UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2014

 

or

 

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ________________ to ________________

 

Commission File Number: 000-55131

 

BARFRESH FOOD GROUP INC.

(Exact name of registrant as specified in its charter)

 

Delaware 27-1994406
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
   
90 Madison Street, Suite 701, Denver, CO 80206
(Address of principal executive offices) (Zip Code)

 

303-329-3008

(Registrant’s telephone number, including area code)

 

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

[X] Yes [  ] No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

[X] Yes [  ] No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer [  ] Accelerated filer [  ]
Non-accelerated filer [  ] (Do not check if a smaller reporting company) Smaller reporting company [X]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

[  ] Yes [X] No

 

As of August 11, 2014, there were 66,112,728 outstanding shares of common stock of the registrant.

 

 

 

 
 

  

TABLE OF CONTENTS

 

   

Page

Number

PART I - FINANCIAL INFORMATION    
     
Item 1.   Financial Statements.   F-1
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations.   3
Item 3.   Quantitative and Qualitative Disclosures About Market Risk.   7
Item 4.   Controls and Procedures.   7
       
PART II - OTHER INFORMATION    
     
Item 1.   Legal Proceedings.   8
Item 1A. Risk Factors.   8
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds.   8
Item 3.   Defaults Upon Senior Securities.   8
Item 4.   Mine Safety Disclosures.   8
Item 5.   Other Information.   8
Item 6.   Exhibits.   8
       
SIGNATURES   9

 

2
 

  

PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

Barfresh Food Group Inc.

Condensed Consolidated Balance Sheets

 

    June 30, 2014     March 31, 2014  
    (Unaudited)     (Audited)  
Assets                
Current assets:                
Cash   $ 2,023,923     $ 2,632,612  
Accounts Receivable     83,402       68,640  
Inventory     73,769       76,913  
Prepaid expenses and other current assets     11,970       12,007  
Total current assets     2,193,064       2,790,172  
Property, plant and equipment, net of depreciation     465,408       362,078  
Intangible asset, net of amortization     696,853       700,654  
Deposits     16,451       14,461  
Total Assets   $ 3,371,776     $ 3,867,365  
                 
Liabilities And Stockholders’ Equity                
Current liabilities:                
Accounts payable   $ 149,011     $ 175,851  
Accrued expenses     273,118       242,820  
Deferred rent liability     1,066       1,866  
Short-term notes payable - related party, net of discount     555,201       492,015  
Short-term notes payable, net of discount     59,481       52,731  
Total current liabilities     1,037,877       965,283  
Convertible note - related party, net of discount     25,924       22,993  
Convertible note, net of discount     191,759       170,066  
Total liabilities     1,255,560       1,158,342  
                 
Commitments and contingencies (Note 6)                
                 
Stockholders’ equity:                
Preferred stock, $0.000001 par value, 5,000,000 shares authorized, none issued or outstanding     -       -  
Common stock, $0.000001 par value; 95,000,000 shares authorized; 65,871,384 and 65,247,660 shares issued and outstanding at June 30, 2014 and March 31, 2014, respectively     66       65  
Additional paid in capital     7,943,117       7,739,117  
Accumulated (deficit)     (5,826,967 )     (5,030,159 )
Total stockholders’ equity     2,116,216       2,709,023  
Total Liabilities and Stockholders’ Equity   $ 3,371,776     $ 3,867,365  

 

See the accompanying notes to the condensed consolidated financial statements

 

F- 1
 

  

Barfresh Food Group Inc.

Condensed Consolidated Statements of Operations

(Unaudited)

 

    For the three months ended June 30,  
    2014     2013  
             
Revenue   $ 61,492     $ 16,325  
Cost of revenue     41,359       10,274  
Gross profit     20,133       6,051  
                 
Operating expenses:                
General and administrative     677,231       424,906  
Depreciation Amortization     28,720       10,568  
Total operating expenses     705,951       435,474  
                 
Operating loss     (685,818 )     (429,423 )
                 
Other expenses                
Interest     110,990       84,210  
                 
Net (loss)   $ (796,808 )   $ (513,633 )
                 
Per share information - basic and fully diluted:                
Weighted average shares outstanding     65,443,194       51,476,550  
Net (loss) per share   $ (0.01 )   $ (0.01 )

 

See the accompanying notes to the condensed consolidated financial statements

 

F- 2
 

  

Barfresh Food Group Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

    for the three months ended June 30,  
    2014     2013  
Net cash used in operations   $ (480,439 )   $ (448,542 )
                 
Cash flow from investing activities:                
Purchase of equipment     (119,594 )     (18,354 )
Purchase of patents     (11,277 )     -  
Sale of equipment     2,621       -  
Net Cash used in investing activities     (128,250 )     (18,354 )
                 
