Barfresh Food Group Inc 10-Q for FY2021 Q3
Barfresh Food Group Inc. (BRFH)
About this 10-Q
Barfresh Food Group Inc filed this 10-Q on November 15, 2021, covering the quarter ended September 30, 2021 (FY2021 Q3).
Headline figures
Quarter ended September 30, 2021, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $1.93M
- up 172.8% from $707.61K a year earlier
- Net loss
- $506.66K
- compared with a net loss of $878.26K a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For
the quarterly period ended
| 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:
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) | |
| (Address of principal executive offices) | (Zip Code) |
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act: None
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
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 such 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.
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule
405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ☐ | Accelerated filer ☐ | |
Smaller
reporting company Emerging
growth company |
If
an emerging growth company, indicate by the check mark if the registrant has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: shares as of November 15, 2021.
TABLE OF CONTENTS
Page Number | |||
| PART I - FINANCIAL INFORMATION | |||
| Item 1. | Financial Statements. | 3 | |
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations. | 17 | |
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk. | 25 | |
| Item 4. | Controls and Procedures. | 26 | |
| PART II - OTHER INFORMATION | |||
| Item 1. | Legal Proceedings. | 27 | |
| Item 1A. | Risk Factors. | 27 | |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. | 27 | |
| Item 3. | Defaults Upon Senior Securities. | 27 | |
| Item 4. | Mine Safety Disclosures. | 27 | |
| Item 5. | Other Information. | 27 | |
| Item 6. | Exhibits. | 27 | |
| SIGNATURES | 28 | ||
| 2 |
Item 1. Financial Statements.
Barfresh Food Group Inc.
Condensed Consolidated Balance Sheets
September 30, 2021 | December 31, 2020 | |||||||
| (Unaudited) | (Audited) | |||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash | $ | $ | ||||||
| Restricted cash | ||||||||
| Accounts receivable, net | ||||||||
| Inventory, net | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total current assets | ||||||||
| Property, plant and equipment, net of depreciation | ||||||||
| Operating lease right-of-use assets, net | ||||||||
| Intangible assets, net of amortization | ||||||||
| Deposits | ||||||||
| Total Assets | $ | $ | ||||||
| Liabilities And Stockholders’ Equity | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued expenses | ||||||||
| Advance payment | ||||||||
| Accrued payroll | ||||||||
| Accrued vacation | ||||||||
| Accrued interest | ||||||||
| Lease liability | ||||||||
| Loan payable – Paycheck Protection Program | ||||||||
| Convertible note, net of discount | ||||||||
| Derivative liabilities | ||||||||
| Total current liabilities | ||||||||
| Long term liabilities: | ||||||||
| Accrued interest | ||||||||
| Lease liability | ||||||||
| Loan payable – Paycheck Protection Program | ||||||||
| Convertible note - related party, net of discount | ||||||||
| Convertible note, net of discount | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies (Note 6,7,8 and 13) | ||||||||
| Stockholders’ equity: | ||||||||
| Preferred stock, $ par value, shares authorized, issued or outstanding | ||||||||
| Common stock, $ par value; shares authorized; and shares issued and outstanding at June 30, 2021 and December 31, 2020, respectively | ||||||||
| Additional paid in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total stockholders’ equity | ||||||||
| Total Liabilities and Stockholders’ Equity | $ | $ | ||||||
See the accompanying notes to the condensed consolidated financial statements.
| 3 |
Barfresh Food Group Inc.
Condensed Consolidated Statements of Operations
For the three and nine months ended September 30, 2021 and 2020
| For the three months ended September 30 | For the nine months ended September 30 | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Revenue | $ | $ | $ | $ | ||||||||||||
| Cost of revenue | ||||||||||||||||
| Depreciation of manufacturing equipment | ||||||||||||||||
| Gross profit | ||||||||||||||||
| Operating expenses: | ||||||||||||||||
| General and administrative | ||||||||||||||||
| Depreciation and amortization | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Operating loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other (income)/expenses | ||||||||||||||||
| (Gain)/Loss from derivative liability | ( | ) | ( | ) | ( | ) | ||||||||||
| (Gain)/Loss from debt extinguishment - PPP | ( | ) | ||||||||||||||
| (Gain)/Loss on extinguishment of debt | ( | |||||||||||||||
| Interest expense | ||||||||||||||||
| Total other (income) expense | ( | ) | ( | ) | ||||||||||||
| Net (loss) | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Per share information - basic and fully diluted: | ||||||||||||||||
| Weighted average shares outstanding | ||||||||||||||||
| Net (loss) per share | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
See the accompanying notes to the condensed consolidated financial statements.
| 4 |
Barfresh Food Group Inc.
