BARFRESH FOOD GROUP INC. 10-K

Item 9A. Controls and Procedures. Management’s Annual Report on Internal Control over Financial Reporting Disclosure Controls and Procedures Under the supervision and with the participation of our management, including our Chief Executive Officer (who is presently also serving as our interim principal financial officer) and our Controller, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Securities and Exchange Act of 1934 Rule 15(d)-15(e). Based on this evaluation, our Chief Executive Officer and our Controller concluded that the Company’s disclosure controls and procedures were not effective as of December 31, 2020, due to inadequate segregation of duties. Management’s Annual Report on Internal Control over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 15d-15(f) under the Exchange Act, for the Company. Internal control over financial reporting includes those policies and procedures that: (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of its management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements. Our management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2020. The framework used by management in making that assessment was the criteria set forth in the document entitled “Internal Control – Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in 2013. Under the supervision and with the participation of our management, including our Chief Executive Officer and our Controller, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Securities and Exchange Act of 1934 Rule 15(d)-15(e). Based on this evaluation, our Chief Executive Officer and our Controller concluded that the Company’s disclosure controls and procedures were not effective as of December 31, 2020. Management has identified the following material weakness in our internal control over financial reporting: Management has concluded that there is a material weakness due to the control environment. The control environment is impacted due to the company’s inadequate segregation of duties. Since the assessment of the effectiveness of our internal control over financial reporting did identify material weaknesses, management considers its internal control over financial reporting to be ineffective. 29 Management recognizes that there are inherent limitations in the effectiveness of any system of internal control, and accordingly, even effective internal control can provide only reasonable assurance with respect to financial statement preparation and may not prevent or detect material misstatements. In addition, effective internal control at a point in time may become ineffective in future periods because of changes in conditions or due to deterioration in the degree of compliance with our established policies and procedures. In an effort to remediate the identified material weakness and enhance our internal control over financial reporting, we plan to hire additional financial personnel to help ensure that we are able to properly implement internal control procedures. This report shall not be deemed to be filed for purposes of Section 18 of the Exchange Act, or otherwise subject to the liabilities of that section, and is not incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing. Changes in Internal Control over Financial Reporting In addition, we note that a different person was identified as our principal financial officer in each of our last three annual reports on Form 10-K. This lack of continuity and institutional knowledge has also affected internal control over financial reporting. Item 9B. Other Information. None 30 PART III Item 10. Directors, Executive Officers and Corporate Governance. Directors and Executive Officers The following sets forth information about our directors and executive officers as of the date of this Report: Name Age Position Riccardo Delle Coste 42 President, Chief Executive Officer and Chairman Steven Lang 68 Director Arnold Tinter 75 Secretary and Director Joseph M. Cugine 60 Director Isabelle Ortiz-Cochet 59 Director Alexander H. Ware 59 Director Justin Borus 44 Director Riccardo Delle Coste has been the Chairman of our board of directors, President and Chief Executive Officer since January 10, 2012. He has also been the President and Chief Executive Officer of Barfresh Inc., a Nevada corporation and our wholly owned subsidiary (“Barfresh NV”), since its inception. Mr. Delle Coste is the inventor of the patented technology and the creator of Barfresh. Mr. Delle Coste developed a unique system using controlled pre-packaged portions to deliver a freshly made smoothie that is quick, cost efficient, healthy and with no waste. In building the business, he is responsible for securing new business and maintaining key client relationships. He is also responsible for the development of new product from testing to full-scale production, establishment of the manufacturing facilities that have all necessary accreditations, technology development, product improvement and research and development with new product launches. Mr. Delle Coste also has over five years of investment banking experience. Mr. Delle Coste attended Macquarie University, Sydney, Australia while studying for a Bachelor of Commerce for 3.5 years but left to pursue business interests before receiving a degree. Qualifications : Mr. Delle Coste has 17 years of experience within retail, hospitality and dairy manufacturing. Steven Lang was appointed as Director of the Company on January 10, 2012. He has also served as Secretary of Barfresh NV since its inception. Prior to joining Barfresh NV, from 2003 to 2007, Mr. Lang was a director of Vericap Finance Limited, a company that specializes in providing advice to and investing in Australian companies with international growth potential. From 1990 to 1999, he served as a director of Babcock & Brown’s Australian operations where he was responsible for international structured finance transactions. Mr. Lang received a Bachelor of Commerce and a Bachelor of Laws from the University of New South Wales in 1976 and a Master of Laws from the University of Sydney in 1984. He has been a member of the Institute of Chartered Accountants in Australia and was licensed to practice foreign law in New York. Qualifications : Mr. Lang has over 40 years of experience in business, accounting, law and finance and served as Chairman of an Australian public company. Arnold Tinter was appointed as Director, Chief Financial Officer and Secretary of the Company on January 10, 2012. Mr. Tinter resigned his position as Chief Financial Officer on May 18, 2015, and served temporarily as Principal Accounting Officer. Mr. Tinter founded Corporate Finance Group, Inc., a consulting firm located in Denver, Colorado, in 1992, and is its President. Corporate Finance Group, Inc., is involved in financial consulting in the areas of strategic planning, mergers and acquisitions and capital formation. He has been the chief financial officer and a director of other public companies In all of the companies his responsibilities included oversight of all accounting functions, including SEC reporting, strategic planning and capital formation. Since May 2015, he has served as chief financial officer of Bambu Franchising LLC, LLC, a privately held company that is a franchisor of Vietnamese-themed shoppes that serve drinks and desserts. Prior to 1990, Mr. Tinter was chief executive officer of Source Venture Capital, a holding company with investments in the gaming, printing and retail industries. Mr. Tinter received a B.S. degree in Accounting in 1967 from C.W. Post College, Long Island University, and is licensed as a Certified Public Accountant in Colorado. 31 Qualifications: Mr. Tinter has over 45 years of experience as a Certified Public Accountant and a financial consultant. During his career he served as a director of numerous public companies. Joseph M. Cugine was appointed as Director of the Company on July 29, 2014 and on April 27, 2015, was appointed president of our wholly owned subsidiary, Barfresh Corporation, Inc. Mr. Cugine is the owner and president of Cugine Foods and JC Restaurants, a franchisee of Taco Bell and Pizza Hut in New York. He is also president and owner of Restaurant Consulting Group LLC. Prior to owning and operating his own firms, Mr. Cugine held a series of leadership roles with PepsiCo, lastly as chief customer officer and senior vice president of PepsiCo’s Foodservice division. Mr. Cugine also serves on the board of directors of The Chef’s Warehouse, Inc., a publicly traded specialty food products distributor in the U.S., as well as Ridgefield Playhouse and R4 Technology. He received his B.S. degree from St. Joseph’s University in Philadelphia. Qualifications: Mr. Cugine’s career in sales, marketing, operations and supply chain spans more than 25 years. He has extensive industry contacts and proven experience leading and advising numerous successful food distribution companies. Isabelle Ortiz-Cochet was appointed as director of the Company on December 16, 2016. She is the Chief Investment Officer for Unibel, parent company of Bel Group. Bel is an international France-based group, a world leader in branded cheese business and fruit pouches, with brands such as Laughing Cow, Mini-Babybel, Boursin or GoGo Squeez. In that position since January 2016, Ms. Ortiz-Cochet drives Unibel diversification strategy, and leads the investment portfolio development. She was previously VP Strategic Development at Bel Group Form September 2013 to December 2015. From 2007 to 2013, based out of Bel’s New York office, Ms. Ortiz-Cochet led the development of long term strategies in North and South America, as well as Marketing strategy in the region. Prior to that position, she held a number of leadership positions in marketing and global strategy at Bel out of the Paris office, at French, European and corporate levels. Isabelle began her career with Kimberly Clark in France. Isabelle earned a master’s degree from ESSEC Business School in France, and an executive MBA from HEC Business School, France . Pursuant to the investor rights agreement between Barfresh and Unibel dated November 23, 2016, Unibel is entitled to appoint one director to the board of directors of Barfresh, which director is entitled to sit on each committee of the board of directors selected by the Unibel, unless Unibel has beneficial ownership of less than: (i) 75.0% of its Shares; and (ii) 5.0% of the company’s issued and outstanding common stock. Unibel has designated Isabelle Ortiz-Cochet as its board designee. Barfresh has agreed to call shareholder meetings whenever necessary to ensure Unibel’s designee is elected as a director. At any time that Unibel’s designee is not a director, Unibel’s designee will be entitled to be a board observer. Riccardo Delle Coste, Steven Lang and their respective affiliates have agreed to vote their shares in favor of Unibel’s designee. Alexander H. Ware was appointed as director of the company on July 13, 2016. Since September 2018, Mr. Ware has served as President of Foodsby, Inc., a fast-growing meal ordering platform for office buildings. Previously, he served as Interim President, Executive Vice President and Chief Financial Officer of Buffalo Wild Wings from October 2016 to 2018. From 2012 through 2016, Mr. Ware was Executive Chairman of MStar Holding Corporation (MicroStar), and had served as Interim Chief Executive Officer in 2013. Prior to MicroStar, he served as a Senior Advisor and previously as Executive Vice President of Strategic Development of Pohlad Companies, a family office, from 2010 to 2015. Starting in 1994, he served in increasing capacities at PepsiCo, then PepsiAmericas, Inc. culminating as Executive Vice President and Chief Financial Officer from 2005 to 2010. Previously, he was a Senior Associate at Booz Allen Hamilton, Inc. from 1990 to 1994. Mr. Ware received his Bachelor of Arts degree in Economics from Hampden-Sydney College and his Master of Business Administration from the Darden Graduate School of Business at University of Virginia. In addition to Barfresh, Mr. Ware currently serves on the board of MStar Holding Corporation and on the advisory board of Stonearch Capital. Qualifications : Mr. Ware has specific and relevant industry experience in the production and marketing of beverages as well as the operations and management of restaurants. In addition, Mr. Ware has knowledge in the areas of strategic and financial planning, corporate development, personnel management, resource allocation and distribution. 