
paid to settle an action or satisfy a judgment. Such indemnification is at the discretion of the Company’s board of directors
and is subject to the SEC’s policy regarding indemnification.
Insofar
as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling
the Company pursuant to the foregoing provisions, or otherwise, the Company has been advised that in the opinion of the SEC, such
indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable.
In
the event that a claim for indemnification against such liabilities (other than the payment of expenses incurred or paid by a
director, officer or controlling person in a successful defense of any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities being registered, we will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to the court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication
of such issue.
At
present, there is no pending litigation or proceeding involving any of our directors, officers or employees as to which indemnification
is sought, nor are we aware of any threatened litigation or proceeding that may result in claims for indemnification.
DESCRIPTION
OF BUSINESS
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:
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●
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Acquisition
of Barfresh NV.
We acquired all of the outstanding capital stock of Barfresh NV in exchange for the issuance of 37,333,328
shares of our $0.000001 par value common stock pursuant to a Share Exchange Agreement between us, our former principal shareholder,
Barfresh NV and the former shareholders of Barfresh NV. As a result of this transaction, Barfresh NV became our wholly owned
subsidiary and the former shareholders of Barfresh NV became our controlling shareholders.
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|
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|
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●
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Spinout
of prior business.
Immediately prior to the acquisition of Barfresh NV, we spun-out our previous business operations to
a former officer, director and principal shareholder, in exchange for all of the shares of our common stock held by that person.
Such shares were cancelled immediately following the acquisition.
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|
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|
●
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Financing
transaction
. Immediately following the acquisition of Barfresh, we sold an aggregate of 1,333,332 shares of our common
stock and five-year warrants to purchase 1,333,332 shares of common stock at a per share exercise price of $1.50 in a private
offering for gross proceeds of $999,998, less expenses of $26,895.
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|
|
|
|
●
|
Change
of name
. Subsequent to the merger, we changed the name of the Company from Moving Box Inc. to Barfresh Food Group Inc.
|
|
|
|
|
●
|
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:
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●
|
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.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This
discussion includes forward-looking statements, as that term is defined in the federal securities laws, based upon current expectations
that involve risks and uncertainties, such as plans, objectives, expectations and intentions. Actual results and the timing of
events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors.
Words such as “anticipate”, “estimate”, “plan”, “continuing”, “ongoing”,
“expect”, “believe”, “intend”, “may”, “will”, “should”,
“could” and similar expressions are used to identify forward-looking statements.
We
caution you that these statements are not guarantees of future performance or events and are subject to a number of uncertainties,
risks and other influences, many of which are beyond our control, which may influence the accuracy of the statements and the projections
upon which the statements are based. Factors that may affect our results include, but are not limited to, the risk factors set
forth in this prospectus under the heading “Risk Factors”. 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
|
|
|
three
months
ended
|
|
|
|
|
|
|
June
30, 2018
|
|
|
June
30, 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
|
|
|
six
months
ended
|
|
|
|
|
|
|
June
30, 2018
|
|
|
June
30, 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.
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
|
|
|
Difference
|
|
Personnel
costs
|
|
$
|
4,260,946
|
|
|
$
|
5,560,502
|
|
|
$
|
(1,299,556
|
)
|
Stock
based compensation/options
|
|
|
1,360,688
|
|
|
|
1,133,149
|
|
|
|
227,539
|
|
Legal
and professional fees
|
|
|
465,737
|
|
|
|
425,781
|
|
|
|
39,956
|
|
Travel
|
|
|
422,284
|
|
|
|
605,920
|
|
|
|
(183,636
|
)
|
Rent
|
|
|
142,572
|
|
|
|
96,151
|
|
|
|
46,421
|
|
Marketing
and selling
|
|
|
696,253
|
|
|
|
730,142
|
|
|
|
(33,889
|
)
|
Consulting
fees
|
|
|
203,721
|
|
|
|
242,668
|
|
|
|
(38,947
|
)
|
Director
fees
|
|
|
206,296
|
|
|
|
165,227
|
|
|
|
41,069
|
|
Research
and development
|
|
|
574,989
|
|
|
|
432,146
|
|
|
|
142,843
|
|
Shipping
Expense and storage
|
|
|
619,871
|
|
|
|
407,247
|
|
|
|
212,624
|
|
Other
expenses
|
|
|
538,737
|
|
|
|
617,000
|
|
|
|
(78,262
|
)
|
|
|
$
|
9,492,094
|
|
|
$
|
10,415,933
|
|
|
$
|
(923,838
|
)
|
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
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.
DESCRIPTION
OF PROPERTY
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.
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
The
following includes a summary of transactions since the beginning of fiscal 2015, or any currently proposed transaction, in which
we were or are to be a participant and the amount involved exceeded or exceeds the lesser of $120,000 or one percent of the average
of our total assets at year end for the last two completed fiscal years and in which any related person had or will have a direct
or indirect material interest (other than compensation described under “Executive Compensation”). We believe the terms
obtained or consideration that we paid or received, as applicable, in connection with the transactions described below were comparable
to or better than terms available or the amounts that would be paid or received, as applicable, in arm’s-length transactions.
During
the three months needed March 31, 2018, we closed an offering of $2,527,500 in convertible notes, of this 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 events
lower than $0.60 per share. 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
January 29, 2016, we closed a private placement to accredited investors of $2,670,000 in promissory notes and warrants to purchase
up to 1,297,500 shares of common stock of the Company for aggregate gross proceeds to the Company of $2,670,000. Of the aggregate
offering amount, $635,000 of the notes and warrants to purchase up to 317,500 shares of common stock were placed with members
of the Company’s management, including officers and directors of the Company, and family members of certain officers and
directors.
