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 four distinct formats.
The
Company’s original single serve format features portion controlled and ready to blend beverage ingredient packs or “beverage
packs”. The beverage packs contain all of the solid ingredients necessary to make the beverage, including the base (either
sorbet, frozen yogurt or ice cream), real fruit pieces, juices and ice – five ounces of water are added before blending.
The
Company’s bulk “Easy Pour” format also contains all of the solid ingredients necessary to make the beverage,
packaged in gallon containers in a concentrated formula that is mixed “one to one” with water. The Company has a “no
sugar added” version of the bulk “Easy Pour” format that is specifically targeted for the USDA national school
meal program, including the School Breakfast Program, the National School Lunch Program, and Smart Snacks in Schools Program.
The Company is currently in contract to sell its bulk Easy Pour products into over three hundred schools. In addition, the Company
received approval from the United States Defense Logistics Agency (“DLA”) to sell its smoothie products into all branches
of the U.S. Armed Forces, and is currently in contract with and selling its bulk Easy Pour products into over one hundred military
bases in the United States and abroad.
The
Company’s new WHIRLZ 100% Juice Concentrates. The new 5:1 juice concentrates will initially target elementary and secondary
schools and are a perfect complement to the company’s current existing 1:1 bulk Easy Pour products used in beverage dispensing
equipment. The 100% juice concentrates offer a more affordably priced product that responds to the need of the schools to have
a wider range of options at various price points. The products are USDA Reimbursable, Smart Snack Compliant for schools in the
United States, a good source of Vitamin C, contain no added sugars and come in fun, great-tasting flavors. WHIRLZ 100% Juice Concentrates
will come in the following 10 exciting flavors: Mango (a first to market flavor), Fruit Punch, Pink Lemonade, Cherry Limeade,
Coco Breeze, Blue Raspberry, Green Watermelon, Cherry, Sour Apple, and Strawberry Kiwi.
The
Company’s new ready-to-drink bottled smoothie, “Twist & Go”™, which will initially be focused towards
the school system channel. This sweet fruit and creamy yogurt smoothie contains four ounces of yogurt and a half-cup of fruit/fruit
juice and comes in two different flavors: strawberry banana and peach. “Twist & Go”™ contains no added sugars,
no preservatives, artificial flavors or colors. At only 125 -130 calories and with 5 grams of protein, they make the perfect start
to any day or on-the-go snack.
Domestic
and international patents and patents pending are owned by Barfresh, as well as related trademarks for all of the single serve
products. Patent rights have been granted in 13 jurisdictions including the United States. In addition, the Company has purchased
all of the trademarks related to the patented products.
The
Company conducts sales through several channels, including National Accounts, Regional Accounts, and Broadline Distributors. Barfresh’s
primary broadline distribution arrangement is through an exclusive nationwide agreement with Sysco Corporation (“Sysco”),
the U.S.’s largest broadline distributor, which was entered into in July 2014.
Pursuant
to that agreement, all Barfresh products are included in Sysco’s national core selection of beverage items, making Barfresh
its exclusive single-serve, pre-portioned beverage provider. The agreement is mutually exclusive; however, Barfresh may also sell
the products to other foodservice distributors, but only to the extent required for such foodservice distributors to service multi-unit
chain operators with at least 20 units and where Sysco is not such multi- unit chain operator’s nominated distributor for
our products. On October 2, 2019, the exclusive distribution agreement with Sysco expired, opening the possibility to expand distribution
with other distributors outside of the Sysco system.
During
2016 and 2017 the Company announced that it had signed supply agreements with several of the major global on-site foodservice
operators. On March 8, 2018, the Company announced that it had signed a new supply agreement with one of the largest of these
foodservice operators, for exclusive distribution of four of Barfresh’s single serve SKUs. On November 14, 2018, the Company
announced that it had received approval for multiple products to be rolled out to a national restaurant chain with over 2,500
locations.
On
October 26, 2015, Barfresh signed a five year agreement with PepsiCo North America Beverages, a division of PepsiCo, to become
its exclusive sales representative within the food service channel to present Barfresh’s line of ready-to-blend smoothies
and frozen beverages throughout the United States and Canada. Through this agreement, Barfresh’ products are included as
part of PepsiCo’s offerings to its significant customer base. The agreement facilitates access to potential National customer
accounts, through introductions provided by PepsiCo’s one-thousand plus person foodservice sales team. Barfresh products
have become part of PepsiCo’s customer presentations at national trade shows and similar venues. On May 30, 2019, the Company
amended its agreement with Pepsi which included a reduction in the commission fee and a clause which allows either party the right
to terminate the agreement upon 90 days written notice. Neither party has exercised its right to terminate the agreement.
Barfresh
utilizes contract manufacturers to manufacture all of its products in the United States.
Our
corporate office is located at 3600 Wilshire Boulevard Suite 1720, Los Angeles, 90010. Our telephone number is (310) 598-7113
and our website is www.barfresh.com.
Corporate
History and Background
The
Company, which was incorporated in Delaware on February 25, 2010, was originally formed to produce movies. As the result of a
reverse merger transaction in 2012, the Company is now engaged in the manufacturing and distribution of ready to blend frozen
beverages, including smoothies, shakes and frappes. We have two direct subsidiaries: Barfresh Corporation, Inc. (formerly known
as Smoothie, Inc.) and Barfresh, Inc.
Products
The
Company’s products are made in four 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 third format is the Company’s
new WHIRLZ 100% Juice Concentrates. These new 5:1 juice concentrates are a perfect complement to the company’s current existing
1:1 bulk Easy Pour products used in beverage dispensing equipment. The fourth format is the Company’s new
ready-to-drink bottled smoothie, “Twist & Go”™, This sweet fruit and creamy yogurt smoothie contains four
ounces of yogurt and a half-cup of fruit/fruit juice and comes in two different flavors.
The
following flavors are available as part of our standard portfolio of single serve products:
The
following flavors are available as part of our standard portfolio of bulk products:
Some
of the key benefits of the products for the end consumers that drink the products include:
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From
as little as 125-130 calories (per serving)
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Real
fruit in every smoothie
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Dairy
free options
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Kosher
approved
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Gluten
Free
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Customer
Marketing Material
A
wide range of consumer marketing materials has been created to assist customers in selling blended beverages.
Research
and Development
The
Company incurred research and development expenses for the year ended December 31, 2020 in the amount of $515,145 and for the
year ended December 31, 2019 in the amount of $538,391. The decrease in Research and Development expenses was primarily attributable
to reduced activity in creating unique flavors for potential customers in our national account pipeline.
Competition
There
is significant competition in the smoothie market at both the consumer purchasing level and also the product level.
The
competition at the consumer level is primarily between specialized juice bars (e.g. Jamba Juice) and major fast casual and fast
food restaurant chains (such as McDonalds). Barfresh does not compete specifically at this level but intends to supply its product
to customers that fall within these segments to enable them to compete for consumer demand.
There
may also be new entrants to the smoothie market that may alter the current competitor landscape.
The
existing competition from a product perspective can be separated into three categories:
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Specialized
juice bar products: The product is made in-store and each ingredient is added separately.
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Syrup
based products: The fruit puree is supplied in bulk and not portion controlled for each smoothie. These types of products
still require the addition of juice, milk or water and/or yogurt and ice. While there are a number of competitors for this
style of product, the two dominant competitors are Island Oasis and Minute Maid.
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Portion
pack products: These products contain only the fruit and yogurt and require the addition of juice or milk and ice. The dominant
competitor is General Mills’ Yoplait Smoothies.
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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, WHIRLZ 100% Juice Concentrates
as well as Twist & Go a new ready to drink smoothie 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
As
of March 15, 2021, the Company has 12 employees and 3 consultants.
Item
1A. Risk Factors
An
investment in the Company’s securities involves significant risks, including the risks described below. The risks included
below are not the only ones that the Company faces. Additional risks presently unknown to us or that we currently consider immaterial
or unlikely to occur could also impair our operations. If any of the risks or uncertainties described below or any such additional
risks and uncertainties actually occur, our business, prospects, financial condition or results of operations could be negatively
affected.
The
impact of COVID-19 on the Company is constantly evolving on a daily and weekly basis. The direct impact to our operations had
begun to take effect at the close of the first quarter ended March 31, 2020. Specifically, our business has been impacted by dining
bans targeted at restaurants to reduce the size of public gatherings. We have noted restaurant chains have closed operations and
furloughed employees which would preclude our single serve products from being served at those establishments for a number of
weeks. Furthermore, many school districts have closed regular attendance which could conceivably last to the end of the school
year. This has directly impacted the sales of our Bulk Product into that sales channel. We are beginning to experience a disruption
in the supply chain for manufacturing our products due to COVID-19. The developments surrounding COVID-19 remain fluid and dynamic,
and consequently, will require the Company to continue to monitor news headlines from government and health officials, as well
as, the business community.
Risks
Related to Our Business
We
have a history of operating losses.
We
have a history of operating losses and may not achieve or sustain profitability. These operating losses have been generated while
we market to potential customers. We cannot guarantee that we will become profitable. Even if we achieve profitability, given
the competitive and evolving nature of the industry in which we operate, we may be unable to sustain or increase profitability
and our failure to do so would adversely affect the Company’s business, including our ability to raise additional funds.
If
we continue to suffer losses from operations, our working capital may be insufficient to support our ability to expand our business
operations as rapidly as we would deem necessary at any time, unless we are able to obtain additional financing. There can be
no assurance that we will be able to obtain such financing on acceptable terms, or at all. If adequate funds are not available
or are not available on acceptable terms, we may not be able to pursue our business objectives and would be required to reduce
our level of operations, including reducing infrastructure, promotions, sales and marketing programs, personnel and other operating
expenses. These events could adversely affect our business, results of operations and financial condition. If adequate funds are
not available or if they are not available on acceptable terms, our ability to fund the growth of our operations, take advantage
of opportunities, develop products or services or otherwise respond to competitive pressures, could be significantly limited.
We
may need additional financing in the future, which may not be available when needed or may be costly and dilutive.
We
may require additional financing to support our working capital needs in the future. The amount of additional capital we may require,
the timing of our capital needs and the availability of financing to fund those needs will depend on a number of factors, including
our strategic initiatives and operating plans, the performance of our business and the market conditions for debt or equity financing.
Additionally, the amount of capital required will depend on our ability to meet our case sales goals and otherwise successfully
execute our operating plan. We believe it is imperative to meet these sales objectives in order to lessen our reliance on external
financing in the future. Although we believe various debt and equity financing alternatives will be available to us to support
our working capital needs, financing arrangements on acceptable terms may not be available to us when needed. Additionally, these
alternatives may require significant cash payments for interest and other costs or could be highly dilutive to our existing shareholders.
Any such financing alternatives may not provide us with sufficient funds to meet our long-term capital requirements. If necessary,
we may explore strategic transactions that we consider to be in the best interest of the Company and our shareholders, which may
include, without limitation, public or private offerings of debt or equity securities, and other strategic alternatives; however,
these options may not ultimately be available or feasible.
A
worsening of economic conditions or a decrease in consumer spending may adversely impact our ability to implement our business
strategy.
Our
success depends to a significant extent on discretionary consumer spending, which is influenced by general economic conditions
and the availability of discretionary income. There is no certainty regarding economic conditions in the United States, and credit
and financial markets and confidence in economic conditions could deteriorate at any time. Accordingly, we may experience declines
in revenue during economic turmoil or during periods of uncertainty. Any material decline in the amount of discretionary spending,
leading cost-conscious consumers to be more selective in restaurants visited, could have a material adverse effect on our revenue,
results of operations, business and financial condition.
The
challenges of competing with the many food services businesses may result in reductions in our revenue and operating margins.
We
compete with many well-established companies, food service and otherwise, on the basis of taste, quality and price of product
offered, customer service, atmosphere, location and overall guest experience. Our success depends, in part, upon the popularity
of our products and our ability to develop new menu items that appeal to consumers across all four day parts. Shifts in consumer
preferences away from our products, our inability to develop new menu items that appeal to consumers across all day parts, or
changes in our menu that eliminate items popular with some consumers could harm our business. We compete with other smoothie and
juice bar retailers, specialty coffee retailers, yogurt and ice cream shops, bagel shops, fast-food restaurants, delicatessens,
cafés, take-out food service companies, supermarkets and convenience stores. Our competitors change with each of the four
day parts, ranging from coffee bars and bakery cafés to casual dining chains. Many of our competitors or potential competitors
have substantially greater financial and other resources than we do, which may allow them to react to changes in the market quicker
than we can. In addition, aggressive pricing by our competitors or the entrance of new competitors into our markets, could reduce
our revenue and operating margins. We also compete with other employers in our markets for workers and may become subject to higher
labor costs as a result of such competition.
The
recent global coronavirus outbreak could harm our business and results of operations.
In
March 2020 the World Health Organization declared coronavirus COVID-19 a global pandemic. This contagious disease outbreak, which
has continued to spread, and any related adverse public health developments, has adversely affected workforces, customers, economies,
and financial markets globally, potentially leading to an economic downturn. It has also disrupted the normal operations of many
businesses, including ours. This outbreak could decrease spending, adversely affect demand for our product and harm our business
and results of operations. It is not possible for us to predict the duration or magnitude of the adverse results of the outbreak
and its effects on our business or results of operations at this time.
Disruption
within our supply chain, contract manufacturing or distribution channels could have an adverse effect on our business, financial
condition and results of operations.
Our
ability, through our suppliers, business partners, contract manufacturers, independent distributors and retailers, to produce,
transport, distribute and sell products is critical to our success.
Damage
or disruption to our suppliers or to manufacturing or distribution capabilities due to weather, natural disaster, fire or explosion,
terrorism, pandemics such as COVD-19 and influenza, labor strikes or other reasons, could impair the manufacture, distribution
and sale of our products. Many of these events are outside of our control. Failure to take adequate steps to protect against or
mitigate the likelihood or potential impact of such events, or to effectively manage such events if they occur, could adversely
affect our business, financial condition and results of operations.
In
addition, our reliance on a limited number of manufacturers and suppliers could further increase this risk. Most of our suppliers
and manufacturers produce similar products for other companies, and our products may represent a small portion of their businesses.
Further, it takes a newly engaged manufacturer typically up to nine months of retrofitting/ preparation before it can begin producing
our products. We have contracts in place to produce sufficient units to meet projected demand; however, if one of our manufactures
fails to perform, we would be faced with a significant interruption in our supply chain. If one of our manufacturers or suppliers
fails to perform or deliver products, for any reason, our sales and results of operations could be adversely affected. Furthermore,
if we are unable to meet our customers’ demands due to a disruption in our supply chain, we may lose that customer which
could adversely affect our business, financial condition and results of operations.
Our
dependence on independent contract manufacturers could make management of our manufacturing and distribution efforts inefficient
or unprofitable.
We
are expected to arrange for our contract manufacturing needs sufficiently in advance of anticipated requirements, which is customary
in the contract manufacturing industry for comparably sized companies. Based on the cost structure and forecasted demand for the
particular geographic area where our contract manufacturers are located, we continually evaluate which of our contract manufacturers
to use. To the extent demand for our products exceeds available inventory or the production capacity of our contract manufacturing
arrangements, or orders are not submitted on a timely basis, we will be unable to fulfill distributor orders on demand. Conversely,
we may produce more product inventory than warranted by the actual demand for it, resulting in higher storage costs and the potential
risk of inventory spoilage. Our failure to accurately predict and manage our contract manufacturing requirements and our inventory
levels may impair relationships with our independent distributors and key accounts, which, in turn, would likely have a material
adverse effect on our ability to maintain effective relationships with those distributors and key accounts.
If
we do not adequately manage our inventory levels, our operating results could be adversely affected.
We
need to maintain adequate inventory levels to be able to deliver products to distributors on a timely basis. Our inventory supply
depends on our ability to correctly estimate demand for our products. Our ability to estimate demand for our products is imprecise,
particularly for new products, seasonal promotions and new markets. If we materially underestimate demand for our products or
are unable to maintain sufficient inventory of raw materials, we might not be able to satisfy demand on a short-term basis. If
we overestimate distributor or retailer demand for our products, we may end up with too much inventory, resulting in higher storage
costs, increased trade spending and the risk of inventory spoilage. If we fail to manage our inventory to meet demand, we could
damage our relationships with our distributors and retailers and could delay or lose sales opportunities, which would unfavorably
impact our future sales and adversely affect our operating results. In addition, if the inventory of our products held by our
distributors and retailers is too high, they will not place orders for additional products, which would also unfavorably impact
our sales and adversely affect our operating results.
Increases
in costs of packaging, ingredients and contract manufacturing tolling fees may have an adverse impact on our gross margin.
Packaging
costs such as paper and aluminum cans have experienced industry wide price increases in the past and there is always the risk
that the company’s co-packers increase their toll rates based on increases in their fixed and variable costs. If the Company
is unable to pass on these costs, the gross margin will be significantly impacted.
Litigation
or legal proceedings could expose us to significant liabilities and damage our reputation.