32 Justin Borus was appointed as a Director of the Company on April 29, 2020. Mr. Borus has approximately 20 years of capital markets expertise. He has been the Chief Investment Officer of Ibex Investors, LLC, a firm focused on niche, differentiated strategies including microcap companies for over 10 years. Prior to joining Ibex, he worked in both the private equity and investment banking groups at Bear, Stearns & Co. Inc. in New York and London. Mr. Borus has served on the Board of Directors of several non-profits including the Anti-Defamation League and Colorado Public Radio. Qualifications: Mr. Borus brings over 20 years of capital markets expertise. Term of Office Directors are appointed for a one-year term to hold office until the next annual general meeting of shareholders or until removed from office in accordance with our bylaws. Our officers are appointed by our board of directors and hold office until the earlier of resignation or removal. Director Independence We use the definition of “independence” standards as defined in the NASDAQ Stock Market Rule 5605(a)(2) provides that an “independent director” is a person other than an officer or employee of the Company or any other individual having a relationship, which, in the opinion of the Company’s board of directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. We have determined that four of our seven directors are independent, which constitutes a majority. Board Committees We currently have an audit committee, a compensation committee and a nominating and governance committee. The members of the audit committee are Arnold Tinter, Steven Lang and Alexander Ware. The audit committee is primarily responsible for reviewing the services performed by our independent auditors and evaluating our accounting policies and our system of internal controls. Steven Lang, Arnold Tinter, and Alexander Ware are independent members of the audit committee, as defined below. The members of the compensation committee are Arnold Tinter, Joe Cugine, and Riccardo Delle Coste. The compensation committee is primarily responsible for reviewing and approving our salary and benefits policies (including stock options) and other compensation of our executive officers. The members of the nominating committee are Arnold Tinter, Steven Lang, and Isabelle Ortiz-Cochet. The nominating and governance committee is primarily responsible for overseeing corporate governance and for identifying, evaluating and recommending individuals to serve as directors of the company. Legal Proceedings To the best of our knowledge, none of our executive officers or directors are parties to any material proceedings adverse to the Company, have any material interest adverse to the Company or have been subject to legal, administrative or judicial orders, proceedings or decrees required to be disclosed. Code of Ethics Our Chief Executive Officer, and our Controller are bound by a Code of Ethics that complies with Item 406 of Regulation S-K of the Exchange Act. Section 16(a) Beneficial Ownership Reporting Compliance Section 16(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) requires our directors and executive officers and beneficial holders of more than 10% of our common stock to file with the SEC initial reports of ownership and reports of changes in ownership of our equity securities. 33 To our knowledge, based solely upon a review of Forms 3 and 4 and amendments thereto furnished to Barfresh under 17 CFR 240.16a-3(e) during our most recent fiscal year and Forms 5 and amendments thereto furnished to Barfresh with respect to our most recent fiscal year, we believe that during the fiscal year ended December 31, 2020 our directors, executive officers and persons who own more than 10% of our common stock complied with all Section 16(a) filing requirements with the exception of the following: ● Joseph Cugine, late filing of Form 4 ● Isabelle Ortiz-Cochet, late filing of Form 4 ● Alexander H. Ware, late filing of Form 4 ● Steve Lang, late filing of Form 4 ● Riccardo Delle Coste, late filing of Form 4 Each late filing reported one transaction unless otherwise indicated. None of our officers or directors submitted Form 5 filings. Item 11. Executive Compensation. The following table sets forth information about the remuneration of our principal executive officer for services rendered during our fiscal years ended December 31, 2020 and 2019, and our other executive officers that had total compensation of $100,000 or more for our last completed full fiscal year (the “Named Officers”). Certain tables and columns have been omitted as no information was required to be disclosed under those tables or columns. SUMMARY COMPENSATION TABLE Name and Principal Position Year Salary ($) Option awards ($) All other compensation ($) Total ($) Riccardo Delle Coste, 2020 350,000 (1) 67,500 (2) 10,800 (3) 428,300 Chief Executive Officer 2019 350,000 (1) 82,500 (4) 10,800 (3) 443,300 Raffi Loussararian, 2020 175,000 24,000 (5) -0- 199,000 Vice President Finance 2019 74,936 51,000 (6) -0- 125,936 (1) Of the salary earned in 2020, $213,648 was paid and $136,352 was deferred. In 2019 $232,835 was paid and $117,165 was deferred. (2) Represents a stock option grant of 250,000 option shares issued 04/27/2020 with an exercise price of $0.38, which vests in equal increments on each of the first, second and third anniversaries of the date of grant. (3) Represents the car allowance paid to Mr. Delle Coste. (4) Represents a stock option grant of 250,000 options shares issued 5/20/19 with an exercise price of $0.45, which vests in equal increments on each of the first, second and third anniversaries of the date of grant. (5) Represents a stock option grant of 100,000 shares issued 01/06/2020 with an exercise price of $0.37, which vests 3 years after the date of grant (cliff vesting). (6) Represents a stock option grant of 150,000 shares issued 7/29/19 with an exercise price of $0.45 which vests ratably according to the option schedule on each anniversary over the next three years and are exercisable until 7/29/27. 34 Employment Agreements On April 27, 2015, Smoothie, Inc. entered into an executive employment agreement with Riccardo Delle Coste, its Chief Executive Officer and director. Mr. Delle Coste is also the Chief Executive Officer and Chairman of the Company. Pursuant to the employment agreement, he receives a base salary of $350,000 and performance bonuses of 75% of his base salary based on mutually agreed upon performance targets. In addition, Mr. Delle Coste receives up to an additional 500,000 performance options, on an annual basis. All options granted under the employment agreement are subject to the Company’s 2015 Equity Incentive Plan. The Company entered into an executive employment agreement with Raffi Loussararian on July 29, 2019, to which he agreed to serve as Vice President, Finance. Pursuant to the employment agreement, Mr. Loussararian received a base salary of $175,000 and performance bonuses of 25% of his base salary, based upon performance targets determined by the Board of Directors. In addition, Mr. Loussararian was granted 3-year options to purchase up to 150,000 shares of common stock of Barfresh. Option grants vest ratably on each anniversary of the date of commencement of Mr. Loussararian’s employment. All options granted under the employment agreement are subject to the Company’s 2015 Equity Incentive Plan. Mr. Loussararian left the Company in January 2021. The following table sets forth information with respect to outstanding equity awards for the Named Officers: OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END Option Awards Name Number of securities underlying unexercised options (#) exercisable Number of securities underlying unexercised options (#) unexercisable Option exercise price ($) Option expiration date Riccardo Delle Coste 250,000 (1) 0.69 4/27/23 250,000 (1) 0.61 5/27/24 125,000 (1) 0.72 11/25/24 250,000 (1) 0.72 4/27/25 250,000 (1) 0.55 9/15/25 166,667 (2) 83,333 (2) 0.52 7/26/26 83,333 (2) 166,667 (2) 0.45 5/20/27 250,000 (2) 0.38 4/25/28 Raffi Loussararian 50,000 (2) 100,000 (2) 0.45 7/29/27 100,000 (3) 0.37 1/6/28 (1) Fully vested. (2) Vest ratably in equal increments on the first, second and third anniversary of the date of grant of the option. (3) Vests on the third anniversary of date of grant of the option. Compensation of Directors The following table summarizes the compensation paid to our directors that were not employees for the fiscal year ended December 31, 2020. A director who is a Company employee does not receive any compensation for service as a director. The compensation received by directors that are employees of the Company is shown above in the summary compensation table. We reimburse all directors for expenses incurred in their capacity as directors. 35 DIRECTOR COMPENSATION Name Fees earned or paid in cash ($) Stock awards ($) Option awards ($) Total ($) Arnold Tinter 50,000 -0- -0- 50,000 Steven Lang 50,000 -0- -0- 50,000 Isabelle Ortiz-Cochet -0- -0- 50,000 50,000 Alex Ware -0- 50,000 -0- 50,000 Justin Borus (1) (1) Mr. Borus became a director on April 29, 2020. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. Security Ownership of Certain Beneficial Owners and Management The following table sets forth certain information regarding our shares of common stock beneficially owned as of March 15, 2021 for (i) each shareholder known to be the beneficial owner of 5% or more of our outstanding shares of common stock, (ii) each named executive officer and director, and (iii) all executive officers and directors as a group. A person is considered to beneficially own any shares: (i) over which such person, directly or indirectly, exercises sole or shared voting or investment power, or (ii) of which such person has the right to acquire beneficial ownership at any time within 60 days through an exercise of stock options or warrants or otherwise. Unless otherwise indicated, voting and investment power relating to the shares shown in the table for our directors and executive officers is exercised solely by the beneficial owner or shared by the owner and the owner’s spouse or children. For purposes of this table, a person or group of persons is deemed to have “beneficial ownership” of any shares of common stock that such person has the right to acquire within 60 days of March 15, 2021. As of March 15, 2021, the Company had 149,133,372 shares of common stock outstanding. For purposes of computing the percentage of outstanding shares of our common stock held by each person or group of persons named above, any shares that such person or persons has the right to acquire within 60 days of March 15, 2021 is deemed to be outstanding, but is not deemed to be outstanding for the purpose of computing the percentage ownership of any other person. The inclusion herein of any shares listed as beneficially owned does not constitute an admission of beneficial ownership. Common Stock Name and address of beneficial owner (1) Amount and nature of beneficial ownership Percent of class o/s Riccardo Delle Coste (2) (3) (4) (5) (6) 22,589,053 14.90 % Steven Lang (7) (8) (9) (10) (11) 21,504,699 14.30 % Arnold Tinter (12) 800,000 0.5 4% Joe Cugine (13) (14) (15) 3,801,074 2.52 % Alexander Ware (16) (17) (18) 678,101 0.45 % Isabelle Ortiz-Cochet 2 Allee De Longchamp Suresnes, France (19) (20) 473,342 0.32 % Justin Borus (21) (22) (23) 22,674,337 14.81 % Raffi Loussararian 0 — All directors and officers as a group (8 persons) 72,520,605 45.61 % Unibel 2 Allee De Longchamp Suresnes, France 92150 (24) (25) (26) 29,138,798 18.34 % IBEX Investors LLC (fka) Lazarus Investment Partners LLLP (27) 3200 Cherry Creek South Drive Suite 670 Denver, CO 80209 16,245,766 10.76 % 1 The address of those listed, except as noted is c/o Barfresh Food Group Inc., 3600 Wilshire Blvd., Suite 1720 Los Angeles CA 90010. 36 2 Mr. Delle Coste is the Chief Executive Officer, President and a Director of the Company. 3 Includes 19,524,381 shares owned by R.D. Capital Holdings PTY Ltd. and of which Riccardo Delle Coste is deemed to be a beneficial owner. 4 Includes 1,541,667 shares issuable under exercisable options granted. 5 Includes 131,679 shares underlying warrants issued in connection with promissory notes, the holder of which is Riccardo Delle Coste or R.D. Capital Holdings PTY Ltd., and of which Riccardo Delle Coste is deemed to be a beneficial owner. 6 Includes 50,000 shares underlying convertible debt held by R.D. Capital Holdings PTY Ltd. 7 Mr. Lang is a Director of the Company. 8 Includes 19,127,177 shares owned by Sidra Pty Limited and 516,236 shares owned by Hodumo Pty Ltd, of which Steven Lang is deemed to be a beneficial owner. 