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BRFH > SEC Filings for BRFH > Form 10-Q on 13-Feb-2014All Recent SEC Filings

Show all filings for BARFRESH FOOD GROUP INC.

Form 10-Q for BARFRESH FOOD GROUP INC.


13-Feb-2014

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 "Report"), including our unaudited condensed consolidated financial statements as of December 31, 2013 and for the nine and three months ended December 31, 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 1A 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 engaged in the manufacturing and distribution of ready to blend beverages, particularly, smoothies, shakes and frappes. We own the domestic and international patents and patents pending, as well as related trademarks, for a sealed pack of ingredients for an individual smoothie. In November 2011 we acquired the patent rights in the United States and Canada. The United States patent was originally filed on December 4, 2007 and its current status is patent pending. The Canadian patent was originally filed on August 16, 2005 and it has been granted. Subsequently, on October 15, 2013, we acquired all of the related international patent rights, 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, on October 15, 2013, we purchased all of the trademarks related to the patented products.

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 equity securities, issuance of convertible debt, issuance of promissory notes and advances from related parties.

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

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 nine months ended December 31, 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.

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

Critical accounting Policies

Our financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America ("GAAP"), which contemplates our continuation as a going concern. We have incurred losses to date of $4,049,516. To date we have funded our operations through the sale of equity securities, the sale of convertible promissory notes, the issuance of promissory notes and advances from related parties. 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 December 31, 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 $40,305 and $55,233, in research and development expenses for the nine months ended December 31, 2013 and 2012, respectively, and $31,866 and $43,004 in research and development expenses for the three months ended December 31, 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 $2,666 and $5,066 at December 31, 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 Nine Month Period Ended December 31, 2013 as Compared to the Nine-Month Period Ended December 31, 2012

(References to 2013 and 2012 are to the nine-month periods ended December 31, 2013 and 2012 respectively, unless otherwise specified.)

Revenue and cost of revenue

Revenue for 2013 was $39,799 as compared to $7,488 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 $25,733 as compared to $6,115 in 2012. Our gross profit was $14,066 (35.34%) and $1,373 (18.3%) for 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 were 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 nine months ended December 31, 2013 and 2012:

                                      2013            2012         Difference
Personnel costs                    $   669,777     $   220,350     $   449,427
Consulting fees                        209,178         459,831        (250,653 )
Legal and professional fees            133,889         110,623          23,266
Travel                                 119,703          98,233          21,470
Investor and public relations           75,094          34,031          41,063
Marketing and selling                   65,145          33,838          31,307
Rent                                    62,209          21,984          40,225
Research and development                40,305          55,233         (14,928 )
Stock based compensation/options      (103,488 )       130,433        (233,921 )
Other expenses                          93,619          51,503          42,116
                                   $ 1,365,431     $ 1,216,059     $   149,372

Personnel cost represent the cost of employees. During 2013 we had 5 to 6 employees. We had 3 employees in 2012. At the end of 2012 we had 5 employees. We moved from outside consultants to internal personnel. In 2012 the worked performed by the equivalent of 3 employees was performed by consultants.

Consulting fees decreased by $250,653 (54.5%) from $459,831 in 2012 to $209,178 in 2013. During 2013 and 2012, we had from four to six consultants providing services to us. As of December 31, 2013 we have only two consultants providing services. Of the amounts included in consulting fees, $154,630 and $234,805, represents noncash expenses in 2013 and 2012, respectively.

Legal and professional fees increased by $23,266 (21.0%) from $110,623 in 2012 to $133,889 in 2013. Legal and professional fees relate to Securities and Exchange Commission ("SEC") compliance, financing legal expenses, and contract negotiation regarding sales, and manufacturing.

Travel expenses increased by $21,470 (21.9%) from $98,233 in 2012 to $119,703 in 2013. Travel expenses are being incurred primarily related to selling expenses.

Investor and public relation expenses increased $41,063 (121%) from $34,031 in 2012 to $75,094 in 2013. We are currently using an outside firm to assist us with our investor and public relations needs. We incurred the cost associated with attending two investor conferences in 2013. We anticipate continuing the use of outside sources and attending conferences in the future.

Marketing and selling expenses increased $31,307 (92.5%) from $33,838 in 2012 to $65,145 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 $14,928 (27.0%) from $55,233 in 2012 to $40,305 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 has been reversed during the nine months ended December 31, 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 $1,407,494 and $1,232,122 for 2013 and 2012, respectively.

Interest expense increased $83,034 from $112,279 in 2012 to $195,313 in 2013. Interest primarily relates to convertible debt which were issued in August 2012 and renewed in September 2013. Interest expense includes direct interest of $48,474 and $17,600 2013 and 2012, respectively, calculated based on the interest rate stated in our various debt instruments.