On
September 28, 2016, we closed a private placement to accredited investors of 4,687,504 shares of common stock at $.64 per share,
and warrants to purchase up to 2,343,752 shares of common stock, for aggregate proceeds to the Company of $3,000,000. Of the aggregate
offering amount, 371,639 shares and 185,819 warrants, were placed with members of the Company’s management, including officers
and directors of the Company, and family members of certain officers and directors.
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 $100,000 or (ii) interest bearing, irrespective of amount, must be approved by the Company’s board of directors.
All issuances of securities by the Company must be approved by the board of directors, irrespective of whether the recipient is
a related party. Each of the foregoing transactions, if required by its terms, was approved in this manner.
EXECUTIVE
COMPENSATION
The
following table summarizes all compensation for the fiscal years ending December 31, 2017 (“2017”) and December 31,
2016 (“2016”) received by our “Named Executive Officers”:
Name
and
Principal
Position
|
|
Period
|
|
Salary
($)
|
|
|
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 $250,000 and
performance bonuses of 75% of his base salary, based upon performance targets determined by the Board of Directors. In addition,
Mr. Tesoriero was granted 350,000 shares of common stock of Barfresh and 8-year options to purchase up to 500,000 shares of common
stock of Barfresh. One-half of each of the share and option grants vests on each of the second and third anniversaries of the
date of commencement of Mr. Tesoriero’s employment. Mr. Tesoriero will also receive 8-year performance options to purchase
up to an additional 350,000 shares on an annual basis. All shares and options granted under the employment agreement are subject
to the Company’s 2015 Equity Incentive Plan.
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
There
were no changes in or disagreements with our accountants on accounting and financial disclosure during the last two fiscal years,
the fiscal years ending December 31, 2017 and December 31, 2016 .
MARKET
FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Market
Information
Our
common stock is currently traded on the OTCQB under the symbol “BRFH”. Our common stock had been quoted on the OTC
Bulletin Board since July 27, 2011 under the symbol MVBX. Effective February 29, 2012, our symbol changed to BRFH based on the
forward split and name change. On March 21, 2012, our common stock was delisted to Pink Sheets. On January 21, 2014, we registered
our common stock under Section 12(g) of the Exchange Act. The following table sets forth the range of high and low bid quotations
for the applicable period. These quotations as reported by the OTCQB reflect inter-dealer prices without retail mark-up, markdown
or commissions and may not necessarily represent actual transactions.
|
|
Bid
Quotation
|
|
Financial
Quarter Ended
|
|
High
($)
|
|
|
Low
($)
|
|
|
|
|
|
|
|
|
March
31, 2018
|
|
|
0.69
|
|
|
|
0.35
|
|
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
October 10, 2018, there were 120,756,547 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.
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.
WHERE
YOU CAN FIND ADDITIONAL INFORMATION
We
have filed with the SEC a registration statement on Form S-1, including exhibits and schedules, under the Securities Act, with
respect to the shares of common stock being offered by this prospectus. This prospectus, which constitutes part of the registration
statement, does not contain all of the information in the registration statement and its exhibits. For further about the Company
and the common stock offered by this prospectus, we refer you to the registration statement and its exhibits. Statements contained
in this prospectus as to the contents of any contract or any other document referred to are not necessarily complete, and in each
instance, we refer you to the copy of the contract or other document filed as an exhibit to the registration statement. Each of
these statements is qualified in all respects by this reference.
You
can read our SEC filings, including the registration statement, over the Internet at the SEC’s website at www.sec.gov. You
may also read and copy any document we file with the SEC at its public reference facilities at 100 F Street, NE, Washington, D.C.
20549. You may also obtain copies of these documents at prescribed rates by writing to the Public Reference Section of the SEC
at 100 F Street, NE, Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the operation of
the public reference facilities. You may also request a copy of these filings, at no cost, by writing us at 8383 Wilshire Blvd.,
Suite 750, Beverly Hills, CA 90211 or calling us at (310) 598-7113.
We
are subject to the information reporting requirements of the Securities Exchange Act of 1934, as amended, and we will file reports,
proxy statements and other information with the SEC. These reports, proxy statements and other information will be available for
inspection and copying at the public reference room and web site of the SEC referred to above. We also maintain a website at
www.barfresh.com/us/
,
at which you may access these materials free of charge as soon as reasonably practicable after they are electronically filed with,
or furnished to, the SEC. Information contained on or accessible through our website is not a part of this prospectus, and the
inclusion of our website address in this prospectus is an inactive textual reference only.
Index
to Consolidated 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.
Report
of Independent Registered Public Accounting Firm
To
the Board of Directors and Stockholders
Barfresh Food Group, Inc.
Beverly Hills, California
Opinion
on the Consolidated Financial Statements
We
have audited the accompanying consolidated balance sheets of Barfresh Food Group, Inc. (the “Company”) as of December
31, 2017 and 2016, and the related consolidated statements of operations, stockholders’ equity, and cash flows, for the
years then ended, and the related notes (collectively referred to as the “financial statements”). In our opinion,
the consolidated financial statements present fairly, in all material respects, the financial position of Barfresh Food Group,
Inc. as of December 31, 2017 and 2016, and the results of its operations and its cash flows for the years then ended, in conformity
with accounting principles generally accepted in the United States of America.
Basis
for Opinion
These
consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the Public
Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to Barfresh
Food Group, Inc. in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities
and Exchange Commission and the PCAOB.