9 Includes 456,237 shares underlying options granted. 10 Includes 722,371 and 44,082 shares underlying warrants issued in connection with promissory notes, the holder of which is Hodumo Pty Ltd and Sidra Pty Ltd, respectively, of which Steven Lang is deemed to be a beneficial owner. 11 Includes 300,000 shares underlying convertible debt held by Hodumo Pty Ltd. 12 Mr. Tinter is the Secretary and a Director of the Company. 13 Mr. Cugine is a Director of the Company. 14 Includes 1,350,458 shares issuable under exercisable options granted. 15 Includes 409,030 shares underlying warrants issued in connection with purchase of common shares. 16 Mr. Ware is a Director of the Company. 17 Includes 580,476 shares owned by The Alexander Ware Revocable Trust of which Mr. Ware is deemed to be a beneficial owner. 18 Includes 78,125 shares underlying warrants issued to The Alexander Ware Revocable Trust in connection with purchase of common shares. 19 Ms. Ortiz-Cochet was a Director of the Company 20 Includes 473,342 shares underlying options granted. 37 21 Mr. Borus is a Director of the Company. 22 Includes 14,442,776 shares owned by Ibex Investors LLC and 3,000 shares owned by Lazarus Macro Micro Partners LLLP, of which Justin Borus is the manager of the investment manager and general partner, respectively, and deemed to be a beneficial owner. 23 Includes 1,800,000 shares underlying warrants issued to Ibex Investors LLC and 2,142,857 shares underlying warrants issued to Mr. Borus. 24 Includes 7,812,500 shares underlying warrants issued in connection with the purchase of common stock. 25 Includes 671,098 shares underlying warrants issued in connection with a convertible promissory note. 26 Includes 1,252,274 shares underlying warrants issued in connection with the purchase of common stock 27 Includes 1,800,000 shares underlying warrants issued in connection with the purchase of common stock. Item 13. Certain Relationships and Related Transactions, and Director Independence. Certain Relationships and Related Transactions The following includes a summary of transactions since the beginning of fiscal 2020 or any currently proposed transaction, in which we were or are to be a participant and the amount involved exceeded or exceeds the lesser of $120,000 or one percent of the average of our total assets at year-end for the last two completed fiscal years and in which any related person had or will have a direct or indirect material interest (other than compensation described under “Executive Compensation”). We believe the terms obtained or consideration that we paid or received, as applicable, in connection with the transactions described below were comparable to or better than terms available or the amounts that would be paid or received, as applicable, in arm’s-length transactions. The Company’s policy with regard to related party transactions requires any related party loans that are (i) non-interest bearing and in excess of $100,000 or (ii) interest bearing, irrespective of amount, must be approved by the Company’s board of directors. All issuances of securities by the Company must be approved by the board of directors, irrespective of whether the recipient is a related party. Each of the foregoing transactions, if required by its terms, was approved in this manner. Director Independence We use the definition of “independence” standards as defined in the NASDAQ Stock Market Rule 5605(a)(2) provides that an “independent director” is a person other than an officer or employee of the company or any other individual having a relationship, which, in the opinion of the Company’s board of directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. We have determined as of December 31, 2020 that four of our six directors are independent, which constitutes a majority. Item 14. Principal Accounting Fees and Services. Aggregate fees for professional services rendered to the Company by Eide Bailly LLP for the years ended December 31, 2020 and December 31, 2019 were as follows. 2020 2019 Audit fees $ 73,032 $ 85,195 Audit related fees - - Tax fees 6,300 8,375 All other fees - - Total $ 79,332 $ 93,570 38 As defined by the SEC, (i) “audit fees” are fees for professional services rendered by our principal accountant for the audit of our annual financial statements and review of financial statements included in our Form 10-K, or for services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements for those fiscal years; (ii) “audit-related fees” are fees for assurance and related services by our principal accountant that are reasonably related to the performance of the audit or review of our financial statements and are not reported under “audit fees;” (iii) “tax fees” are fees for professional services rendered by our principal accountant for tax compliance, tax advice, and tax planning; and (iv) “all other fees” are fees for products and services provided by our principal accountant, other than the services reported under “audit fees,” “audit-related fees,” and “tax fees.” Audit Fees. The aggregate fees billed for the years end December 31, 2020 and December 31, 2019 were for the audits of our financial statements and reviews of our interim financial statements included in our annual and quarterly reports. Audit Related Fees. Eide Bailly LLP did not provide us with audit related services for the years ended December 31, 2020 or December 31, 2019, that are not reported under Audit Fees. Tax Fees. The aggregate tax fees billed for the years end December 31, 2020 and 2019 related to the preparation of corporate income tax returns. All Other Fees. Eide Bailly LLP did not provide us with professional services related to “Other Fees” for the years ended December 31, 2020 or December 31, 2019. Audit Committee Pre-Approval Policies and Procedures Under the SEC’s rules, an audit committee is required to pre-approve the audit and non-audit services performed by the independent registered public accounting firm in order to ensure that they do not impair the auditors’ independence. The SEC’s rules specify the types of non-audit services that an independent auditor may not provide to its audit client and establish the audit committee’s responsibility for administration of the engagement of the independent registered public accounting firm. The Company has established an Audit Committee. Accordingly, audit services and non-audit services described in this Item 14 were pre-approved by an Audit Committee. There were no hours expended on the principal accountant’s engagement to audit the registrant’s financial statements for the most recent fiscal year that were attributed to work performed by persons other than the principal accountant’s full-time, permanent employees. PART IV Item 15. Exhibits and Financial Statements. (a) 1. Financial Statements See Index to Financial Statements in Item 8 of this Annual Report on Form 10-K, which is incorporated herein by reference. 2. Financial Statement Schedules All other financial statement schedules have been omitted because they are either not applicable or the required information is shown in the financial statements or notes thereto. 3. Exhibits See the Exhibit Index, which follows the signature page of this Annual Report on Form 10-K, which is incorporated herein by reference. (b) Exhibits See Item 15(a) (3) above. (c) Financial Statement Schedules See Item 15(a) (2) above. Item 16. Form 10-K Summary. None. 39 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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: April 14, 2021 By: /s/ Riccardo Delle Coste Riccardo Delle Coste Chief Executive Officer (Principal Executive Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Capacity Date /s/ Riccardo Delle Coste Chief Executive Officer and Director April 14, 2021 Riccardo Delle Coste (Principal Executive Officer and interim Principal Financial Officer) /s/ Eric Narimatsu Controller April 14, 2021 Eric Narimatsu (Principal Accounting Officer) /s/ Steven Lang Director April 14, 2021 Steven Lang /s/ Arnold Tinter Director April 14, 2021 Arnold Tinter /s/ Joseph M. Cugine Director April 14, 2021 Joseph M. Cugine /s/ Isabelle Ortiz-Cochet Director April 14, 2021 Isabelle Ortiz-Cochet /s/ Alexander H. Ware Director April 14, 2021 Alexander Ware /s/ Justin Borus Director April 14, 2021 Justin Borus 40 Exhibit Index Exhibit Number Description 3.1 Certificate of Incorporation of Moving Box Inc. dated February 25, 2010 (incorporated by reference to Exhibit 3.1 to Form S-1 (Registration No. 333-168738) as filed August 11, 2010) 3.2 Amended and Restated Bylaws of Barfresh Food Group Inc. (incorporated by reference to Exhibit 3.1 to Current Report on Form 8-K as filed August 4, 2014) 3.3 Certificate of Amendment of Certificate of Incorporation of Moving Box Inc. dated February 13, 2012 (incorporated by reference to Exhibit 3.1 to Current Report on Form 8-K as filed February 17, 2012) 3.4 Certificate of Amendment of Certificate of Incorporation of Smoothie Holdings Inc. dated February 16, 2012 (incorporated by reference to Exhibit 3.2 to Current Report on Form 8-K as filed February 17, 2012) 4.1 Form of Series A Warrant (incorporated by reference to Exhibit 10.3 to Current Report on Form 8-K as filed January 17, 2012) 4.2 Form of Series B Warrant (incorporated by reference to Exhibit 4.2 to Form 10K for the period ending March 31, 2014, as filed June 30, 2014) 4.3 Form of Series C Warrant (incorporated by reference to Exhibit 4.3 to Form 10K for the period ending March 31, 2014, as filed June 30, 2014) 4.4 Form of Series D Warrant (incorporated by reference to Exhibit 4.4 to Form 10K for the period ending March 31, 2014, as filed June 30, 2014) 4.5 Form of Series PA Warrant (incorporated by reference to Exhibit 4.5 to Form 10K for the period ending March 31, 2014, as filed June 30, 2014) 4.6 Form of Series CN Warrant (incorporated by reference to Exhibit 4.6 to Form 10K for the period ending March 31, 2014, as filed June 30, 2014) 4.7 Form of Series EN Warrant (incorporated by reference to Exhibit 4.7 to Registration Statement on Form S-1 (Registration No. 333-211019) as filed April 29, 2016) 4.8 Form of Series E Warrant (Incorporated by reference to Exhibit 3.8 to Registration Statement on Form S-1 (Registration No. 333-203340) as filed April 10, 2015) 4.9 Form of Series G Warrant (incorporated by reference to Exhibit 4.1 to Current Report on Form 8-K as filed February 16, 2015) 4.10 Form of Series H Warrant (incorporated by reference to Exhibit 4.10 to Registration Statement on Form S-1 (Registration No. 333-211019) as filed April 29, 2016) 4.11 Form of Series I Warrant (incorporated by reference to Exhibit 4.11 to Registration Statement on Form S-1 (Registration No. 333-211019) as filed April 29, 2016) 4.12 Form of Convertible Promissory Note dated January 29, 2016 by Barfresh Food Group Inc. in favor of certain investors (incorporated by reference to Exhibit 4.12 to Registration Statement on Form S-1 (Registration No. 333-211019) as filed April 29, 2016) 41 4.13 Form of warrant dated December 1, 2013 (incorporated by reference to Exhibit 4.13 to Registration Statement on Form S-1 (Registration No. 333-211019) as filed April 29, 2016) 4.14 Form of Series K Warrant (incorporated by reference to Exhibit 4.14 to Registration Statement on Form S-1 (Registration No. 333-333-215322) as filed December 23, 2016) 4.15 Form of Series J Warrant (incorporated by reference to Exhibit 4.15 to Registration Statement on Form S-1 (Registration No. 333-333-215322) as filed December 23, 2016) 4.16 Repayment of Debt Agreement dated July 26, 2018 by and between Barfresh Food Group, Inc. and Ibex Investors LLC (incorporated by reference to Exhibit 4.16 to Registration Statement on Form S-1, No. 333-228030) 4.17 Form of Series L Warrant (incorporated by reference to Exhibit 4.17 to Registration Statement on Form S-1, No. 333-228030) 4.18 Form of 10% Convertible Promissory Note dated March 5, 2018 issued by Barfresh Food Group Inc. in favor of Ibex Investors LLC (incorporated by reference to Exhibit 4.18 to Registration Statement on Form S-1, No. 333-228030) 4.19 Form of 12% Convertible Promissory Note issued by Barfresh Food Group, Inc. in favor of certain investors in February 2018 (incorporated by reference to Exhibit 4.19 to Registration Statement on Form S-1, No. 333-228030) 4.20 Description of Securities Registered Under Section 12 of the Securities Exchange Act of 1934, as amended (incorporated by reference to Exhibit 4.20 to Annual Report on Form 10-K for the year ended December 31, 2019, as filed April 