We
may become party to litigation claims and legal proceedings. Litigation involves significant risks, uncertainties and costs, including
distraction of management attention away from our business operations. We evaluate litigation claims and legal proceedings to
assess the likelihood of unfavorable outcomes and to estimate, if possible, the amount of potential losses. Based on these assessments
and estimates, we establish reserves and disclose the relevant litigation claims or legal proceedings, as appropriate. These assessments
and estimates are based on the information available to management at the time and involve a significant amount of management
judgment. Actual outcomes or losses may differ materially from those envisioned by our current assessments and estimates. Our
policies and procedures require strict compliance by our employees and agents with all U.S. and local laws and regulations applicable
to our business operations, including those prohibiting improper payments to government officials. Nonetheless, our policies and
procedures may not ensure full compliance by our employees and agents with all applicable legal requirements. Improper conduct
by our employees or agents could damage our reputation or lead to litigation or legal proceedings that could result in civil or
criminal penalties, including substantial monetary fines, as well as disgorgement of profits.
We
have identified a material weakness in our disclosure controls and procedures and internal control over financial reporting. If
not remediated, our failure to establish and maintain effective disclosure controls and procedures and internal control over financial
reporting could result in material misstatements in our financial statements and a failure to meet our reporting and financial
obligations, each of which could have a material adverse effect on our financial condition and the trading price of our common
stock.
Maintaining
effective internal control over financial reporting and effective disclosure controls and procedures are necessary for us to produce
reliable financial statements. As discussed in Item 9A – “Controls and Procedures” of this Form 10-K, we have
re-evaluated our internal control over financial reporting and our disclosure controls and procedures and concluded that they
were not effective as of December 31, 2020.
A
material weakness is defined as a deficiency, or a combination of deficiencies, in internal control over financial reporting such
that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be
prevented or detected on a timely basis. Management has concluded that there is a material weakness due to the control environment.
The control environment is impacted due to the company’s inadequate segregation of duties.
The
Company is committed to remediating its material weaknesses as promptly as possible. Implementation of the Company’s remediation
plans has commenced and is being overseen by the audit committee. However, there can be no assurance as to when these material
weaknesses will be remediated or that additional material weaknesses will not arise in the future. Even effective internal control
can provide only reasonable assurance with respect to the preparation and fair presentation of financial statements. Any failure
to remediate the material weaknesses or the development of new material weaknesses in our internal control over financial reporting,
could result in material misstatements in our financial statements, which in turn could
have a material adverse effect on our financial condition and the trading price of our common stock and we could fail to
meet our financial reporting obligations.
Fluctuations
in various food and supply costs, particularly fruit and dairy, could adversely affect our operating results.
Supplies
and prices of the various ingredients that we are going to use to can be affected by a variety of factors, such as weather, seasonal
fluctuations, demand, politics and economics in the producing countries.
These
factors subject us to shortages or interruptions in product supplies, which could adversely affect our revenue and profits. In
addition, the prices of fruit and dairy, which are the main ingredients in our products, can be highly volatile. The fruit of
the quality we seek tends to trade on a negotiated basis, depending on supply and demand at the time of the purchase. An increase
in pricing of any fruit that we are going to use in our products could have a significant adverse effect on our profitability.
We cannot assure you that we will be able to secure our fruit supply.
Our
business depends substantially on the continuing efforts of our senior management and other key personnel, and our business may
be severely disrupted if we lose their services.
Our
future success heavily depends on the continued service of our senior management and other key employees. If one or more of our
senior executives is unable or unwilling to continue to work for us in his present position, we may have to spend a considerable
amount of time and resources searching, recruiting, and integrating a replacement into our operations, which would substantially
divert management’s attention from our business and severely disrupt our business. This may also adversely affect our ability
to execute our business strategy.
Our
senior management’s limited experience managing a publicly traded company may divert management’s attention from operations
and harm our business.
Our
senior management team has relatively limited experience managing a publicly traded company and complying with federal securities
laws, including compliance with recently adopted disclosure requirements on a timely basis. Our management will be required to
design and implement appropriate programs and policies in responding to increased legal, regulatory compliance and reporting requirements,
and any failure to do so could lead to the imposition of fines and penalties and harm our business.
We
may be unable to attract and retain qualified, experienced, highly skilled personnel, which could adversely affect the implementation
of our business plan.
Our
success depends to a significant degree upon our ability to attract, retain and motivate skilled and qualified personnel. As we
become a more mature company in the future, we may find recruiting and retention efforts more challenging. If we do not succeed
in attracting, hiring and integrating excellent personnel, or retaining and motivating existing personnel, we may be unable to
grow effectively. The loss of any key employee, including members of our senior management team, and our inability to attract
highly skilled personnel with sufficient experience in our industries could harm our business.
Product
liability exposure may expose us to significant liability.
We
may face an inherent business risk of exposure to product liability and other claims and lawsuits in the event that the development
or use of our technology or prospective products is alleged to have resulted in adverse effects. We may not be able to avoid significant
liability exposure. Although we believe our insurance coverage to be adequate, we may not have sufficient insurance coverage,
and we may not be able to obtain sufficient coverage at a reasonable cost. An inability to obtain product liability insurance
at acceptable cost or to otherwise protect against potential product liability claims could prevent or inhibit the commercialization
of our products. A product liability claim could hurt our financial performance. Even if we ultimately avoid financial liability
for this type of exposure, we may incur significant costs in defending ourselves that could hurt our financial performance and
condition.
Our
inability to protect our intellectual property rights may force us to incur unanticipated costs.
Our
success will depend, in part, on our ability to obtain and maintain protection in the United States and internationally for certain
intellectual property incorporated into our products. Our intellectual property rights may be challenged, narrowed, invalidated
or circumvented, which could limit our ability to prevent competitors from marketing similar solutions that limit the effectiveness
of our patent protection and force us to incur unanticipated costs. In addition, existing laws of some countries in which we may
provide services or solutions may offer only limited protection of our intellectual property rights.
Our
products may infringe the intellectual property rights of third parties, and third parties may infringe our proprietary rights,
either of which may result in lawsuits, distraction of management and the impairment of our business.
As
the number of patents, copyrights, trademarks and other intellectual property rights in our industry increases, products based
on our technology may increasingly become the subject of infringement claims. Third parties could assert infringement claims against
us in the future. Infringement claims with or without merit could be time consuming, result in costly litigation, cause product
shipment delays or require us to enter into royalty or licensing agreements. Royalty or licensing agreements, if required, might
not be available on terms acceptable to us, or at all. We may initiate claims or litigation against third parties for infringement
of our proprietary rights or to establish the validity of our proprietary rights. Litigation to determine the validity of any
claims, whether or not the litigation is resolved in our favor, could result in significant expense to us and divert the efforts
of our technical and management personnel from productive tasks. If there is an adverse ruling against us in any litigation, we
may be required to pay substantial damages, discontinue the use and sale of infringing products and expend significant resources
to develop non-infringing technology or obtain licenses to infringing technology. Our failure to develop or license a substitute
technology could prevent us from selling our products.
If
securities or industry analysts do not publish research, or publish inaccurate or unfavorable research, about our business, our
share price and trading volume could decline.
The
trading market for our common stock may be impacted, in part, by the research and reports that securities or industry analysts
publish about our business or us. There can be no assurance that analysts will cover us, continue to cover us or provide favorable
coverage. If one or more analysts downgrade our stock or change their opinion of our stock, our share price may decline. In addition,
if one or more analysts cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in
the financial markets, which could cause our share price or trading volume to decline.
We
will continue to incur increased costs as a result of operating as a public company, and our management will be required to devote
substantial time to compliance initiatives and corporate governance practices.
As
a public company, we will continue to incur significant legal, accounting and other expenses. The Sarbanes-Oxley Act of 2002,
the Dodd-Frank Wall Street Reform and Consumer Protection Act and other applicable securities rules and regulations impose various
requirements on public companies, including establishment and maintenance of effective disclosure and financial controls and corporate
governance practices. Our management and other personnel will need to continue to devote a substantial amount of time to these
compliance initiatives. Moreover, these rules and regulations will increase our legal and financial compliance costs and make
some activities more time-consuming and costly.
We
cannot predict or estimate the amount of additional costs we may incur to continue to operate as a public company, nor can we
predict the timing of such costs. These rules and regulations are often subject to varying interpretations, in many cases due
to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided
by regulatory and governing bodies which could result in continuing uncertainty regarding compliance matters and higher costs
necessitated by ongoing revisions to disclosure and governance practices.
Failure
to comply with the United States Foreign Corrupt Practices Act could subject us to penalties and other adverse consequences.
As
a Delaware corporation, we are subject to the United States Foreign Corrupt Practices Act, which generally prohibits United States
companies from engaging in bribery or other prohibited payments to foreign officials for the purpose of obtaining or retaining
business. Some foreign companies, including some that may compete with our Company, may not be subject to these prohibitions.
Corruption, extortion, bribery, pay-offs, theft and other fraudulent practices may occur from time-to-time in countries in which
we conduct our business. However, our employees or other agents may engage in conduct for which we might be held responsible.
If our employees or other agents are found to have engaged in such practices, we could suffer severe penalties and other consequences
that may have a material adverse effect on our business, financial condition and results of operations.
It
is difficult to predict the timing and amount of our sales because our distributors and national accounts may not be required
to place minimum orders with us.
Our
distributors are not required to place minimum monthly or annual orders for our products. Accordingly, we cannot predict the timing
or quantity of purchases by any of our independent distributors or whether any of our distributors will continue to purchase products
from us in the same frequencies and volumes as they may have done in the past. Additionally, our larger distributors and partners
may make orders that are larger than we have historically been required to fill. Shortages in inventory levels, supply of raw
materials or other key supplies could negatively affect us.
If
we do not adequately manage our inventory levels, our operating results could be adversely affected.
We
need to maintain adequate inventory levels to be able to deliver products on a timely basis. Our inventory supply depends on our
ability to correctly estimate demand for our products. Our ability to estimate demand for our products is imprecise, particularly
for new products, seasonal promotions and new markets. If we materially underestimate demand for our products or are unable to
maintain sufficient inventory of raw materials, we might not be able to satisfy demand on a short-term basis. If we overestimate
retailer demand for our products, we may end up with too much inventory, resulting in higher storage costs, increased trade spend
and the risk of obsolete inventory. If we fail to manage our inventory to meet demand, we could damage our relationships with
our retailers and could delay or lose sales opportunities, which would unfavorably impact our future sales and adversely affect
our operating results.
Risks
Related to Ownership of Our Common Stock
Our
common stock is quoted on the OTCQB, which may have an unfavorable impact on our stock price and liquidity.
Our
common stock is quoted on the OTCQB, which is a significantly more limited trading market than the New York Stock Exchange, or
the NASDAQ Stock Market. The quotation of the Company’s shares on the OTCQB may result in a less liquid market available
for existing and potential shareholders to trade shares of our common stock, could depress the trading price of our common stock
and could have a long-term adverse impact on our ability to raise capital in the future.
There
is limited liquidity on the OTCQB, which may result in stock price volatility and inaccurate quote information.
When
fewer shares of a security are being traded on the OTCQB, price volatility may increase and price movement may outpace the ability
to deliver accurate quote information. Due to lower trading volumes in shares of our common stock, there may be a lower likelihood
of one’s orders for shares of our common stock being executed, and current prices may differ significantly from the price
one was quoted at the time of one’s order entry.
If
we are unable to adequately fund our operations, we may be forced to voluntarily file for deregistration of our common stock with
the SEC.
Compliance
with the periodic reporting requirements required by the SEC consumes a considerable amount of both internal, as well external,
resources and represents a significant cost for us. If we are unable to continue to devote adequate funding and the resources
needed to maintain such compliance, while continuing our operations, we could be forced to deregister with the SEC. After the
deregistration process, our common stock would only be tradable on the “Pink Sheets” and could suffer a decrease in
or absence of liquidity.
Because
we became public by means of a “reverse merger”, we may not be able to attract the attention of major brokerage firms.
Additional
risks may exist since we became public through a “reverse merger”. Securities analysts of major brokerage firms may
not provide coverage of us since there is little incentive to brokerage firms to recommend the purchase of our common stock. We
cannot assure you that brokerage firms will want to conduct any secondary offerings on behalf of our Company in the future.
Future
sales of our common stock in the public market could lower the price of our common stock and impair our ability to raise funds
in future securities offerings.
Future
sales of a substantial number of shares of our common stock in the public market, or the perception that such sales may occur,
could adversely affect the then prevailing market price of our common stock and could make it more difficult for us to raise funds
in the future through a public offering of our securities.
Our
common stock is thinly traded, so you may be unable to sell at or near asking prices or at all if you need to sell your shares
to raise money or otherwise desire to liquidate your shares.
Currently,
the Company’s common stock is quoted in the OTCQB and future trading volume may be limited by the fact that many major institutional
investment funds, including mutual funds, as well as individual investors follow a policy of not investing in OTCQB stocks and
certain major brokerage firms restrict their brokers from recommending OTCQB stocks because they are considered speculative, volatile
and thinly traded. The OTCQB market is an inter-dealer market much less regulated than the major exchanges and our common stock
is subject to abuses, volatility and shorting. Thus, there is currently no broadly followed and established trading market for
the Company’s common stock. An established trading market may never develop or be maintained. Active trading markets generally
result in lower price volatility and more efficient execution of buy and sell orders. Absence of an active trading market reduces
the liquidity of the shares traded there.
The
trading volume of our common stock has been and may continue to be limited and sporadic. As a result of such trading activity,
the quoted price for the Company’s common stock on the OTCQB may not necessarily be a reliable indicator of its fair market
value. Further, if we cease to be quoted, holders would find it more difficult to dispose of our common stock or to obtain accurate
quotations as to the market value of the Company’s common stock and as a result, the market value of our common stock likely
would decline.
Our
common stock is subject to price volatility unrelated to our operations.
The
market price of our common stock could fluctuate substantially due to a variety of factors, including market perception of our
ability to achieve our planned growth, quarterly operating results of other companies in the same industry, trading volume in
our common stock, changes in general conditions in the economy and the financial markets or other developments affecting the Company’s
competitors or the Company itself. In addition, the OTCQB is subject to extreme price and volume fluctuations in general. This
volatility has had a significant effect on the market price of securities issued by many companies for reasons unrelated to their
operating performance and could have the same effect on our common stock.
We
are subject to penny stock regulations and restrictions and you may have difficulty selling shares of our common stock.
Our
common stock is currently quoted on the OTCQB. Our common stock is subject to the requirements of Rule 15(g)-9, promulgated under
the Securities Exchange Act as long as the price of our common stock is below $5.00 per share. Under such rule, broker-dealers
who recommend low-priced securities to persons other than established customers and accredited investors must satisfy special
sales practice requirements, including a requirement that they make an individualized written suitability determination for the
purchaser and receive the purchaser’s consent prior to the transaction. The Securities Enforcement Remedies and Penny Stock
Reform Act of 1990 also requires additional disclosure in connection with any trades involving a stock defined as a penny stock.
Generally, the Commission defines a penny stock as any equity security not traded on a national exchange that has a market price
of less than $5.00 per share. The required penny stock disclosures include the delivery, prior to any transaction, of a disclosure
schedule explaining the penny stock market and the risks associated with it. Such requirements could severely limit the market
liquidity of the securities and the ability of purchasers to sell their securities in the secondary market.
Because
we do not intend to pay dividends, shareholders will benefit from an investment in our common stock only if it appreciates in
value.
We
have never declared or paid any cash dividends on our preferred stock or common stock. For the foreseeable future, it is expected
that earnings, if any, generated from our operations will be used to finance the growth of our business, and that no dividends
will be paid to holders of the Company’s common stock. As a result, the success of an investment in our common stock will
depend upon any future appreciation in its value. There can be no guarantee that our common stock will appreciate in value.
The
price of our common stock may become volatile, which could lead to losses by investors and costly securities litigation.
The
trading price of our common stock is likely to be highly volatile and could fluctuate in response to factors such as:
|
●
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actual
or anticipated variations in our operating results;
|
|
●
|
announcements
of developments by us or our competitors;
|
|
●
|
announcements
by us or our competitors of significant acquisitions, strategic partnerships, joint ventures
or capital commitments;
|
|
●
|
adoption
of new accounting standards affecting our industry;
|
|
●
|
additions
or departures of key personnel;
|
|
●
|
introduction
of new products by us or our competitors;
|
|
●
|
sales
of our common stock or other securities in the open market; and
|
|
●
|
other
events or factors, many of which are beyond our control.
|
The
stock market is subject to significant price and volume fluctuations. In the past, following periods of volatility in the market
price of a company’s securities, securities class action litigation has often been initiated against such a company. Litigation
initiated against us, whether or not successful, could result in substantial costs and diversion of our management’s attention
and Company resources, which could harm our business and financial condition.
Investors
may experience dilution of their ownership interests because of the future issuance of additional shares of our common stock.
We
intend to continue to seek financing through the issuance of equity or convertible securities to fund our operations. In the future,
we may also issue additional equity securities resulting in the dilution of the ownership interests of our present shareholders.
We may also issue additional shares of our common stock or other securities that are convertible into or exercisable for our common
stock in connection with hiring or retaining employees, future acquisitions or for other business purposes. The future issuance
of any such additional shares of common stock will result in dilution to our shareholders and may create downward pressure on
the trading price of our common stock.
Provisions
in our corporate charter documents and under Delaware law could make an acquisition of our company, which may be beneficial to
our stockholders, more difficult and may prevent attempts by our stockholders to replace or remove our current management.