We
conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits
to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether
due to error or fraud. Barfresh Food Group Inc. is not required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial
reporting but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control over financial
reporting. Accordingly, we express no such opinion.
Our
audits included performing procedures to assess the risk of material misstatement of the consolidated financial statements, whether
due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting
principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated
financial statements. We believe that our audits provide a reasonable basis for our opinion.
We
have served as Barfresh Food Group Inc.’s auditor since 2012.
/s/
Eide Bailly LLP
Denver,
Colorado
March
30, 2018
Barfresh
Food Group Inc.
Consolidated
Balance Sheets
December
31, 2017 and 2016
|
|
2017
|
|
|
2016
|
|
Assets
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
1,304,916
|
|
|
$
|
9,180,947
|
|
Accounts
receivable
|
|
|
301,012
|
|
|
|
131,088
|
|
Inventory
|
|
|
1,415,495
|
|
|
|
317,948
|
|
Prepaid
expenses and other current assets
|
|
|
24,496
|
|
|
|
25,864
|
|
Total
current assets
|
|
|
3,045,919
|
|
|
|
9,655,847
|
|
Property,
plant and equipment, net of depreciation
|
|
|
1,760,890
|
|
|
|
1,494,478
|
|
Intangible
assets, net of amortization
|
|
|
586,943
|
|
|
|
619,863
|
|
Deposits
|
|
|
39,369
|
|
|
|
53,202
|
|
Total
Assets
|
|
$
|
5,433,121
|
|
|
$
|
11,823,390
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Stockholders’ Equity
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
421,176
|
|
|
$
|
153,756
|
|
Accrued
expenses
|
|
|
849,529
|
|
|
|
746,375
|
|
Deferred
rent liability
|
|
|
495
|
|
|
|
165
|
|
Current
portion of long term debt
|
|
|
-
|
|
|
|
3,849
|
|
Total
current liabilities
|
|
|
1,271,200
|
|
|
|
904,145
|
|
Long
term Debt, net of current portion
|
|
|
0
|
|
|
|
8,958
|
|
Total
liabilities
|
|
|
1,271,200
|
|
|
|
913,103
|
|
|
|
|
|
|
|
|
|
|
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; 118,690,527 and 117,103,276 shares issued and outstanding at December
31, 2017 and 2016, respectively
|
|
|
119
|
|
|
|
117
|
|
Additional
paid in capital
|
|
|
37,992,799
|
|
|
|
35,829,627
|
|
Accumulated
(deficit)
|
|
|
(33,830,997
|
)
|
|
|
(24,919,457
|
)
|
Total
stockholders’ equity
|
|
|
4,161,921
|
|
|
|
10,910,287
|
|
Total
Liabilities and Stockholders’ Equity
|
|
$
|
5,433,121
|
|
|
$
|
11,823,390
|
|
See
the accompanying notes to the consolidated financial statements
Barfresh
Food Group Inc.
Consolidated
Statements of Operations
|
|
For
the year ended
|
|
|
For
the year ended
|
|
|
|
December
31, 2017
|
|
|
December
31, 2016
|
|
Revenue
|
|
$
|
1,997,012
|
|
|
$
|
1,457,499
|
|
Cost
of revenue
|
|
|
1,085,575
|
|
|
|
772,827
|
|
Gross
profit
|
|
|
911,437
|
|
|
|
684,672
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
General
and administrative
|
|
|
9,492,094
|
|
|
|
10,415,933
|
|
Depreciation
and Amortization
|
|
|
330,883
|
|
|
|
208,614
|
|
Total
operating expenses
|
|
|
9,822,977
|
|
|
|
10,624,547
|
|
|
|
|
|
|
|
|
|
|
Operating
loss
|
|
|
(8,911,540
|
)
|
|
|
(9,939,875
|
)
|
|
|
|
|
|
|
|
|
|
Other
expenses
|
|
|
|
|
|
|
|
|
Interest
|
|
|
-
|
|
|
|
250,850
|
|
|
|
|
|
|
|
|
|
|
Net
(loss)
|
|
$
|
(8,911,540
|
)
|
|
$
|
(10,190,725
|
)
|
|
|
|
|
|
|
|
|
|
Per
share information - basic and fully diluted:
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding
|
|
|
117,748,411
|
|
|
|
95,557,640
|
|
Net
(loss) per share
|
|
$
|
(0.08
|
)
|
|
$
|
(0.11
|
)
|
See
the accompanying notes to the consolidated financial statements
Barfresh
Food Group, Inc.