Cash flow from financing activities:                
Issuance of common stock for cash     -       400,000  
Net cash provided by financing activities     -       400,000  
                 
Net increase (decrease) in cash     (608,689 )     (66,896 )
Cash at beginning of period     2,632,612       85,957  
Cash at end of period   $ 2,023,923     $ 19,061  
                 
Supplemental disclosure of cash flow information:                
Cash paid for interest   $ 3,182     $ -  
Cash paid for income taxes   $ -     $ -  
                 
Non-cash financing activities:                
Common stock issued for services   $ 204,000     $ -  

 

See the accompanying notes to the condensed consolidated financial statements

 

F- 3
 

 

Barfresh Food Group Inc.

Notes to Condensed Consolidated Financial Statements

June 30, 2014 and 2013

(Unaudited)

 

Note 1. Basis of Presentation and Significant Accounting Policies

 

Throughout this report, the terms “our”, “we”, “us” and the “Company” refer to Barfresh Food Group Inc., including its subsidiaries. The accompanying unaudited condensed financial statements of Barfresh Food Group Inc. at June 30, 2014 and 2013 have been prepared in accordance with generally accepted accounting principles (“GAAP”) for interim financial statements, instructions to Form 10-Q, and Regulation S-X. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted. These condensed financial statements should be read in conjunction with the financial statements and notes thereto included in our annual report on Form 10-K for the year ended March 31, 2014. In management’s opinion, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation to make our financial statements not misleading have been included. The results of operations for the periods ended June 30, 2014 and 2013 presented are not necessarily indicative of the results to be expected for the full year. The March 31, 2014 balance sheet has been derived from our audited financial statements included in our annual report on Form 10-K for the year ended March 31, 2014.

 

Basis of Consolidation

 

The consolidated condensed financial statements include the financial statements of the Company and our wholly owned subsidiaries Barfresh Inc. and 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.

 

Intangible Assets

 

Intangible assets are comprised of patents, net of amortization. The patent costs are being amortized over the life of the patents, which is twenty years from the date of filing the patent applications. In accordance with ASC Topic 350 Intangibles - Goodwill and Other (“ASC 350”), the costs of internally developing other intangible assets, such as patents, are expensed as incurred. However, as allowed by ASC 350, legal fees and similar costs relating to patents have been capitalized.

 

Property, Plant and Equipment

 

Property, plant and equipment is stated at cost less accumulated depreciation and accumulated impairment loss, if any. Depreciation is calculated on a straight line basis over the estimated useful lives of the assets. Leasehold improvements are being amortized over the shorter of the useful life of the asset or the lease term that includes any expected renewal periods deemed to be reasonably assured. The estimated useful lives used for financial statement purposes are:

 

Furniture and fixtures: 5 years

Equipment: 7 years

Leasehold improvements: 2 years

 

Revenue Recognition

 

We recognize revenue when there is persuasive evidence of an arrangement, delivery has occurred or services have been rendered, the sales price is determinable and collection is reasonably assured.

 

Earnings per Share

 

We calculate net loss per share in accordance with ASC Topic 260, Earnings per Share . Basic net loss per share is computed by dividing net loss by the weighted average number of shares of common stock outstanding for the period, and diluted earnings per share is computed by including common stock equivalents outstanding for the period in the denominator. At June 30, 2014 and 2013 any equivalents would have been anti-dilutive as we had losses for the periods then ended.

 

F- 4
 

 

Barfresh Food Group Inc.

Notes to Condensed Consolidated Financial Statements

June 30, 2014 and 2013

(Unaudited)

 

Research and Development

 

Expenditures for research activities relating to product development and improvement are charged to expense as incurred. We incurred $5,602 and $3,907 in research and development expenses for the three months ended June 30, 2014 and 2013, respectively.

 

Rent Expense

 

We recognize rent expense on a straight-line basis over the reasonably assured lease term as defined in ASC Topic 840, Leases (“ASC 840”). In addition, our lease agreement provides for rental payments commencing at a date other than the date of initial occupancy. We include the rent holidays in determination of straight-line rent expense. Therefore, rent expense is charged to expense beginning with the occupancy date. Deferred rent was $1,066 and $1,866 at June 30, 2014 and March 31, 2014, respectively, and will be charged to rent expense over the life of the lease.

 

Recent Pronouncements

 

We have reviewed all recently issued, but not yet effective, accounting pronouncements and do not believe the future adoptions of any such pronouncements may be expected to cause a material impact on our financial condition or results of operations.