Condensed Consolidated Statements of Cash Flows
For the nine months ended September 30, 2021 and 2020
| 2021 | 2020 | |||||||
| Net Cash (used for) operating activities | ( | ) | ( | ) | ||||
| Investing Activities | ||||||||
| Purchase of property and equipment | ( | ) | ( | ) | ||||
| Purchase of intangibles | ( | ) | ( | ) | ||||
| Net Cash (used for) investing activities | ( | ) | ( | ) | ||||
| Financing Activities | ||||||||
| Cash received for stock | ||||||||
| Proceeds from note payable | ||||||||
| Repayment of convertible notes | ( | ) | ( | ) | ||||
| Payments for Debt issue cost | ( | ) | ||||||
| Payments of operating leases | ( | ) | ( | ) | ||||
| Net Cash from financing activities | ||||||||
| Net change in cash and restricted cash | ||||||||
| Cash and restricted cash, beginning of year | ||||||||
| Cash and restricted cash, end of year | $ | $ | ||||||
| Non-cash financing and investing activities | ||||||||
| Executive deferred compensation settled through issuance of warrants | $ | $ | ||||||
| Net carrying value of convertible notes and accrued interest settled through issuance of stock (debt extinguishment) | $ | $ | ||||||
| Accrued interest settled through issuance of stock | $ | $ | ||||||
| Debt discount warrant and derivative liability | $ | $ | ||||||
| Offering and debt issuance costs included in accounts payable | $ | $ | ||||||
| Extinguishment of derivative liability | $ | |||||||
| Equipment included in accrued liability | $ | $ | ||||||
See the accompanying notes to the condensed consolidated financial statements.
| 5 |
Barfresh Food Group Inc.
Notes to Condensed Consolidated Financial Statements
September 30, 2021
(Unaudited)
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 can be in excess of the $
Restricted Cash
At
September 30, 2021 and December 31, 2020, the Company had $
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.
| 6 |
Barfresh Food Group Inc.
Notes to Condensed Consolidated Financial Statements
September 30, 2021
(Unaudited)
Our financial instruments consist of cash, accounts receivable, accounts payable, advanced payments, restricted cash, convertible debt, derivative liability and the PPP loan. The carrying value of our financial instruments approximates their fair value. The PPP loan approximates fair value as forgiveness is expected in the near term.
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 September 30, 2021 and December 31, 2020, the Company’s allowance for doubtful accounts was
$
Inventory
Inventory
consists of raw materials and 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 September
30, 2021 and December 31, 2020, the Company’s inventory reserve was $
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
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 periods 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-lined 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:
Manufacturing
equipment and customer equipment:
Vehicles:
| 7 |
Barfresh Food Group Inc.
Notes to Condensed Consolidated Financial Statements
September 30, 2021
(Unaudited)
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 general and administrative expense as incurred.
We incurred $
| 8 |
Barfresh Food Group Inc.
Notes to Condensed Consolidated Financial Statements
September 30, 2021
(Unaudited)
Shipping and Storage Costs
Shipping
and handling costs are included in general and administrative expenses. For the three months ending September 30, 2021 and 2020, shipping
and storage costs totaled $
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
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.
| 9 |
Barfresh Food Group Inc.
Notes to Condensed Consolidated Financial Statements
September 30, 2021
(Unaudited)
Debt Extinguishment
The
Company evaluates its convertible instruments in accordance with ASC 470-50, “Debt Modifications and Extinguishments.” For
all extinguishments of debt, ASC 470-50 requires 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) to be recognized as a gain or loss when the debt is
extinguished. Accordingly, the Company recorded a net loss of $
We calculate net loss per share in accordance with ASC Topic 260. 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 September 30, 2021 and 2020 any equivalents would have been anti-dilutive as we had losses for the periods then ended.
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.
Note 2. Inventory
Inventory consists of the following at September 30, 2021 and December 31, 2020:
Schedule of Inventory
| 2021 | 2020 | |||||||
| Raw materials | $ | $ | ||||||
| Finished goods, net of reserve | ||||||||
| Inventory, net | $ | $ | ||||||
Note 3. Property Plant and Equipment
Major classes of property and equipment at September 30, 2021 and December 31, 2020:
Schedule of Major Classes of Property and Equipment
| 2021 | 2020 | |||||||
| Furniture and fixtures | $ | $ | ||||||
| Manufacturing Equipment and customer equipment | ||||||||
| Leasehold Improvements | ||||||||
| Vehicles | ||||||||
| Less: accumulated depreciation | ( | ) | ( | ) | ||||
| Equipment not yet placed in service | ||||||||
| Property and equipment, net of depreciation | $ | $ | ||||||
| 10 |
Barfresh Food Group Inc.