Provisions
in our certificate of incorporation and our bylaws may discourage, delay or prevent a merger, acquisition or other change in control
of our company that stockholders may consider favorable, including transactions in which you might otherwise receive a premium
for your shares. These provisions could also limit the price that investors might be willing to pay in the future for shares of
our common stock, thereby depressing the market price of our common stock. In addition, because our board of directors is responsible
for appointing the members of our management team, these provisions may frustrate or prevent any attempts by our stockholders
to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors.
In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General
Corporation Law, which prohibits a person who owns in excess of 15% of our outstanding voting stock from merging or combining
with us for a period of three years after the date of the transaction in which the person acquired in excess of 15% of our outstanding
voting stock, unless the merger or combination is approved in a prescribed manner.
Item
1B. Unresolved Staff Comments.
Not
applicable.
Item
2. Properties.
Our
principal executive offices are located at 3600 Wilshire Boulevard Suite 1720, Los Angeles, 90010. Beginning in April 2019, we
leased this office space pursuant to a direct lease for $6,457 per month through March 31, 2023.
Item
3. Legal Proceedings.
Neither
the Company nor its subsidiaries are party to or have property that is the subject of any material pending legal proceedings.
We may be subject to ordinary legal proceedings incidental to our business from time to time that are not required to be disclosed
under this Item 3.
Item
4. Mine Safety Disclosures.
Not
applicable.
PART
II
Item
5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market
Information
Our
common stock is currently traded on the OTCQB under the symbol “BRFH”. Our common stock had been quoted on the OTC
Bulletin Board since July 27, 2011 under the symbol MVBX. Effective February 29, 2012, our symbol changed to BRFH based on the
forward split and name change. On March 21, 2012, our common stock was delisted to Pink Sheets. On January 21, 2014, we registered
our common stock under Section 12(g) of the Exchange Act. The following table sets forth the range of high and low bid quotations
for the applicable period. These quotations as reported by the OTCQB reflect inter-dealer prices without retail mark-up, markdown
or commissions and may not necessarily represent actual transactions.
|
|
Bid
Quotation
|
|
Financial
Quarter Ended
|
|
High
($)
|
|
|
Low
($)
|
|
|
|
|
|
|
|
|
December
31, 2020
|
|
|
0.48
|
|
|
|
0.17
|
|
September
30, 2020
|
|
|
0.42
|
|
|
|
0.24
|
|
June 30, 2020
|
|
|
0.55
|
|
|
|
0.29
|
|
March 31,
2020
|
|
|
0.41
|
|
|
|
0.21
|
|
December 31,
2019
|
|
|
0.35
|
|
|
|
0.26
|
|
September
30, 2019
|
|
|
0.45
|
|
|
|
0.44
|
|
June 30, 2019
|
|
|
0.68
|
|
|
|
0.40
|
|
March 31,
2019
|
|
|
0.70
|
|
|
|
0.58
|
|
Holders
At
March 15, 2021, there were 149,133,372 shares of our common stock outstanding. Our shares of common stock are held by 99 stockholders
of record. The number of record holders was determined from the records of our transfer agent and does not include beneficial
owners of common stock whose shares are held in the names of various security brokers, dealers and registered clearing agencies.
Recent
Sales of Unregistered Securities
There
were no sales of equity securities during the period covered by this Annual Report that were not registered under the Securities
Act that were not included in a Quarterly Report on Form 10Q or a Current Report on Form 8-K.
Purchases
of Equity Securities by the Company
There
were no purchases of equity securities made by the Company in the period covered by this report.
Securities
Authorized for Issuance Under Equity Compensation Plans
The
following table provides information, as of December 31, 2020, 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
|
|
|
7,640,959
|
|
|
$
|
0.60
|
|
|
|
7,359,041
|
|
Equity
compensation plans not approved by security holders
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
|
|
|
7,640,959
|
|
|
$
|
0.60
|
|
|
|
7,359,041
|
|
Transfer
Agent
Our
transfer agent, Action Stock Transfer, is located at 2469 E. Fort Union Blvd, Suite 214, Salt Lake City, Utah 84121, and its telephone
number is (801) 274-1088.
Item
6. Selected Financial Data.
Not
applicable because we are a smaller reporting company.
Item
7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The
information and financial data discussed below is derived from the audited financial statements of Barfresh for its fiscal year
ended December 31, 2020 and for the fiscal year ended December 31, 2019. The financial statements of Barfresh were prepared and
presented in accordance with generally accepted accounting principles in the United States. The information and financial data
discussed below is only a summary and should be read in conjunction with the historical financial statements and related notes
of Barfresh contained elsewhere in this Annual Report. This discussion and analysis may contain forward-looking statements based
on assumptions about our future business. Our actual results could differ materially from those anticipated in these forward-looking
statements as a result of certain factors. See “Cautionary Note Regarding Forward Looking Statements” above for a
discussion of forward-looking statements and the significance of such statements in the context of this Annual Report.
The
Company’s products are made in four 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 third format is the Company’s
new WHIRLZ 100% Juice Concentrates. These new 5:1 juice concentrates are a perfect complement to the company’s current existing
1:1 bulk Easy Pour products used in beverage dispensing equipment. The fourth format is the Company’s new
ready-to-drink bottled smoothie, “Twist & Go”™, This sweet fruit and creamy yogurt smoothie contains four
ounces of yogurt and a half-cup of fruit/fruit juice and comes in two different flavors.
Domestic
and international patents and patents pending are owned by Barfresh, as well as related trademarks for all of the single serve
products. Patent rights have been granted in 13 jurisdictions including the United States. In addition, the Company has purchased
all of the trademarks related to the patented products.
The
Company conducts sales through several channels, including National Accounts, Regional Accounts, and Broadline Distributors. Barfresh’s
primary broadline distribution arrangement is through an exclusive nationwide agreement with Sysco Corporation (“Sysco”),
the U.S.’s largest broadline distributor, which was entered into during July 2014. Pursuant to that agreement, all Barfresh
products are included in Sysco’s national core selection of beverage items, making Barfresh its exclusive single-serve,
pre-portioned beverage provider. The agreement is mutually exclusive; however, Barfresh may also sell the products to other foodservice
distributors, but only to the extent required for such foodservice distributors to service multi-unit chain operators with at
least 20 units and where Sysco is not such multi- unit chain operator’s nominated distributor for our products. On October
2, 2019, the exclusive distribution agreement with Sysco expired, opening the possibility to expand distribution with other distributors
outside of the Sysco system.
During
2016 and 2017 the Company announced that it had signed supply agreements with several of the major global on-site foodservice
operators. On March 8, 2018, the Company announced that it had signed a new supply agreement with one of the largest of these
foodservice operators, for exclusive distribution of four Barfresh single serve skus. On November 14, 2018, the Company announced
that it had received approval for multiple products to be rolled out to a national restaurant chain with over 2,500 locations.
On
October 26, 2015, Barfresh signed a five-year agreement with PepsiCo North America Beverages, a division of PepsiCo, to become
its exclusive sales representative within the food service channel to present the Barfresh line of ready-to-blend smoothies and
frozen beverages throughout the United States and Canada. Through this agreement, Barfresh’ products are included as part
of PepsiCo’s offerings to its significant customer base. The agreement facilitates access to potential National customer
accounts, through introductions provided by PepsiCo’s one thousand plus person foodservice sales team. Barfresh products
have become part of PepsiCo’s customer presentations at national trade shows and similar venues. On May 30, 2019, the Company
amended its agreement with Pepsi which included a reduction in the commission fee and a clause which allows either party the right
to terminate the agreement upon 90 days written notice. Neither party has exercised its right to terminate the agreement.
Barfresh
utilizes contract manufacturers to manufacture all of the products in the United States.
During
November 2016, the Company received an equity investment from Unibel, the majority shareholder of the Bel Group (“Unibel”).
The Bel Group is headquartered in Paris, France, with global operations in 33 countries, 30 production sites on 4 continents and
nearly 12,000 employees. Its many branded products, including The Laughing Cow®, Mini Babybel® and Boursin®, are sold
in over 130 countries around the world. Pursuant to the securities purchase agreement, Unibel purchased 15,625,000 shares of common
stock at $0.64 per share (“Shares”) and warrants to purchase 7,812,500 shares of common stock (“Warrants”)
for aggregate gross proceeds to Barfresh of $10 million. The Warrants are exercisable for a term of five years at a per share
price of $.88 for cash. Pursuant to the Investor Rights agreement, Barfresh has registered the Shares and the Warrants, and Unibel
was granted a seat on the Barfresh Board. This strategic investment provided Barfresh with necessary capital while leveraging
Unibel’s more than 150 years of industrial expertise, innovative capabilities, world-class marketing and branding expertise
to accelerate our growth in new and existing markets and product channels.
On
February 14, 2018, the Company announced the private placement of convertible notes with gross proceeds of $4.1 million The closing
of the first 60% of this amount occurred between March 12 and 22, 2018, after notice was issued by the Company that it had entered
into a material agreement or series of related agreements with a national account for the sale of its products into approximately
1,000 new locations. The remaining 40% of the principal amount was to be received upon achieving a second milestone, which is
entering into a material agreement or series of related agreements with a national account for the sale of its products into approximately
2,500 new locations. During November of 2018 the Company and several of the Convertible Note investors agreed to amend the definition
of Milestone 2 to allow for the funding the remaining 40% of the principal amount upon the Company receiving approval from a National
Restaurant Chain with over 2,500 for the rollout of its products. Such approval was received during the fourth quarter of 2018,
and the Company received an additional $1.4 million of convertible note proceeds.
The
convertible notes are unsecured and have (i) a two-year term, (ii) a 10% annual coupon to be paid in cash or stock at the Company’s
discretion at a conversion price equal to 85% of the average closing bid prices of the Common Stock over the twenty (20) consecutive
trading day period immediately preceding the payment date, but in no event lower than sixty cents ($0.60) per share of Common
Stock. The investor’s may elect to convert their principal into common stock at a conversion price equal to the lower of:
(i) $0.88 per share of Common Stock, or (ii) 85% of the average closing bid prices of the Common Stock over the twenty (20) consecutive
trading day period immediately preceding the date of investor’s election to convert; but in no event lower than $0.60 per
share of Common Stock. Investors also received warrant coverage of 25% of the number of shares that would be issuable upon a full
conversion of the principal amount at an average of the twenty consecutive trading day period immediately preceding the applicable
closing date. If any principal amount remains outstanding after the one-year anniversary of the closing, investors will be granted
an additional warrant with identical terms. The warrants are exercisable for a period of three years for cash at the greater of
120% of the closing price or $0.70 per share of common stock. After the initial private placement, investors were offered the
opportunity to accelerate the issuance of the additional warrant by increasing their convertible note investment by 10% to 20%.
After the close of the first quarter 2018, a number of investors took advantage of this acceleration opportunity, resulting in
an increase in the amount of the total convertible note by $177,300 and the issuance of 930,332 additional warrants. During the
fourth quarter 2018, four of the convertible note investors elected to convert their notes into stock, with a total of $453,000
of convertible debt, plus accrued interest being converted into stock.
During
the fourth quarter of 2018, one investor exercised 833,333 N warrants for cash, at $0.45 per share. $221,918 of the proceeds of
that transaction were used to pay down a short term note payable, held by the same investor, in the amount of $200,000, plus accrued
interest. The balance of the proceeds of the N warrant exercise, in the amount of $153,082 were received by the Company.
During
the first quarter of 2019, the Company completed additional funding, including a Private Placement Offering for common shares
priced at $0.60 per share, resulting in the receipt of capital investment in the amount of $2.4 million and the issuance of 4,000,000
shares. In addition, during the first quarter of 2019 the Company offered to reduce the exercise price on its I Warrants from
$1 to $0.60, for a limited time. During the time this offer was open, I Warrant holders converted 2,841,454 warrants at $0.60,
resulting in the receipt of capital investment in the amount of $1.7 million. In addition, during the first quarter of 2019, one
investor exercised G series warrants, resulting in the receipt of capital investment in the amount of $180,000, and the issuance
of 300,000 shares. In total, during the first quarter of 2019 the Company raised $4.3 million and issued 7,141,454 shares, and
no additional warrants were issued.
On
March 23, 2020, the Company completed additional funding, including a Private Placement Offering for common shares priced at $0.50
per share (subject to adjustment) resulting in the receipt of proceeds in the amount of $3,825,000 million and the issuance of
7,650,000 shares. The investors of this Private Placement Offering were granted O warrants which are eligible to purchase an additional
0.50 shares for every share issued to each purchaser, exercisable for a period of 3 years at an exercise price of $0.60 per share
(subject to adjustment). If the volume-weighted average trading price for the 20 consecutive trading days that conclude upon 6
months after the initial closing (the “Six Month Price”) exceeds or equals $0.50 per share (the “Target Price”),
the per share purchase price will not be adjusted. If the Six Month Price is less than the Target Price, the per share purchase
price will be automatically reduced to the Six Month Price, but in no event less than $0.35 per share, in which case the Company
shall issue to each investor, pro-rata based on such investor’s investment: (a) shares in a quantity that equals the difference
between the number of shares issued to such purchaser at closing and the number of shares that would have been issued to such
purchaser at closing at the Six Month Price; and (b) a warrant for a number of shares of common stock equal to 50% of the difference
between the number of shares issued to such investor at closing and the number of shares that would have been issued to such investor
at closing at the Six Month Price, with an exercise price equal to the sum of $0.10 per share and the Six Month Price, but in
no eventless than $0.45 per share. The exercise price per share for each warrant will automatically adjust to the sum of $0.10
per share and the Six-Month Price, but in no event less than $0.45 per share. On September 28, 2020, the Company determined the
volume-weighted average price was below the $0.35 per share and consequently issued 5,322,868 additional shares in accordance
with provisions of the Private Placement Offering. Similarly, the Company issued an additional 2,652,868 Warrants to investors
that contributed capital or exercised the conversion of their convertible note. Lastly, the Company issued an additional 459,000
Warrants for convertible noteholders that extended their convertible notes.
In
addition, the Company obtained a 24 month extension on $1,071,000 in principal, and conversion of $720,000 of principal of the
Milestone I Convertible Notes at a conversion price of $0.50 per share. The remaining $110,166 was extended for thirty days. The
interest rate on the principal balance of the extended Milestone I Convertible Notes was amended to 15%. Furthermore, the Company
obtained a 12 month extension on $168,000 in principal, and conversion of $1,128,000 in principal of the Milestone II Convertible
Notes. The Convertible Noteholders of the Milestone I and II Convertible Notes were granted additional interest depending upon
their election to convert or extend their Convertible Notes.
Currently
we have 12 employees and 3 consultants.
Critical
Accounting Policies
Our
financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America
(“GAAP”).
Revenue
Recognition
In
accordance with ASC 606, “Revenue from Contracts with Customers”, revenue is recognized when a customer obtains ownership
of promised goods. The amount of revenue recognized reflects the consideration to which the Company expects to be entitled to
receive in exchange for these goods. The Company applies the following five steps:
|
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 the time of delivery to a customer warehouse. Customer sales incentives such as volume-based
rebates or discounts are treated as a reduction of sales at the time the sale is recognized. Shipping and handling costs are
treated as fulfillment costs and presented in distribution, selling and administrative costs.
|
Stock-based
Compensation
We
account for share-based employee compensation plans under the fair value recognition and measurement provisions in accordance
with applicable accounting standards, which require all share-based payments to employees, including grants of stock options and
restricted stock units (RSUs), to be measured based on the grant date fair value of the awards, with the resulting expense generally
recognized on a straight-line basis over the period during which the employee is required to perform service in exchange for the
award.
Convertible
Notes
We
issue debt that may have separate warrants, conversion features, or no equity-linked attributes. When we issue debt with warrants,
we determine the value of the warrants using the Black-Scholes Option Pricing Model (“Black-Scholes”) using the stock
price on the date of issuance, the risk free interest rate associated with the life of the debt, and the estimated volatility
of our stock. When we issue debt with a conversion feature, we must first assess whether the conversion feature meets the requirements
to be treated as a derivative. If the conversion feature within convertible debt meets the requirements to be treated as a derivative,
we estimate the fair value of the convertible debt derivative using Black-Scholes upon the date of issuance, using the stock price
on the date of issuance, the risk free interest rate associated with the life of the debt, and the estimated volatility of our
stock. If the conversion feature is not treated as a derivative, we assess whether it is a beneficial conversion feature (“BCF’).
A BCF exists if the conversion price of the convertible debt instrument is less than the stock price on the commitment date. This
typically occurs when the conversion price is less than the fair value of the stock on the date the instrument was issued. The
value of a BCF is equal to the intrinsic value of the feature, the difference between the conversion price and the common stock
into which it is convertible.
Derivative
Liability
The
Company evaluates its convertible instruments, options, warrants or other contracts to determine if those contracts or embedded
components of those contracts qualify as derivatives to be separately accounted for under ASC Topic 815, “Derivatives and
Hedging.” The result of this accounting treatment is that the fair value of any derivative is marked-to-market each balance
sheet date and recorded as a liability. In the event that the fair value is recorded as a liability, the change in fair value
is recorded in the statement of operations as gain/loss from derivative liability. Upon conversion or exercise of a derivative
instrument, the instrument is marked to fair value at the conversion date and then that fair value is reclassified to equity.