Statement
of Stockholders’ Equity
For
the Period from January 1, 2016 to December 31, 2017
|
|
Common
Stock
|
|
|
Additional
paid in
|
|
|
Accumulated
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
(Deficit)
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
January 1, 2016
|
|
|
86,186,453
|
|
|
$
|
87
|
|
|
$
|
15,798,337
|
|
|
$
|
(14,728,732
|
)
|
|
$
|
1,069,692
|
|
Issuance
of stock for cash, net of expenses of $750,019
|
|
|
24,598,674
|
|
|
|
24
|
|
|
|
15,707,106
|
|
|
|
-
|
|
|
|
15,707,130
|
|
Exercise of
warrants
|
|
|
2,464,017
|
|
|
|
2
|
|
|
|
714,998
|
|
|
|
-
|
|
|
|
715,000
|
|
Exercise of
options
|
|
|
50,000
|
|
|
|
-
|
|
|
|
25,500
|
|
|
|
-
|
|
|
|
25,500
|
|
Conversion
of debt into stock
|
|
|
3,502,327
|
|
|
|
4
|
|
|
|
2,242,688
|
|
|
|
-
|
|
|
|
2,242,692
|
|
Debt
settled for stock
|
|
|
176,328
|
|
|
|
-
|
|
|
|
112,849
|
|
|
|
-
|
|
|
|
112,849
|
|
Issuance
of stock for services
|
|
|
125,477
|
|
|
|
-
|
|
|
|
95,000
|
|
|
|
-
|
|
|
|
95,000
|
|
Equity
based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
1,133,149
|
|
|
|
-
|
|
|
|
1,133,149
|
|
Net
(loss) for the year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,190,725
|
)
|
|
|
(10,190,725
|
)
|
Balance December
31, 2016
|
|
|
117,103,276
|
|
|
$
|
117
|
|
|
|
35,829,627
|
|
|
|
(24,919,457
|
)
|
|
|
10,910,287
|
|
Exercise of
warrants
|
|
|
232,005
|
|
|
|
-
|
|
|
|
35,400
|
|
|
|
|
|
|
|
35,400
|
|
Exercise of
options
|
|
|
276,171
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
Issuance
of stock for services
|
|
|
178,733
|
|
|
|
1
|
|
|
|
112,250
|
|
|
|
|
|
|
|
112,251
|
|
Equity
based compensation
|
|
|
900,342
|
|
|
|
1
|
|
|
|
2,015,522
|
|
|
|
|
|
|
|
2,015,523
|
|
Net
(loss) for the year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,911,540
|
)
|
|
|
(8,911,540
|
)
|
Balance
December 31, 2017
|
|
|
118,690,527
|
|
|
$
|
119
|
|
|
$
|
37,992,799
|
|
|
$
|
(33,830,997
|
)
|
|
$
|
4,161,921
|
|
See
the accompanying notes to the consolidated financial statements
Barfresh
Food Group Inc.
Consolidated
Statements of Cash Flows
|
|
For
the year ended
December 31, 2017
|
|
|
For
the year ended
December 31, 2016
|
|
Cash
flow from operating activities:
|
|
|
|
|
|
|
|
|
Net
(loss)
|
|
$
|
(8,911,540
|
)
|
|
$
|
(10,190,725
|
)
|
Adjustments
to reconcile net (loss) to net cash (used in) operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
268,784
|
|
|
|
147,131
|
|
Equity
based compensation
|
|
|
1,550,718
|
|
|
|
1,133,149
|
|
Amortization
of intellectual property
|
|
|
62,099
|
|
|
|
61,483
|
|
Interest
related to debt discount
|
|
|
-
|
|
|
|
180,707
|
|
Loss
on sale of property and equipment
|
|
|
-
|
|
|
|
63,751
|
|
Stock
issuance for service
|
|
|
112,250
|
|
|
|
95,000
|
|
Change
in operating assets and liabilities
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(169,924
|
)
|
|
|
(102,492
|
)
|
Inventory
|
|
|
(1,097,547
|
)
|
|
|
10,012
|
|
Prepaid
expenses
|
|
|
1,368
|
|
|
|
4,660
|
|
Deposits
|
|
|
13,833
|
|
|
|
(36,751
|
)
|
Accounts
payable
|
|
|
267,420
|
|
|
|
21,952
|
|
Accrued
expenses
|
|
|
567,960
|
|
|
|
589,025
|
|
Deferred
rent
|
|
|
330
|
|
|
|
(1,690
|
)
|
Net
cash (used in) operations
|
|
|
(7,334,249
|
)
|
|
|
(8,024,788
|
)
|
|
|
|
|
|
|
|
|
|
Cash
flow from investing activities:
|
|
|
|
|
|
|
|
|
Purchase
of fixed assets
|
|
|
(535,196
|
)
|
|
|
(1,053,498
|
)
|
Proceeds
from sale of equipment
|
|
|
-
|
|
|
|
36,910
|
|
Investment
in patent and trademarks
|
|
|
(29,179
|
)
|
|
|
(64,089
|
)
|
Net
cash (used in) investing activities
|
|
|
(564,375
|
)
|
|
|
(1,080,677
|
)
|
|
|
|
|
|
|
|
|
|
Cash
flow from financing activities:
|
|
|
|
|
|
|
|
|
Issuance
of common stock and warrants for cash
|
|
|
35,400
|
|
|
|
16,457,150
|
|
Equity
issuance costs
|
|
|
-
|
|
|
|
(750,020
|
)
|
Exercise
of warrant and options
|
|
|
-
|
|
|
|
740,500
|
|
Repayment
of short term notes payable -related party
|
|
|
-
|
|
|
|
(100,000
|
)
|
Repayment
of long term debt
|
|
|
(12,807
|
)
|
|
|
(47,222
|
)
|
Net
cash provided by financing activities
|
|
|
22,593
|
|
|
|
16,300,408
|
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash
|
|
|
(7,876,031
|
)
|
|
|
7,197,943
|
|
Cash
and cash equivalents at beginning of period
|
|
|
9,180,947
|
|
|
|
1,986,004
|
|
Cash
and cash equivalents at end of period
|
|
$
|
1,304,916
|
|
|
$
|
9,180,947
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$
|
-
|
|
|
$
|
23,370
|
|
Cash
paid for income taxes
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Non-cash
financing activities:
|
|
|
|
|
|
|
|
|
Common
stock issued for services, and conversion of debt
|
|
$
|
|
|
|
$
|
2,450,541
|
|
Settlement
of liability with Equity awards
|
|
|
464,806
|
|
|
|
|
|
See
the accompanying notes to the financial statements
Notes
to Consolidated Financial Statements
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.