Notes to Condensed Consolidated Financial Statements
September 30, 2021
(Unaudited)
We
recorded depreciation expense related to these assets of $
Note 4. Intangible Assets
As
of September 30, 2021, intangible assets consist of patent costs of $
As
of December 31, 2020, intangible assets consist of patent costs of $
The
amounts carried on the balance sheet represent cost to acquire, legal fees and similar costs relating to the patents incurred by the
Company.
Estimated future amortization expense related to patents as of September 30, 2021, is as follows:
Schedule of Estimated Future Amortization Expense Related to Intangible Property
| Total Amortization | ||||
| Years ending December 31, | ||||
| 2021 | $ | |||
| 2022 | ||||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| Intangible asset, net of amortization | $ | |||
Note 5. Related Parties
As disclosed below in Note 7, members of management and directors invested in the 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
On May 7, 2020 the Company was granted a $
On January 27, 2021, the Company was granted a second
$
| 11 |
Barfresh Food Group Inc.
Notes to Condensed Consolidated Financial Statements
September 30, 2021
(Unaudited)
The repayment for the PPP loan as of September 30, 2021, are as follows:
Schedule of Repayment of Paycheck Protection Program (PPP) Loan
| Total Repayment | ||||
| Years ending December 31, | ||||
| 2021 (three months remaining) | $ | |||
| 2022 | ||||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| Later years | ||||
| Repayment of debt | $ | |||
Note 7. Convertible Notes (Related and Unrelated Party)
As
of September 30, 2021, the Company settled all outstanding convertible note which included the $
The convertible notes consist of the following components as of September 30, 2021 and December 31, 2020:
Schedule of Convertible Notes
September 30, 2021 | December 31, 2020 | |||||||
| Convertible notes | $ | $ | ||||||
| Less: Debt discount (warrant value) | ( | ) | ( | ) | ||||
| Less: Debt discount (derivative value) (Note 8) | ||||||||
| Less: Debt discount (issuance costs paid) | ( | ) | ( | ) | ||||
| Less: Note conversion/settlements | ( | ) | ( | ) | ||||
| Add: Debt discount amortization | ||||||||
| Total convertible notes | $ | $ | ||||||
As
of September 30, 2021, the Company settled all outstanding convertible note holders which included the $
The convertible notes consist of the following components as of September 30, 2021 and December 31, 2020:
Schedule of Convertible Notes
September 30, 2021 | December 31, 2020 | |||||||
| Convertible notes | $ | $ | ||||||
| Less: Debt discount (warrant value) | ( | ) | ( | ) | ||||
| Less: Debt discount (derivative value) (Note 8) | ( | ) | ( | ) | ||||
| Less: Debt discount (issuance costs paid) | ( | ) | ( | ) | ||||
| Less: Note conversion/settlements | ( | ) | ( | ) | ||||
| Add: Debt discount amortization | ||||||||
| Total convertible notes | $ | $ | ||||||
The
total of $
| 12 |
Barfresh Food Group Inc.
Notes to Condensed Consolidated Financial Statements
September 30, 2021
(Unaudited)
Note 8. Derivative Liabilities
As
discussed in Note 7, Convertible Notes, the Company had $
The
fair values of the Company’s derivative liabilities are estimated at the issuance date and are revalued at each subsequent reporting
date. As of September 30, 2021, the Convertible Noteholders discussed in Note 7 were settled. Upon debt extinguishment the Company’s
derivative liability was revalued at May 26, 2021 with value of $
The fair value of the derivative liabilities for CN Notes 2 was calculated using the Black-Scholes model using the following assumptions.
Schedule of Fair Value of the Derivative Liability
| 26-May-21 | 31-Dec-20 | |||||||
| Expected life | ||||||||
| Volatility (based on comparable company) | % | % | ||||||
| Risk Free interest rate | % | % | ||||||
| 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, 2020 to September 30, 2021:
Schedule of Derivative Liability Measured at Fair Value on a Recurring Basis
| December 31, 2020 | $ | |||
| Net gain from change in value | ( | ) | ||
| Extinguishment change in derivative from debt settlement | ( | ) | ||
| September 30, 2021 | $ |
The following table presents the Company’s fair value hierarchy for applicable assets and liabilities measured at fair value as of December 31, 2020 and September 30, 2021:
Schedule of Fair Value Hierarchy of Assets and Liabilities
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Derivative Liability December 31, 2020 | $ | $ | ||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Derivative Liability September 30, 2021 | $ | $ |
Note 9. Commitments and Contingencies
We
lease office space under a non-cancelable operating lease which expires on
| 13 |
Barfresh Food Group Inc.