 

Note 2. Property Plant and Equipment

 

Major classes of property and equipment at June 30, 2014 and March 31, 2014:

 

    June 30, 2014     March 31,2014  
Furniture and fixtures   $ 13,331     $ 13,331  
Equipment     377,585       372,617  
Leasehold Improvements     3,300       3,300  
      394,216       389,248  
Less: accumulated depreciation     (100,787 )     (87,146 )
      293,429       302,102  
Equipment not in service     171,979       59,976  
Property and equipment, net of depreciation   $ 465,408     $ 362,078  

 

We recorded depreciation expense related to these assets of $13,642 and $10,023 for the three months ended June 30, 2014 and 2013, respectively.

 

Note 3. Intangible Assets

 

As of June 30, 2014 and March 31, 2014, intangible assets consist primarily of patent costs of $747,925 and $736,648, less accumulated amortization of $51,072 and $35,994, respectively.

 

The amounts carried on the balance sheet represent cost to acquire, legal fees and similar costs relating to the patents incurred by the Company. Amortization is calculated through the expiration date of the patent, which is December, 2025. The amount charged to expenses for amortization of the patent costs was $15,078 and $545 for the three months ended June 30, 2014 and 2013, respectively.

 

F- 5
 

 

Barfresh Food Group Inc.

Notes to Condensed Consolidated Financial Statements

June 30, 2014 and 2013

(Unaudited)

 

Estimated amortization expense related to the patent as of June 30, 2014 is as follows:

 

Fiscal Years ending March 31,     Total Amortization  
2015 (nine months remaining)     $ 46,119  
2016       61,492  
2017       61,492  
2018       61,492  
2019       61,492  
Later years       404,766  
      $ 696,853  

 

Note 4. Short-Term Notes Payable (Related and Unrelated)

 

In December 2013, we closed an offering of $775,000 in short-term notes payable (“Short-Term Notes”), $500,000 of which was purchased by a significant shareholder, $100,000 was purchased by an officer, director and significant shareholder and $100,000 was purchased by a director and significant shareholder. The Short-Term Notes bear interest at a rate of 2% per annum and are due and payable on December 20, 2014. We also issued 1,291,667 warrants to the Short-Term Note holders for the right to purchase shares of our common stock. Each warrant entitles the holder to purchase one share of our common stock at a price of $0.45 per share, may be exercised on a cashless basis and are exercisable for a period of five years.

 

In accordance with the guidance in ASC Topic 470-20 Debt with Conversion and Other Options (“ASC 470”), we first calculated the fair value of the warrants issued and then determined the relative value of the Short-Term Notes.

 

The fair value of the warrant, $0.38 per share, was calculated using the Black-Sholes option pricing model using the following assumptions:

 

Expected life (in years)     5  
Volatility (based on a comparable company)     97 %
Risk Free interest rate     1.66 %
Dividend yield (on common stock)     -  

 

The relative value of the warrants was $298,232, which was the amount recorded as debt discount. The amounts recorded as debt discount will be amortized over the life of the note, one year, and charged to interest expense. We estimated the effective interest rate as calculated to be approximately 52% but will be paying cash at a rate of 2% per annum.

 

The balance at June 30, 2014 was comprised of:

 

Convertible notes payable, related and unrelated parties   $ 775,000  
Unamortized Debt discount     (160,318 )
    $ 614,682  

 

Accrued expenses include interest of $41,010 at June 30, 2014.

 

We have the right to extend the due date of the Short-Term Notes to June 19, 2015 with notice to the holders given at least 30 days and no more than 60 days prior to the initial due date. If we extend the Short-Term Notes the interest rate will increase to 3% per annum and we will be required to issue additional warrants (“Extension Warrants”). The Extension Warrants will have a 3 year term and the exercise price will be determined based on the volume weighted average price for the 10 trading days preceding the original due date of the Short-Term Notes. The number of shares which may be purchased will be computed by dividing 56.25% of the unpaid principal amount of the Short-Term Notes held by the initial exercise price computed as set forth above.

 

F- 6
 

 

Barfresh Food Group Inc.

Notes to Condensed Consolidated Financial Statements

June 30, 2014 and 2013

(Unaudited)

 

Note 5. Convertible Note (Related and Unrelated)

 

In August 2012, we closed an offering of $440,000 of convertible notes, $50,000 of which was purchased by a significant shareholder of ours. The notes bear interest at a rate of 12% per annum and were due and payable on September 6, 2013. In addition, the notes were convertible at any time after the original issue date until the notes are no longer outstanding into our common stock at a conversion price of $0.372 per share. We also issued 956,519 warrants to the note holders for the right to purchase shares of our common stock. Each warrant entitled the holder to purchase one share of our common stock at a price of $0.46 per share for a term of seven years.