INFORMATION
NOT REQUIRED IN PROSPECTUS
Item
24. Indemnification of Directors and Officers
Section
145 of the Delaware General Corporation Law provides that a corporation may indemnify directors and officers as well as other
employees and individuals against expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by such person in connection with any threatened, pending or completed actions, suits or proceedings
in which such person is made a party by reason of such person being or having been a director, officer, employee or agent of the
corporation. Section 145 of the Delaware General Corporation Law also provides that expenses (including attorneys’ fees)
incurred by a director or officer in defending an action may be paid by a corporation in advance of the final disposition of an
action if the director or officer undertakes to repay the advanced amounts if it is determined such person is not entitled to
be indemnified by the corporation. The Delaware General Corporation Law provides that Section 145 is not exclusive of other rights
to which those seeking indemnification may be entitled under any bylaw, agreement, vote of shareholders or disinterested directors
or otherwise. The provision does not affect directors’ responsibilities under any other laws, such as the federal securities
laws. The Company’s Certificate of Incorporation provides for such indemnification to the fullest extent of Section 145
and states that the indemnification is not exclusive of other rights of those seeking indemnification may be entitled.
Section
102(b)(7) of the Delaware General Corporation Law permits a corporation to provide in its certificate of incorporation that a
director of the corporation shall not be personally liable to the corporation or its shareholders for monetary damages for breach
of fiduciary duty as a director, except for liability (i) for any breach of the director’s duty of loyalty to the corporation
or its shareholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation
of law, (iii) for unlawful payments of dividends or unlawful stock repurchases, redemptions or other distributions, or (iv) for
any transaction from which the director derived an improper personal benefit. The Company’s Certificate of Incorporation
provides for such limitation of liability.
The
Company has entered into agreements with its directors and executive officers, that require the Company to indemnify such persons
to the fullest extent permitted by law, against expenses, judgments, fines, settlements and other amounts incurred (including
attorneys’ fees), and advance expenses if requested by such person, in connection with investigating, defending, being a
witness in, participating, or preparing for any threatened, pending, or completed action, suit, or proceeding or any alternative
dispute resolution mechanism, or any inquiry, hearing or investigation (collectively, a “Proceeding”), relating to
any event or occurrence that takes place either prior to or after the execution of the indemnification agreement, related to the
fact that such person is or was a director or officer of the Company, or while a director or officer is or was serving at the
request of the Company as a director, officer, employee, trustee, agent or fiduciary of another foreign or domestic corporation,
partnership, joint venture, employee benefit plan, trust or other enterprise, or was a director, officer, employee or agent of
a foreign or domestic corporation that was a predecessor corporation of the Company or of another enterprise at the request of
such predecessor corporation, or related to anything done or not done by such person in any such capacity, whether or not the
basis of the Proceeding is alleged action in an official capacity as a director, officer, employee or agent or in any other capacity
while serving as a director, officer, employee, or agent of the Company. Indemnification is prohibited on account of any Proceeding
in which judgment is rendered against such persons for an accounting of profits made from the purchase or sale by such persons
of securities of the Company pursuant to the provisions of Section 16(b) of the Securities Exchange Act of 1934, as amended, or
similar provisions of any federal, state or local laws. The indemnification agreements also set forth certain procedures that
apply in the event of a claim for indemnification thereunder.
The
Company maintains insurance on behalf of any person who is or was a director, officer or employee of the Company, or is or was
serving at the request of the Company as a director, officer, employee or agent of another company, partnership, joint venture,
trust or other enterprise against liability asserted against him and incurred by him in any such capacity, or arising out of his
status as such, whether or not the Company would have the power to indemnify him against liability under the provisions of this
section.
The
right of any person to be indemnified is subject always to the right of the Company by its board of directors, in lieu of such
indemnity, to settle any such claim, action, suit or proceeding at the expense of the Company by the payment of the amount of
such settlement and the costs and expenses incurred in connection therewith.
Insofar
as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling
the Company pursuant to the foregoing provisions, or otherwise, the Company has been advised that in the opinion of the Securities
and Exchange Commission, such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable.
In
the event that a claim for indemnification against such liabilities (other than the payment of expenses incurred or paid by a
director, officer or controlling person in a successful defense of any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities being registered, we will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to the court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication
of such issue.
At
present, there is no pending litigation or proceeding involving any of our directors, officers or employees as to which indemnification
is sought, nor are we aware of any threatened litigation or proceeding that may result in claims for indemnification.
Item
25. Other Expenses of Issuance and Distribution
The
following table sets forth the costs and expenses payable by us in connection with the offering of the common stock being registered.
All amounts are estimates. The selling shareholders will pay none of the expenses set forth below.
SEC filing fees
|
|
$
|
[ ]
|
|
Legal fees and expenses
|
|
|
5,0
00
|
|
Accounting fees and expenses
|
|
|
5,000
|
|
Total
|
|
$
|
[ ]
|
|
Item
26. Recent Sales of Unregistered Securities
The
following sets forth all sales of unregistered securities we have completed during the last three years. Except as otherwise indicated
below, the following transactions were effected in reliance upon the exemption from registration set forth in Section 4(2) of
the Securities Act. We based such reliance upon the following facts and circumstances: (i) the investors were accredited investors,
as defined in Rule 501 of the Securities Act and were sophisticated, having sufficient knowledge and experience in financial and
business matters to make them capable of evaluating the merits and risks of the investment, (ii) the investors represented that
they were purchasing the securities for investment purposes without a view to distribution, (iii) the investors had access to
our management and information concerning the Company, its business and financial information and (iv) we conducted the sale of
the securities without general solicitation or advertising. Except as otherwise indicated below, no underwriting discounts or
commissions were paid in the transactions.