13, 2020) 4.21 Form of Series O Warrant (incorporated by reference to Exhibit 4.21 to Annual Report on Form 10-K for the year ended December 31, 2019, as filed April 13, 2020) 10.1 Form of Registration Rights Agreement dated February 16, 2016 (incorporated by reference to Exhibit 10.1 to Registration Statement on Form S-1 (Registration No. 333-211019) as filed April 29, 2016) 10.2 Intellectual Property Sale Deed by and between National Australia Bank Limited and Barfresh Inc. dated October 15, 2013 (incorporated by reference to Exhibit 10.1 to Quarterly Report on Form 10-Q as filed November 20, 2013) 10.3 Form of Securities Purchase Agreement dated February 16, 2016 by and between Barfresh Food Group Inc. and certain investors. (incorporated by reference to Exhibit 10.3 to Registration Statement on Form S-1 (Registration No. 333-211019) as filed April 29, 2016) 10.4 Form of Investor Rights Agreement dated November 23, 2016 by and between Barfresh Food Group, Inc. and Unibel (Incorporated by reference to Exhibit 10.4 to Registration Statement on Form S-1 No. 333-203340) 10.5 Form of Securities Purchase Agreement dated November 23, 2016 by and between Barfresh Food Group, Inc. and Unibel (incorporated by reference to Exhibit 10.5 to Registration Statement on Form S-1 (Registration No. 333-215322) as filed December 23, 2016) 10.6 Form of Securities Purchase Agreement dated September 28, 2016 by and between Barfresh Food Group, Inc. and certain investors (incorporated by reference to Exhibit 10.6 to Registration Statement on Form S-1 (Registration No. 333-215322) as filed December 23, 2016) 42 10.7 Form of Registration Rights Agreement dated September 28, 2016 by and between Barfresh Food Group, Inc. and certain investors (incorporated by reference to Exhibit 10.7 to Registration Statement on Form S-1 (Registration No. 333-215322) as filed December 23, 2016) 10.8 Barfresh Food Group, Inc. 2014 Equity Incentive Plan (incorporated by reference to Exhibit 10.10 to Annual Report Form 10-K filed June 30, 2014)+ 10.9 Barfresh Food Group, Inc. 2015 Equity Incentive Plan (incorporated by reference to Exhibit 10.10 to Annual Report Form 10-K filed July 7, 2015)+ 10.10 Executive Employment Agreement by and between Smoothie, Inc. and Riccardo Delle Coste dated April 27, 2015 (incorporated by reference to Exhibit 10.11 to Annual Report Form 10-K filed July 7, 2015)+ 10.11 Executive Employment Agreement by and between Smoothie, Inc. and Joseph M. Cugine dated April 27, 2015 (incorporated by reference to Exhibit 10.12 to Annual Report Form 10-K filed July 7, 2015)+ 10.12 Form of Series D Warrant Exercise Offer dated July 25, 2018 (incorporated by reference to Exhibit 10.13 to Registration Statement on Form S-1, No. 333-228030) 10.13 Form of Securities Purchase Agreement dated February 14, 2018 by and between Barfresh Food Group, Inc. and certain investors (incorporated by reference to Exhibit 10.14 to Registration Statement on Form S-1, No. 333-228030) 10.14 Form of Securities Purchase Agreement dated March 15, 2020 by and between Barfresh Food Group, Inc. and certain investors (incorporated by reference to Exhibit 10.14 to Annual Report on 10-K for the year ended December 31, 2019, filed April 13, 2020) 21.1 Subsidiaries (incorporated by reference to Exhibit 21.1 to Annual Report on Form 10-K for the year ended December 31, 2019, filed April 13 2020) 31.1 Rule 15d-14(a) Certification* 32.1 Certification Pursuant to 18 U.S.C. Section 1350* 101.INS XBRL Instance. 101.XSD XBRL Schema. 101.PRE XBRL Presentation. 101.CAL XBRL Calculation. 101.DEF XBRL Definition. 101.LAB XBRL Label. * Filed herewith + Compensatory plan In accordance with SEC Release 33-8238, Exhibit 32.1 is being furnished and not filed. Furnished herewith. XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections. 43 Barfresh Food Group Inc. Index to Consolidated Financial Statements Page Report of Independent Registered Public Accounting Firm F-2 Consolidated Balance Sheets as of December 31, 2020 and 2019 F-3 Consolidated Statements of Operations for the Years Ended December 31, 2020 and 2019 F-4 Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2020 and 2019 F-5 Consolidated Statements of Cash Flows for the Years Ended December 31, 2020 and 2019 F-6 Notes to Consolidated Financial Statements F-7 See the accompanying notes to the consolidated financial statements. F- 1 Report of Independent Registered Public Accounting Firm To the Board of Directors and Stockholders Barfresh Food Group, Inc. Los Angeles, California Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of Barfresh Food Group, Inc. (the “Company”) as of December 31, 2020 and 2019, and the related consolidated statements of operations , stockholders’ equity, and cash flows for the years then ended, and the related notes (collectively referred to as the “financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Barfresh Food Group, Inc. as of December 31, 2020 and 2019, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to Barfresh Food Group, Inc. in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Barfresh Food Group Inc. is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risk of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which they relate. Debt and Equity Transactions As discussed in Notes 7, 8 and 10 to the consolidated financial statements, the Company has entered into debt and equity agreements which include stock-based compensation, debt modification and derivative liabilities. These agreements include transactions, including the issuance of warrants and stock options, that are required to be recorded at estimated fair value. These transactions resulted in recording of stock-based compensation expense of $276,641 and a gain on debt extinguishment of $379,200 for the year ended December 31, 2020, and the recording of a derivative liability of $41,475 as of December 31, 2020. The Company’s determination of the estimated fair value involves the identification of related financial instruments and a clear understanding of the terms of the agreements. Auditing management’s estimates of fair value requires a high degree of auditor judgment and an increased extent of effort, including the need to carefully examine to understand the true nature of the related agreements. Our audit procedures related to determination of the estimated fair values of these debt and equity transactions included the following, among others: ● We gained an understanding of management’s process and methodology to develop the estimates ● We examined signed contracts and amendments. ● We evaluated the reasonableness of the inputs and assumptions used by management in developing the estimates. ● We evaluated the adequacy of the disclosures related to these fair value measurements. /s/ Eide Bailly LLP We have served as Barfresh Food Group Inc.’s auditor since 2012. Denver, Colorado April 14, 2021 F- 2 Barfresh Food Group Inc. Consolidated Balance Sheets December 31, 2020 and 2019 2020 2019 Assets Current assets: Cash $ 1,816,887 $ 999,989 Restricted cash 142,382 91,385 Accounts receivable, net 425,029 284,668 Inventory, net 870,190 634,746 Prepaid expenses and other current assets 47,066 17,606 Total current assets 3,301,554 2,028,394 Property, plant and equipment, net of depreciation 1,922,912 2,406,317 Operating lease right-of-use assets, net 147,947 203,287 Intangible assets, net of amortization 430,216 479,503 Deposits 14,817 8,304 Total Assets $ 5,817,446 $ 5,125,805 Liabilities And Stockholders’ Equity Current liabilities: Accounts payable $ 353,046 $ 625,068 Accrued expenses 298,489 250,125 Advance payment 401,306 - Accrued payroll 191,137 215,601 Accrued vacation 117,166 95,851 Accrued interest 68,627 487,978 Lease liability 65,007 56,692 Loan payable – Paycheck Protection Program 410,317 - Convertible note, net of discount 158,243 150,742 Derivative liabilities 41,475 - Total current liabilities 2,104,813 1,882,057 Long term liabilities: Accrued interest 127,664 - Lease liability 94,170 159,177 Loan payable – Paycheck Protection Program 157,814 - Convertible note - related party, net of discount 197,804 1,181,942 Convertible note, net of discount 810,995 1,407,877 Derivative liabilities - 211,028 Total liabilities 3,493,260 4,842,081 Commitments and contingencies (Note 6,7,8 and 13) Stockholders’ equity: Preferred stock, $0.000001 par value, 5,000,000 shares authorized, none issued or outstanding - - Common stock, $0.000001 par value; 295,000,000 shares authorized; 149,133,372 and 130,341,737 shares issued and outstanding at December 30, 2020and 2019, respectively 149 130 Additional paid in capital 53,223,665 47,030, 716 Accumulated deficit (50,899,628 ) (46,747, 122) Total stockholders’ equity 2,324,186 283,724 Total Liabilities and Stockholders’ Equity $ 5,817,446 $ 5,125,805 See the accompanying notes to the consolidated financial statements. F- 3 Barfresh Food Group Inc. Consolidated Statements of Operations For the years ended December 31, 2020 and 2019 2020 2019 Revenue $ 2,567,547 $ 4,306,785 Cost of revenue 1,784,537 1,928,210 Depreciation of manufacturing equipment 18,938 65,366 Gross profit 764,072 2,313,209 Operating expenses: General and administrative 4,379,976 6,850,566 Depreciation and amortization 593,198 649,847 Total operating expenses 4,973,174 7,500,413 Operating loss (4,209,102 ) (5,187,204 ) Other (income)/expenses (Gain) from derivative liability (156,540 ) (1,114,625 ) (Gain) from debt extinguishment (379,200 ) - Warrant modification - 307,460 Interest expense 479,144 1,213,263 Total other (income) expense (56,596 ) 406,098 Net (loss) $ (4,152,506 ) $ (5,593,302) Per share information - basic and fully diluted: Weighted average shares outstanding 138,755,506 128,510,646 Net (loss) per share $ (0.03 ) $ (0.04 ) See the accompanying notes to the consolidated financial statements. F- 4 Barfresh Food Group, Inc. Statement of Stockholders’ Equity For the Years ended December 31, 2020 and 2019 Additional Common Stock paid in Accumulated Shares Amount Capital (Deficit) Total Balance January 1, 2019 122,770,960 $ 123 $ 41,118,649 $ (41,153,820 ) $ (35,048 ) Exercise of warrants 3,196,180 3 1,884,873 - 1,884,876 Issuance of stock and options for services 374,597 - 335,914 - 335,914 Equity based compensation - - 225,026 - 225,026 Warrants issued to Management - - 758,798 - 758,798 Issuance of stock for capital raise 4,000,000 4 2, 399,996 - 2,400,000 Warrant modification - - 307,460 - 307,460 Net (loss) for the year - - - (5,593,302 ) (5,593,302 ) Balance December 31, 2019 130,341,737 130 47,030,716 (46,747,122 ) 283,724 Issuance of stock for capital raise, net of offering costs of $27,200 12,972,868 13 3,797,787 - 3,797,800 Conversion of debt 4,770,030 5 1,333,757 - 1,333,762 Interest paid in shares 654,651 1 392,788 - 392,789 Issuance of stock for services 272,559 - 130,000 - 130,000 Equity based compensation - - 276,641 - 276,641 Warrants issued to management - - 167,893 - 167,893 Warrant modification - - 18,899 - 18,899 Warrant issued for note extension - - 75,184 - 75,184 Restricted stock issuance 121,527 - - - - Net (loss) for the year - - - (4,152,506 ) (4,152,506 ) Balance December 31, 2020 149,133,372 $ 149 $ 53,223,665 $ (50,899,628 ) $ 2,324,186 See the accompanying notes to the consolidated financial statements. F- 5 Barfresh Food Group Inc. Consolidated Statements of Cash Flows For the Years ended December 31, 2020 and 2019 2020 2019 Net loss $ (4,152,506 ) $ (5,593,828 ) Adjustments to reconcile net loss to net cash used for operating activities Depreciation 548,323 651,603 Amortization 63,813 63,610 Amortization of right of use asset 55,340 38,268 Change in allowance for doubtful accounts (8,364 ) 89,397 Change in inventory reserve (41,558 ) 69,414 Interest expense related to debt discount 276,013 881,871 Warrant modification expense - 307,460 Stock-based compensation 276,641 225,026 Stock and options issued for services 130,000 335,914 Gain on derivative (156,540 ) (1,114,625 ) Gain on debt extinguishment (379,200 ) - Changes in assets and liabilities Accounts receivable (131,997 ) (16,757 ) Inventories (199,142 ) 456,938 Prepaid expenses and other assets (29,460 ) 41,482 Deposits (6,513 ) 31,065 Accounts payable (272,022 ) (502,376 ) Accrued expenses 213,107 350,780 Advanced payments 401,306 - Accrued interest 214,917 331,432 Net Cash (used for) operating activities (3,197,782 ) (3,353,326 ) Investing Activities Purchase of property and equipment (59,662 ) (466,216 ) Purchase of intangibles (14,526 ) (5,324 ) Net Cash (used for) investing activities (74,188 ) (471,540 ) Financing