 

When the convertible notes were due we settled the notes by repaying $40,000 of the notes in cash, issuing new convertible notes in the amount of $400,000 and received payment for another note in the amount of $20,000. The new notes bear interest at a rate of 12% per annum and are due and payable on September 6, 2015. In addition the new notes are convertible at any time after the original issue date until the new notes are no longer outstanding, into our common stock at a conversion price of $0.25 per share. We also issued warrants to the new note holders for the right to purchase shares of our common stock. Each warrant entitles the holder to purchase one share of our common stock at a price of $0.25 per share. There were 1,680,000 warrants issued. The warrants issued with the original notes were cancelled.

 

In accordance with the guidance in ASC Topic 470-20 Debt with Conversion and Other Options (“ASC 470”), we first calculated the fair value of the warrants issued and then determined the relative value of the notes and determined that there was a beneficial conversion feature.

 

The fair value of the warrants, $0.13 per share, ($216,531 in the aggregate) was calculated using the Black-Sholes option pricing model using the following assumptions:

 

Expected life (in years)     3  
Volatility (based on a comparable company)     85 %
Risk Free interest rate     0.91 %
Dividend yield (on common stock)     -  

 

The relative value of the warrants to the notes was $142,873, which was the amount recorded as a portion of the debt discount. We also recorded a beneficial conversion feature on the convertible notes of $125,905. The amounts recorded as debt discount will be amortized over the life of the notes, two years, and charged to interest expense. We estimated the effective interest rate as calculated to be approximately 74% but will be paying cash at a rate of 12% per annum.

 

The balance at June 30, 2014 was comprised of:

 

Convertible notes payable, related and unrelated parties   $ 420,000  
Unamortized Debt discount     (202,317 )
    $ 217,683  

 

Accrued expenses include interest of $4,972 at June 30, 2014.

 

The aggregate amount of principal payments due as of June 30, 2014 are as follows:

 

Fiscal Years ending March 31,        
2015       775,000  
2016       420,000  
      $ 1,195,000  

 

Note 6. Commitments and Contingencies

 

We lease office space under a non-cancelable operating lease, which expires October 31, 2014.

 

As of June 30, 2014 the aggregate minimum requirements under non-cancelable leases as of June 30, 2014 all of which are in the fiscal year ending March 31, 2015, are $26,660.

 

Rent expense was $28,949 and $18,140 for the three months ended June 30, 2014 and 2013, respectively.

 

F- 7
 

 

Barfresh Food Group Inc.

Notes to Condensed Consolidated Financial Statements

June 30, 2014 and 2013

(Unaudited)

 

Note 7. Stockholders’ Equity

 

During the three months ended June 30, 2014 we issued 400,000 shares of common stock to officers and directors of the Company for services rendered. In accordance with ASC Topic 718, Compensation - Stock Compensation (“ASC 718”), compensation expense in the amount of $204.000 was recognized in the statement of operations for the three months ended June 30, 2014. The fair value of the stock was based on the trading value of the shares on the date of grant.

 

The following is a summary of outstanding stock options issued to employees as of June 30, 2014

 

    Number of
Options
    Exercise
price
per share
    Average
remaining
term in years
    Aggregate
intrinsic value
at date of grant
 
Outstanding March 31, 2014     800,000     $ 0.50       2.88     $ -  
Issued     -                          
Cancelled     -       -       -       -  
Outstanding June 30, 2014     800,000       0.50       2.55       -  
Exercisable     800,000     $ 0.50       2.55     $ -  

 

During the three month period ended June 30, 2014 holders of 348,520 warrants to purchase shares of our common stock elected to exercise those warrants. The warrants cashless and were 223,724 shares of our common stock were issued.

 

Note 8. Outstanding Warrants

 

The following is a summary of all outstanding warrants as of June 30, 2014:

 

    Number of
 warrants
    Exercise  price
 per share
    Average
 remaining  term
in years
    Aggregate  
intrinsic value
 at date of grant
 
Warrants issued in connection with private placements of common stock     16,548,812     $    0.25 - 1.50       2.64     $ 1,237,172  
Warrants issued in connection with private placement of convertible notes     1,680,000     $ 0.25       2.195     $ -  
Warrants issued in connection with short-term notes payable     1,291,667     $ .45       4.48     $ 64,583  

 

Note 9. Interest Expense

 

Interest expense includes direct interest of $16,430 and $13,200 for the three months ended June 30, 2014 and 2013, respectively, calculated based on the interest rate stated in our various debt instruments.

 

In addition as more fully described in Notes 4 and 5 above, interest expense includes non-cash amortization of the debt discount of $94,560 and $71,010 for the three months ended June 30, 2014 and 2013, respectively

 

Note 10. Income Taxes

 

We account for income taxes in interim periods in accordance with ASC Topic 740, Income Taxes (“ASC 740”). We have determined an estimated annual effective tax rate. The rate will be revised, if necessary, as of the end of each successive interim period during our fiscal year to our best current estimate. As of June 30, 2014 the estimated effective tax rate for the year will be zero.

