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BRFH > SEC Filings for BRFH > Form 10-Q/A on 20-Nov-2013All Recent SEC Filings

Show all filings for BARFRESH FOOD GROUP INC.

Form 10-Q/A for BARFRESH FOOD GROUP INC.


20-Nov-2013

Quarterly Report


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 "Quarterly Report"), including our unaudited condensed consolidated financial statements as of September 30, 2013 and for the six and three months ended September 30, 2013 and 2012 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 2.01 in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (the "SEC") on July 1, 2013. 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 a company engaging in the manufacturing and distribution of ready to blend beverages, particularly, smoothies, shakes and frappes. We hold the technology, and a Canadian patent and a United States patent pending for a sealed pack of ingredients for an individual smoothie. We have generated limited revenue to date. 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. We recently purchased all of the international intellectual rights to the technology. We are currently reviewing our options as how best to monetize the international patents.

To date, we have funded our operations through the sale of our common stock, issuance of convertible debt, and advances from a related party.

In January 2012, we completed an offering of units consisting of an aggregate of
(i) 1,333,332 shares of our common stock and (ii) warrants to purchase 1,333,332 shares of common stock which have a five-year term and an initial per share exercise price of $1.50. The price per unit was $0.75 for an aggregate purchase price of $999,998.

In August 2012, we closed an offering of $440,000 of Convertible Notes ("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 Note is no longer outstanding, into our $0.000001 par value 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 entitles the holder to purchase one share of our $0.000001, par value common stock, a price of $0.46 per share. There were 956,519 warrants issued.

When the Convertible Notes were due we settled the Notes by repaying $40,000 of the Notes in cash, issuing new convertible notes ("New Notes") in the amount of $400,000 and received payment for another New Note in the amount of $20,000. In addition we cancelled the outstanding warrants. 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 Note is no longer outstanding, into our $0.000001 par value 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 $0.000001, par value common stock, a price of $0.25 per share. There were 1,680,000 warrants issued.

During December 2012 through June 30, 2013 we sold (i) 3,200,000 shares of our common stock and (ii) warrants to purchase 1,600,000 shares of common stock which have a three-year term and an initial per share exercise price of $0.50. The price per unit was $0.25 for an aggregate purchase price of $800,000. We incurred cost of the offering of $17,500, for net proceeds of $785,500. The offering has been closed.

During December 2012 through September 30, 2013 we received a cash advance from a relative of an officer of the Company in the amount of $43,274. The advance had no interest and was repaid.

During the three months ended September 30, 2013 we completed an offering of common stock units at a price of $0.25 per unit. Each unit consisted of one share of common stock, a three year warrant to purchase one share of our common stock at an exercise price of $0.25 per share(which may be exercised on a cashless basis), and a five year warrant to purchase one-half (1/2) share of our common stock at an exercise price of $0.50 per share for total consideration of $1,906,500 less $267,645 in cost for a net amount received of $1,638,855.

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

? Participate in test marketing of the product with the flavors developed for the customer

? Agree 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 six months ended September 30, 2013 we began shipping our products to one of the customers we have contracts with 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.

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

Subsequent to September 30, 2013 we acquired all of the international patent rights in respect to a sealed pack of ingredients for an individual smoothie and associated methods and apparatuses (the "Patents"). The Patents, which were filed pursuant to the Patent Cooperation Treaty (the "PCT"), have been granted in 13 jurisdictions and are pending in the remainder of the jurisdictions that have signed the PCT. In addition, we purchased all of the trademarks related to the patented products. These intellectual property assets were acquired from an Australia bank pursuant to an open competitive bidding process for a cash purchase price of AUS $710,000 (approximately U.S. $678,000). Prior to this acquisition we owned the related patents rights in the United States and Canada.

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.

Critical accounting Policies

Our financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America ("GAAP"), which contemplates our continuation as a going concern. We have incurred losses to date of $3,518,908. To date we have funded our operations through advances from a related party, issuance of convertible debt, and the sale of our common stock. We intend to raise additional funding through third party equity or debt financing. There is no certainty that funding will be available as needed. These factors raise substantial doubt about our ability to continue operating as a going concern. Our ability to continue our operations as a going concern, realize the carrying value of our assets, and discharge our liabilities in the normal course of business is dependent upon our ability to raise capital sufficient to fund our commitments and ongoing losses, and ultimately generate profitable operations.

We were in the development stage from December 4, 2009 through March 31, 2013. Our fiscal year ending March 31, 2014 is the first year during which we are considered an operating company and no longer in the development stage.

Intangible Assets

Intangible assets are comprised of patents, net of amortization. The patent costs are being amortized over the life of the patent which is twenty years from the date of filing the patent application. In accordance with ASC Topic 350 Intangibles - Goodwill and Other ("ASC 350"), the costs of internally developing other intangible assets, such as patents, are expensed as incurred. However, as allowed by ASC 350, 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 that are 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.

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.

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 September 30, 2013 and 2012 any equivalents would have been anti-dilutive as we had losses for the periods then ended.