Activities Cash received for warrant exercises - 1,500,357 Cash received for stock, net of offering costs 3,797,800 2,400,000 Repayments of convertible notes (157,366 ) - Proceeds from note payable 568,131 - Debt issuance costs (12,008 ) - Payments of operating leases (56,692 ) (25,686 ) Net Cash from financing activities 4,139,865 3,874,671 Net change in cash and restricted cash 867,895 49,805 Cash and restricted cash, beginning of year 1,091,374 1,041,569 Cash and restricted cash, end of year $ 1,959,269 $ 1,091,374 Cash payments for interest $ 2,775 $ - Non-cash financing and investing activities Total property and equipment included in accounts payable $ - $ 26,084 Debt discount warrant and derivative liability $ 107,611 $ - Convertible notes principal and interest settled through warrant exercise $ - $ 384,563 Operating lease right-of-use asset $ - $ 241,555 Deferred compensation settled through issuance of warrants $ 167,893 $ 758,798 Net carrying value of convertible notes and accrued interest settled through issuance of stock (debt extinguishment) $ 1,770,963 $ - Accrued interest settled through issuance of stock $ 392,789 $ - See the accompanying notes to the consolidated financial statements. F- 6 Barfresh food Group Inc. Notes to Consolidated Financial Statements Note 1. Summary of Significant Accounting Policies Barfresh Food Group Inc., (“we,” “us,” “our,” and the “Company”) was incorporated on February 25, 2010 in the State of Delaware. We are engaged in the manufacturing and distribution of ready to blend beverages, particularly, smoothies, shakes and frappes. The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). Basis of Consolidation The consolidated financial statements include the financial statements of the Company and our wholly owned subsidiaries, Barfresh Inc. and Barfresh Corporation Inc. (formerly known as Smoothie, Inc.). All inter-company balances and transactions among the companies have been eliminated upon consolidation. Use of Estimates The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities in the balance sheets and revenues and expenses during the years reported. Actual results may differ from these estimates. Concentration of Credit Risk The amount of cash on deposit with financial institutions exceeds the $250,000 federally insured limit at December 31, 2020 and 2019. However, we believe that cash on deposit that exceeds $250,000 in the financial institutions is financially sound and the risk of loss is minimal. Restricted Cash At December 31, 2020, the Company had $142,382 and $91,385, respectively, in restricted cash related to our co-packing agreement. Fair Value Measurement Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 820, Fair Value Measurements and Disclosures (“ASC 820”), provides a comprehensive framework for measuring fair value and expands disclosures which are required about fair value measurements. Specifically, ASC 820 sets forth a definition of fair value and establishes a hierarchy prioritizing the inputs to valuation techniques, giving the highest priority to quoted prices in active markets for identical assets and liabilities and the lowest priority to unobservable value inputs. ASC 820 defines the hierarchy as follows: Level 1 - Quoted prices are available in active markets for identical assets or liabilities as of the reported date. The types of assets and liabilities included in Level 1 are highly liquid and actively traded instruments with quoted prices, such as equities listed on the New York Stock Exchange. Level 2 - Pricing inputs are other than quoted prices in active markets but are either directly or indirectly observable as of the reported date. The types of assets and liabilities in Level 2 are typically either comparable to actively traded securities or contracts or priced with models using highly observable inputs. Level 3 - Significant inputs to pricing that are unobservable as of the reporting date. The types of assets and liabilities included in Level 3 are those with inputs requiring significant management judgment or estimation, such as complex and subjective models and forecasts used to determine the fair value of financial transmission rights. F- 7 Barfresh food Group Inc. Notes to Consolidated Financial Statements Our financial instruments consist of cash, accounts receivable, accounts payable, advanced payments, derivative liabilities, convertible notes, restricted cash, and PPP loan payable. The carrying value of our financial instruments approximates their fair value, except for the derivative liability in which carrying value is fair value. Accounts Receivable Accounts receivable are typically unsecured. Our credit policy calls for payment generally within 30 days. The credit worthiness of a customer is evaluated prior to a sale. As of December 31, 2020, and 2019, the company’s allowance for doubtful accounts was $133,424 and $141,788 respectively. There was $133,424 of bad debt expense recorded for the year ended December 31, 2020 and $89,397 of bad debt expense for the year ended December 31, 2019. The allowance was applied to certain receivable accounts which are over 95 days. Inventory Inventory consists of finished goods and is carried at the lower of cost or net realizable value on a first in first out basis. The company monitors the remaining useful life of its inventory and establishes a reserve of obsolescence where appropriate. As of December 31, 2020 and 2019, the Company’s inventory reserve was $59,093 and $100,651 respectively. Intangible Assets Intangible assets are comprised of patents, net of amortization and trademarks. The patent costs are being amortized over the life of the patent, which is twenty years from the date of filing the patent application. In accordance with ASC Topic 350 Intangibles - Goodwill and Other (“ASC 350”), the costs of internally developing other intangible assets, such as patents, are expensed as incurred. However, as allowed by ASC 350, costs associated with the acquisition of patents from third parties, legal fees and similar costs relating to patents have been capitalized. In accordance with ASC 350 legal costs related to trademarks have been capitalized. We have determined that trademarks have an indeterminable life and therefore are not being amortized. Long-Lived Assets and Other Acquired Intangible Assets We evaluate the recoverability of property and equipment and finite-lived intangible assets for possible impairment whenever events or circumstances indicate that the carrying amount of such assets may not be recoverable. The evaluation is performed at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. Recoverability of these assets is measured by a comparison of the carrying amounts to the future undiscounted cash flows the assets are expected to generate. If such review indicates that the carrying amount of property and equipment and intangible assets is not recoverable, the carrying amount of such assets is reduced to fair value. We have not recorded any impairment charges during the years presented. Property, Plant, and Equipment Property, plant, and equipment is stated at cost less accumulated depreciation and accumulated impairment loss, if any. Depreciation is calculated on a straight-line basis over the estimated useful lives of the assets. Leasehold improvements are being amortized over the shorter of the useful life of the asset or the lease term that includes any expected renewal periods that are deemed to be reasonably assured. The estimated useful lives used for financial statement purposes are: Furniture and fixtures: 5 years Manufacturing equipment and customer equipment: 3 years to 7 years Vehicles: 5 years F- 8 Barfresh food Group Inc. Notes to Consolidated Financial Statements Revenue Recognition In accordance with ASC 606, Revenue from Contracts with Customers, revenue is recognized when a customer obtains ownership of promised goods. The amount of revenue recognized reflects the consideration to which the Company expects to be entitled to receive in exchange for these goods. The Company applies the following five steps: 1) Identify the contract with a customer A contract with a customer exists when (i) the Company enters into an enforceable contract with a customer that defines each party’s rights, (ii) the contract has commercial substance and, (iii) the Company determines that collection of substantially all consideration for goods or services that are transferred is probable. For the Company, the contract is the approved sales order, which may also be supplemented by other agreements that formalize various terms and conditions with customers. 2) Identify the performance obligation in the contract Performance obligations promised in a contract are identified based on the goods or services that will be transferred to the customer. For the Company, this consists of the delivery of frozen beverages, which provide immediate benefit to the customer. 3) Determine the transaction price The transaction price is determined based on the consideration to which the Company will be entitled in exchange for transferring goods and is generally stated on the approved sales order. Variable consideration, which typically includes volume-based rebates or discounts, are estimated utilizing the most likely amount method. 4) Allocate the transaction price to performance obligations in the contract Since our contracts contain a single performance obligation, delivery of frozen beverages, the transaction price is allocated to that single performance obligation. 5) Recognize Revenue when or as the Company satisfies a performance obligation The Company recognizes revenue from the sale of frozen beverages when title and risk of loss passes and the customer accepts the goods, which generally occurs at the time of delivery to a customer warehouse. Customer sales incentives such as volume-based rebates or discounts are treated as a reduction of sales at the time the sale is recognized. Shipping and handling costs are treated as fulfillment costs and presented in distribution, selling and administrative costs. Payments that are received before performance obligations are recorded are shown as current liabilities. The company evaluated the requirement to disaggregate revenue and concluded that substantially all of its revenue comes from a single product, frozen beverages. Research and Development Expenditures for research activities relating to product development and improvement are charged to expense as incurred. We incurred $515,145 and $538,391, in research and development expenses for the years ended December 31, 2020 and 2019, respectively. Shipping and Storage Costs Shipping and handling costs are included in general and administrative expenses. For the years ended December 31, 2020 and 2019, shipping and handling costs totaled $488,465 and $751,237, respectively. F- 9 Barfresh food Group Inc. Notes to Consolidated Financial Statements Leases We determine if an arrangement is a lease upon inception. A contract is or contains a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. The right to control the use of an asset includes the right to obtain substantially all of the economic benefits of the underlying asset and the right to direct how and for what purpose the asset is used. After adoption of ASU 2016-02 and related standards, operating lease right-of-use assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. Lease expense is recognized on a straight-line basis over the lease term. As a lessee, the Company leases office space. Income Taxes The provision for income taxes is determined in accordance with the provisions of ASC Topic 740, Accounting for Income Taxes (“ASC 740”). Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted income tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Any effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. ASC 740 prescribes a comprehensive model for how companies should recognize, measure, present, and disclose in their financial statements, uncertain tax positions taken or expected to be taken on a tax return. Under ASC 740, tax positions must initially be recognized in the financial statements when it is more likely than not the position will be sustained upon examination by the tax authorities. Such tax positions must initially and subsequently be measured as the largest amount of tax benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the tax authority assuming full knowledge of the position and relevant facts. ASC 740 requires a valuation allowance to reduce the deferred tax assets reported if, based on the weight of evidence, it is more than likely than not that some portion or all of the deferred tax assets will not be recognized. For the years ended December 31, 2020 and 2019 we did not have any interest and penalties or any significant unrecognized uncertain tax positions. Derivative Liability The Company evaluates its convertible instruments, options, warrants or other contracts to determine if those contracts or embedded components of those contracts qualify as derivatives to be separately accounted for under ASC Topic 815, “Derivatives and Hedging.” The result of this accounting treatment is that the fair value of any derivative is marked-to-market each balance sheet date and recorded as a liability. In the event that the fair value is recorded as a liability, the change in fair value is recorded in the statement of operations as gain/loss from derivative liability. Upon conversion or exercise of a derivative instrument, the instrument is marked to fair value at the conversion date and then that fair value is reclassified to equity. We analyzed the derivative financial instruments in accordance with ASC 815. The objective is to provide guidance for determining whether an equity-linked financial instrument is indexed to an entity’s own stock. This determination is needed for a scope exception which would enable a derivative instrument to be accounted for under the accrual method. The classification of a non-derivative instrument that falls within the scope of ASC 815-40-05 “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock” also hinges on whether the instrument is indexed to an entity’s own stock. A non-derivative instrument that is not indexed to an entity’s own stock cannot be classified as equity and must be accounted for as a liability. There is a two-step approach in determining whether an instrument or embedded feature is indexed to an entity’s own stock. First, the instrument’s contingent exercise provisions, if any, must be evaluated, followed by an evaluation of the instrument’s settlement provisions. The Company utilized the fair value standard set forth by the Financial Accounting Standards Board, defined as the amount at which the assets (or liability) could be bought (or incurred) or sold (or settled) in a current transaction between willing parties, that is, other than in a forced or liquidation sale. F- 10 Barfresh food Group Inc. Notes to Consolidated Financial Statements Earnings per Share We calculate net loss per share in accordance with ASC Topic 260, Earnings per Share . Basic net loss per share is computed by dividing net loss by the weighted average number of shares of common stock outstanding for the period, and diluted earnings per share is computed by including common stock equivalents outstanding for the period in the denominator. At December 31, 2020 and 2019 any equivalents would have been anti-dilutive as we had losses for the years then ended. Stock Based Compensation We calculate stock compensation in accordance with ASC Topic 718, Compensation-Stock Based Compensation (“ASC 718”). ASC 718 requires that the cost resulting from all share-based payment transactions be recognized in the financial statements and establishes fair value as the measurement objective in accounting for share-based payment arrangements and requires all entities to apply a fair-value-based measurement method in accounting for share-based payment transactions with employees except for equity instruments held by employee stock ownership plans. Recent pronouncements From time to time, new accounting pronouncements are issued that we adopt as of the specified effective date. We have not determined if the impact of recently issued standards that are not yet effective will have an impact on our results of operations and financial position. Note 2. Invento ry Inventory consists of the following at December 31: 2020 2019 Raw materials $ 130,296 $ 286,028 Finished goods 798,987 449,369 Inventory reserve (59,093 ) (100,651 ) Inventory, net $ 870,190 $ 634,746 Note 3. Property Plant and Equipment Major classes of property and equipment at December 31, 2020 and 2019 consist of the following: 2020 2019 Furniture and fixtures $ 1,524 $ 1,524 Manufacturing Equipment and customer equipment 3,573,528 3,521,636 Leasehold Improvements 4,886 4,886 Vehicles 29,696 29,696 3,609,634 3,557,742 Less: accumulated depreciation (2,331,034 ) (1,787,967 ) 1,278,600 1,769,775 Equipment not yet placed in service 644,312 636,542 Property and equipment, net of depreciation $ 1,922,912 $ 2,406,317 F- 11 Barfresh food Group Inc. Notes to Consolidated Financial Statements We recorded depreciation expense related to these assets of $529,385 and $586,237 for the years ended December 31, 2020 and 2019, respectively. Depreciation expense in Cost of Goods Sold was $18,938 and $65,366 for the years ended December 31, 2020 and 2019 respectively. Note 4. Intangible Assets As of December 31, 2020, intangible assets consist of patent costs of $768,138, trademarks of $119,911 and accumulated amortization of $457,833. As of December 31, 2019, intangible assets consist of patent costs of $764,891, trademarks of $108,632 and accumulated amortization of $394,020. The amounts carried on the balance sheet represent cost to acquire, legal fees and similar costs relating to the patents incurred by the Company. Amortization is calculated through the expiration date of the patent, which is December 2025. The amount charged to expenses for amortization of the patent costs was $63,813 and $63,610 for the years ended December 31, 2020 and 2019, respectively. Estimated future amortization expense related to patents as of December 31, 2020, is as follows: Years ending December 31, Total Amortization 2021 $ 64,422 2022 64,422 2023 64,422 2024 64,218 2025 52,821 $ 310,305 Note 5. Related Parties As disclosed below in Note 7, members of management and directors invested in company’s convertible notes; and in Note 10, members of management and directors have received shares of stock and options in exchange for services. Note 6. Paycheck Protection Program (PPP) loan The Company was granted a $568,131 loan under the PPP administered by a Small Business Administration (SBA) approved partner. The loan, which matures in two years, is uncollateralized and is fully guaranteed by the Federal government. The Company is eligible for loan forgiveness of up to 100% of the loan, upon meeting certain requirements. The Company has recorded a note payable and will record the forgiveness upon being legally released from the loan obligation by the SBA. No forgiveness income has been recorded for the year ended December 31, 2020. The Company will be required to repay any remaining balance, plus interest accrued at 1 percent, in monthly payments commencing upon notification that the loan will not be forgiven or only partially forgiven. The company has applied for and anticipates the loan to be forgiven in 2021. F- 12 Barfresh food Group Inc. Notes to Consolidated Financial Statements Note 7. Convertible Notes (Related and Unrelated Party) In March 2018, we closed an offering of $2,527,500 in convertible notes, Series CN Note 1 of 2, of which, management, directors and significant shareholders have invested $840,000. The convertible notes bear 10% interest per annum and are due and payable on March 14, 2020. The notes are convertible at any time prior to the due date into our common stock at conversion price of $0.88 per share or 85% of the average closing price of the common stock over the twenty consecutive trading days immediately preceding the date of note holders’ election; but in no event lower than $0.60 per share. In addition, the interest is convertible at any time prior to the due dates into our common stock at conversion price of 85% of the average closing price of the common stock over the twenty consecutive trading days immediately preceding the date of note holders’ election; but in no event lower than $0.60 per share. There were 1,331,583 warrants issued, in conjunction with the convertible note offering. The fair value of the warrants, $0.17 per share ($220,548 in the aggregate), was calculated using the Black-Scholes option pricing model using the following assumptions: Expected life (in years) 3 Volatility (based on a comparable company) 54.82 % Risk Free interest rate 2.41 % Dividend yield (on common stock) - The value of $220,548 was recorded as a debt discount related to the issuance of the warrants. In April 2018, we offered investors in our March 2018 Convertible Note (“Series CN Notes”) the opportunity to accelerate the issuance of certain warrants associated with the CN Notes. Pursuant to the acceleration offer, Series CN Notes investors who invested an additional 10% to 20% of the Series CN Note amount, immediately received an additional 25% warrant coverage on their initial CN Note investment, which would otherwise have been issued after one year. During April 2018, we closed the CN Note acceleration offer in the amount of $177,300 in convertible notes, of which, management, directors and significant shareholders have invested $30,000. The CN Note acceleration offer convertible notes bear 10% interest per annum and are due and payable on March 14, 2020. The notes are convertible at any time prior to the due date into our common stock at conversion price of $0.88 per share or 85% of the average closing price of the common stock over the twenty consecutive trading days immediately preceding the date of note holders’ election; but in no event lower than $0.60 per share. In addition, the interest is convertible at any time prior to the due dates into our common stock at conversion price of 85% of the average closing price of the common stock over the twenty consecutive trading days immediately preceding the date of note holders’ election; but in no event lower than $0.60 per share. There were 937,373 warrants issued in conjunction with the Series CN Note acceleration offer convertible note offering. The fair value of the warrants, $0.25 per share ($235,519 in the aggregate), was calculated using the Black-Scholes option pricing model using the following assumptions: Expected life (in years) 3 Volatility (based on a comparable company) 55.49 % Risk Free interest rate 2.45 % Dividend yield (on common stock) - The value of $105,199 was recorded as a debt discount related to the issuance of the warrants as using the fair value would cause the debt discount to exceed the gross proceeds received. F- 13 Barfresh food Group Inc. Notes to Consolidated Financial Statements In March 2019, an investor elected to exercise I-Warrants by using part of the investor’s convertible note. The total debt settled was $350,634 of principal and $33,929 of accrued interest. On March 20, 2020, we completed a Private Placement offering of $3,825,000 of common stock. In connection with the transaction, the Company offered the Convertible Noteholders of Series CN Note 1 and 2 to participate in the equity offering. A total of $720,000 principal balance of Series CN 1 was converted into common stock [$630,000 from related parties]. The Series CN Note 1 Noteholders were offered bonus interest equivalent to 20% of their outstanding principal which was converted to common stock. For $1,071,000 of the remaining $1,186,167 Series CN Note 1 Noteholders that chose not to participate in the equity offering, the terms of the Series CN Note 1 were amended to increase the interest rate to 15% per annum and to extend the maturity of the outstanding principal balance by 24 months to March 20, 2022. The notes are convertible at any time prior to the maturity into our common stock at a conversion price of $0.50 per share. If the six month price is less than the $0.50 per share, the principal conversion price will be automatically reduced to the $0.50 per share, but in no event less than $0.35 per Share, in which case the Company shall issue to each purchaser, based on such purchaser’s investment, (a) shares in a quantity that equals the difference between the number of Shares issued to such purchaser at closing and the number of Shares that would have been issued to such purchaser at closing at the $0.50 per share and (b) warrants in a quantity that equals fifty percent (50%) of the difference between the number of shares issued to such Purchaser at closing and the number of shares that would have been issued to such purchaser at closing at the $0.50 per share, with an exercise price that equals the sum of $0.10 per share and the $0.50 per share, but in no event less than $0.45 per share. The exercise price per share for the