Notes to Condensed Consolidated Financial Statements
September 30, 2021
(Unaudited)
In
determining the present value of our operating lease right-of-use asset and liability, we used a
The following table presents the future operating lease payment as of September 30, 2021:
Schedule of Estimate Future Maturities of Lease Liabilities
| 2021 (three months remaining) | ||||
| 2022 | ||||
| 2023 | ||||
| Total Lease payments | ||||
| Less: imputed interest | ( | ) | ||
| Total lease liability | $ |
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 $
Note 10. Stockholders’ Equity
During the nine months ended September 30, 2021, we issued options to purchase our common stock to employees. The exercise price of the options were $-$ per share, with a combination of both cliff and graded vesting over years and are exercisable for a period of 8 years.
Summary of Fair Value of Options Using Black-Sholes Option Pricing Model
| Expected life (in years) | - | |||
| Volatility (based on a comparable company) | %- | % | ||
| Risk Free interest rate | %- | % | ||
| Dividend yield (on common stock) |
For the nine months ended September 30, 2021, the Company issued options for board director compensation, and options were cancelled. The total amount of equity-based compensation included in additional paid in capital was $ and $ for the three months ended September 30, 2021 and 2020, respectively. The total amount of equity-based compensation included in additional paid in capital was $ and $ for the nine months ended September 30, 2021 and 2020, respectively.
Summary of Outstanding Stock Options Issued to Employees and Directors
| Number of Options | Exercise price per share $ | Average remaining term in years | Aggregate intrinsic value at date of grant $ | |||||||||||||
| Outstanding January 1, 2021 | - | |||||||||||||||
| Issued - Employees | - | |||||||||||||||
| Issued - Directors | ||||||||||||||||
| Cancelled/Expired | ( | ) | ||||||||||||||
| Outstanding September 30 2021 | - | |||||||||||||||
| Exercisable, September 30, 2021 | - | - | ||||||||||||||
| 14 |
Barfresh Food Group Inc.
Notes to Condensed Consolidated Financial Statements
September 30, 2021
(Unaudited)
As of September 30, 2021, the Company has $ of total unrecognized share-based compensation expense related to unvested options, which is expected to be amortized over the remaining weighted average period of years.
The following is Changes in Stockholders’ Equity as of September 30, 2020 and September 30, 2021:
Schedule of Changes in Stockholders' Equity
| Additional | ||||||||||||||||||||
| Common Stock | paid in | Accumulated | ||||||||||||||||||
| Shares | Amount | Capital | (Deficit) | Total | ||||||||||||||||
| Balance January 1, 2020 | $ | $ | ( | ) | $ | |||||||||||||||
| Issuance of stock for capital raise, net of offering costs of $ | - | |||||||||||||||||||
| Conversion of debt | - | |||||||||||||||||||
| Interest paid in shares | - | - | ||||||||||||||||||
| Issuance of stock for services | - | - | ||||||||||||||||||
| Equity based compensation | - | - | - | |||||||||||||||||
| Warrants issued to management | - | - | - | |||||||||||||||||
| Warrant Modification | - | - | - | |||||||||||||||||
| Warrant issued for note extension | - | - | - | |||||||||||||||||
| Restricted stock issuance | - | - | - | - | ||||||||||||||||
| Net (loss) for the year | - | - | - | ( | ) | ( | ) | |||||||||||||
| Balance September 30, 2020 | $ | $ | ( | ) | $ | |||||||||||||||
| 15 |
Barfresh Food Group Inc.
Notes to Condensed Consolidated Financial Statements
September 30, 2021
(Unaudited)
| Additional | ||||||||||||||||||||
| Common Stock | paid in | Accumulated | ||||||||||||||||||
| Shares | Amount | Capital | (Deficit) | Total | ||||||||||||||||
| Balance January 1, 2021 | $ | $ | ( | ) | $ | |||||||||||||||
| Issuance of stock for capital raise, | - | |||||||||||||||||||
| Conversion of debt and accrued interest | - | |||||||||||||||||||
| Interest paid in shares | - | - | ||||||||||||||||||
| Issuance of stock for services | - | - | ||||||||||||||||||
| Equity based compensation | - | - | - | |||||||||||||||||
| Net (loss) for the year | - | - | - | ( | ) | ( | ) | |||||||||||||
| Balance September 30, 2021 | $ | $ | ( | ) | $ | |||||||||||||||
On
June 1, 2021, the Company completed a private placement of shares of its common stock at $ per share, resulting in gross
proceeds of $
Note 11. Outstanding Warrants
The following is a summary of all outstanding warrants as of September 30, 2021:
Summary of Outstanding Warrants
| 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 | $ | | $ | |||||||||||||
| Warrants issued in connection with private placement of notes | $ | $ | ||||||||||||||
| Warrants issued in connection with settlement of deferred compensation | $ | | $ | |||||||||||||
| Warrants issued in connection with Settlement of services | $ | $ | ||||||||||||||
Note 12. Income Taxes
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. Accordingly, at this time the Company has placed
a valuation allowance on all tax assets. As of September 30, 2021, the estimated effective tax rate for the year will be
| 16 |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion should be read in conjunction with the financial information included elsewhere in this Quarterly Report on Form 10-Q (this “Report”), including our unaudited condensed consolidated financial statements and the related notes. References in this Management’s Discussion and Analysis of Financial Condition and Results of Operations section to “us”, “we”, “our” and similar terms refer to Barfresh Food Group Inc. This discussion includes forward-looking statements, as that term is defined in the federal securities laws, based upon current expectations that involve risks and uncertainties, such as plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors. Words such as “anticipate”, “estimate”, “plan”, “continuing”, “ongoing”, “expect”, “believe”, “intend”, “may”, “will”, “should”, “could” and similar expressions are used to identify forward-looking statements.