 

F- 8
 

 

Barfresh Food Group Inc.

Notes to Condensed Consolidated Financial Statements

June 30, 2014 and 2013

(Unaudited)

 

There are open statutes of limitations for taxing authorities in federal and state jurisdictions to audit our tax returns from 2009 through the current period. Our policy is to account for income tax related interest and penalties in income tax expense in the statement of operations. There have been no income tax related interest or penalties assessed or recorded.

 

ASC 740 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This pronouncement also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition.

 

For the three months ended June 30, 2014 and 2013 we did not have any interest and penalties associated with tax positions. As of June 30, 2014 we did not have any significant unrecognized uncertain tax positions.

  

Note 11. Business Segments

 

During the three months ended June 30, 2014 and 2013 we operated in only one business segment.

  

Note 12. Subsequent Events

 

Management has evaluated all activity and concluded that no subsequent events have occurred that would require recognition in the financial statements or disclosure in the notes to the financial statements.

 

F- 9
 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

The following discussion should be read in conjunction with the financial information included elsewhere in this Quarterly Report on Form 10-Q (this “Report”), including our unaudited condensed consolidated financial statements as of June 30, 2014 and for the nine and three months ended June 30, 2014 and 2013 and the related notes. References in this Management’s Discussion and Analysis of Financial Condition and Results of Operations section to “us”, “we”, “our” and similar terms refer to Barfresh Food Group Inc. This discussion includes forward-looking statements, as that term is defined in the federal securities laws, based upon current expectations that involve risks and uncertainties, such as plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors. Words such as “anticipate”, “estimate”, “plan”, “continuing”, “ongoing”, “expect”, “believe”, “intend”, “may”, “will”, “should”, “could” and similar expressions are used to identify forward-looking statements.

 

We caution you that these statements are not guarantees of future performance or events and are subject to a number of uncertainties, risks and other influences, many of which are beyond our control, which may influence the accuracy of the statements and the projections upon which the statements are based. Factors that may affect our results include, but are not limited to, the risk factors in Item 1A in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on June 30, 2014. Any one or more of these uncertainties, risks and other influences could materially affect our results of operations and whether forward-looking statements made by us ultimately prove to be accurate. Our actual results, performance and achievements could differ materially from those expressed or implied in these forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statements, whether from new information, future events or otherwise.

 

We are engaged in the manufacturing and distribution of ready to blend beverages, particularly, smoothies, shakes and frappes. Our products are portion controlled ready to blend beverage ingredient packs or “beverage packs”. They contain all of the ingredients necessary to make the beverage, including the base (either sorbet, frozen yogurt or ice cream), fruit pieces, juices and ice. Ingredients used are natural, no syrups or powders.

 

We own the domestic and international patents and patents pending, as well as related trademarks for our products. In November 2011 we acquired the patent rights in the United States and Canada. The Canadian patent has been granted and the United States patent is “patent pending”. On October 15, 2013, we 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 treaty. In addition, on October 15, 2013, we purchased all of the trademarks related to the patented products.

 

We have been developing flavor profiles of our smoothies that we believe will be appealing to tastes in the United States. We have been in discussions with a number of companies including both large and small quick service restaurant (“QSR”) chains and national food services companies that serve alternative venues such as stadiums, arenas and universities with national footprints in the United States and have reached preliminary agreements with three potential customers to begin testing in the near future. We are in ongoing negotiations with a number of other companies. In addition to the large retail fast food and fast casual chains, we will sell to food distributors that supply products to the food services market place. Finally, we intend to monetize the international patents outside of our current area of operations, North America, by expanding contract manufacturing to other countries and selling either through selling agents or our own sales personnel or by entering into some form of license or royalty agreements with third parties. We began selling product to Australia during the final months of our fiscal year ended March 31, 2014.

 

To date, we have funded our operations through the sale of our equity securities, issuance of convertible debt, issuance of promissory notes and advances from related parties.

 

The acquisition of the international patents and trademarks on October 15, 2013 was funded through an advance of $672,157 from an affiliate of a director and significant shareholder. Two hundred thousand ($200,000) of the advance was satisfied through the participation in the Company’s December 20, 2013 private placement of notes and warrants by the affiliate of the aforementioned director and significant shareholder and also an affiliate of an officer and director and significant shareholder. The net proceeds to the Company from the private placement that closed on December 20, 2013, including the aforementioned $200,000, was $775,000. The $775,000 in notes bears interest at a rate of 2% per annum and is due and payable on December 20, 2014, with certain provisions for extension. Warrants to purchase 1,291,667 shares of the Company’s common stock were issued to these investors and the warrants have an exercise price of $0.45 per share. In addition to the related parties discussed above, $500,000 of notes was purchased by a significant shareholder. All of the related parties participated in the offering upon the same terms offered to other investors. The balance of the remaining loan for the acquisition of the patents and trademarks, including interest, was paid in cash, in full by the Company.