We analyzed the derivative financial instruments in accordance with ASC 815. The objective is to provide guidance for determining
whether an equity-linked financial instrument is indexed to an entity’s own stock. This determination is needed for a scope
exception which would enable a derivative instrument to be accounted for under the accrual method. The classification of a non-derivative
instrument that falls within the scope of ASC 815-40-05 “Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company’s Own Stock” also hinges on whether the instrument is indexed to an entity’s
own stock. A non-derivative instrument that is not indexed to an entity’s own stock cannot be classified as equity and must
be accounted for as a liability. There is a two-step approach in determining whether an instrument or embedded feature is indexed
to an entity’s own stock. First, the instrument’s contingent exercise provisions, if any, must be evaluated, followed
by an evaluation of the instrument’s settlement provisions. The Company utilized the fair value standard set forth by the
Financial Accounting Standards Board, defined as the amount at which the assets (or liability) could be bought (or incurred) or
sold (or settled) in a current transaction between willing parties, that is, other than in a forced or liquidation sale.
Results
of Operations
Revenue
and cost of revenue
Revenue
decreased $1,739,238, or -40%, from $4,306,785 in 2019 to $2,567,547 in 2020. The overall revenue for 2020 was lower due to decreased
sales of both single serve and bulk product which was directly impacted by COVID-19.
Cost
of revenue for 2020 was $1,784,537 as compared to $1,928,210 in 2019. Our gross profit was $764,072 (30%) and $2,313,209 (54%)
for 2020 and 2019, respectively. This decline was mainly driven by the COVID 19 pandemic in 2020. In addition, gross margins were
lower due to product mix which included the launch of the new 8oz bottle and 5:1 juice concentrate. Also contributing to the lower
gross profit were inventory price and quantity adjustments along with higher customer rebates. Depreciation from manufacturing
equipment was $18,938 and $65,366 for December 31, 2020 and 2019, respectively.
Operating
expenses
Our
operations were primarily directed towards increasing sales and expanding our distribution network.
Our
general and administrative expenses decreased $2,470,590 (36%) from $6,850,566 in 2019 to $4,379,976 in 2020, with the improvement
driven by lower personnel expenses resulting from reduced headcount, reduced marketing and selling expense from a renegotiated
distribution agreement. The following is a breakdown of our general and administrative expenses for the years 2020 and 2019.
|
|
Year
ended
December
31,
|
|
|
Year
ended
December
31,
|
|
|
|
|
|
|
|
|
|
2020
|
|
|
2019
|
|
|
Change
|
|
|
Percent
|
|
Personnel
costs
|
|
|
1,581,414
|
|
|
|
2,837,685
|
|
|
|
(1,256,271
|
)
|
|
|
-44
|
%
|
Stock
based compensation/options
|
|
|
276,641
|
|
|
|
225,026
|
|
|
|
51,615
|
|
|
|
23
|
%
|
Legal
and professional fees
|
|
|
300,047
|
|
|
|
305,155
|
|
|
|
(5,108
|
)
|
|
|
-2
|
%
|
Travel
|
|
|
86,569
|
|
|
|
358,455
|
|
|
|
(271,886
|
)
|
|
|
-76
|
%
|
Rent
|
|
|
82,194
|
|
|
|
92,608
|
|
|
|
(10,414
|
)
|
|
|
-11
|
%
|
Marketing
and selling
|
|
|
205,050
|
|
|
|
568,107
|
|
|
|
(363,057
|
)
|
|
|
-64
|
%
|
Consulting
fees
|
|
|
75,890
|
|
|
|
118,971
|
|
|
|
(43,081
|
)
|
|
|
-36
|
%
|
Director
fees
|
|
|
187,500
|
|
|
|
245,386
|
|
|
|
(57,886
|
)
|
|
|
-24
|
%
|
Research
and development
|
|
|
515,145
|
|
|
|
538,391
|
|
|
|
(23,246
|
)
|
|
|
-4
|
%
|
Shipping
and storage
|
|
|
488,465
|
|
|
|
751,237
|
|
|
|
(262,772
|
)
|
|
|
-35
|
%
|
Other
expenses
|
|
|
581,061
|
|
|
|
809,545
|
|
|
|
(228,485
|
)
|
|
|
-28
|
%
|
|
|
|
4,379,976
|
|
|
|
6,850,566
|
|
|
|
(2,470,590
|
)
|
|
|
-36
|
%
|
Personnel
cost represents the cost of employees including salaries, bonuses, employee benefits and employment taxes for the years 2020 and
2019 and continues to be our largest cost. Personnel cost decreased $1,256,271 (44%) from $2,837,685 to $1,581,414. At year end
2019 we had 17 full time employees, and we currently have 12 full time employees.
Stock
based compensation is used as an incentive to attract new employees and to compensate existing employees. Stock based compensation
includes stock issued and options granted to employees. Stock compensation for the year ended December 31, 2020 was $276,641,
an increase of $51,615, or 23%, from the year ended December 31, 2019 expense of $225,026. The increase is primarily due to changes
in our workforce and the timing of equity grants. The Company issues additional stock options to its employees from time to time
under its Equity Compensation Plan.
Legal
and professional fees decreased 2%, or $5,108, from $305,155 in 2019 to $300,047 in 2020. The decrease was primarily due to reduced
legal services required. We anticipate legal fees related to our business and financing activities to decrease as we have renegotiated
arrangements with existing service providers.
Travel
expenses decreased $271,886 (76%) from $358,455 in 2019 to $86,569 in 2020. The decrease is primarily due to reduced travel associated
with terminated employees and COVID restrictions. We anticipate that travel expenses for 2021 will increase compared to the current
year as business resume after COVID restriction lifted.
Rent
expense decreased $10,414 (11%), from $92,608 in 2019, to $82,194 in 2020. Rent expense is primarily for our location in Los Angeles,
California. Rent expense for the Los Angeles office is approximately $6,500 per month. We lease office space at 3600 Wilshire
Boulevard, Los Angeles, California pursuant to a new lease that commenced on April 1, 2019 and expires March 31, 2023.
Marketing
and selling expenses decreased $363,057 (64%) from $568,107 in 2019 to $205,050 in 2020. Lower marketing and selling expenses
were primarily due to lower percentage commission associated with a renegotiated distribution agreement.
Consulting
fees decreased $43,081 (36%), from $118,971 in 2019, to $75,890 in 2020. The decrease was due primarily to services related to
consulting to improve sales operations. Our consulting fees vary based on needs. We engaged consultants in the areas of sales
operations during both 2020 and 2019. The need for future consulting services will be variable.
Director
fees decreased $57,886, or 24%, from $245,386 in 2019 to $187,500 in 2020 due to director and officer insurance premiums. Annual
director fees are anticipated at $50,000 per non-employee director.
Research
and development expenses decreased $23,246 (4%) from $538,391 in 2019 to $515,145 in 2020 due to reduced product development activity
with national accounts and fewer market tests. These expenses relate to the services performed by our Director of Manufacturing
and Product Development, and consultants supporting that employee. These activities are primarily directed towards to development
of new products.
Shipping
and storage expense decreased $262,772 (35%) from $751,237 in 2019 to $488,465 in 2020. This improvement is primarily due to the
growth of the scale of our business, and the corresponding cost savings associated with freight movement. We anticipate that shipping
and storage expense as a percentage of sales will continue to reduce in the future, as the Company continues to take advantage
of more efficient distribution arrangements.
Other
expenses consist of ordinary operating expenses such as investor relations, office, telephone, insurance, and stock related costs.
Other expense decreased $228,485, from $809,545 in 2019 to $581,061 in 2020, driven mainly by equipment repair, recruiting,
and insurance expense.
Other
(income)/expenses
Interest
expense decreased $734,119 (60%) from $1,213,263 in 2019 to $479,144 in 2020. This decrease is due to the conversion and repayment
of $2,005,366 of convertible notes during 2020.
The
change in fair value of the derivative liability resulted in gains of $156,540 and $1,114,625 for the years ended December 31,
2020 and 2019, respectively. The gain was driven by the decrease in the stock price of the Company.
We
recorded a net gain on extinguishment of debt of $379,200 which was comprised of a gain of $437,201, offset by a loss of $58,001.
The gain of $437,201 related to the portion of convertible notes that were converted to common stock on March 20, 2020. The loss
on extinguishment of debt of $58,001 related to the portion of convertible notes that were extended by either 24 months for Milestone
I, or 12 months for Milestone II.
The
warrant modification was revalued at February 22, 2019 with a value of $849,505. The difference in fair value immediately before
and after the modification of the warrant resulted in a loss of $307,460. There was no warrant modification in 2020.
We
had net losses of $4,152,506 and $5,593,302 for the years 2020 and 2019, respectively. This reduction in net loss, in the
amount of $1,440,796, or 26%, is primarily attributable to the same factors that drove the improvement in operating losses,
partially offset by certain non-cash charges, including higher interest, warrant modification, and gain from derivative liability,
in 2019. Also due to COVID-19, there were reductions in personnel, travel, marketing and selling costs.
Liquidity
and Capital Resources
As
of December 31, 2020, we had a working capital surplus of $1,196,741 as compared with a working capital surplus of $146,337 at
December 31, 2019. The increase in working capital surplus is primarily due to higher available cash with the issuance of stock
for capital raise of $3,825,000 and the Paycheck Protection Program loan proceeds of $568,131, and increased accrued expenses,
offset by higher inventory and account receivables.
The
Company was granted a $568,131 loan under the Paycheck Protection Program (PPP) administered by a Small Business Administration
(SBA) approved partner. The loan, which matures in two years, is uncollateralized and is fully guaranteed by the Federal government.
The Company is eligible for loan forgiveness of up to 100% of the loan, upon meeting certain requirements. The Company has recorded
a note payable and will record the forgiveness upon being legally released from the loan obligation by the SBA. No forgiveness
income has been recorded for the year ended December 31, 2020. The Company will be required to repay any remaining balance, plus
interest accrued at 1 percent, in monthly payments commencing upon notification that the loan will not be forgiven or only partially
forgiven. Subsequent to December 31, 2020 the Company received an addition loan of $568,131 which is not reflected in our consolidated
financial statements.
During
the year ended December 31, 2020, we used cash of $3,197,782 in operations, $59,662 for the purchase of equipment, and
$14,526 for patents and trademarks. The Company received $3,797,800 in cash for issuance of stock, $568,131 for an SBA PPP loan,
and paid $56,692 in operating leases, $12,008 in debt issuance costs, and $157,366 in short term debt.
Our
liquidity needs will depend on how quickly we are able to profitably ramp up sales, as well as our ability to control and reduce
variable operating expenses, and to continue to control and reduce fixed overhead expense.
During
the first quarter of 2019, the Company completed additional funding including a Private Placement Offering for common shares priced
at $0.60 per share, resulting in the receipt of capital investment in the amount of $2.4 million and the issuance of 4,000,000
shares. In addition, during the first quarter of 2019 the Company offered to reduce the exercise price on its I Warrants from
$1 to $0.60, for a limited time. During the time this offer was open, I Warrant holders converted 2,841,454 warrants at $0.60,
resulting in the receipt of capital investment in the amount of $1.7 million. In addition, during the first quarter of 2019, one
investor exercised G series warrants, resulting in the receipt of capital investment in the amount of $180,000, and the issuance
of 300,000 shares. In total, during the first quarter of 2019 the Company has raised $4.3 million and issued 7,141,454 shares,
and no additional warrants.
On
March 23, 2020, the Company completed additional funding, including a Private Placement Offering for common shares priced at $0.50
per share (subject to adjustment) resulting in the receipt of proceeds in the amount of $3.825 million and the issuance of 7,650,000
shares. The investors of this Private Placement Offering were granted O warrants which are eligible to purchase an additional
0.50 shares for every share issued to each purchaser, exercisable for a period of 3 years at an exercise price of $0.60 per share
(subject to adjustment). If the volume-weighted average trading price for the 20 consecutive trading days that conclude upon 6
months after the initial closing (the “Six Month Price”) exceeds or equals $0.50 per share (the “Target Price”),
the per share purchase price will not be adjusted. If the Six Month Price is less than the Target Price, the per share purchase
price will be automatically reduced to the Six Month Price, but in no event less than $0.35 per share, in which case the Company
shall issue to each investor, pro-rata based on such investor’s investment: (a) shares in a quantity that equals the difference
between the number of shares issued to such purchaser at closing and the number of shares that would have been issued to such
purchaser at closing at the Six Month Price; and (b) a warrant for a number of shares of common stock equal to 50% of the difference
between the number of shares issued to such investor at closing and the number of shares that would have been issued to such investor
at closing at the Six Month Price, with an exercise price equal to the sum of $0.10 per share and the Six Month Price, but in
no eventless than $0.45 per share. The exercise price per share for each warrant will automatically adjust to the sum of $0.10
per share and the Six-Month Price, but in no event less than $0.45 per share. On September 28, 2020, the Company determined the
volume-weighted average price was below the $0.35 per share and consequently issued 5,322,868 additional shares in accordance
with provisions of the Private Placement Offering. Similarly, the Company issued an additional 2,652,868 Warrants to investors
that contributed capital or exercised the conversion of their convertible note. Lastly, the Company issued an additional 459,000
Warrants for convertible noteholders that extended their convertible notes.
In
addition, the Company obtained a 24 month extension on $1,071,000 in principal, and conversion of $720,000 of principal of the
Milestone I Convertible Notes at a conversion price of $0.50 per share. The remaining $110,166 was extended for thirty days. The
interest rate on the principal balance of the extended Milestone I Convertible Notes was amended to 15%. Furthermore, the Company
obtained a 12 month extension on $168,000 in principal, and conversion of $1,128,000 in principal of the Milestone II Convertible
Notes. The remaining $67,200 was extended for thirty days. The Convertible Noteholders of the Milestone I and II Convertible Notes
were granted additional interest depending upon their election to convert or extend their Convertible Notes.
The
impact of COVID-19 on the Company is evolving rapidly with events unfolding on a daily and weekly basis. The direct impact to
our operations began to take effect at the close of the first quarter ended March 31, 2020. Specifically, our business
was impacted by the dining bans targeted at restaurants to reduce the size of public gatherings. We note that
restaurant chains have closed operations and furloughed employees which precluded our single serve products from being
served at those establishments for extended periods of time throughout 2020 and still in part in many locations. Furthermore,
many school districts closed regular attendance for most of the school year. This directly impacted the sales of
our Bulk Product into that sales channel. We have begun to see various channels begin to open up at varying degrees due to
local restrictions, although it is still a long way from pre-COVID levels of operation. As the market begins to come back online,
we are beginning to experience some disruption in the supply chain and freight for manufacturing and distribution
of our products. The developments surrounding COVID-19 remain fluid and dynamic, and consequently, will require the Company
to continue to monitor news headlines from government and health officials, as well as the business community.
Our
operations to date have been financed by the sale of securities, the issuance of convertible debt and the issuance of short-term
debt, including related party advances. If we are unable to generate sufficient cash flow from operations with the capital raised
we will be required to raise additional funds either in the form of equity or in the form of debt. There are no assurances that
we will be able to generate the necessary capital to carry out our current plan of operations.
We
have entered into a direct lease for new premises covering the period April 1, 2019 to March 31, 2023. The aggregate minimum
requirements under the non-cancellable direct lease as of December 31, 2020 is $178,620.
Off-Balance
Sheet Arrangements
We
have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial
condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital
resources that are material to stockholders.
Item
7A. Quantitative and Qualitative Disclosures About Market Risk.
Not
applicable because we are a smaller reporting company.
Item
8. Financial Statements and Supplementary Data.
Our
consolidated financial statements are included beginning immediately following the signature page to this report. See Item 15
for a list of the consolidated financial statements included herein.
Item
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item
9A. Controls and Procedures.
Management’s
Annual Report on Internal Control over Financial Reporting
Disclosure
Controls and Procedures
Under
the supervision and with the participation of our management, including our Chief Executive Officer (who is presently also serving
as our interim principal financial officer) and our Controller, we conducted an evaluation of our disclosure controls and procedures,
as such term is defined under Securities and Exchange Act of 1934 Rule 15(d)-15(e). Based on this evaluation, our Chief Executive
Officer and our Controller concluded that the Company’s disclosure controls and procedures were not effective as of December
31, 2020, due to inadequate segregation of duties.
Management’s
Annual Report on Internal Control over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is
defined in Rule 15d-15(f) under the Exchange Act, for the Company.
Internal
control over financial reporting includes those policies and procedures that: (1) pertain to the maintenance of records that,
in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (2) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted
accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of its management
and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use
or disposition of our assets that could have a material effect on the financial statements.
Our
management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2020.
The framework used by management in making that assessment was the criteria set forth in the document entitled “Internal
Control – Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO)
in 2013.
Under
the supervision and with the participation of our management, including our Chief Executive Officer and our Controller, we conducted
an evaluation of our disclosure controls and procedures, as such term is defined under Securities and Exchange Act of 1934 Rule
15(d)-15(e). Based on this evaluation, our Chief Executive Officer and our Controller concluded that the Company’s disclosure
controls and procedures were not effective as of December 31, 2020.