We caution you that these statements are not guarantees of future performance or events and are subject to a number of uncertainties, risks and other influences, many of which are beyond our control, which may influence the accuracy of the statements and the projections upon which the statements are based. Any one or more of these uncertainties, risks and other influences could materially affect our results of operations and whether forward-looking statements made by us ultimately prove to be accurate. Our actual results, performance and achievements could differ materially from those expressed or implied in these forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statements, whether from new information, future events or otherwise.
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 three different flavors (Peach, Mango and Strawberry/Banana).
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. The Company has multiple SKUs developed and approved by the customer which are awaiting placement on the marketing calendar.
| 17 |
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. This agreement remains in effect.
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 were unsecured and had (i) a two-year term, and (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 investors could 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 were to remain outstanding after the one-year anniversary of the closing, investors would 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.
| 18 |
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 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 concluded 6 months after the initial closing (the “Six Month Price”) exceeded or equaled $0.50 per share (the “Target Price”), the per share purchase price would not be adjusted. If the Six Month Price was less than the Target Price, the per share purchase price would be automatically reduced to the Six Month Price, but in no event less than $0.35 per share, in which case the Company would issue to each investor, pro-rata based on such investor’s investment: (a) shares in a quantity that equaled 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 event less than $0.45 per share. The exercise price per share for each warrant would 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.
On June 1, 2021, the Company completed a private placement of 16,666,666 shares of its common stock at $0.36 per share, resulting in gross proceeds of $6,000,000. In addition, holders of debt converted a total of $399,000 in principal and $234,410 in interest into 1,741,873 shares of common stock, debt in the amount of $840,000 was retired, and a PPP loan in the amount of $568,131 was forgiven, leaving the Company with no debt except for a PPP loan in the amount of $568,131.
Currently we have 14 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”).
| 19 |
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.
| 20 |
Results of Operations
Results of Operation for Three Months Ended September 30, 2021 as Compared to the Three Months Ended September 30, 2020
Revenue and cost of revenue
Revenue increased $1,222,936 (173%) from $707,610 in 2020 to $1,930,546 in 2021. The overall revenue for the third quarter 2021 was higher due to growing “Twist & Go”™ revenue and the gradual return of single serve and bulk demand.
Cost of revenue for 2021 was $1,209,425 as compared to $423,942 in 2020. Our gross profit was $721,121 (37.4%) and $278,553 (39.4%) for 2021 and 2020, respectively. Gross margin percentages decreased in the third quarter primarily due to higher supply chain costs. We anticipate margins will improve based on improving Twist and Go margins and having a greater mix of higher margin bulk and single serve revenue. As a result, the gross profit percentage for the remainder of 2021 is expected to be approximately 39%.
Operating expenses
Our operations were primarily directed towards increasing sales and expanding our distribution network.