 

3
 

 

Our plan is to utilize contract manufacturers to manufacture our products in the United States. Ice cream manufacturers are best suited for our products. Our first production line has been installed and commissioned in Salt Lake City and is currently producing products being sold to our customers as well as new product development for new large customers.

 

Although we do not have a contract with any suppliers for the raw materials needed to manufacture smoothie packs we believe that there are a significant number of sources available and we do not anticipate becoming dependent on any one supplier. As demand for our range of products grows, we will look to contract a level of our raw material requirements to ensure continuity of supply.

 

We currently have two employees selling our product. The process of obtaining orders from potential customers will likely follow the following process:

 

Meeting with and introducing products to customer
   
Developing flavor profiles for the specific customer
   
Participating in test marketing of the product with the flavors developed for the customer
   
Agreeing to a roll out schedule for the customer.

 

Although we have agreements with potential customers representing approximately 10,000 outlets to develop flavors and test our products and have begun to develop flavor profiles for others, we have no assurance that we will supply any chain with our products. During the year ended March 31, 2014 we began shipping our products to one of the customers with whom we have contracts and to a number of smaller customers.

 

In addition to the large retail fast food and fast casual chains, we will sell to food distributors that supply products to the food services market place. Effective July 2, 2014 we entered into an agreement with Sysco Merchandising and Supply Chain Services, Inc. for resale by the Sysco Corporation (“Sysco”) to the foodservice industry of the Company’s ready-to-blend smoothies, shakes and frappes. Our products will be 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; provided however, we may supply our 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 operators nominated distributor for our products. We have begun shipping to Sysco under this agreement

 

There can be no assurance that we will not become dependent on one or a few major customers.

 

We intend to monetize the international patents outside of our current area of operations, North America, by expanding contract manufacturing to other countries and selling either through selling agents or our own sales personnel or by entering into some form of license or royalty agreements with third parties. Most recently, as part of our expansion due to the acquisition of the international patents, we engaged a leading regional Australian food ingredient supply and product developer as our wholesaler and distributor. Our first order was shipped to Australia in January 2014.

 

Critical accounting Policies

 

Our financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”).

 

Basis of Consolidation

 

The consolidated condensed financial statements include the financial statements of the Company and our wholly owned subsidiaries Barfresh Inc. and 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.

 

Intangible Assets

 

Intangible assets are comprised of patents, net of amortization. The patent costs are being amortized over the life of the patents, which is twenty years from the date of filing the patent applications. In accordance with ASC Topic 350 Intangibles - Goodwill and Other (“ASC 350”), the costs of internally developing other intangible assets, such as patents, are expensed as incurred. However, as allowed by ASC 350, legal fees and similar costs relating to patents have been capitalized.

 

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Property, Plant and Equipment

 

Property, plant and equipment is stated at cost less accumulated depreciation and accumulated impairment loss, if any. Depreciation is calculated on a straight line basis over the estimated useful lives of the assets. Leasehold improvements are being amortized over the shorter of the useful life of the asset or the lease term that includes any expected renewal periods deemed to be reasonably assured. The estimated useful lives used for financial statement purposes are:

 

Furniture and fixtures: 5 years

Equipment: 7 years

Leasehold improvements: 2 years

 

Revenue Recognition

 

We recognize revenue when there is persuasive evidence of an arrangement, delivery has occurred or services have been rendered, the sales price is determinable and collection is reasonably assured.

 

Research and Development

 

Expenditures for research activities relating to product development and improvement are charged to expense as incurred. We incurred $5,602 and $3,907 in research and development expenses for the three months ended June 30, 2014 and 2013, respectively.

 

Rent Expense

 

We recognize rent expense on a straight-line basis over the reasonably assured lease term as defined in ASC Topic 840, Leases (“ASC 840”). In addition, our lease agreement provides for rental payments commencing at a date other than the date of initial occupancy. We include the rent holidays in determination of straight-line rent expense. Therefore, rent expense is charged to expense beginning with the occupancy date. Deferred rent was $1,066 and $1,866 at June 30, 2014 and March 31, 2014, respectively, and will be charged to rent expense over the life of the lease.

 

Results of Operations

 

Results of Operation for Three Months Ended June 30, 2014 as Compared to the Three Months Ended June 30, 2013

(References to 2014 and 2013 are to the three months ended June 30, 2014 and 2013 respectively, unless otherwise specified.)