Management
has identified the following material weakness in our internal control over financial reporting:
Management
has concluded that there is a material weakness due to the control environment. The control environment is impacted due to the
company’s inadequate segregation of duties.
Since
the assessment of the effectiveness of our internal control over financial reporting did identify material weaknesses, management
considers its internal control over financial reporting to be ineffective.
Management
recognizes that there are inherent limitations in the effectiveness of any system of internal control, and accordingly, even effective
internal control can provide only reasonable assurance with respect to financial statement preparation and may not prevent or
detect material misstatements. In addition, effective internal control at a point in time may become ineffective in future periods
because of changes in conditions or due to deterioration in the degree of compliance with our established policies and procedures.
In
an effort to remediate the identified material weakness and enhance our internal control over financial reporting, we plan to
hire additional financial personnel to help ensure that we are able to properly implement internal control procedures.
This
report shall not be deemed to be filed for purposes of Section 18 of the Exchange Act, or otherwise subject to the liabilities
of that section, and is not incorporated by reference into any filing of the Company, whether made before or after the date hereof,
regardless of any general incorporation language in such filing.
Changes
in Internal Control over Financial Reporting
In
addition, we note that a different person was identified as our principal financial officer in each of our last three annual reports
on Form 10-K. This lack of continuity and institutional knowledge has also affected internal control over financial reporting.
Item
9B. Other Information.
None
PART
III
Item
10. Directors, Executive Officers and Corporate Governance.
Directors
and Executive Officers
The
following sets forth information about our directors and executive officers as of the date of this Report:
|
Name
|
|
Age
|
|
Position
|
|
Riccardo
Delle Coste
|
|
42
|
|
President,
Chief Executive Officer and Chairman
|
|
Steven
Lang
|
|
68
|
|
Director
|
|
Arnold
Tinter
|
|
75
|
|
Secretary
and Director
|
|
Joseph
M. Cugine
|
|
60
|
|
Director
|
|
Isabelle
Ortiz-Cochet
|
|
59
|
|
Director
|
|
Alexander
H. Ware
|
|
59
|
|
Director
|
|
Justin
Borus
|
|
44
|
|
Director
|
Riccardo
Delle Coste has been the Chairman of our board of directors, President and Chief Executive Officer since January 10, 2012.
He has also been the President and Chief Executive Officer of Barfresh Inc., a Nevada corporation and our wholly owned subsidiary
(“Barfresh NV”), since its inception. Mr. Delle Coste is the inventor of the patented technology and the creator of
Barfresh. Mr. Delle Coste developed a unique system using controlled pre-packaged portions to deliver a freshly made smoothie
that is quick, cost efficient, healthy and with no waste. In building the business, he is responsible for securing new business
and maintaining key client relationships. He is also responsible for the development of new product from testing to full-scale
production, establishment of the manufacturing facilities that have all necessary accreditations, technology development, product
improvement and research and development 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.
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 40 years of experience in business, accounting, law and finance and served as Chairman of an Australian public
company.
Arnold
Tinter was appointed as Director, Chief Financial Officer and Secretary of the Company on January 10, 2012. Mr. Tinter
resigned his position as Chief Financial Officer on May 18, 2015, and served temporarily as Principal Accounting Officer. Mr.
Tinter founded Corporate Finance Group, Inc., a consulting firm located in Denver, Colorado, in 1992, and is its President. Corporate
Finance Group, Inc., is involved in financial consulting in the areas of strategic planning, mergers and acquisitions and capital
formation. He has been the chief financial officer and a director of other public companies In all of the companies his responsibilities
included oversight of all accounting functions, including SEC reporting, strategic planning and capital formation. Since May 2015,
he has served as chief financial officer of Bambu Franchising LLC, LLC, a privately held company that is a franchisor of Vietnamese-themed
shoppes that serve drinks and desserts. 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 45 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, Barfresh Corporation, Inc. Mr. Cugine is the owner and president of Cugine Foods and JC Restaurants,
a franchisee of Taco Bell and Pizza Hut in New York. He is also president and owner of Restaurant Consulting Group LLC. Prior
to owning and operating his own firms, Mr. Cugine held a series of leadership roles with PepsiCo, lastly as chief customer officer
and senior vice president of PepsiCo’s Foodservice division. Mr. Cugine also serves on the board of directors of The Chef’s
Warehouse, Inc., a publicly traded specialty food products distributor in the U.S., as well as Ridgefield Playhouse and R4 Technology.
He received his B.S. degree from St. Joseph’s University in Philadelphia.
Qualifications:
Mr. Cugine’s career in sales, marketing, operations and supply chain spans more than 25 years. He has extensive industry
contacts and proven experience leading and advising numerous successful food distribution companies.
Isabelle
Ortiz-Cochet was appointed as director of the Company on December 16, 2016. She is the Chief Investment Officer for Unibel,
parent company of Bel Group. Bel is an international France-based group, a world leader in branded cheese business and fruit pouches,
with brands such as Laughing Cow, Mini-Babybel, Boursin or GoGo Squeez. In that position since January 2016, Ms. Ortiz-Cochet
drives Unibel diversification strategy, and leads the investment portfolio development. She was previously VP Strategic Development
at Bel Group Form September 2013 to December 2015. From 2007 to 2013, based out of Bel’s New York office, Ms. Ortiz-Cochet
led the development of long term strategies in North and South America, as well as Marketing strategy in the region. Prior to
that position, she held a number of leadership positions in marketing and global strategy at Bel out of the Paris office, at French,
European and corporate levels. Isabelle began her career with Kimberly Clark in France. Isabelle earned a master’s degree
from ESSEC Business School in France, and an executive MBA from HEC Business School, France.
Pursuant
to the investor rights agreement between Barfresh and Unibel dated November 23, 2016, Unibel is entitled to appoint one director
to the board of directors of Barfresh, which director is entitled to sit on each committee of the board of directors selected
by the Unibel, unless Unibel has beneficial ownership of less than: (i) 75.0% of its Shares; and (ii) 5.0% of the company’s
issued and outstanding common stock. Unibel has designated Isabelle Ortiz-Cochet as its board designee. Barfresh has agreed to
call shareholder meetings whenever necessary to ensure Unibel’s designee is elected as a director. At any time that Unibel’s
designee is not a director, Unibel’s designee will be entitled to be a board observer. Riccardo Delle Coste, Steven Lang
and their respective affiliates have agreed to vote their shares in favor of Unibel’s designee.
Alexander
H. Ware was appointed as director of the company on July 13, 2016. Since September 2018, Mr. Ware has served as President
of Foodsby, Inc., a fast-growing meal ordering platform for office buildings. Previously, he served as Interim President, Executive
Vice President and Chief Financial Officer of Buffalo Wild Wings from October 2016 to 2018. From 2012 through 2016, Mr. Ware was
Executive Chairman of MStar Holding Corporation (MicroStar), and had 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 and Chief Financial Officer from 2005 to 2010. Previously, he was a Senior Associate at
Booz Allen Hamilton, Inc. from 1990 to 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 has specific and relevant industry experience in the production and marketing of beverages as well as the operations
and management of restaurants. In addition, Mr. Ware has knowledge in the areas of strategic and financial planning, corporate
development, personnel management, resource allocation and distribution.
Justin
Borus was appointed as a Director of the Company on April 29, 2020. Mr. Borus has approximately 20 years of capital markets
expertise. He has been the Chief Investment Officer of Ibex Investors, LLC, a firm focused on niche, differentiated strategies
including microcap companies for over 10 years. Prior to joining Ibex, he worked in both the private equity and investment banking
groups at Bear, Stearns & Co. Inc. in New York and London. Mr. Borus has served on the Board of Directors of several non-profits
including the Anti-Defamation League and Colorado Public Radio.
Qualifications:
Mr. Borus brings over 20 years of capital markets expertise.
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 Alexander Ware. The audit committee is primarily responsible for reviewing the services
performed by our independent auditors and evaluating our accounting policies and our system of internal controls. Steven Lang,
Arnold Tinter, and Alexander Ware are independent members of the audit committee, as defined below. The members of the compensation
committee are Arnold Tinter, Joe Cugine, and Riccardo Delle Coste. The compensation committee is primarily responsible for reviewing
and approving our salary and benefits policies (including stock options) and other compensation of our executive officers. The
members of the nominating committee are Arnold Tinter, Steven Lang, and Isabelle Ortiz-Cochet. 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 Controller are bound by a Code of Ethics that complies with Item 406 of Regulation S-K of the
Exchange Act.
Section
16(a) Beneficial Ownership Reporting Compliance
Section
16(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) requires our directors and executive
officers and beneficial holders of more than 10% of our common stock to file with the SEC initial reports of ownership and reports
of changes in ownership of our equity securities.
To
our knowledge, based solely upon a review of Forms 3 and 4 and amendments thereto furnished to Barfresh under 17 CFR 240.16a-3(e)
during our most recent fiscal year and Forms 5 and amendments thereto furnished to Barfresh with respect to our most recent fiscal
year, we believe that during the fiscal year ended December 31, 2020 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
|
|
●
|
Isabelle
Ortiz-Cochet, late filing of Form 4
|
|
●
|
Alexander
H. Ware, late filing of Form 4
|
|
●
|
Steve
Lang, late filing of Form 4
|
|
●
|
Riccardo
Delle Coste, late filing of Form 4
|
Each
late filing reported one transaction unless otherwise indicated. None of our officers or directors submitted Form 5 filings.
Item
11. Executive Compensation.
The
following table sets forth information about the remuneration of our principal executive officer for services rendered during
our fiscal years ended December 31, 2020 and 2019, and our other executive officers that had total compensation of $100,000 or
more for our last completed full fiscal year (the “Named Officers”). Certain tables and columns have been omitted
as no information was required to be disclosed under those tables or columns.
SUMMARY
COMPENSATION TABLE
Name
and Principal Position
|
|
Year
|
|
|
Salary
($)
|
|
|
Option
awards
($)
|
|
|
All
other compensation ($)
|
|
|
Total
($)
|
|
Riccardo
Delle Coste,
|
|
|
2020
|
|
|
|
350,000
|
(1)
|
|
|
67,500
|
(2)
|
|
|
10,800
|
(3)
|
|
|
428,300
|
|
Chief
Executive Officer
|
|
|
2019
|
|
|
|
350,000
|
(1)
|
|
|
82,500
|
(4)
|
|
|
10,800
|
(3)
|
|
|
443,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Raffi
Loussararian,
|
|
|
2020
|
|
|
|
175,000
|
|
|
|
24,000
|
(5)
|
|
|
-0-
|
|
|
|
199,000
|
|
Vice
President Finance
|
|
|
2019
|
|
|
|
74,936
|
|
|
|
51,000
|
(6)
|
|
|
-0-
|
|
|
|
125,936
|
|
(1)
|
Of
the salary earned in 2020, $213,648 was paid and $136,352 was deferred. In 2019 $232,835 was paid and $117,165 was deferred.
|
|
|
(2)
|
Represents
a stock option grant of 250,000 option shares issued 04/27/2020 with an exercise price
of $0.38, which vests in equal increments on each of the first, second and third anniversaries
of the date of grant.
|
(3)
|
Represents
the car allowance paid to Mr. Delle Coste.
|
|
|
(4)
|
Represents
a stock option grant of 250,000 options shares issued 5/20/19 with an exercise price of $0.45, which vests in equal increments
on each of the first, second and third anniversaries of the date of grant.
|
|
|
(5)
|
Represents
a stock option grant of 100,000 shares issued 01/06/2020 with an exercise price of $0.37,
which vests 3 years after the date of grant (cliff vesting).
|
(6)
|
Represents
a stock option grant of 150,000 shares issued 7/29/19 with an exercise price of $0.45 which vests ratably according to the
option schedule on each anniversary over the next three years and are exercisable until 7/29/27.
|
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 receives 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 receives 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 Raffi Loussararian on July 29, 2019, to which he agreed to serve as
Vice President, Finance. Pursuant to the employment agreement, Mr. Loussararian received a base salary of $175,000 and performance
bonuses of 25% of his base salary, based upon performance targets determined by the Board of Directors. In addition, Mr. Loussararian
was granted 3-year options to purchase up to 150,000 shares of common stock of Barfresh. Option grants vest ratably on each anniversary
of the date of commencement of Mr. Loussararian’s employment. All options granted under the employment agreement are subject
to the Company’s 2015 Equity Incentive Plan. Mr. Loussararian left the Company in January 2021.
The
following table sets forth information with respect to outstanding equity awards for the Named Officers:
OUTSTANDING
EQUITY AWARDS AT FISCAL YEAR-END
|
|
Option
Awards
|
Name
|
|
Number
of securities underlying unexercised options (#) exercisable
|
|
|
Number
of securities underlying unexercised options (#) unexercisable
|
|
|
Option
exercise price ($)
|
|
|
Option
expiration date
|
Riccardo
Delle Coste
|
|
|
250,000
|
(1)
|
|
|
|
|
|
|
0.69
|
|
|
4/27/23
|
|
|
|
250,000
|
(1)
|
|
|
|
|
|
|
0.61
|
|
|
5/27/24
|
|
|
|
125,000
|
(1)
|
|
|
|
|
|
|
0.72
|
|
|
11/25/24
|
|
|
|
250,000
|
(1)
|
|
|
|
|
|
|
0.72
|
|
|
4/27/25
|
|
|
|
250,000
|
(1)
|
|
|
|
|
|
|
0.55
|
|
|
9/15/25
|
|
|
|
166,667
|
(2)
|
|
|
83,333
|
(2)
|
|
|
0.52
|
|
|
7/26/26
|
|
|
|
83,333
|
(2)
|
|
|
166,667
|
(2)
|
|
|
0.45
|
|
|
5/20/27
|
|
|
|
|
|
|
|
250,000
|
(2)
|
|
|
0.38
|
|
|
4/25/28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Raffi
Loussararian
|
|
|
50,000
|
(2)
|
|
|
100,000
|
(2)
|
|
|
0.45
|
|
|
7/29/27
|
|
|
|
|
|
|
|
100,000
|
(3)
|
|
|
0.37
|
|
|
1/6/28
|
(1)
|
Fully
vested.
|
(2)
|
Vest
ratably in equal increments on the first, second and third anniversary of the date of grant of the option.
|
(3)
|
Vests
on the third anniversary of date of grant of the option.
|
Compensation
of Directors
The
following table summarizes the compensation paid to our directors that were not employees for the fiscal year ended December 31,
2020. 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.
DIRECTOR
COMPENSATION
Name
|
|
Fees
earned or paid in
cash
($)
|
|
|
Stock
awards ($)
|
|
|
Option
awards ($)
|
|
|
Total
($)
|
|
Arnold
Tinter
|
|
|
50,000
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
50,000
|
|
Steven
Lang
|
|
|
50,000
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
50,000
|
|
Isabelle
Ortiz-Cochet
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
50,000
|
|
|
|
50,000
|
|
Alex
Ware
|
|
|
-0-
|
|
|
|
50,000
|
|
|
|
-0-
|
|
|
|
50,000
|
|
Justin
Borus(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Mr.
Borus became a director on April 29, 2020.
|
Item
12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Security
Ownership of Certain Beneficial Owners and Management
The
following table sets forth certain information regarding our shares of common stock beneficially owned as of March 15, 2021 for
(i) each shareholder known to be the beneficial owner of 5% or more of our outstanding shares of common stock, (ii) each named
executive officer and director, and (iii) all executive officers and directors as a group. A person is considered to beneficially
own any shares: (i) over which such person, directly or indirectly, exercises sole or shared voting or investment power, or (ii)
of which such person has the right to acquire beneficial ownership at any time within 60 days through an exercise of stock options
or warrants or otherwise. Unless otherwise indicated, voting and investment power relating to the shares shown in the table for
our directors and executive officers is exercised solely by the beneficial owner or shared by the owner and the owner’s
spouse or children.
For
purposes of this table, a person or group of persons is deemed to have “beneficial ownership” of any shares of common
stock that such person has the right to acquire within 60 days of March 15, 2021. As of March 15, 2021, the Company had 149,133,372
shares of common stock outstanding. For purposes of computing the percentage of outstanding shares of our common stock held by
each person or group of persons named above, any shares that such person or persons has the right to acquire within 60 days of
March 15, 2021 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) (6)
|
|
|
22,589,053
|
|
|
|
14.90
|
%
|
|
|
|
|
|
|
|
|
|
Steven
Lang (7) (8) (9) (10) (11)
|
|
|
21,504,699
|
|
|
|
14.30
|
%
|
|
|
|
|
|
|
|
|
|
Arnold
Tinter (12)
|
|
|
800,000
|
|
|
|
0.5
4%
|
|
|
|
|
|
|
|
|
|
|
Joe
Cugine (13) (14) (15)
|
|
|
3,801,074
|
|
|
|
2.52
|
%
|
|
|
|
|
|
|
|
|
|
Alexander
Ware (16) (17) (18)
|
|
|
678,101
|
|
|
|
0.45
|
%
|
|
|
|
|
|
|
|
|
|
Isabelle
Ortiz-Cochet
2 Allee De Longchamp Suresnes, France (19) (20)
|
|
|
473,342
|
|
|
|
0.32
|
%
|
|
|
|
|
|
|
|
|
|
Justin
Borus (21) (22) (23)
|
|
|
22,674,337
|
|
|
|
14.81
|
%
|
|
|
|
|
|
|
|
|
|
Raffi
Loussararian
|
|
|
0
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
All
directors and officers as a group (8 persons)
|
|
|
72,520,605
|
|
|
|
45.61
|
%
|
|
|
|
|
|
|
|
|
|
Unibel
2 Allee De Longchamp Suresnes, France 92150 (24) (25) (26)
|
|
|
29,138,798
|
|
|
|
18.34
|
%
|
|
|
|
|
|
|
|
|
|
IBEX
Investors LLC (fka) Lazarus Investment Partners LLLP (27)
3200
Cherry Creek South Drive Suite 670 Denver, CO 80209
|
|
|
16,245,766
|
|
|
|
10.76
|
%
|
1
|
The
address of those listed, except as noted is c/o Barfresh Food Group Inc., 3600 Wilshire Blvd., Suite 1720 Los Angeles CA 90010.
|
2
|
Mr.