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.
We
did not issue any additional securities during 2017.
During
2016 we issued 28,277,329 shares of our common stock and warrants to purchase 14,033,438 Shares 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.
During
the three months ended September 30, 2015 we granted 80,000 options to purchase shares of our common stock to officers, directors
and employees. The exercise prices range from $0.47 to $0.72.
During
the three months ended June 30, 2015 we granted the right to 1,000,000 shares of restricted common stock to a director of the
Company who during the period became an officer of the Company. The stock vests 50% on each of the second and third anniversary
of the issuance. In addition, we granted the right to 350,000 shares of restricted to another officer in connection with an employment
agreement entered into during the three-month period ended June 30, 2015.
During
the three months ended June 30, 2015, we issued 1,740,000 options to purchase our common stock to officers and employees of the
Company. The exercise price of the options ranged from $0.50 to $0.82 per share, and the options are exercisable for periods of
between 5 and 8 years. The options vest under a variety of vesting schedules. Two hundred sixty-five thousand (265,000)
of the options vest on the first anniversary of issuance, 675,000 of the options vest on the second anniversary of issuance, 675,000
of the options vest on the third anniversary of issuance, and 125,000 of the options vest on the third anniversary of issuance.
During
the year ended March 31, 2015 we completed two offerings of common stock units at a price of $0.50 per unit. Each unit consists
of one share of common stock and a five-year warrant to purchase one-half (1/2) share of our common stock at an exercise
price of $0.60 per share. We sold a total of 11,044,000 units representing 11,044,000 shares and warrants to purchase 5,522,000
shares for total consideration of $5,522,000.
During
the year ended March 31, 2015 we issued 900,000 shares of restricted common stock to an officer and two employees of the Company
for services rendered.
Also
during the year ended March 31, 2015, we issued 155,000 shares of our restricted common stock to legal counsel and a consultant
to the Company.
Additionally,
during the year ended March 31, 2015, we issued 64,100 shares of our common stock to a director. The shares vest over a one-year
period. We also issued options to purchase 600,000 shares of our common stock at an exercise price of $0.45 per share to two officers
and directors and a director of the Company. The options vested immediately and are exercisable for a period of 5 years from the
date of issuance, January 21, 2014.
Item
27. Exhibits
(
b)
|
|
Exhibits
required by Item 601 of Regulation S-K
|
Exhibit
Number
|
|
Description
|
2.1
|
|
Share
Exchange Agreement dated January 10, 2012 by and among Moving Box Inc., Andreas Wilcken, Jr., Barfresh Inc. and the shareholders
of Barfresh Inc. (incorporated by reference to Exhibit 2.1 to Current Report on Form 8-K as filed January 17, 2012
|
3.1
|
|
Certificate
of Incorporation of Moving Box Inc. dated February 25, 2010 (incorporated by reference to Exhibit 3.1 to Form S-1 (Registration
No. 333-168738) as filed August 11, 2010)
|
3.2
|
|
Amended
and Restated Bylaws of Barfresh Food Group Inc. (incorporated by reference to Exhibit 3.1 to Current Report on Form 8-K as
filed August 4, 2014)
|
3.3
|
|
Certificate
of Amendment of Certificate of Incorporation of Moving Box Inc. dated February 13, 2012 (incorporated by reference to Exhibit
3.1 to Current Report on Form 8-K as filed February 17, 2012)
|
3.4
|
|
Certificate
of Amendment of Certificate of Incorporation of Smoothie Holdings Inc. dated February 16, 2012 (incorporated by reference
to Exhibit 3.2 to Current Report on Form 8-K as filed February 17, 2012)
|
4.1
|
|
Form
of Series A Warrant (incorporated by reference to Exhibit 10.3 to Current Report on Form 8-K as filed January 17, 2012)
|
4.2
|
|
Form
of Series B Warrant (incorporated by reference to Exhibit 4.2 to Form 10K for the period ending March 31, 2014, as filed June
30, 2014)
|
4.3
|
|
Form
of Series C Warrant (incorporated by reference to Exhibit 4.3 to Form 10K for the period ending March 31, 2014, as filed June
30, 2014)
|
4.4
|
|
Form
of Series D Warrant (incorporated by reference to Exhibit 4.4 to Form 10K for the period ending March 31, 2014, as filed June
30, 2014)
|
4.5
|
|
Form
of Series PA Warrant (incorporated by reference to Exhibit 4.5 to Form 10K for the period ending March 31, 2014, as filed
June 30, 2014)
|
4.6
|
|
Form
of Series CN Warrant (incorporated by reference to Exhibit 4.6 to Form 10K for the period ending March 31, 2014, as filed
June 30, 2014)
|
4.7
|
|
Form
of Series EN Warrant (incorporated by reference to Exhibit 4.7 to Registration Statement on Form S-1 (Registration No. 333-211019)
as filed April 29, 2016)
|
4.8
|
|
Form
of Series E Warrant (Incorporated by reference to Exhibit 3.8 to Registration Statement on Form S-1 (Registration No. 333-203340)
as filed April 10, 2015)
|
4.9
|
|
Form
of Series G Warrant (incorporated by reference to Exhibit 4.1 to Current Report on Form 8-K as filed February 16, 2015)
|
4.10
|
|
Form
of Series H Warrant (incorporated by reference to Exhibit 4.10 to Registration Statement on Form S-1 (Registration No. 333-211019)
as filed April 29, 2016)
|
4.11
|
|
Form
of Series I Warrant (incorporated by reference to Exhibit 4.11 to Registration Statement on Form S-1 (Registration No. 333-211019)
as filed April 29, 2016)
|
4.12
|
|
Form
of Convertible Promissory Note dated January 29, 2016 by Barfresh Food Group Inc. in favor of certain investors (incorporated
by reference to Exhibit 4.12 to Registration Statement on Form S-1 (Registration No. 333-211019) as filed April 29, 2016)
|
4.13
|
|
Form
of warrant dated December 1, 2013 (incorporated by reference to Exhibit 4.13 to Registration Statement on Form S-1 (Registration
No. 333-211019) as filed April 29, 2016)
|
4.14
|
|
Form
of Series K Warrant (Incorporated by reference to Exhibit 4.14 to Registration Statement of Form S-1 No. 333-203340)
|
4.15
|
|
Form
of Series J Warrant (Incorporated by reference to Exhibit 4.15 to Registration Statement of Form S-1 No. 333-203340)
|
4.16
|
|
Repayment of Debt Agreement dated July 26, 2018 by and between Barfresh Food Group, Inc. and Ibex Investors LLC, filed herewith.