Convertible Note Warrants and the Bonus Warrant issued at closing will automatically adjust as well to the sum of $0.10 per share and the Six Month Price, but in no event less than $0.45 per share. There were 864,000 O warrants issued to the Series CN Note 1 Noteholders for participating in the common stock offering. On March 20, 2020, 1,082,727 of the original L Warrants related to the Series CN Note 1 Noteholders had their terms modified, whereby the exercise price was reduced from $0.70 to $0.50 per share. In addition, the Series CN Note 1 Noteholders that chose to extend their notes for 24 months were granted 1,071,000 Series P warrants. The fair value of the warrants, ($92,266 in the aggregate which consists of the L and P Warrants), were calculated using the Black-Scholes option pricing model using the following assumptions: Expected life (in years) 1 to 3 Volatility 76.74- 98.00 % Risk Free interest rate .15 - .41 % Dividend yield (on common stock) - F- 14 Barfresh food Group Inc. Notes to Consolidated Financial Statements Based on the relative fair value, we recorded a debt discount of $75,184 related to the issue of P Warrants to CN 1 and CN 2 Noteholders. The modification of the L Warrants resulted in an incremental increase in fair value of $17,082, which was recorded as a debt discount. The convertible notes consist of the following components as of December 31, 2020 and December 31, 2019: 2020 2019 Convertible notes $ 1,181,167 $ 2,704,800 Less: Debt discount (warrant value) (92,266 ) (325,747 ) Less: Debt discount (derivative value) (Note 8) - (638,988 ) Less: Debt discount (issuance costs paid) (6,004 ) (27,000 ) Less: Note repayments/conversion (110,166 ) (803,634 ) Add: Debt discount amortization 38,173 898,940 $ 1,010,904 $ 1,808,371 In December 2018, we closed an offering of $1,363,200 in convertible notes, Series CN 2 of 2, of which, management, directors and significant shareholders have invested $560,000. The convertible notes bear 10% interest per annum and are due and payable on November 30, 2020. The notes are convertible at any time prior to the due date into our common stock at conversion price of $0.88 per share or 85% of the average closing price of the common stock over the twenty consecutive trading days immediately preceding the date of note holders’ election; but in no event lower than $0.60 per share. In addition, the interest is convertible at any time prior to the due dates into our common stock at conversion price of 85% of the average closing price of the common stock over the twenty consecutive trading days immediately preceding the date of note holders’ election; but in no event lower than $0.60 per share. There were 678,864 warrants issued, in conjunction with the convertible note offering. The fair value of the warrants, $0.31 per share ($212,763 in the aggregate), was calculated using the Black-Scholes option pricing model using the following assumptions: Expected life (in years) 3 Volatility (based on a comparable company) 59.00 % Risk Free interest rate 2.83 % Dividend yield (on common stock) - The value of $212,763 was recorded as a debt discount related to the issuance of the warrants. On March 20, 2020, a total of $1,128,000 principal balance of Series CN Note 2 was converted into common stock [$560,000 from related parties]. The Noteholders were offered bonus interest equivalent to 20% of their outstanding principal and converted their accrued interest into common stock. For $168,000 of the remaining $235,200 Series CN Note 2 Noteholders that chose not to participate in the equity offering, the terms of the Series CN Note 2 were amended to extend the maturity of the outstanding principal balance by 12 months to November 30, 2021. The notes are convertible at any time prior to the maturity into our common stock at a conversion price of $0.60 per share. There were 1,501,012 O warrants issued to the Series CN Note 2 Noteholders for participating in the common stock offering. The fair value of the modified L warrants, ($4,279 prior to modification, and $6,096 post modification), was calculated using the Black-Scholes option pricing model using the following assumptions: Expected life (in years) 1.71 Volatility 88.02 % Risk Free interest rate 0.37 % Dividend yield (on common stock) - The incremental value of $1,817 was recorded as a debt discount related to the modification of existing L warrants. F- 15 Barfresh food Group Inc. Notes to Consolidated Financial Statements The convertible notes consist of the following components as of December 31, 2020 and December 31, 2019: 2020 2019 Convertible notes $ 235,200 $ 1,363,200 Less: Debt discount (warrant value) (1,817 ) (212,763 ) Less: Debt discount (derivative value) (Note 8) (13,528 ) (697,186 ) Less: Debt discount (issuance costs paid) (6,004 ) (23,700 ) Less: Note repayments (67,200 ) - Add: Debt discount amortization 9,487 502,639 $ 156,138 $ 938,190 The total of the two tables above at December 31, 2020, net of discount, equals $1,167,042 which is presented on the consolidated balance sheet as, $158,243 Convertible Note, net of discount, Current Liabilities, $197,804 Convertible Note, Related Party, Net of Discount, Long-Term Liabilities and $810,995 Convertible Note, Net of Discount, Long-term Liabilities. The total of $2,740,561 shown in the two tables above at December 31, 2019, are presented in the balance sheet as Long-Term Liabilities: Convertible Note – related party net of discount, of $1,181,942, Convertible Note – net of Discount of $1,407,877, and Current Liabilities: Convertible Note – net of Discount $150,742. Future maturity of convertible notes at face value before effect of all discount, are as follow: Years Ending December 31, Total Convertible Notes 2021 $ 168,000 2022 1,071,000 $ 1,139,000 On March 20, 2020, the Company and the Holders of the Series CN Note 1 and Note 2 mutually agreed to amend its terms to change the maturity date to March 20, 2022 and November 30, 2021, respectively. The Company accounted for the modification in accordance with ASC 470-50, Modifications and Extinguishments, which states that for all extinguishments of debt, the difference between the reacquisition price (including any premium) and the net carrying amount of the debt being extinguished (including any deferred debt issuance costs) should be recognized as a gain or loss when the debt is extinguished. Accordingly, the Company recorded a net gain on extinguishment of debt of $379,200 which was comprised of a gain of $437,201, offset by a loss of $58,001. The gain of $437,201 related to the portion of Convertible Notes that were converted to common stock on March 20, 2020. The loss on extinguishment of debt of $58,001 related to the portion of Convertible Notes that were extended by either 24 months for CN I, or 12 months for CN2. Note 8. Derivative Liabilities As discussed in Note 7, Convertible Notes, the Company issued Series CN Note acceleration offer convertible notes payable that provide variable conversion provisions. The conversion terms of the convertible notes are variable based on certain factors, such as the future price of the Company’s common stock. The number of shares of common stock to be issued is based on the future price of the Company’s common stock, therefore the number of shares of common stock issuable upon conversion of the promissory note is indeterminate. The fair values of the Company’s derivative liabilities are estimated at the issuance date and are revalued at each subsequent report date. The derivative liability was revalued at December 31, 2019 with a value of $211,028, which resulted in a gain of $1,114,625 for the year then ended. F- 16 Barfresh food Group Inc. Notes to Consolidated Financial Statements As discussed in Note 7, there was a portion of the CN1 and CN2 notes that was not modified. The Company continued to revalue the derivative liability for each reporting period in 2020. At December 31, 2020, there was no value as the Company settled the derivative liability through repayment of the outstanding principal upon maturity. On March 20, 2020, the Company determined the fair value of the derivative liability related to CN1 and CN2 notes that were converted and extended. The derivative liability values of $23,100 (CN converted) and $3,440 (CN extended) were used to determine the debt extinguishment gain or loss. The fair value of the derivative liability for CN notes that were converted and CN notes that were extended was calculated using the Black-Scholes model using the following assumptions: March 20, 2020 Expected life (in years) 0.71 Volatility 84.82 % Risk Free interest rate 0.5 % Dividend yield (on common stock) - As the variable conversion provisions were not modified for $168,000 of CN2 notes that were extended to November 2021, the Company valued the derivative liability as of March 20, 2020. As of March 20, 2020, the initial value of the derivative liability was $13,527. The fair value of the derivative liability for CN2 notes that were extended was calculated using the Black-Scholes model using the following assumptions: March 20, 2020 Expected life (in years) 1.71 Volatility 88.02 % Risk Free interest rate 0.37 % Dividend yield (on common stock) - The fair value of the derivative liabilities for CN Convertible Note 2 of 2 was calculated using the Black-Scholes model using the following assumptions. December 31, 2020 December 31, 2019 Expected life 0.92 0.93 Volatility 120.38 % 104.89 % Risk Free interest rate .1 % 1.58 % Dividend yield (on common stock) - - Reconciliation of the derivative liability measured at fair value on a recurring basis with the use of significant unobservable inputs (level 3) from December 31, 2018 to December 31, 2019: December 31, 2018 $ 1,325,653 Loss from change in value (1,114,625 ) For the period ended December 31, 2019 $ 211,028 F- 17 Barfresh food Group Inc. Notes to Consolidated Financial Statements Reconciliation of the derivative liabilities measured at fair value on a recurring basis with the use of significant unobservable inputs (level 3) from December 31, 2019 to December 31, 2020: December 31, 2019 $ 211,028 Extinguishment change in derivative from conversion (23,100 ) Extinguishment change in derivative from extension (3,440 ) Initial derivative value – March 20, 2020 13,527 Net gain from change in value (156,540 ) For the period ended December 31, 2020 $ 41,475 The following table presents the Company’s fair value hierarchy for applicable assets and liabilities measured at fair value as of December 31, 2019 and December 31, 2020: Level 1 Level 2 Level 3 Total Derivative Liability December 31, 2019 $ - - 211,028 $ 211,028 Level 1 Level 2 Level 3 Total Derivative Liability December 31, 2020 $ - - 41,475 $ 41,475 Note 9. Commitments and Contingencies We lease office space under non-cancelable operating lease which expires on March 31, 2023. We incurred lease expense of $82,194 and $92,608 for the years ended December 31, 2020 and 2019, respectively. As of December 31, 2020, our right of use asset and related liability was $147,947 and $159,177, respectively. In determining the present value of our operating lease right-of-use asset and liability, we used a 10% discount rate (which approximates our borrowing rate). The remaining term on the lease is 2.25 years. The following table presents the future operating lease payment as of December 31, 2020. 