Delle Coste is the Chief Executive Officer, President and a Director of the Company.
|
|
|
3
|
Includes
19,524,381 shares owned by R.D. Capital Holdings PTY Ltd. and of which Riccardo Delle Coste is deemed to be a beneficial owner.
|
|
|
4
|
Includes
1,541,667 shares issuable under exercisable options granted.
|
|
|
5
|
Includes
131,679 shares underlying warrants issued in connection with promissory notes, the holder of which is Riccardo Delle Coste
or R.D. Capital Holdings PTY Ltd., and of which Riccardo Delle Coste is deemed to be a beneficial owner.
|
|
|
6
|
Includes
50,000 shares underlying convertible debt held by R.D. Capital Holdings PTY Ltd.
|
|
|
7
|
Mr.
Lang is a Director of the Company.
|
|
|
8
|
Includes
19,127,177 shares owned by Sidra Pty Limited and 516,236 shares owned by Hodumo Pty Ltd, of which Steven Lang is deemed to
be a beneficial owner.
|
|
|
9
|
Includes
456,237 shares underlying options granted.
|
|
|
10
|
Includes
722,371 and 44,082 shares underlying warrants issued in connection with promissory notes, the holder of which is Hodumo Pty
Ltd and Sidra Pty Ltd, respectively, of which Steven Lang is deemed to be a beneficial owner.
|
|
|
11
|
Includes
300,000 shares underlying convertible debt held by Hodumo Pty Ltd.
|
|
|
12
|
Mr.
Tinter is the Secretary and a Director of the Company.
|
|
|
13
|
Mr.
Cugine is a Director of the Company.
|
|
|
14
|
Includes
1,350,458 shares issuable under exercisable options granted.
|
|
|
15
|
Includes
409,030 shares underlying warrants issued in connection with purchase of common shares.
|
16
|
Mr.
Ware is a Director of the Company.
|
|
|
17
|
Includes
580,476 shares owned by The Alexander Ware Revocable Trust of which Mr. Ware is deemed to be a beneficial owner.
|
|
|
18
|
Includes
78,125 shares underlying warrants issued to The Alexander Ware Revocable Trust in connection with purchase of common shares.
|
|
|
19
|
Ms.
Ortiz-Cochet was a Director of the Company
|
|
|
20
|
Includes
473,342 shares underlying options granted.
|
21
|
Mr.
Borus is a Director of the Company.
|
22
|
Includes
14,442,776 shares owned by Ibex Investors LLC and 3,000 shares owned by Lazarus Macro Micro Partners LLLP, of which Justin
Borus is the manager of the investment manager and general partner, respectively, and deemed to be a beneficial owner.
|
|
|
23
|
Includes
1,800,000 shares underlying warrants issued to Ibex Investors LLC and 2,142,857 shares underlying warrants issued to Mr. Borus.
|
|
|
24
|
Includes
7,812,500 shares underlying warrants issued in connection with the purchase of common stock.
|
|
|
25
|
Includes
671,098 shares underlying warrants issued in connection with a convertible promissory note.
|
|
|
26
|
Includes
1,252,274 shares underlying warrants issued in connection with the purchase of common stock
|
|
|
27
|
Includes
1,800,000 shares underlying warrants issued in connection with the purchase of common stock.
|
Item
13. Certain Relationships and Related Transactions, and Director Independence.
Certain
Relationships and Related Transactions
The
following includes a summary of transactions since the beginning of fiscal 2020 or any currently proposed transaction, in which
we were or are to be a participant and the amount involved exceeded or exceeds the lesser of $120,000 or one percent of the average
of our total assets at year-end for the last two completed fiscal years and in which any related person had or will have a direct
or indirect material interest (other than compensation described under “Executive Compensation”). We believe the terms
obtained or consideration that we paid or received, as applicable, in connection with the transactions described below were comparable
to or better than terms available or the amounts that would be paid or received, as applicable, in arm’s-length transactions.
The
Company’s policy with regard to related party transactions requires any related party loans that are (i) non-interest bearing
and in excess of $100,000 or (ii) interest bearing, irrespective of amount, must be approved by the Company’s board of directors.
All issuances of securities by the Company must be approved by the board of directors, irrespective of whether the recipient is
a related party. Each of the foregoing transactions, if required by its terms, was approved in this manner.
Director
Independence
We
use the definition of “independence” standards as defined in the NASDAQ Stock Market Rule 5605(a)(2) provides that
an “independent director” is a person other than an officer or employee of the company or any other individual having
a relationship, which, in the opinion of the Company’s board of directors, would interfere with the exercise of independent
judgment in carrying out the responsibilities of a director. We have determined as of December 31, 2020 that four of our six directors
are independent, which constitutes a majority.
Item
14. Principal Accounting Fees and Services.
Aggregate
fees for professional services rendered to the Company by Eide Bailly LLP for the years ended December 31, 2020 and December 31,
2019 were as follows.
|
|
2020
|
|
|
2019
|
|
Audit
fees
|
|
$
|
73,032
|
|
|
$
|
85,195
|
|
Audit
related fees
|
|
|
-
|
|
|
|
-
|
|
Tax
fees
|
|
|
6,300
|
|
|
|
8,375
|
|
All
other fees
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
79,332
|
|
|
$
|
93,570
|
|
As
defined by the SEC, (i) “audit fees” are fees for professional services rendered by our principal accountant for the
audit of our annual financial statements and review of financial statements included in our Form 10-K, or for services that are
normally provided by the accountant in connection with statutory and regulatory filings or engagements for those fiscal years;
(ii) “audit-related fees” are fees for assurance and related services by our principal accountant that are reasonably
related to the performance of the audit or review of our financial statements and are not reported under “audit fees;”
(iii) “tax fees” are fees for professional services rendered by our principal accountant for tax compliance, tax advice,
and tax planning; and (iv) “all other fees” are fees for products and services provided by our principal accountant,
other than the services reported under “audit fees,” “audit-related fees,” and “tax fees.”
Audit
Fees. The aggregate fees billed for the years end December 31, 2020 and December 31, 2019 were for the audits of our financial
statements and reviews of our interim financial statements included in our annual and quarterly reports.
Audit
Related Fees. Eide Bailly LLP did not provide us with audit related services for the years ended December 31, 2020 or December
31, 2019, that are not reported under Audit Fees.
Tax
Fees. The aggregate tax fees billed for the years end December 31, 2020 and 2019 related to the preparation of corporate income
tax returns.
All
Other Fees. Eide Bailly LLP did not provide us with professional services related to “Other Fees” for the years
ended December 31, 2020 or December 31, 2019.
Audit
Committee Pre-Approval Policies and Procedures
Under
the SEC’s rules, an audit committee is required to pre-approve the audit and non-audit services performed by the independent
registered public accounting firm in order to ensure that they do not impair the auditors’ independence. The SEC’s
rules specify the types of non-audit services that an independent auditor may not provide to its audit client and establish the
audit committee’s responsibility for administration of the engagement of the independent registered public accounting firm.
The Company has established an Audit Committee. Accordingly, audit services and non-audit services described in this Item 14 were
pre-approved by an Audit Committee.
There
were no hours expended on the principal accountant’s engagement to audit the registrant’s financial statements for
the most recent fiscal year that were attributed to work performed by persons other than the principal accountant’s full-time,
permanent employees.
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 consolidated financial statements have been prepared in conformity with accounting principles generally accepted
in the United States of America (“GAAP”).
Basis
of Consolidation
The
consolidated financial statements include the financial statements of the Company and our wholly owned subsidiaries, Barfresh
Inc. and Barfresh Corporation Inc. (formerly known as Smoothie, Inc.). All inter-company balances and transactions among the companies
have been eliminated upon consolidation.
Use
of Estimates
The
preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities in the balance sheets and revenues and expenses during the years reported. Actual
results may differ from these estimates.
Concentration
of Credit Risk
The
amount of cash on deposit with financial institutions exceeds the $250,000 federally insured limit at December 31, 2020 and 2019.
However, we believe that cash on deposit that exceeds $250,000 in the financial institutions is financially sound and the risk
of loss is minimal.
Restricted
Cash
At
December 31, 2020, the Company had $142,382 and $91,385, respectively, in restricted cash related to our co-packing agreement.
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.
Barfresh
food Group Inc.
Notes
to Consolidated Financial Statements
Our
financial instruments consist of cash, accounts receivable, accounts payable, advanced payments, derivative liabilities, convertible
notes, restricted cash, and PPP loan payable. The carrying value of our financial instruments approximates their fair value,
except for the derivative liability in which carrying value is fair value.
Accounts
Receivable
Accounts
receivable are typically unsecured. Our credit policy calls for payment generally within 30 days. The credit worthiness of a customer
is evaluated prior to a sale. As of December 31, 2020, and 2019, the company’s allowance for doubtful accounts was $133,424
and $141,788 respectively. There was $133,424 of bad debt expense recorded for the year ended December 31, 2020 and $89,397 of
bad debt expense for the year ended December 31, 2019. The allowance was applied to certain receivable accounts which are over
95 days.
Inventory
Inventory
consists of finished goods and is carried at the lower of cost or net realizable value on a first in first out basis. The company
monitors the remaining useful life of its inventory and establishes a reserve of obsolescence where appropriate. As of December
31, 2020 and 2019, the Company’s inventory reserve was $59,093 and $100,651 respectively.
Intangible
Assets
Intangible
assets are comprised of patents, net of amortization and trademarks. The patent costs are being amortized over the life of the
patent, which is twenty years from the date of filing the patent application. In accordance with ASC Topic 350 Intangibles
- Goodwill and Other (“ASC 350”), the costs of internally developing other intangible assets, such as patents,
are expensed as incurred. However, as allowed by ASC 350, costs associated with the acquisition of patents from third parties,
legal fees and similar costs relating to patents have been capitalized.
In
accordance with ASC 350 legal costs related to trademarks have been capitalized. We have determined that trademarks have an indeterminable
life and therefore are not being amortized.
Long-Lived
Assets and Other Acquired Intangible Assets
We
evaluate the recoverability of property and equipment and finite-lived intangible assets for possible impairment whenever events
or circumstances indicate that the carrying amount of such assets may not be recoverable. The evaluation is performed at the lowest
level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. Recoverability
of these assets is measured by a comparison of the carrying amounts to the future undiscounted cash flows the assets are expected
to generate. If such review indicates that the carrying amount of property and equipment and intangible assets is not recoverable,
the carrying amount of such assets is reduced to fair value. We have not recorded any impairment charges during the years presented.
Property,
Plant, and Equipment
Property,
plant, and equipment is stated at cost less accumulated depreciation and accumulated impairment loss, if any. Depreciation is
calculated on a straight-line basis over the estimated useful lives of the assets. Leasehold improvements are being amortized
over the shorter of the useful life of the asset or the lease term that includes any expected renewal periods that are deemed
to be reasonably assured. The estimated useful lives used for financial statement purposes are:
Furniture
and fixtures:
|
5
years
|
Manufacturing
equipment and customer equipment:
|
3
years to 7 years
|
Vehicles:
|
5
years
|
Barfresh
food Group Inc.
Notes
to Consolidated Financial Statements
Revenue
Recognition
In
accordance with ASC 606, Revenue from Contracts with Customers, revenue is recognized when a customer obtains ownership of promised
goods. The amount of revenue recognized reflects the consideration to which the Company expects to be entitled to receive in exchange
for these goods. The Company applies the following five steps:
|
1)
|
Identify
the contract with a customer
|
|
|
|
|
|
A
contract with a customer exists when (i) the Company enters into an enforceable contract with a customer that defines each
party’s rights, (ii) the contract has commercial substance and, (iii) the Company determines that collection of substantially
all consideration for goods or services that are transferred is probable. For the Company, the contract is the approved sales
order, which may also be supplemented by other agreements that formalize various terms and conditions with customers.
|
|
|
|
|
2)
|
Identify
the performance obligation in the contract
|
|
|
|
|
|
Performance
obligations promised in a contract are identified based on the goods or services that will be transferred to the customer.
For the Company, this consists of the delivery of frozen beverages, which provide immediate benefit to the customer.
|
|
|
|
|
3)
|
Determine
the transaction price
|
|
|
|
|
|
The
transaction price is determined based on the consideration to which the Company will be entitled in exchange for transferring
goods and is generally stated on the approved sales order. Variable consideration, which typically includes volume-based rebates
or discounts, are estimated utilizing the most likely amount method.
|
|
|
|
|
4)
|
Allocate
the transaction price to performance obligations in the contract
Since
our contracts contain a single performance obligation, delivery of frozen beverages, the transaction price is allocated
to that single performance obligation.
|
|
|
|
|
5)
|
Recognize
Revenue when or as the Company satisfies a performance obligation
|
|
|
|
|
|
The
Company recognizes revenue from the sale of frozen beverages when title and risk of loss
passes and the customer accepts the goods, which generally occurs at the time of delivery
to a customer warehouse. Customer sales incentives such as volume-based rebates or discounts
are treated as a reduction of sales at the time the sale is recognized. Shipping and
handling costs are treated as fulfillment costs and presented in distribution, selling
and administrative costs.
Payments
that are received before performance obligations are recorded are shown as current liabilities.
|
|
|
|
|
|
The
company evaluated the requirement to disaggregate revenue and concluded that substantially all of its revenue comes from a
single product, frozen beverages.
|
Research
and Development
Expenditures
for research activities relating to product development and improvement are charged to expense as incurred. We incurred $515,145
and $538,391, in research and development expenses for the years ended December 31, 2020 and 2019, respectively.
Shipping
and Storage Costs
Shipping
and handling costs are included in general and administrative expenses. For the years ended December 31, 2020 and 2019, shipping
and handling costs totaled $488,465 and $751,237, respectively.
Barfresh
food Group Inc.
Notes
to Consolidated Financial Statements
Leases
We
determine if an arrangement is a lease upon inception. A contract is or contains a lease if the contract conveys the right to
control the use of an identified asset for a period of time in exchange for consideration. The right to control the use of an
asset includes the right to obtain substantially all of the economic benefits of the underlying asset and the right to direct
how and for what purpose the asset is used. After adoption of ASU 2016-02 and related standards, operating lease right-of-use
assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. Lease
expense is recognized on a straight-line basis over the lease term. As a lessee, the Company leases office space.
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, 2020 and 2019 we did not have any interest and penalties or any significant unrecognized uncertain
tax positions.
Derivative
Liability
The
Company evaluates its convertible instruments, options, warrants or other contracts to determine if those contracts or embedded
components of those contracts qualify as derivatives to be separately accounted for under ASC Topic 815, “Derivatives and
Hedging.” The result of this accounting treatment is that the fair value of any derivative is marked-to-market each balance
sheet date and recorded as a liability. In the event that the fair value is recorded as a liability, the change in fair value
is recorded in the statement of operations as gain/loss from derivative liability. Upon conversion or exercise of a derivative
instrument, the instrument is marked to fair value at the conversion date and then that fair value is reclassified to equity.
We analyzed the derivative financial instruments in accordance with ASC 815. The objective is to provide guidance for determining
whether an equity-linked financial instrument is indexed to an entity’s own stock. This determination is needed for a scope
exception which would enable a derivative instrument to be accounted for under the accrual method. The classification of a non-derivative
instrument that falls within the scope of ASC 815-40-05 “Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company’s Own Stock” also hinges on whether the instrument is indexed to an entity’s
own stock. A non-derivative instrument that is not indexed to an entity’s own stock cannot be classified as equity and must
be accounted for as a liability. There is a two-step approach in determining whether an instrument or embedded feature is indexed
to an entity’s own stock. First, the instrument’s contingent exercise provisions, if any, must be evaluated, followed
by an evaluation of the instrument’s settlement provisions. The Company utilized the fair value standard set forth by the
Financial Accounting Standards Board, defined as the amount at which the assets (or liability) could be bought (or incurred) or
sold (or settled) in a current transaction between willing parties, that is, other than in a forced or liquidation sale.
Barfresh
food Group Inc.
Notes
to Consolidated Financial Statements
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, 2020
and 2019 any equivalents would have been anti-dilutive as we had losses for the years 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 have not determined
if the impact of recently issued standards that are not yet effective will have an impact on our results of operations and financial
position.