|
4.17
|
|
Form of Series L Warrant, filed herewith.
|
4.18
|
|
Form of 10% Convertible Promissory Note dated March 5, 2018 issued by Barfresh Food Group Inc. in favor of Ibex Investors LLC, filed herewith.
|
4.19
|
|
Form of 12% Convertible
Promissory Note issued by Barfresh Food Group, Inc. in favor of certain investors in February 2018, filed herewith.
|
5.1
|
|
Opinion and Consent of Libertas Law Group, Inc., filed herewith.
|
10.1
|
|
Form
of Registration Rights Agreement dated February 16, 2016 (incorporated by reference to Exhibit 10.1 to Registration Statement
on Form S-1 (Registration No. 333-211019) as filed April 29, 2016)
|
10.2
|
|
Intellectual
Property Sale Deed by and between National Australia Bank Limited and Barfresh Inc. dated October 15, 2013 (incorporated by
reference to Exhibit 10.1 to Quarterly Report on Form 10-Q as filed November 20, 2013)
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10.3
|
|
Form
of Securities Purchase Agreement dated February 16, 2016 by and between Barfresh Food Group Inc. and certain investors. (incorporated
by reference to Exhibit 10.3 to Registration Statement on Form S-1 (Registration No. 333-211019) as filed April 29, 2016)
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10.4
|
|
Form
of Investor Rights Agreement dated November 23, 2016 by and between Barfresh Food Group, Inc. and Unibel (Incorporated by
reference to Exhibit 10.4 to Registration Statement of Form S-1 No. 333-203340)
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10.5
|
|
Form
of Securities Purchase Agreement dated November 23, 2016 by and between Barfresh Food Group, Inc. and Unibel (Incorporated
by reference to Exhibit 10.5 to Registration Statement of Form S-1 No. 333-203340)
|
10.6
|
|
Form
of Securities Purchase Agreement dated September 28, 2016 by and between Barfresh Food Group, Inc. and certain investors (Incorporated
by reference to Exhibit 10.6 to Registration Statement of Form S-1 No. 333-203340)
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10.7
|
|
Form
of Registration Rights Agreement dated September 28, 2016 by and between Barfresh Food Group, Inc. and certain investors (Incorporated
by reference to Exhibit 10.7 to Registration Statement of Form S-1 No. 333-203340)
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10.8
|
|
Barfresh
Food Group, Inc. 2014 Equity Incentive Plan (incorporated by reference to Exhibit 10.10 to Annual Report Form 10-K filed June
30, 2014)
|
10.9
|
|
Barfresh
Food Group, Inc. 2015 Equity Incentive Plan (incorporated by reference to Exhibit 10.10 to Annual Report Form 10-K filed July
7, 2015)
|
10.10
|
|
Executive
Employment Agreement by and between Smoothie, Inc. and Riccardo Delle Coste dated April 27, 2015 (incorporated by reference
to Exhibit 10.11 to Annual Report Form 10-K filed July 7, 2015)
|
10.11
|
|
Executive
Employment Agreement by and between Smoothie, Inc. and Joseph M. Cugine dated April 27, 2015 (incorporated by reference to
Exhibit 10.12 to Annual Report Form 10-K filed July 7, 2015)
|
10.12
|
|
Executive
Employment Agreement by and between Barfresh Food Group, Inc. and Joseph S. Tesoriero dated May 18, 2015 (incorporated by
reference to Exhibit 10.13 to Annual Report Form 10-K filed July 7, 2015)
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10.13
|
|
Form of Series D Warrant Exercise Offer dated July 25, 2018, filed herewith.
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10.14
|
|
Form of Securities Purchase Agreement dated February 14, 2018 by and between Barfresh Food Group, Inc. and certain investors, filed herewith.
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21.1
|
|
Subsidiaries
(Incorporated by reference to Exhibit 21.1 to Transitional Report on Form 10KT for the transitional period from April 1, 2015
to December 31, 2015, filed on March 30, 2016)
|
23.1
|
|
Consent
of Eide Bailly LLP, filed herewith.
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23.2
|
|
Consent of Libertas Law Group, Inc. (included in Exhibit 5.1)*
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Item
28. Undertakings
The
undersigned registrant hereby undertakes:
1.
To file, during any period in which offers or sales are being made, a post-effective amendment to this Registration Statement:
a.