Research and Development

Expenditures for research activities relating to product development and improvement are charged to expense as incurred. We incurred $8,439 and $12,229, in research and development expenses for the six month periods ended September 30, 2013 and 2012, respectively, and $4,532 and $12,229 in research and development expenses for the three month periods ended September 30, 2013 and 2012, 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 $3,466 and $5,066 at September 30, 2013 and March 31, 2013, respectively and will be charged to rent expense over the life of the lease.

Results of Operations

Results of Operation for Six Month Period Ended September 30, 2013 As Compared to the Six Month Period Ended September 30, 2012

(References to 2013 and 2012 are to the six month periods ended September 30, 2013 and 2012 respectively, unless otherwise specified.)

Revenue

Revenue for 2013 was $32,258 as compared to $2,880 in 2012. A number of customers began testing our products in multiple locations in 2013. There was no revenue prior to July 1, 2012.

Cost of revenue for 2013 was $21,319 as compared to $1,584 in 2012. Our gross profit was $10,939 (33.9%) and $1,296 (45.0%) for the six month periods ended September 30, 2013 and 2012, respectively. We anticipate that our gross profit percentage in 2013 is more indicative of our expected results going forward than the percentage in 2012.

Operating expenses

Our operations during 2012 had been limited to developing flavor profiles of our product, setting up a manufacturing facility, producing products, setting up a sales force and negotiating agreements. Our operations in 2013 are more indicative of no longer being a development stage company.

All of our general and administrative expenses increased significantly as we grew the business and is not necessarily indicative of the rate of future growth.

The following is a breakdown of our general and administrative expenses for the six month periods ended September 30, 2013 and 2012:

                                      2013          2012        Difference
Personnel costs                    $  455,920     $  21,185     $   434,735
Consulting fees                       172,762       382,680        (209,918 )
Travel                                 74,695        48,839          25,856
Legal and professional fees            72,698        63,188           9,510
Investor and public relations          66,094         5,312          60,782
Marketing and selling                  40,987        26,288          14,699
Rent                                   39,952         2,383          37,569
Research and development                8,439        12,229          (3,790 )
Stock based compensation/options     (103,488 )      37,292        (140,780 )
Other expenses                         74,573        35,989          38,584
                                   $  902,632     $ 635,385     $   267,247

Personnel cost represent the cost of employees. As of September 30, 2013 we had 6 employees. We had 3 employees in 2012. In 2012 the worked performed by 3 of the employees was performed by consultants.

Consulting fees decreased by $209,918 (54.9%) from $382,680 in 2012 to $172,762 in 2013. During 2013 and 2012, we had from four to six consultants providing services to us. As of September 30, 2013 we have only two consultant providing services. Of the amounts included in consulting fees, $116,842 and $127,315, represents noncash expenses in 2013 and 2012, respectively.

Travel expenses increased by $25,856 (52.9%) from $48,839 in 2012 to $74,695 in 2013. Travel expenses are being incurred primarily related to selling expenses.

Legal and professional fees increased by $9,510 (15.1%) from $63,188 in 2012 to $72,698 in 2013. Legal and professional fees relate to Securities and Exchange Commission ("SEC") compliance, financing legal expenses, and contract negotiation regarding sales, and manufacturing.

Investor and public relation expenses increased $60,782 from $5,312 in 2012 to $66,094 in 2013. The increase was primarily from engaging two firms to assist us with our investor and public relations needs. We anticipate continuing the use of outside sources in the future.

Marketing and selling expenses increased $14,699 (55.9%) from $26,288 in 2012 to $40,987 in 2013. The increase relates primarily to sample expenses. We gave away more products in 2013 than in 2012.

Rent expense is primarily for our location in Beverly Hills, California. Our rent expense is approximately $6,700 per month. The lease on the office commenced in October 2012.

Research and development expenses decreased by $3,790 (31.0%), from $12,229 in 2012 to $8,439 in 2013. Research and development represent 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 costs will be dependent on new formulations and new flavor profiles as our customer base increases.

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, have been reversed during the six month period ended September 30, 2013.

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 $920,170 and $641,431 for 2013 and 2012, respectively.

Interest expense increased $123,959 from $28,070 in 2012 to $152,029 in 2013. Interest primarily relates to convertible debt which were issued in August 2012. Interest expense includes direct interest of $24,924 and $4,400 for 2013 and 2012, respectively, calculated based on the interest rate stated in the convertible notes. In addition, interest expense includes non-cash amortization of the debt discount of $121,622 and $23,670, for 2013 and 2012, respectively.

We had net losses of $1,072,199 and $669,205 for 2013 and 2012, respectively.

Results of Operation for Three Month Period Ended September 30, 2013 As Compared to the Three Month Period Ended September 30, 2012

(References to 2013 and 2012 are to the three month periods ended September 30, 2013 and 2012 respectively, unless otherwise specified.)

Revenue

Revenue for 2013 was $15,933 as compared to $2,880 in 2012. A number of customers began testing our products in multiple locations in 2013. There was no revenue prior to the three months ended September 30, 2012.