 

Revenue and cost of revenue

 

Revenue for 2014 was $61,492 as compared to $16,325 in 2013. We began shipping to new customers in 2014 whereas in 2013 only a limited number of customers were testing our products.

 

Cost of revenue for 2014 was $41,359 as compared to $10,274 in 2013. Our gross profit was $20,133 (33%) and $6,051 (37%) for 2014 and 2013, respectively. There were no significant change in our cost and gross profit relates primarily to selling prices. Our selling prices to overseas customers yields higher gross profit. We anticipate that our gross profit percentage in 2014 is indicative of our expected results going forward.

 

Operating expenses

 

Our operations during 2014 and 2013 were directed towards increasing sales and finalizing flavor profiles. We are currently evaluating our needs in regards to increased overhead as a result of the agreement with Sysco.

 

Our general and administrative expenses increased $252,325 as we grew the business and is not necessarily indicative of the rate of future increases.

 

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The following is a breakdown of our general and administrative expenses for the three months ended June 30, 2014 and 2013:

 

    2014     2013     Difference  
Personnel costs   $ 242,126     $ 230,384     $ 11,742  
Stock based compensation/options     204,000       (103,488 )     307,488  
Legal and professional fees     61,011       38,164       22,847  
Travel and entertainment     32,574       37,761       (5,187 )
Rent     23,949       18,140       5,809  
Marketing and selling     25,057       14,599       10,458  
Investor and public relations     22,338       44,799       (22,461 )
Consulting fees     10,000       114,095       (104,095 )
Director fees     12,500       0       12,500  
Research and development     5,603       3,907       1,696  
Other expenses     38,073       26,545       11,528  
    $ 677,231     $ 424,906     $ 252,325  

 

Personnel cost represents the cost of employees including salaries, employee benefits and employment taxes and continues to be are largest cost. Personnel cost increased $11,742 (5.1%) from $230,384 to $242,126. We currently have six full time employees. We anticipate personnel cost to increase in the future as we add more staff.

 

Stock based compensation, which includes stock issued and options granted to employee, and non-employees. The amount in 2014 represents a stock grant made to an officer and director. Stock based compensation is used as an incentive to attract new employees and to compensate existing employees. In 2013, certain previously granted restricted stock rights and stock options were subject to performance conditions. As a result of the employee termination the performance conditions will not be met. In accordance with ASC Topic 718, Compensation - Stock Compensation (“ASC 718”), previously recognized unvested equity based compensation cost of $103,488, was reversed during 2013.

 

Legal and professional fees increase $22,847 (59.9%) from $38,164 in 2013 to $61,011 in 2014, as a result of cost associated with negotiating two supply agreements, one of which has been entered into. We anticipate legal fees related to ongoing Securities and Exchange Commission reporting to remain the same and additional Legal fees to be related to the number of contract we are negotiating.

 

Travel and entertainment expenses decreased $5,187 (13.7%) from $37,761 in 2013 to $32,574 in 2014. The decrease is due to timing. We anticipate that travel and entertainment cost will increase as we increase the number of customers that we are selling to.

 

Rent expense is primarily for our location in Beverly Hills, California. Our rent expense is approximately $6,800 per month. The lease on the office commenced in October 2012 and expires in October 2014. We are currently negotiating with our landlord to extend the lease. In 2014 we incurred rent expense on storage facilities.

 

Marketing and selling expenses increased $10,458 (71.6%) from $14,599 in 2013 to $25,057 in 2014. The increase relates primarily to overall sales and marketing activities.

 

Investor and public relation expenses decreased $22,461 (50.1%) from $44,799 in 2013 to $22,338 in 2014. We are currently using one IR/PR firm to assist us with our investor and public relations needs. We used three IR/PR firms in 2013. We anticipate continuing the use of an outside IR/PR firm and attending investor conferences in the future.

 

Consulting fees decreased by $104,095 (91.2%) from $114,095 in 2013 to $10,000 in 2014. During 2013, we had five consultants providing services to us. During 2014 we had only one consultant providing services. Future consulting fees will be variable depending on our needs.

 

We had no director fees in 2013. We will incur director fees in the future. We approved a fee of $12,500 per quarter for all non employee directors. We currently have two non employee directors who will receive payments in the future.

 

Research and development expenses were not significant in either period. Research and development represents the cost of developing flavor profiles of our products and the development of future equipment. We anticipate cost continuing in future periods, the amounts of which cannot be estimated at this point in time. Our research and development cost will be dependent on new formulations and new flavor profiles as our customer base increases.

 

Other expenses consist of ordinary operating expenses such as office, telephone, insurance, and stock related costs. These costs have increased as our business has grown. We anticipate additional increases in these expenses.