Our general and administrative expenses increased slightly $89,122 (9%) from $976,208 in 2020 to $1,065,330 in 2021. Shipping and storage costs were significantly higher due to higher sales volume due to unprecedented market price and labor shortage, which offset lower research and development, and personnel costs. The following is a breakdown of our general and administrative expenses for the three months ended September 30, 2021 and 2020:
| three months ended | three months ended | |||||||||||
| September 30, 2021 | September 30, 2021 | Difference | ||||||||||
| Personnel costs | $ | 349,570 | 370,010 | (20,440 | ) | |||||||
| Bonus | - | - | - | |||||||||
| Stock based compensation/options | 41,574 | 45,692 | (4,118 | ) | ||||||||
| Legal and professional fees | 45,801 | 29,680 | 16,121 | |||||||||
| Travel | 15,530 | 17,331 | (1,801 | ) | ||||||||
| Rent | 19,818 | 19,813 | 5 | |||||||||
| Marketing and selling | 35,571 | 55,194 | (19,623 | ) | ||||||||
| Consulting fees | 20,744 | 9,005 | 11,739 | |||||||||
| Director fees | 50,000 | 50,000 | - | |||||||||
| Research and development | 34,454 | 147,738 | (113,284 | ) | ||||||||
| Shipping expense and storage | 335,414 | 126,737 | 208,677 | |||||||||
| Other expenses | 116,854 | 105,008 | 11,846 | |||||||||
| $ | 1,065,330 | 976,208 | 89,122 | |||||||||
| 21 |
Personnel cost represents the cost of employees including salaries, bonuses, employee benefits and employment taxes and continues to be one of our largest costs. Personnel cost decreased $20,440 (6%) from $370,010 to $349,570. We had 17 full time employees at the end of the third quarter of 2020, and we currently have 14 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 and non-employees. Stock based compensation for the current quarter was $41,574, a decrease of $4,118, or (9%), from the year ago quarter expense of $45,692 The Company issues additional stock options to its employees from time to time under its Equity Compensation Plan.
Legal and professional fees increased $16,121 (54%) from $29,680 in 2020 to $45,801 in 2021. The increase was primarily due to legal services for up listing. 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 $1,801 (10%) from $17,331 in 2020 to $15,530 in 2021. We anticipate that travel expenses for the remainder of this year will gradually pick up and for the second half of 2021 comparable to 2019 trends.
Rent expense remained flat for the three months ended September 30, 2020 compared to the three months ended September 30, 2021. Rent expense is 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 $19,623 (36%) from $55,194 in 2020 to $35,571 in 2021. Lower marketing and selling expenses were primarily due to changes that were made to certain sales commission agreements.
Consulting fees were $20,774 in 2021, as compared with $9,005 in 2020, an increase of 130%. Our consulting fees vary based on needs. We engaged consultants in the areas of finance during the quarter due to reduced headcount. The need for future consulting services will be variable.
Director fees are flat $50,000 in 2020 to $50,000 in 2021. Annual director fees are anticipated at $50,000 per non-employee director of which six directors will be compensated in 2021.
Research and development expenses decreased $113,284 (77%) from $147,738 in 2020 to $34,454 in 2021. These expenses relate to the services performed by our Director of Manufacturing and Product Development, and consultants supporting that employee. The reduction is primarily due to a reduction in labor hours for our development staff.
Shipping and storage expense became our largest expense in third quarter 2021, it increased $208,677 (165%) from $126,737 in 2020 to $335,414 in 2021. This is primarily due to higher sales volume, higher fuel costs, and from relocating materials from one location to another. We anticipate that shipping and storage expense as a percentage of sales will reduce during the balance of the year, as the Company is able to take advantage of more efficient distribution arrangements as well as an increased volume per load due to higher sales volume in 2021.
Other expenses increased $11,846 (11%) from $105,008 in 2020 to $116,854 in 2021, primarily due to lower insurance expense and the results of the cash and accrued expense reconciliations. Other expenses consist of ordinary operating expenses such as investor relations, office, telephone, insurance, and stock related costs. We anticipate these expenses to be comparable to 2020 for the balance of the year.
| 22 |
We had operating losses of $506,660 and $836,384 for the three-month periods ended September 30, 2021 and 2020, respectively. The improvement of $329,724 or (39%), was primarily due to higher sales volume and related product margin.
The change in the value of the derivative liability is based upon the Black-Scholes model from one period to another. The loss is a result of the change in components of the Black-Scholes model. Components include the Company’s stock price, conversion price, remaining term, volatility, and current discount rate. The derivative liability was settled upon conversion and repayment of the convertible notes in 2020.
We had net losses of $506,660 and $878,257 in the three-month periods ended September 30, 2021 and 2020, respectively.
Results of Operation for Nine Months Ended September 30, 2021 as Compared to the Nine Months Ended September 30, 2020
Revenue and cost of revenue
Revenue increased $2,298,842 (118%) from $1,947,766 in 2020 to $4,246,608 in 2021. The overall revenue for the third quarter 2021 was higher due to growing “Twist & Go”™ revenue and the gradual return of single serve demand.
Cost of revenue for 2021 was $2,597,121 as compared to $1,142,391 in 2020. Our gross profit was $1,631,814 (38.4%) and $790,658 (40.6%) for 2021 and 2020, respectively. Gross margins decreased in the third quarter primarily due to product mix which includes “Twist & Go”™ at lower product margins. We anticipate margins will improve based on improving Twist and Go margins and having a greater mix of higher margin bulk and single serve revenue. As a result, the gross profit percentage for the remainder of 2021 is expected to be approximately 39%.