Note
2. Inventory
Inventory
consists of the following at December 31:
|
|
2020
|
|
|
2019
|
|
Raw
materials
|
|
$
|
130,296
|
|
|
$
|
286,028
|
|
Finished
goods
|
|
|
798,987
|
|
|
|
449,369
|
|
Inventory
reserve
|
|
|
(59,093
|
)
|
|
|
(100,651
|
)
|
Inventory,
net
|
|
$
|
870,190
|
|
|
$
|
634,746
|
|
Note
3. Property Plant and Equipment
Major
classes of property and equipment at December 31, 2020 and 2019 consist of the following:
|
|
2020
|
|
|
2019
|
|
Furniture
and fixtures
|
|
$
|
1,524
|
|
|
$
|
1,524
|
|
Manufacturing
Equipment and customer equipment
|
|
|
3,573,528
|
|
|
|
3,521,636
|
|
Leasehold
Improvements
|
|
|
4,886
|
|
|
|
4,886
|
|
Vehicles
|
|
|
29,696
|
|
|
|
29,696
|
|
|
|
|
3,609,634
|
|
|
|
3,557,742
|
|
Less:
accumulated depreciation
|
|
|
(2,331,034
|
)
|
|
|
(1,787,967
|
)
|
|
|
|
1,278,600
|
|
|
|
1,769,775
|
|
Equipment
not yet placed in service
|
|
|
644,312
|
|
|
|
636,542
|
|
Property
and equipment, net of depreciation
|
|
$
|
1,922,912
|
|
|
$
|
2,406,317
|
|
Barfresh
food Group Inc.
Notes
to Consolidated Financial Statements
We
recorded depreciation expense related to these assets of $529,385 and $586,237 for the years ended December 31, 2020 and 2019,
respectively. Depreciation expense in Cost of Goods Sold was $18,938 and $65,366 for the years ended December 31, 2020 and 2019
respectively.
Note
4. Intangible Assets
As
of December 31, 2020, intangible assets consist of patent costs of $768,138, trademarks of $119,911 and accumulated amortization
of $457,833.
As
of December 31, 2019, intangible assets consist of patent costs of $764,891, trademarks of $108,632 and accumulated amortization
of $394,020.
The
amounts carried on the balance sheet represent cost to acquire, legal fees and similar costs relating to the patents incurred
by the Company. Amortization is calculated through the expiration date of the patent, which is December 2025. The amount charged
to expenses for amortization of the patent costs was $63,813 and $63,610 for the years ended December 31, 2020 and 2019, respectively.
Estimated
future amortization expense related to patents as of December 31, 2020, is as follows:
Years
ending December 31,
|
|
Total
Amortization
|
|
2021
|
|
$
|
64,422
|
|
2022
|
|
|
64,422
|
|
2023
|
|
|
64,422
|
|
2024
|
|
|
64,218
|
|
2025
|
|
|
52,821
|
|
|
|
$
|
310,305
|
|
Note
5. Related Parties
As
disclosed below in Note 7, members of management and directors invested in company’s convertible notes; and in Note 10,
members of management and directors have received shares of stock and options in exchange for services.
Note
6. Paycheck Protection Program (PPP) loan
The
Company was granted a $568,131 loan under the PPP administered by a Small Business Administration (SBA) approved partner. The
loan, which matures in two years, is uncollateralized and is fully guaranteed by the Federal government. The Company is eligible
for loan forgiveness of up to 100% of the loan, upon meeting certain requirements. The Company has recorded a note payable and
will record the forgiveness upon being legally released from the loan obligation by the SBA. No forgiveness income has been recorded
for the year ended December 31, 2020. The Company will be required to repay any remaining balance, plus interest accrued at 1
percent, in monthly payments commencing upon notification that the loan will not be forgiven or only partially forgiven. The company
has applied for and anticipates the loan to be forgiven in 2021.
Barfresh
food Group Inc.
Notes
to Consolidated Financial Statements
Note
7. Convertible Notes (Related and Unrelated Party)
In
March 2018, we closed an offering of $2,527,500 in convertible notes, Series CN Note 1 of 2, of which, management, directors and
significant shareholders have invested $840,000. The convertible notes bear 10% interest per annum and are due and payable on
March 14, 2020. The notes are convertible at any time prior to the due date into our common stock at conversion price of $0.88
per share or 85% of the average closing price of the common stock over the twenty consecutive trading days immediately preceding
the date of note holders’ election; but in no event lower than $0.60 per share. In addition, the interest is convertible
at any time prior to the due dates into our common stock at conversion price of 85% of the average closing price of the common
stock over the twenty consecutive trading days immediately preceding the date of note holders’ election; but in no event
lower than $0.60 per share. There were 1,331,583 warrants issued, in conjunction with the convertible note offering.
The
fair value of the warrants, $0.17 per share ($220,548 in the aggregate), was calculated using the Black-Scholes option pricing
model using the following assumptions:
Expected
life (in years)
|
|
|
3
|
|
Volatility
(based on a comparable company)
|
|
|
54.82
|
%
|
Risk
Free interest rate
|
|
|
2.41
|
%
|
Dividend
yield (on common stock)
|
|
|
-
|
|
The
value of $220,548 was recorded as a debt discount related to the issuance of the warrants.
In
April 2018, we offered investors in our March 2018 Convertible Note (“Series CN Notes”) the opportunity to accelerate
the issuance of certain warrants associated with the CN Notes. Pursuant to the acceleration offer, Series CN Notes investors who
invested an additional 10% to 20% of the Series CN Note amount, immediately received an additional 25% warrant coverage on their
initial CN Note investment, which would otherwise have been issued after one year. During April 2018, we closed the CN Note acceleration
offer in the amount of $177,300 in convertible notes, of which, management, directors and significant shareholders have invested
$30,000. The CN Note acceleration offer convertible notes bear 10% interest per annum and are due and payable on March 14, 2020.
The notes are convertible at any time prior to the due date into our common stock at conversion price of $0.88 per share or 85%
of the average closing price of the common stock over the twenty consecutive trading days immediately preceding the date of note
holders’ election; but in no event lower than $0.60 per share. In addition, the interest is convertible at any time prior
to the due dates into our common stock at conversion price of 85% of the average closing price of the common stock over the twenty
consecutive trading days immediately preceding the date of note holders’ election; but in no event lower than $0.60 per
share. There were 937,373 warrants issued in conjunction with the Series CN Note acceleration offer convertible note offering.
The
fair value of the warrants, $0.25 per share ($235,519 in the aggregate), was calculated using the Black-Scholes option pricing
model using the following assumptions:
Expected
life (in years)
|
|
|
3
|
|
Volatility
(based on a comparable company)
|
|
|
55.49
|
%
|
Risk
Free interest rate
|
|
|
2.45
|
%
|
Dividend
yield (on common stock)
|
|
|
-
|
|
The
value of $105,199 was recorded as a debt discount related to the issuance of the warrants as using the fair value would cause
the debt discount to exceed the gross proceeds received.
Barfresh
food Group Inc.
Notes
to Consolidated Financial Statements
In
March 2019, an investor elected to exercise I-Warrants by using part of the investor’s convertible note. The total debt
settled was $350,634 of principal and $33,929 of accrued interest.
On
March 20, 2020, we completed a Private Placement offering of $3,825,000 of common stock. In connection with the transaction, the
Company offered the Convertible Noteholders of Series CN Note 1 and 2 to participate in the equity offering. A total of $720,000
principal balance of Series CN 1 was converted into common stock [$630,000 from related parties]. The Series CN Note 1 Noteholders
were offered bonus interest equivalent to 20% of their outstanding principal which was converted to common stock. For $1,071,000
of the remaining $1,186,167 Series CN Note 1 Noteholders that chose not to participate in the equity offering, the terms of the
Series CN Note 1 were amended to increase the interest rate to 15% per annum and to extend the maturity of the outstanding principal
balance by 24 months to March 20, 2022. The notes are convertible at any time prior to the maturity into our common stock at a
conversion price of $0.50 per share. If the six month price is less than the $0.50 per share, the principal conversion price will
be automatically reduced to the $0.50 per share, but in no event less than $0.35 per Share, in which case the Company shall issue
to each purchaser, based on such purchaser’s investment, (a) shares in a quantity that equals the difference between the
number of Shares issued to such purchaser at closing and the number of Shares that would have been issued to such purchaser at
closing at the $0.50 per share and (b) warrants in a quantity that equals fifty percent (50%) of the difference between the number
of shares issued to such Purchaser at closing and the number of shares that would have been issued to such purchaser at closing
at the $0.50 per share, with an exercise price that equals the sum of $0.10 per share and the $0.50 per share, but in no event
less than $0.45 per share. The exercise price per share for the Convertible Note Warrants and the Bonus Warrant issued at closing
will automatically adjust as well to the sum of $0.10 per share and the Six Month Price, but in no event less than $0.45 per share.
There were 864,000 O warrants issued to the Series CN Note 1 Noteholders for participating in the common stock offering.
On
March 20, 2020, 1,082,727 of the original L Warrants related to the Series CN Note 1 Noteholders had their terms modified, whereby
the exercise price was reduced from $0.70 to $0.50 per share. In addition, the Series CN Note 1 Noteholders that chose to extend
their notes for 24 months were granted 1,071,000 Series P warrants. The fair value of the warrants, ($92,266 in the aggregate
which consists of the L and P Warrants), were calculated using the Black-Scholes option pricing model using the following assumptions:
Expected
life (in years)
|
|
|
1
to 3
|
|
Volatility
|
|
|
76.74-
98.00
|
%
|
Risk
Free interest rate
|
|
|
.15
- .41
|
%
|
Dividend
yield (on common stock)
|
|
|
-
|
|
Barfresh
food Group Inc.
Notes
to Consolidated Financial Statements
Based
on the relative fair value, we recorded a debt discount of $75,184 related to the issue of P Warrants to CN 1 and CN 2 Noteholders.
The modification of the L Warrants resulted in an incremental increase in fair value of $17,082, which was recorded as a debt
discount.
The
convertible notes consist of the following components as of December 31, 2020 and December 31, 2019:
|
|
2020
|
|
|
2019
|
|
Convertible
notes
|
|
$
|
1,181,167
|
|
|
$
|
2,704,800
|
|
Less:
Debt discount (warrant value)
|
|
|
(92,266
|
)
|
|
|
(325,747
|
)
|
Less:
Debt discount (derivative value) (Note 8)
|
|
|
-
|
|
|
|
(638,988
|
)
|
Less:
Debt discount (issuance costs paid)
|
|
|
(6,004
|
)
|
|
|
(27,000
|
)
|
Less:
Note repayments/conversion
|
|
|
(110,166
|
)
|
|
|
(803,634
|
)
|
Add:
Debt discount amortization
|
|
|
38,173
|
|
|
|
898,940
|
|
|
|
$
|
1,010,904
|
|
|
$
|
1,808,371
|
|
In
December 2018, we closed an offering of $1,363,200 in convertible notes, Series CN 2 of 2, of which, management, directors and
significant shareholders have invested $560,000. The convertible notes bear 10% interest per annum and are due and payable on
November 30, 2020. The notes are convertible at any time prior to the due date into our common stock at conversion price of $0.88
per share or 85% of the average closing price of the common stock over the twenty consecutive trading days immediately preceding
the date of note holders’ election; but in no event lower than $0.60 per share. In addition, the interest is convertible
at any time prior to the due dates into our common stock at conversion price of 85% of the average closing price of the common
stock over the twenty consecutive trading days immediately preceding the date of note holders’ election; but in no event
lower than $0.60 per share. There were 678,864 warrants issued, in conjunction with the convertible note offering.
The
fair value of the warrants, $0.31 per share ($212,763 in the aggregate), was calculated using the Black-Scholes option pricing
model using the following assumptions:
Expected
life (in years)
|
|
|
3
|
|
Volatility
(based on a comparable company)
|
|
|
59.00
|
%
|
Risk
Free interest rate
|
|
|
2.83
|
%
|
Dividend
yield (on common stock)
|
|
|
-
|
|
The
value of $212,763 was recorded as a debt discount related to the issuance of the warrants.
On
March 20, 2020, a total of $1,128,000 principal balance of Series CN Note 2 was converted into common stock [$560,000 from related
parties]. The Noteholders were offered bonus interest equivalent to 20% of their outstanding principal and converted their accrued
interest into common stock. For $168,000 of the remaining $235,200 Series CN Note 2 Noteholders that chose not to participate
in the equity offering, the terms of the Series CN Note 2 were amended to extend the maturity of the outstanding principal balance
by 12 months to November 30, 2021. The notes are convertible at any time prior to the maturity into our common stock at a conversion
price of $0.60 per share. There were 1,501,012 O warrants issued to the Series CN Note 2 Noteholders for participating in the
common stock offering.
The
fair value of the modified L warrants, ($4,279 prior to modification, and $6,096 post modification), was calculated using the
Black-Scholes option pricing model using the following assumptions:
Expected
life (in years)
|
|
|
1.71
|
|
Volatility
|
|
|
88.02
|
%
|
Risk
Free interest rate
|
|
|
0.37
|
%
|
Dividend
yield (on common stock)
|
|
|
-
|
|
The
incremental value of $1,817 was recorded as a debt discount related to the modification of existing L warrants.
Barfresh
food Group Inc.
Notes
to Consolidated Financial Statements
The
convertible notes consist of the following components as of December 31, 2020 and December 31, 2019:
|
|
2020
|
|
|
2019
|
|
Convertible
notes
|
|
$
|
235,200
|
|
|
$
|
1,363,200
|
|
Less:
Debt discount (warrant value)
|
|
|
(1,817
|
)
|
|
|
(212,763
|
)
|
Less:
Debt discount (derivative value) (Note 8)
|
|
|
(13,528
|
)
|
|
|
(697,186
|
)
|
Less:
Debt discount (issuance costs paid)
|
|
|
(6,004
|
)
|
|
|
(23,700
|
)
|
Less:
Note repayments
|
|
|
(67,200
|
)
|
|
|
-
|
|
Add:
Debt discount amortization
|
|
|
9,487
|
|
|
|
502,639
|
|
|
|
$
|
156,138
|
|
|
$
|
938,190
|
|
The
total of the two tables above at December 31, 2020, net of discount, equals $1,167,042 which is presented on the consolidated
balance sheet as, $158,243 Convertible Note, net of discount, Current Liabilities, $197,804 Convertible Note, Related Party, Net
of Discount, Long-Term Liabilities and $810,995 Convertible Note, Net of Discount, Long-term Liabilities. The total of $2,740,561
shown in the two tables above at December 31, 2019, are presented in the balance sheet as Long-Term Liabilities: Convertible Note
– related party net of discount, of $1,181,942, Convertible Note – net of Discount of $1,407,877, and Current Liabilities:
Convertible Note – net of Discount $150,742.
Future
maturity of convertible notes at face value before effect of all discount, are as follow:
Years
Ending December 31,
|
|
Total
Convertible Notes
|
|
2021
|
|
$
|
168,000
|
|
2022
|
|
|
1,071,000
|
|
|
|
$
|
1,139,000
|
|
On
March 20, 2020, the Company and the Holders of the Series CN Note 1 and Note 2 mutually agreed to amend its terms to change the
maturity date to March 20, 2022 and November 30, 2021, respectively. The Company accounted for the modification in accordance
with ASC 470-50, Modifications and Extinguishments, which states that for all extinguishments of debt, the difference between
the reacquisition price (including any premium) and the net carrying amount of the debt being extinguished (including any deferred
debt issuance costs) should be recognized as a gain or loss when the debt is extinguished. Accordingly, the Company recorded a
net gain on extinguishment of debt of $379,200 which was comprised of a gain of $437,201, offset by a loss of $58,001. The gain
of $437,201 related to the portion of Convertible Notes that were converted to common stock on March 20, 2020. The loss on extinguishment
of debt of $58,001 related to the portion of Convertible Notes that were extended by either 24 months for CN I, or 12 months for
CN2.
Note
8. Derivative Liabilities
As
discussed in Note 7, Convertible Notes, the Company issued Series CN Note acceleration offer convertible notes payable
that provide variable conversion provisions. The conversion terms of the convertible notes are variable based on certain factors,
such as the future price of the Company’s common stock. The number of shares of common stock to be issued is based on the
future price of the Company’s common stock, therefore the number of shares of common stock issuable upon conversion of the
promissory note is indeterminate.
The
fair values of the Company’s derivative liabilities are estimated at the issuance date and are revalued at each subsequent
report date. The derivative liability was revalued at December 31, 2019 with a value of $211,028, which resulted in a gain
of $1,114,625 for the year then ended.
Barfresh
food Group Inc.
Notes
to Consolidated Financial Statements
As
discussed in Note 7, there was a portion of the CN1 and CN2 notes that was not modified. The Company continued to revalue the
derivative liability for each reporting period in 2020. At December 31, 2020, there was no value as the Company settled the derivative
liability through repayment of the outstanding principal upon maturity. On March 20, 2020, the Company determined the fair value
of the derivative liability related to CN1 and CN2 notes that were converted and extended. The derivative liability values of
$23,100 (CN converted) and $3,440 (CN extended) were used to determine the debt extinguishment gain or loss.