 

We had operating losses of $685,818 and $429,423 for 2014 and 2013, respectively.

 

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Interest expense increased $26,780 (31.8%) from $84,210 in 2013 to $110,990 in 2014. Interest primarily relates to convertible debt that was issued in August 2013 and renewed in September 2013 and short term notes that were issued in December 2013. The stated interest rate on the convertible debt is 12%. After giving effect to the debt discount the effective rate of interest on the short term debt is estimated to be approximately 72% and approximately 74% on the convertible notes.

 

Interest expense includes direct interest of $16,430 and $13,200 in 2014 and 2013, respectively, calculated based on the interest rate stated in our various debt instruments.

 

In addition, interest expense includes non-cash amortization of the debt discount of $94,560 and $71,010, for 2014 and 2013, respectively.

 

We had net losses of $796,808 and $513,633 for 2014 and 2013, respectively.

 

Liquidity and Capital Resources

 

As of June 30, 2014 we had working capital of $1,155,187.

 

During the three months ended June 30, 2014 we used cash of $480,439 in operations, $119,594 for the purchase of equipment and $11,277 for patents and trademarks.

 

We had no financing activity during the three months ended June 30, 2014.

 

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 capital or debt. There are no assurances that we will be able to generate the necessary capital or debt to carry out our current plan of operations.

 

As of June 30, 2014 the aggregate minimum requirements under non-cancelable leases as of June 30, 2014 all of which are in the fiscal year ending March 31, 2015, are $26,660.

 

The aggregate amount of principal payments due as of June 30, 2014 are as follows:

 

Fiscal Years ending March 31,        
2015       775,000  
2016       420,000  
      $ 1,195,000  

 

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 3. Quantitative and Qualitative Disclosures About Market Risk.

 

Not required because we are a smaller reporting company.

 

Item 4 . Controls and Procedures.

 

Evaluation of Disclosure Controls and Procedures

 

Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Securities and Exchange Act of 1934 Rules 13a-15(f). Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of June 30, 2014.

 

However, management has identified the following material weaknesses in our internal control over financial reporting:

 

  We do not have an audit committee: While we are not currently obligated to have an audit committee, including a member who is an audit committee financial expert, as defined in Item 407 of Regulation S-K, under applicable regulations or listing standards; however, it is management’s view that such a committee is an important internal control over financial reporting, the lack of which may result in ineffective oversight in the establishment and monitoring of internal controls and procedures.
     
  We do not have a majority of independent directors on our board of directors, which may result in ineffective oversight in the establishment and monitoring of required internal controls and procedures.
     
  Inadequate Segregation of Duties: We have an inadequate number of personnel to properly implement control procedures.

 

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 believes that the material weakness set forth above did not have an effect on our financial results.


Changes in Internal Control over Financial Reporting

 

There has been no change in the Company’s internal control over financial reporting during the three months ended June 30, 2014 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II - OTHER INFORMATION

 

Item 1. Legal Proceedings.

 

No disclosure required hereunder.

 

Item 1A. Risk Factors.

 

Not required because we are a smaller reporting company.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

During the three months ended June 30, 2014, we issued 400,000 shares of our restricted common stock to an officer and director of the Company. These securities were issued pursuant to exemption from registration under Section 4(2) of the Securities Act of 1933 based on the recipient’s pre-existing relationship with the Company.

 

Item 3. Defaults Upon Senior Securities.

 

None.

 

Item 4. Mine Safety Disclosures.

 

Not applicable.

 

Item 5. Other Information.

 

None.

 

Item 6. Exhibits.

 

Exhibit No.   Description
     
31.1   Certification of Principal Executive Officer, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)
     
31.2   Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)
     
32.1*   Certification of Principal Executive Officer of the Company, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
     
32.2*   Certification of Principal Financial Officer of the Company, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
     
101.INS*   XBRL Instance Document
101.SCH*   XBRL Taxonomy Extension Schema Document
101.CAL*   XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*   XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*   XBRL Taxonomy Extension Label Linkbase Document
101.PRE*   XBRL Taxonomy Extension Presentation Linkbase Document

 

* Furnished herewith.

 

XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

 

In accordance with SEC Release 33-8238, Exhibits 32.1 and 32.2 are furnished and not filed.

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

  BARFRESH FOOD GROUP INC.
     
Date: August 13, 2014 By: /s/ Riccardo Delle Coste
    Riccardo Delle Coste
    Chief Executive Officer
    (Duly Authorized Officer and Principal Executive Officer)
     
Date: August 13 2014 By: /s/ Arnold Tinter
    Arnold Tinter
    Chief Financial Officer
    (Duly Authorized Officer and Principal Financial Officer)

 

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