To include any prospectus required by Section 10(a)(3) of the Securities Act;
b.
To reflect in the prospectus any facts or events which, individually or together, represent a fundamental change in the information
in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end
of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule
424(b) if, in the aggregate, the changes in the volume and rise represent no more than a 20% change in the maximum aggregate offering
price set forth in the “Calculation of Registration Fee” table in the effective registration statement; and
c.
To include any material information with respect to the plan of distribution not previously disclosed in this Registration Statement
or any material changes to such information in the Registration Statement.
2.
For determining liability under the Securities Act, treat each post-effective amendment as a new registration statement of the
securities offered, and the offering of the securities at that time to be the initial bona fide offering.
3.
To file a post-effective amendment to remove from registration any of the securities that remain unsold at the end of the offering.
4.
For determining liability of the undersigned issuer under the Securities Act to any purchaser in the initial distribution of the
securities, the undersigned issuer undertakes that in a primary offering of securities of the undersigned issuer pursuant to this
registration statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities
are offered or sold to such purchaser by means of any of the following communications, the undersigned issuer will be a seller
to the purchaser and will be considered to offer or sell such securities to such purchaser:
i.
Any preliminary prospectus or prospectus of the undersigned issuer relating to the offering required to be filed pursuant to Rule
424;
ii.
Any free writing prospectus relating to the offering prepared by or on behalf of the undersigned issuer or used or referred to
by the undersigned issuer;
iii.
The portion of any other free writing prospectus relating to the offering containing material information about the undersigned
issuer or its securities provided by or on behalf of the undersigned issuer; and
iv.
Any other communication that is an offer in the offering made by the undersigned issuer to the purchaser.
5.
Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion
of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer of controlling person of the Registrant in the successful defense
of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities
being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed
in the Securities Act and will be governed by the final adjudication of such issue.
6.
For determining any liability under the Securities Act, treat the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant under
Rule 424(b)(1) or (4) or 497(h) under the Securities Act as part of this registration statement as of the time the Commission
declared it effective.
7.
For determining any liability under the Securities Act, treat each post-effective amendment that contains a form of prospectus
as a new registration statement for the securities offered in the registration statement, and that offering of the securities
at that time as the initial bona fide offering of those securities.
8.
That, for the purpose of determining liability under the Securities Act to any purchaser:
a.
If the issuer is relying on Rule 430B:
1.
Each prospectus filed by the undersigned issuer pursuant to Rule 424(b)(3) shall be deemed to be part of the registration statement
as of the date the filed prospectus was deemed part of and included in the registration statement; and
2.
Each prospectus required to be filed pursuant to Rule 424(b)(2), (b)(5), or (b)(7) as part of a registration statement in reliance
on Rule 430B relating to an offering made pursuant to Rule 415(a)(1)(i), (vii), or (x) for the purpose of providing the information
required by section 10(a) of the Securities Act shall be deemed to be part of and included in the registration statement as of
the earlier of the date such form of prospectus is first used after effectiveness or the date of the first contract of sale of
securities in the offering described in the prospectus. As provided in Rule 430B, for liability purposes of the issuer and any
person that is at that date an underwriter, such date shall be deemed to be a new effective date of the registration statement
relating to the securities in the registration statement to which that prospectus relates, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof. Provided, however, that no statement made in a registration
statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by
reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with
a time of contract of sale prior to such effective date, supersede or modify any statement that was made in the registration statement
or prospectus that was part of the registration statement or made in any such document immediately prior to such effective date;
or
b.
If the issuer is subject to Rule 430C: Each prospectus filed pursuant to Rule 424(b) as part of a registration statement relating
to an offering, other than registration statements relying on Rule 430B or other than prospectuses filed in reliance on Rule 430A,
shall be deemed to be part of and included in the registration statement as of the date it is first used after effectiveness.
Provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement
or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part
of the registration statement will, as to a purchaser with a time of contract of sale prior to such first use, supersede or modify
any statement that was made in the registration statement or prospectus that was part of the registration statement or made in
any such document immediately prior to such date of first use.
SIGNATURES
In accordance with the requirements of the
Securities Act of 1933, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements
of filing on Form S-1 and authorized this registration statement to be signed on its behalf by the undersigned, in the City of
Beverly Hills, State of California, on October 26, 2018.
|
BARFRESH
FOOD GROUP, INC.
|
|
|
|
/s/
Riccardo Delle Coste
|
|
Riccardo
Delle Coste
|
|
Chief
Executive Officer
|
In
accordance with the requirements of the Securities Act of 1933, this registration statement was signed by the following persons
in the capacities and on the dates stated.
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
/s/
Riccardo Delle Coste
|
|
Chief
Executive Officer and Director
|
|
October
26, 2018
|
Riccardo
Delle Coste
|
|
(Principal
Executive Officer)
|
|
|
|
|
|
|
|
/s/
Joseph Tesoriero
|
|
Chief
Financial Officer
|
|
October
26, 2018
|
Joseph
Tesoriero
|
|
(Principal
Financial Officer; Principal Accounting Officer)
|
|
|
|
|
|
|
|
/s/
Arnold Tinter
|
|
Director
|
|
October
26, 2018
|
Arnold
Tinter
|
|
|
|
|
|
|
|
|
|
/s/
Alexander H. Ware
|
|
Director
|
|
October
26, 2018
|
Alexander
H. Ware
|
|
|
|
|
|
|
|
|
|
/s/
Isabelle Ortiz-Cochet
|
|
Director
|
|
October
26, 2018
|
Isabelle Ortiz-Cochet
|
|
|
|
|