Cost of revenue for 2013 was $11,045 as compared to $1,584 in 2012. Our gross profit was $4,888 (30.7%) and $1,296 (45.0%) for the three month periods ended September 30, 2012 and 2012, respectively. We anticipate that our gross profit percentage in 2013 is more indicative of our expected results going forward than the percentage in 2012.

Operating expenses

Our operations during 2012 had been limited to developing flavor profiles of our product, setting up a manufacturing facility, producing products, setting up a sales force and negotiating agreements. Our operations in 2013 are more indicative of future operations as we are no longer a development stage company.

All of our general and administrative expenses increased significantly as we grew the business and is not necessarily indicative of the rate of future growth.

The following is a breakdown of our general and administrative expenses for the three month periods ended September 30, 2013 and 2012:

                                     2013          2012        Difference
Personnel costs                    $ 225,536     $  21,185     $   204,351
Consulting fees                       58,667       183,919        (125,252 )
Travel                                36,934        28,890           8,044
Legal and professional fees           34,534        28,526           6,008
Investor and public relations         21,295         4,362          16,933
Marketing and selling                 24,533        15,413           9,120
Rent                                  21,812         2,383          19,429
Research and development               4,532        12,229          (7,697 )
Stock based compensation/options           -        37,292         (37,292 )
Other expenses                        49,883        21,487          28,396
                                   $ 477,726     $ 355,686     $   122,040

Personnel cost represent the cost of employees. As of September 30, 2013 we had 6 employees. We had 3 employees in 2012. In 2012 the worked performed by 3 of the employees was performed by consultants.

Consulting fees decreased by $125,252 (68.1%) from $183,919 in 2012 to $58,667 in 2013. During 2013 and 2012, we had from two to three consultants providing services to us. As of September 30, 2013 we have only two consultant providing services. Of the amounts included in consulting fees, $25,000 and $55,313, represents noncash expenses in 2013 and 2012, respectively.

Travel expenses increased by $8,044 (27.8%) from $28,890 in 2012 to $36,934 in 2013. Travel expenses are being incurred primarily related to selling expenses.

Legal and professional fees increased by $6,008 (21.1%) from $28,526 in 2012 to $34,534 in 2013. Legal and professional fees relate to Securities and Exchange Commission ("SEC") compliance, financing legal expenses, and contract negotiation regarding consultants and manufacturing.

Investor and public relation expenses increased $16,933 from $4,362 in 2012 to $21,295 in 2013. The increase was primarily from engaging two firms to assist us with our investor and public relations needs. We anticipate continuing the use of outside sources in the future.

Marketing and selling expenses increased $9,120 (59.2%) from $15,413 in 2012 to $24,533 in 2013. The increase relates primarily to sample expenses. We gave away more products in 2013 than in 2012.

Rent expense is primarily for our location in Beverly Hills, California. Our rent expense is approximately $6,700 per month. The lease on the office commenced in October 2012.

Research and development expenses decreased by $7,697 (62.9%), from $12,229 in 2012 to $4,532 in 2013. Research and development represent 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 costs will be dependent on new formulations and new flavor profiles as our customer base increases.

There was no stock based compensation in 2013.

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 $490,747 and $360,891 for 2013 and 2012, respectively

Interest expense increased $39,749 from $28,070 in 2012 to $67,819 in 2013. Interest primarily relates to convertible debt which were issued in August 2012. Interest expense includes direct interest of $15,039 and $4,400 for 2013 and 2012, respectively, calculated based on the interest rate stated in the convertible notes. In addition, interest expense includes non-cash amortization of the debt discount of $51,467 and $23,670 for 2013 and 2012, respectively.

We had net losses of $558,566 and $388,961 for 2013 and 2012, respectively.

Liquidity and Capital Resources

As of September 30, 2013 we had working capital of $825,508. During the six months ended September 30, 2013 we used cash of $1,028,338 in operations, $24,486 for investment in equipment, and we received $2,306,500 less expenses of $267,645 for a net amount of $2,308,855 for the sale of (i) 9,226,000 shares our common stock and (ii) warrants to purchase 12,239,000 shares of common stock which have terms from three to five year and exercise prices between $0.25 and $0.50 per share. In addition we borrowed $12,975 and repaid $43,247 in advances from a relative of one of our officers and directors. We also repaid $40,000 and borrowed $20,000 of principal our convertible debt.

Our operations to date have been financed by the sale of securities and by the issuance of convertible debt. We believe that the proceeds of our latest offering should be sufficient to fund our operations for the foreseeable future. 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.

The aggregate minimum requirements under non-cancelable leases as of September 30, 2013 are as follows:

                     Fiscal Years ending March 31,
                     2014 (six months remaining)       39,990
                     2015                              46,655
                                                     $ 86,645

The aggregate amount of principal payments due are as follows:

                    Fiscal Years ending March 31,
                    2014 (six months remaining)     $       -
                    2015                                    -
                    2016                              420,000
                                                    $ 420,000

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.

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