Operating expenses
Our operations were primarily directed towards increasing sales and expanding our distribution network.
Our general and administrative expenses decreased $450,378 (14%) from $3,284,673 in 2020 to $2,834,295 in 2021, with the improvement primarily driven by the following lower expenses: personnel and marketing and selling expenses resulting from lower headcount and the renegotiation of certain sales commission agreements, stock based compensation, research and development and legal and professional fees. The following is a breakdown of our general and administrative expenses for the nine months ended September 30, 2021 and 2020:
nine months ended September 30, | nine months ended September 30, | |||||||||||
| 2021 | 2020 | Difference | ||||||||||
| Personnel costs | 1,015,070 | 1,217,690 | (202,620 | ) | ||||||||
| Stock based compensation/options | 51,857 | 240,216 | (188,359 | ) | ||||||||
| Legal and professional fees | 154,188 | 273,177 | (118,989 | ) | ||||||||
| Travel | 33,493 | 69,167 | (35,674 | ) | ||||||||
| Rent | 59,489 | 59,657 | (168 | ) | ||||||||
| Marketing and selling | 117,436 | 192,006 | (74,570 | ) | ||||||||
| Consulting fees | 89,956 | 69,193 | 20,763 | |||||||||
| Director fees | 200,000 | 150,000 | 50,000 | |||||||||
| Research and development | 172,900 | 326,892 | (153,992 | ) | ||||||||
| Shipping and storage | 716,552 | 356,270 | 360,282 | |||||||||
| Other expenses | 223,354 | 330,405 | (107,051 | ) | ||||||||
| 2,834,295 | 3,284,673 | (450,378 | ) | |||||||||
| 23 |
Personnel cost represents the cost of employees including salaries, bonuses, employee benefits and employment taxes and continues to be our largest cost. Personnel cost decreased $202,620 (17%) from $1,217,690 to $1,015,070. We had 17 full time employees at the end of the third quarter of 2020, and we currently have 14 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 and non-employees. Stock based compensation for the nine months ended September 30, 2021 was $51,857, a decrease of $188,359, or 78%, from the year ago period expense of $240,216. The Company issues additional stock options to its employees from time to time under its Equity Compensation Plan.
Legal and professional fees decreased $118,989 (44%) from $273,177 in 2020 to $154,188 in 2021. The decrease was primarily due to renegotiated fees for legal services. 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 $35,674 (52%) from $69,167 in 2020 to $33,493 in 2021. The decrease is primarily due to reduction in travel costs associated with terminated employees, tighter controls over sales territories, and reduced travel due to COVID-19. We anticipate that travel expenses for the remainder of this year will gradually pick up and for the second half of 2021 be comparable to 2019 trends.
Rent expense remained flat for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2021. Rent expense is 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 $74,570 (39%) from $192,006 in 2020 to $117,436 in 2021. Lower marketing and selling expenses were primarily due to changes that were made to certain sales commission agreements.
Consulting fees were $89,956 in 2021, as compared with $69,193 in 2020, an increase of $20,763 (30%). Our consulting fees vary based on needs. We engaged consultants in the areas of finance during the quarter due to reduced headcount. The need for future consulting services will be variable.
Director fees increased $50,000 (33%) from $150,000 in 2020 to $200,000 in 2021. Annual director fees are anticipated at $50,000 per non-employee director of which two additional directors will be compensated in 2021.
Research and development expenses decreased $153,992 (47%) from $326,892 in 2020 to $172,900 in 2021. These expenses relate to the services performed by our Director of Manufacturing and Product Development, and consultants supporting that employee. The reduction is primarily due to a reduction in labor hours for our development staff.
Shipping and storage expense increased $360,282 (101%) from $356,270 in 2020 to $716,552 in 2021. This is primarily due to higher sales volume, higher fuel costs, and from relocating materials from one location to another. We anticipate that shipping and storage expense as a percentage of sales will reduce during the balance of the year, as the Company is able to take advantage of more efficient distribution arrangements as well as an increased volume per load due to higher sales volume in 2021.
Other expenses decreased $107,051 (32%) from $330,405 in 2020 to $223,354 in 2021, primarily due to lower insurance expense and the results of the vendor, cash and accrued expenses reconciliation. Other expenses consist of ordinary operating expenses such as investor relations, office, telephone, insurance, and stock related costs. We anticipate these expenses to be comparable to 2020 for the balance of the year.
We had operating losses of $1,658,229 and $2,936,392 for the nine-month periods ended September 30, 2021 and 2020, respectively. The improvement of $1,278,163 or 44%, was primarily to higher sales volume and related product margin.