The
fair value of the derivative liability for CN notes that were converted and CN notes that were extended was calculated using the
Black-Scholes model using the following assumptions:
|
|
March
20, 2020
|
|
Expected
life (in years)
|
|
|
0.71
|
|
Volatility
|
|
|
84.82
|
%
|
Risk Free interest
rate
|
|
|
0.5
|
%
|
Dividend yield (on
common stock)
|
|
|
-
|
|
As
the variable conversion provisions were not modified for $168,000 of CN2 notes that were extended to November 2021, the Company
valued the derivative liability as of March 20, 2020. As of March 20, 2020, the initial value of the derivative liability was
$13,527.
The
fair value of the derivative liability for CN2 notes that were extended was calculated using the Black-Scholes model using the
following assumptions:
|
|
March
20, 2020
|
|
Expected
life (in years)
|
|
|
1.71
|
|
Volatility
|
|
|
88.02
|
%
|
Risk Free interest
rate
|
|
|
0.37
|
%
|
Dividend yield (on
common stock)
|
|
|
-
|
|
The
fair value of the derivative liabilities for CN Convertible Note 2 of 2 was calculated using the Black-Scholes model using the
following assumptions.
|
|
December
31,
2020
|
|
|
December
31,
2019
|
|
Expected
life
|
|
|
0.92
|
|
|
|
0.93
|
|
Volatility
|
|
|
120.38
|
%
|
|
|
104.89
|
%
|
Risk
Free interest rate
|
|
|
.1
|
%
|
|
|
1.58
|
%
|
Dividend
yield (on common stock)
|
|
|
-
|
|
|
|
-
|
|
Reconciliation
of the derivative liability measured at fair value on a recurring basis with the use of significant unobservable inputs (level
3) from December 31, 2018 to December 31, 2019:
December
31, 2018
|
|
$
|
1,325,653
|
|
Loss
from change in value
|
|
|
(1,114,625
|
)
|
For
the period ended December 31, 2019
|
|
$
|
211,028
|
|
Barfresh
food Group Inc.
Notes
to Consolidated Financial Statements
Reconciliation
of the derivative liabilities measured at fair value on a recurring basis with the use of significant unobservable inputs (level
3) from December 31, 2019 to December 31, 2020:
|
|
December
31, 2019
|
|
|
|
$
|
211,028
|
|
Extinguishment
change in derivative from conversion
|
|
|
(23,100
|
)
|
Extinguishment
change in derivative from extension
|
|
|
(3,440
|
)
|
Initial derivative
value – March 20, 2020
|
|
|
13,527
|
|
Net
gain from change in value
|
|
|
(156,540
|
)
|
For
the period ended December 31, 2020
|
|
$
|
41,475
|
|
The
following table presents the Company’s fair value hierarchy for applicable assets and liabilities measured at fair value
as of December 31, 2019 and December 31, 2020:
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
Derivative
Liability December 31, 2019
|
|
$
|
-
|
|
|
|
-
|
|
|
|
211,028
|
|
|
$
|
211,028
|
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
Derivative
Liability December 31, 2020
|
|
$
|
-
|
|
|
|
-
|
|
|
|
41,475
|
|
|
$
|
41,475
|
|
Note
9. Commitments and Contingencies
We
lease office space under non-cancelable operating lease which expires on March 31, 2023. We incurred lease expense of $82,194
and $92,608 for the years ended December 31, 2020 and 2019, respectively. As of December 31, 2020, our right of use asset and
related liability was $147,947 and $159,177, respectively.
In
determining the present value of our operating lease right-of-use asset and liability, we used a 10% discount rate (which approximates
our borrowing rate). The remaining term on the lease is 2.25 years.
The
following table presents the future operating lease payment as of December 31, 2020.
2021
|
|
$
|
78,021
|
|
2022
|
|
|
80,361
|
|
2023
|
|
|
20,238
|
|
Total
Lease payments
|
|
|
178,620
|
|
Less:
imputed interest
|
|
|
(19,443
|
)
|
Total
lease liability
|
|
$
|
159,177
|
|
From
time to time, various lawsuits and legal proceedings may arise in the ordinary course of business. However, litigation is subject
to inherent uncertainties and an adverse result in these or other matters may arise from time to time that may harm our business.
We are currently the defendant in one legal proceeding for an amount less than $100,000. Our legal counsel and management believe
a material unfavorable outcome to be remote.
Barfresh
food Group Inc.
Notes
to Consolidated Financial Statements
Note
10. Stockholders’ Equity
During
the year ended December 31, 2019, we issued 282,944 shares of common stock, valued at $169,040 for services. We also issued 91,653
shares of our common stock, with a value of $50,000, to a member of our Board of Directors in lieu of cash payments for Director
fees. In addition, we issued 281,343 options to purchase our common stock to certain member of the Board of Directors in lieu
of cash payments for Director fees valued at $116,874. The exercise price of the options ranged from $0.47 to $0.65 per share,
vest immediately, and are exercisable for periods of 8 years. In addition, we issued 875,000 options to purchase our common stock
to employees and executives. The exercise price of the options ranged from $0.45 to $0.73 per share, vest after 3 years, and are
exercisable for periods of 8 years.
The
fair value of the options issued ($237,850, in the aggregate) was calculated using the Black-Sholes option pricing model, based
on the criteria shown below.
Expected
life (in years)
|
|
|
5.5
to 8
|
|
Volatility
(based on a comparable company)
|
|
|
59.82%
to 77.19
|
%
|
Risk
Free interest rate
|
|
|
1.79%
to 2.78
|
%
|
Dividend
yield (on common stock)
|
|
|
-
|
|
During
the same period, we cancelled 1,387,333 options to purchase our common stock, which was primarily driven by the resignation of
executives.
The
Holders of 2,841,454 warrants elected to exercise those warrant on a cash basis of $1,320,313 and cashless basis of $384,563 to
offset convertible note and accrued interest; and received 2,841,454 shares of our common stock.
The
Holder of 300,000 warrants elected to exercise those warrant on a cash basis of $180,000 and received 300,000 shares of our common
stock.
During
the year ended December 31, 2019, the Company completed additional funding including a Private Placement Offering for common shares
priced at $0.60 per share, resulting in the receipt of proceeds in the amount of $2.4 million and the issuance of 4,000,000 shares.
In
addition, the Company settled certain Executive Deferred Compensation payments with a combination of cash and warrants. The total
amount of Deferred Executive compensation settled is $771,113. One-third of that total or $243,623, was paid in cash. The remaining
balance of $487,246 was settled by granting the Executives warrants exercisable for five years to purchase the Company’s
stock at an exercise price of $0.70 per share.
During
the year ended December 31, 2020, the Company completed a funding, including a Private Placement Offering for common shares priced
at $0.50 per share (subject to adjustment) in the amount of $3,825,000 and the issuance of 7,650,000 shares. The investors of
this Private Placement Offering were granted O warrants to be eligible to purchase an additional 0.50 shares for every share issued
to each purchaser, exercisable for a period of 3 years at an exercise price of $0.60 per share (subject to adjustment). If the
volume-weighted average trading price for the 20 consecutive trading days that conclude upon 6 months after the initial closing
(the “Six Month Price”) exceeds or equals $0.50 per share (the “Target Price”), the per share purchase
price will not be adjusted. If the Six Month Price is less than the Target Price, the per share purchase price will be automatically
reduced to the Six Month Price, but in no event less than $0.35 per share, in which case the Company shall issue to each investor,
pro-rata based on such investor’s investment: (a) shares in a quantity that equals the difference between the number of
shares issued to such purchaser at closing and the number of shares that would have been issued to such purchaser at closing at
the Six Month Price; and (b) a warrant for a number of shares of common stock equal to 50% of the difference between the number
of shares issued to such investor at closing and the number of shares that would have been issued to such investor at closing
at the Six Month Price, with an exercise price equal to the sum of $0.10 per share and the Six Month Price, but in no eventless
than $0.45 per share. The exercise price per share for each warrant will automatically adjust to the sum of $0.10 per share and
the Six-Month Price, but in no event less than $0.45 per share.
Barfresh
food Group Inc.
Notes
to Consolidated Financial Statements
On
September 28, 2020, the Company determined the volume-weighted average price was below the $0.35 per share and consequently issued
5,322,868 additional shares in accordance with provisions of the Private Placement Offering. Similarly, the Company issued an
additional 2,652,868 Warrants to investors that contributed capital or exercised the conversion of their convertible note. Lastly,
the Company issued an additional 459,000 Warrants for convertible noteholders that extended their convertible notes.
In
addition, at the Company’s option, we issued 654,651 shares of our Common Stock to pay interest due of $392,789.
We
issued 272,559 shares of our Common Stock for services rendered. The shares of our common stock were valued between $0.25 - $0.50
per share.
During
the year ended December 31, 2020, we issued 870,000 options to purchase our common stock to employees and 199,358 options to a
Board Member. The exercise price of the options was between $0.34 and $0.44 per share, with both cliff and graded vesting over
3 years, and are exercisable for a period of 8 years.
The
fair value of the options issued ($217,650, 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)
|
|
|
73.36%-75.82
|
%
|
Risk
Free interest rate
|
|
|
0.30%-1.61
|
%
|
Dividend
yield (on common stock)
|
|
|
-
|
|
For
the year ended December 31, 2020, 625,423 options expired or were cancelled.
During
the first quarter of 2020, the Company settled certain Executive Deferred Compensation payments with the issuance of 1,573,988
warrants. The fair value of the warrants totaled $251,837. The total executive Deferred Compensation that was settled with the
issuance of the warrants was $167,892. The difference between the fair value of the warrants and the Executive Deferred Compensation
settled of $83,945 was recorded as stock-based compensation during the year ended December 31, 2020.
The
total amount of equity-based compensation included in additional paid in capital was $276,641 and $225,026 for the years
ended December 31, 2020 and 2019.
The
following is a summary of outstanding stock options issued to employees and directors as of December 31, 2020:
|
|
Number
of Options
|
|
|
Exercise
price per
share $
|
|
|
Average
remaining
term in years
|
|
|
Aggregate
intrinsic
value at date
of grant $
|
|
Outstanding
January 1, 2019
|
|
|
7,428,014
|
|
|
|
.40
- .87
|
|
|
|
5.48
|
|
|
|
|
|
Issued
|
|
|
1,156,343
|
|
|
|
.45
- .73
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(1,387,333
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
December 31, 2019
|
|
|
7,197,024
|
|
|
|
.40
- .87
|
|
|
|
4.55
|
|
|
|
-
|
|
Issued
|
|
|
1,069,358
|
|
|
|
.34
- .44
|
|
|
|
|
|
|
|
|
|
Cancelled/Expired
|
|
|
(625,423
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
December 31, 2020
|
|
|
7,640,959
|
|
|
|
.34
- .87
|
|
|
|
3.48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable,
December 31 2020
|
|
|
6,667,625
|
|
|
|
.34
- .87
|
|
|
|
3.48
|
|
|
|
-
|
|
As
of December 31, 2020, the Company has $175,847 of total unrecognized share-based compensation expense related to unvested
options, which is expected to be amortized over the remaining weighted average period of 1.51 years.
Barfresh
food Group Inc.
Notes
to Consolidated Financial Statements
Note
11. Outstanding Warrants
The
following is a summary of all outstanding warrants as of December 31, 2020:
|
|
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
|
|
|
22,020,833
|
|
|
|
$
0.50 - $1.00
|
|
|
|
1.34
|
|
|
$
|
-
|
|
Warrants
issued in connection with private placement of notes
|
|
|
3,465,501
|
|
|
$
|
0.60
|
|
|
|
1.23
|
|
|
$
|
-
|
|
Warrants
issued in connection with settlement of deferred compensation
|
|
|
3,169,599
|
|
|
$
|
0.60
|
|
|
|
3.72
|
|
|
$
|
-
|
|
Note
12. Income Taxes
Income
tax provision (benefit) for the years ended December 31, 2020 and 2019 is summarized below:
|
|
2020
|
|
|
2019
|
|
Current:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
-
|
|
|
$
|
-
|
|
State
|
|
|
-
|
|
|
|
-
|
|
Total
current
|
|
|
-
|
|
|
|
-
|
|
Deferred:
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(715,000
|
)
|
|
|
(937,500
|
)
|
State
|
|
|
(235,000
|
)
|
|
|
(1,488,500
|
)
|
Total
deferred
|
|
|
(950,000
|
)
|
|
|
(2,426,000
|
)
|
Change
in valuation allowance
|
|
$
|
950,000
|
|
|
$
|
2,426,000
|
|
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:
|
|
2020
|
|
|
2019
|
|
Income
tax provision at the federal statutory rate
|
|
|
21.0
|
%
|
|
|
21.0
|
%
|
State
income taxes, net of federal benefit
|
|
|
6.9
|
%
|
|
|
3.3
|
%
|
Permanent
Difference
|
|
|
(2.5
|
)%
|
|
|
(2.5
|
)%
|
Effect
of rate change
|
|
|
-
|
%
|
|
|
-
|
%
|
Effect
of change in valuation allowance
|
|
|
(25.4
|
)%
|
|
|
(21.8
|
)%
|
|
|
|
-
|
%
|
|
|
-
|
%
|
Components
of the net deferred income tax assets at December 31, 2020 and 2019 were as follows:
|
|
2020
|
|
|
2019
|
|
Net
operating loss carryover
|
|
$
|
11,345,000
|
|
|
$
|
10,395,000
|
|
Valuation
allowance
|
|
|
(11,345,000
|
)
|
|
|
(10,395,000
|
)
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Barfresh
food Group Inc.
Notes
to Consolidated Financial Statements
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 $11,345,000 and $10,395,000 allowance at December 31, 2020
and 2019, respectively, is necessary to reduce the deferred tax assets to the amount that will more likely than not be realized.
The increase in the valuation allowance for the current period is $950,000.
As
of December 31, 2020, we have a net operating loss carry forward of approximately $40,664,400. The loss will be available to offset
future taxable income. If not used, this carry forward will expire as follows:
2030
|
|
$
|
1,000
|
|
2031
|
|
$
|
63,800
|
|
2032
|
|
$
|
345,900
|
|
2033
|
|
$
|
1,840,300
|
|
2034
|
|
$
|
2,324,100
|
|
2035
|
|
$
|
2,987,300
|
|
2036
|
|
$
|
5,061,700
|
|
2037
|
|
$
|
8,464,700
|
|
2038
|
|
$
|
7,315,400
|
|
2039
|
|
$
|
4,391,100
|
|
The
2020 and 2019 net operating loss carry forward of $3,404,600 and $4,464,500 does not expire under the Tax Cut and Job Act of 2017.
Note
13. Business Segments and Customer Concentrations.
During
the years ended December 31, 2020 and 2020, we operated in one segment.
The
following is a breakdown of customers representing more than 10% of sales for the year ended December 31, 2020:
|
|
Revenue
from
customer
|
|
|
Percentage
of
total
revenue
|
|
Customer
A
|
|
$
|
845,011
|
|
|
|
31.41
|
%
|
Customer
B
|
|
$
|
562,499
|
|
|
|
20.91
|
%
|
Customer
C
|
|
$
|
297,527
|
|
|
|
11.06
|
%
|
The
following is a breakdown of customers representing more than 10% of sales for the year ended December 31, 2019:
|
|
|
|
|
Percentage
|
|
|
|
Revenue
from
|
|
|
of
total
|
|
|
|
customer
|
|
|
revenue
|
|
Customer
A
|
|
$
|
1,641,333
|
|
|
|
38.14
|
%
|
Customer
B
|
|
$
|
739,956
|
|
|
|
17.19
|
%
|
Barfresh
food Group Inc.
Notes
to Consolidated Financial Statements
Note
14. Liquidity
We
have a history of operating losses and negative cash flow from operations. 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, 2020, we had $1,959,269 of
cash and restricted cash on the balance sheet. We have continued to significantly reduce core operating expenses, reducing total
General and Administrative Expense in 2020 by $2,470,590 or 36%, as compared with 2019. In January 2021, the company secured $568,131
in proceeds from the second PPP loan.
The
Company is expecting an increase in revenue bouncing back from Covid-19 and its new Twist & Go products. The Company
believes this will provide sufficient cash to cover operating expenses and $1,139,000 in debt due over the next 12 months. If
there are not sufficient cash flows to cover the debt repayment the company believes that the debt could be satisfied through
refinancing including conversion, raising additional proceeds through issuance of stock or new debt. With the lean initiatives
implemented by the business in 2020, liquidity is expected to remain stable with very little change from 2020.
Management
has concluded that these actions have alleviated the substantial doubt of our ability to continue as a going concern. However,
the Company cannot predict, with certainty, the outcome of its action to generate liquidity, including the availability of additional
financing, or whether such actions would generate the expected liquidity as planned.
Note
15. Subsequent Events
On
January 27, 2021, the Company was granted a $568,131 loan under the PPP administered by a Small Business Administration (SBA)
approved partner. The loan, which matures in five years, at an interest rate of 1%, and is uncollateralized and is fully guaranteed
by the Federal government. The deferral period is 24 weeks plus 10 months from the loan note date. The Company is eligible for
loan forgiveness of up to 100% of the loan, upon meeting certain requirements. The Company has recorded a note payable and will
record the forgiveness upon being legally released from the loan obligation by the SBA. The Company will be required to repay
any remaining balance, plus interest accrued at 1 percent, in monthly payments commencing upon notification that the loan will
not be forgiven or only partially forgiven.