2021 $ 78,021 2022 80,361 2023 20,238 Total Lease payments 178,620 Less: imputed interest (19,443 ) Total lease liability $ 159,177 From time to time, various lawsuits and legal proceedings may arise in the ordinary course of business. However, litigation is subject to inherent uncertainties and an adverse result in these or other matters may arise from time to time that may harm our business. We are currently the defendant in one legal proceeding for an amount less than $100,000. Our legal counsel and management believe a material unfavorable outcome to be remote. F- 18 Barfresh food Group Inc. Notes to Consolidated Financial Statements Note 10. Stockholders’ Equity During the year ended December 31, 2019, we issued 282,944 shares of common stock, valued at $169,040 for services. We also issued 91,653 shares of our common stock, with a value of $50,000, to a member of our Board of Directors in lieu of cash payments for Director fees. In addition, we issued 281,343 options to purchase our common stock to certain member of the Board of Directors in lieu of cash payments for Director fees valued at $116,874. The exercise price of the options ranged from $0.47 to $0.65 per share, vest immediately, and are exercisable for periods of 8 years. In addition, we issued 875,000 options to purchase our common stock to employees and executives. The exercise price of the options ranged from $0.45 to $0.73 per share, vest after 3 years, and are exercisable for periods of 8 years. The fair value of the options issued ($237,850, in the aggregate) was calculated using the Black-Sholes option pricing model, based on the criteria shown below. Expected life (in years) 5.5 to 8 Volatility (based on a comparable company) 59.82% to 77.19 % Risk Free interest rate 1.79% to 2.78 % Dividend yield (on common stock) - During the same period, we cancelled 1,387,333 options to purchase our common stock, which was primarily driven by the resignation of executives. The Holders of 2,841,454 warrants elected to exercise those warrant on a cash basis of $1,320,313 and cashless basis of $384,563 to offset convertible note and accrued interest; and received 2,841,454 shares of our common stock. The Holder of 300,000 warrants elected to exercise those warrant on a cash basis of $180,000 and received 300,000 shares of our common stock. During the year ended December 31, 2019, the Company completed additional funding including a Private Placement Offering for common shares priced at $0.60 per share, resulting in the receipt of proceeds in the amount of $2.4 million and the issuance of 4,000,000 shares. In addition, the Company settled certain Executive Deferred Compensation payments with a combination of cash and warrants. The total amount of Deferred Executive compensation settled is $771,113. One-third of that total or $243,623, was paid in cash. The remaining balance of $487,246 was settled by granting the Executives warrants exercisable for five years to purchase the Company’s stock at an exercise price of $0.70 per share. During the year ended December 31, 2020, the Company completed a funding, including a Private Placement Offering for common shares priced at $0.50 per share (subject to adjustment) in the amount of $3,825,000 and the issuance of 7,650,000 shares. The investors of this Private Placement Offering were granted O warrants to be eligible to purchase an additional 0.50 shares for every share issued to each purchaser, exercisable for a period of 3 years at an exercise price of $0.60 per share (subject to adjustment). If the volume-weighted average trading price for the 20 consecutive trading days that conclude upon 6 months after the initial closing (the “Six Month Price”) exceeds or equals $0.50 per share (the “Target Price”), the per share purchase price will not be adjusted. If the Six Month Price is less than the Target Price, the per share purchase price will be automatically reduced to the Six Month Price, but in no event less than $0.35 per share, in which case the Company shall issue to each investor, pro-rata based on such investor’s investment: (a) shares in a quantity that equals the difference between the number of shares issued to such purchaser at closing and the number of shares that would have been issued to such purchaser at closing at the Six Month Price; and (b) a warrant for a number of shares of common stock equal to 50% of the difference between the number of shares issued to such investor at closing and the number of shares that would have been issued to such investor at closing at the Six Month Price, with an exercise price equal to the sum of $0.10 per share and the Six Month Price, but in no eventless than $0.45 per share. The exercise price per share for each warrant will automatically adjust to the sum of $0.10 per share and the Six-Month Price, but in no event less than $0.45 per share. F- 19 Barfresh food Group Inc. Notes to Consolidated Financial Statements On September 28, 2020, the Company determined the volume-weighted average price was below the $0.35 per share and consequently issued 5,322,868 additional shares in accordance with provisions of the Private Placement Offering. Similarly, the Company issued an additional 2,652,868 Warrants to investors that contributed capital or exercised the conversion of their convertible note. Lastly, the Company issued an additional 459,000 Warrants for convertible noteholders that extended their convertible notes. In addition, at the Company’s option, we issued 654,651 shares of our Common Stock to pay interest due of $392,789. We issued 272,559 shares of our Common Stock for services rendered. The shares of our common stock were valued between $0.25 - $0.50 per share. During the year ended December 31, 2020, we issued 870,000 options to purchase our common stock to employees and 199,358 options to a Board Member. The exercise price of the options was between $0.34 and $0.44 per share, with both cliff and graded vesting over 3 years, and are exercisable for a period of 8 years. The fair value of the options issued ($217,650, in the aggregate) was calculated using the Black-Sholes option pricing model, based on the criteria shown below. Expected life (in years) 5.5 to 8 Volatility (based on a comparable company) 73.36%-75.82 % Risk Free interest rate 0.30%-1.61 % Dividend yield (on common stock) - For the year ended December 31, 2020, 625,423 options expired or were cancelled. During the first quarter of 2020, the Company settled certain Executive Deferred Compensation payments with the issuance of 1,573,988 warrants. The fair value of the warrants totaled $251,837. The total executive Deferred Compensation that was settled with the issuance of the warrants was $167,892. The difference between the fair value of the warrants and the Executive Deferred Compensation settled of $83,945 was recorded as stock-based compensation during the year ended December 31, 2020. The total amount of equity-based compensation included in additional paid in capital was $276,641 and $225,026 for the years ended December 31, 2020 and 2019. The following is a summary of outstanding stock options issued to employees and directors as of December 31, 2020: Number of Options Exercise price per share $ Average remaining term in years Aggregate intrinsic value at date of grant $ Outstanding January 1, 2019 7,428,014 .40 - .87 5.48 Issued 1,156,343 .45 - .73 Cancelled (1,387,333 ) Outstanding December 31, 2019 7,197,024 .40 - .87 4.55 - Issued 1,069,358 .34 - .44 Cancelled/Expired (625,423 ) Outstanding December 31, 2020 7,640,959 .34 - .87 3.48 Exercisable, December 31 2020 6,667,625 .34 - .87 3.48 - As of December 31, 2020, the Company has $175,847 of total unrecognized share-based compensation expense related to unvested options, which is expected to be amortized over the remaining weighted average period of 1.51 years. F- 20 Barfresh food Group Inc. Notes to Consolidated Financial Statements Note 11. Outstanding Warrants The following is a summary of all outstanding warrants as of December 31, 2020: Number of warrants Price per share Remaining term in years Intrinsic value at date of grant Warrants issued in connection with private placements of common stock 22,020,833 $ 0.50 - $1.00 1.34 $ - Warrants issued in connection with private placement of notes 3,465,501 $ 0.60 1.23 $ - Warrants issued in connection with settlement of deferred compensation 3,169,599 $ 0.60 3.72 $ - Note 12. Income Taxes Income tax provision (benefit) for the years ended December 31, 2020 and 2019 is summarized below: 2020 2019 Current: Federal $ - $ - State - - Total current - - Deferred: Federal (715,000 ) (937,500 ) State (235,000 ) (1,488,500 ) Total deferred (950,000 ) (2,426,000 ) Change in valuation allowance $ 950,000 $ 2,426,000 The provision for income taxes differs from the amount computed by applying the statutory federal income tax rate before provision for income taxes. The sources and tax effect of the differences are as follows: 2020 2019 Income tax provision at the federal statutory rate 21.0 % 21.0 % State income taxes, net of federal benefit 6.9 % 3.3 % Permanent Difference (2.5 )% (2.5 )% Effect of rate change - % - % Effect of change in valuation allowance (25.4 )% (21.8 )% - % - % Components of the net deferred income tax assets at December 31, 2020 and 2019 were as follows: 2020 2019 Net operating loss carryover $ 11,345,000 $ 10,395,000 Valuation allowance (11,345,000 ) (10,395,000 ) $ - $ - F- 21 Barfresh food Group Inc. Notes to Consolidated Financial Statements ASC 740 requires a valuation allowance to reduce the deferred tax assets reported if, based on the weight of evidence, it is more than likely than not that some portion or all of the deferred tax assets will not be recognized. After consideration of all the evidence, both positive and negative, management has determined that a $11,345,000 and $10,395,000 allowance at December 31, 2020 and 2019, respectively, is necessary to reduce the deferred tax assets to the amount that will more likely than not be realized. The increase in the valuation allowance for the current period is $950,000. As of December 31, 2020, we have a net operating loss carry forward of approximately $40,664,400. The loss will be available to offset future taxable income. If not used, this carry forward will expire as follows: 2030 $ 1,000 2031 $ 63,800 2032 $ 345,900 2033 $ 1,840,300 2034 $ 2,324,100 2035 $ 2,987,300 2036 $ 5,061,700 2037 $ 8,464,700 2038 $ 7,315,400 2039 $ 4,391,100 The 2020 and 2019 net operating loss carry forward of $3,404,600 and $4,464,500 does not expire under the Tax Cut and Job Act of 2017. Note 13. Business Segments and Customer Concentrations. During the years ended December 31, 2020 and 2020, we operated in one segment. The following is a breakdown of customers representing more than 10% of sales for the year ended December 31, 2020: Revenue from customer Percentage of total revenue Customer A $ 845,011 31.41 % Customer B $ 562,499 20.91 % Customer C $ 297,527 11.06 % The following is a breakdown of customers representing more than 10% of sales for the year ended December 31, 2019: Percentage Revenue from of total customer revenue Customer A $ 1,641,333 38.14 % Customer B $ 739,956 17.19 % F- 22 Barfresh food Group Inc. Notes to Consolidated Financial Statements Note 14. Liquidity We have a history of operating losses and negative cash flow from operations. These conditions raise substantial doubt over the Company’s ability to meet all of its obligations over the twelve months following the filing of this Form 10-K. Management has evaluated these conditions, and concluded that current plans will alleviate this concern. As of December 31, 2020, we had $1,959,269 of cash and restricted cash on the balance sheet. We have continued to significantly reduce core operating expenses, reducing total General and Administrative Expense in 2020 by $2,470,590 or 36%, as compared with 2019. In January 2021, the company secured $568,131 in proceeds from the second PPP loan. The Company is expecting an increase in revenue bouncing back from Covid-19 and its new Twist & Go products. The Company believes this will provide sufficient cash to cover operating expenses and $1,139,000 in debt due over the next 12 months. If there are not sufficient cash flows to cover the debt repayment the company believes that the debt could be satisfied through refinancing including conversion, raising additional proceeds through issuance of stock or new debt. With the lean initiatives implemented by the business in 2020, liquidity is expected to remain stable with very little change from 2020. Management has concluded that these actions have alleviated the substantial doubt of our ability to continue as a going concern. However, the Company cannot predict, with certainty, the outcome of its action to generate liquidity, including the availability of additional financing, or whether such actions would generate the expected liquidity as planned. Note 15. Subsequent Events On January 27, 2021, the Company was granted a $568,131 loan under the PPP administered by a Small Business Administration (SBA) approved partner. The loan, which matures in five years, at an interest rate of 1%, and is uncollateralized and is fully guaranteed by the Federal government. The deferral period is 24 weeks plus 10 months from the loan note date. The Company is eligible for loan forgiveness of up to 100% of the loan, upon meeting certain requirements. The Company has recorded a note payable and will record the forgiveness upon being legally released from the loan obligation by the SBA. The Company will be required to repay any remaining balance, plus interest accrued at 1 percent, in monthly payments commencing upon notification that the loan will not be forgiven or only partially forgiven. F- 23