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The change in the value of the derivative liability is based upon the Black-Scholes model from one period to another. The gain is a result of the change in components of the Black-Scholes model. Components include the Company’s stock price, conversion price, remaining term, volatility, and current discount rate. The derivative liability was settled upon conversion and repayment of the convertible notes.
The PPP loan in the amount of $568,131 was forgiven and debt extinguished, resulting in other operating income of $568,131.
The debt settlement in the second quarter resulted in debt converted of $399,000 in principal and $280,610 in interest into 1,741,873 shares of common stock, with debt in the amount of $840,000 repaid, resulting in a loss of $193,562.
Interest expense for the nine months ended September 30, 2021 was $128,064, as compared with $420,634 for the nine months ended September 30, 2020. Interest decreased $292,570 (70%) due to conversion and repayment of $2,005,366 in convertible notes during the first quarter of 2020, and the debt is fully repaid in second quarter 2021.
We had net losses of $1,395,419 and $2,800,843 in the nine-month periods ended September 30, 2021 and 2020, respectively.
Liquidity and Capital Resources
As of September 30, 2021, we had a working capital surplus of $6,214,494 as compared with a working capital surplus of $1,196,741 at December 31, 2020. The increase in working capital surplus is primarily due to the completion of the private placement of our common stock which resulted in gross proceeds of $6,000,000, offset by the debt extinguishment of all convertible debt of which $840,000 of the principal debt was paid in cash.
In 2020, 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 was eligible for loan forgiveness of up to 100% of the loan, upon meeting certain requirements, and recorded the forgiveness upon being legally released from the loan obligation by the SBA during the three months ended June 30, 2021.
On January 27, 2021, the Company was granted a $568,131 loan under the PPP administered by a 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. The Company anticipates the loan to be forgiven in the second half of 2021.
On June 1, 2021, the Company completed a private placement of 16,666,666 shares of its common stock at $0.36 per share, resulting in gross proceeds of $6,000,000. In addition, holders of debt converted a total of $399,000 in principal and $234,410 in interest into 1,741,873 shares of common stock and debt in the amount of $840,000 was retired, leaving the Company with no debt except for the PPP loan in the amount of $568,131.
During the nine months ended September 30, 2021, we used cash of $1,093,967 in operations, $137,405 for the purchase of equipment, and $4,374 for patents and trademarks.
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.
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 premises covering the period April 1, 2019 to March 31, 2023. The aggregate minimum requirements under the non-cancellable direct lease as of September 30, 2021 is $111,180.
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.
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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 (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). Disclosure controls and procedures are designed to provide reasonable assurance that the information required to be disclosed in the reports that we file or submit under the Exchange Act has been appropriately recorded, processed, summarized and reported on a timely basis and are effective in ensuring that such information is accumulated and communicated to the Company’s management, as appropriate to allow timely decisions regarding required disclosure. Based on this evaluation, our Chief Executive Officer and our Controller concluded that as of September 30, 2021, although process improvements have been implemented which addresses internal control weaknesses, our disclosure on controls and procedures remain the same and are not effective.
Management has identified the following material weaknesses 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
In an effort to remediate the identified material weakness and enhance our internal control over financial reporting, we have hired additional personnel and are reassigning control responsibilities to help ensure that we are able to properly implement internal control procedures. New processes have since been implemented to address segregation of duty issues which also includes transactional signs offs between preparer and reviewer as well as documenting discussions around financial results and metrics including reserves and balance sheet reconciliations.
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 have been changes in the Company’s internal controls as described above; however, such changes did not affect our financial reporting during the three months ended September 30, 2021.
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PART II-OTHER INFORMATION
Item 1. Legal Proceedings.
Neither the Company nor its subsidiaries are party to or have property that is the subject of any material pending legal proceedings. We may be subject to ordinary legal proceedings incidental to our business from time to time that are not required to be disclosed under this Item 1.
Item 1A. Risk Factors.
Not required because we are a smaller reporting company.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
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 | Rule 15d-14(a) Certification (filed herewith) | |
| 32.1 | Certification pursuant to 18 U.S.C. Section 1350 (filed herewith) | |
| 101.INS | Inline XBRL Instance Document* | |
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document* | |
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document* | |
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document* | |
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document* | |
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document* | |
| 104 | Cover Page Interactive Data File (embedded within the Inline XBRL document) |
*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, Exhibit 32.1 is 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: November 15, 2021 | By: | /s/ Riccardo Delle Coste |
Riccardo Delle Coste Chief Executive Officer (Principal Executive Officer) | ||
| Date: November 15, 2021 | By: | /s/ Eric Narimatsu |
Controller (Principal Accounting Officer) | ||
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