In addition interest expense includes non-cash amortization of the debt discount of $146,839 and $94,679, for 2013 and 2012, respectively.

We had net losses of $1,602,807 and $1,344,401 for 2013 and 2012, respectively.

Results of Operation for Three Month Period Ended December 31, 2013 as Compared to the Three-Month Period Ended December 31, 2012

(References to 2013 and 2012 are to the three-month periods ended December 31, 2013 and 2012 respectively, unless otherwise specified.)

Revenue

Revenue for 2013 was $7,541 as compared to $4,608 in 2012. A number of customers began testing our products in multiple locations in 2013.

Cost of revenue for 2013 was $4,414 as compared to $3,859 in 2012. Our gross profit was $3,127 (41.5%) and $749 (16.3%) for 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 three months ended December 31, 2013 and 2012:

                                     2013          2012        Difference
Personnel costs                    $ 213,857     $ 199,165     $    14,692
Consulting fees                       36,416       106,837         (70,421 )
Legal and professional fees           59,194        47,435          11,759
Travel                                47,005        43,349           3,656
Investor and public relations         18,501        28,719         (10,218 )
Marketing and selling                 24,158         7,847          16,311
Rent                                  22,257        19,601           2,656
Research and development              31,866        43,004         (11,138 )
Stock based compensation/options           -        63,455         (63,455 )
Other expenses                         9,545        21,934         (12,389 )
                                   $ 462,799     $ 581,346     $  (118,547 )

Personnel cost represent the cost of employees. As of December 31, 2013 we had 6 employees. We had 3 employees in 2012. At the end of 2012 we had 5 employees. We moved from outside consultants to internal personnel. In 2012 the worked performed by 3 of the employees was performed by consultants.

Consulting fees decreased by $70,421 (65.9%) from $106,837 in 2012 to $36,416 in 2013. During 2013 and 2012, we had from four to six consultants providing services to us. As of December 31, 2013 we have only two consultants providing services. Of the amounts included in consulting fees, $25,000 and $83,170, represents noncash expenses in 2013 and 2012, respectively.

Legal and professional fees increased by $11,759 (24.8%) from $47,435 in 2012 to $59,194 in 2013. Legal and professional fees relate to Securities and Exchange Commission ("SEC") compliance, financing legal expenses, and contract negotiation regarding sales, and manufacturing.

Travel expenses increased by $3,656 (8.4%) from $43,349 in 2012 to $47,005 in 2013. Travel expenses are being incurred primarily related to selling expenses.

Investor and public relation expenses decreased $10,218 (35.6%) from $28,719 in 2012 to $18,501 in 2013. The decrease was primarily due to timing of investor relations activity. We currently are using one outside firm to assist us in our investor relations efforts. We anticipate continuing the use of outside sources and attending conferences in the future and anticipate an increase in costs.

Marketing and selling expenses increased $16,311 (208%) from $7,847 in 2012 to $24,158 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 $11,138 (25.9%) from $43,004 in 2012 to $31,866 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.

Liquidity and Capital Resources

As of December 31, 2013 we had a working capital deficit of $76,954. During the nine months ended December 31, 2013 we used cash of $1,443,739 in operations, $697,157 for the purchase of patents and trademarks, $44,160 for investment in equipment, and we received $2,306,500 less expenses of $267,645 for a net amount of $2,038,855 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. We issued $775,000 in short-term notes payable, $500,000 of which was purchased by a significant shareholder, $100,000 was purchased by an officer, director and significant shareholder and $100,000 was purchased by a director and significant shareholder. The short-term notes are due and payable in one year but we have the right to a six month extension. We also issued 1,291,667 warrants to the short-term note holders for the right to purchase shares of our common stock. Each warrant entitles the holder to purchase one share of our common stock at a price of $0.45 per share, may be exercised on a cashless basis and is exercisable for a period of five years. In addition we borrowed $485,132 and repaid $515,404 in advances from related parties. The advance from related parties was primarily used towards the acquisition of the patents and trademarks and the cash used to repay the advances came from the issuance of the short-term debt. 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, the issuance of convertible debt and the issuance of short-term debt, including related party advances. If we are unable to generate sufficient cash flow from operations with the capital raised we will be required to raise additional funds either in the form of capital or debt. There are no assurances that we will be able to generate the necessary capital or debt to carry out our current plan of operations.

The aggregate minimum requirements under non-cancelable leases as of December 31, 2013 are as follows:

                     Fiscal Years ending March 31,
                     2014 (three months remaining)   $ 19,995
                     2015                              46,655
                                                     $ 66,650

The aggregate amount of principal payments due as of December 31, 2013 are as follows:

Fiscal Years ending March 31,

                   2014                            $         -
                   2015                                775,000
                   2016                                420,000
                                                   $ 1,195,000

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to stockholders.

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