BARFRESH FOOD GROUP INC. 10-Q

Item 1. Financial Statements. Barfresh Food Group Inc. Condensed Consolidated Balance Sheets September 30, 2021 December 31, 2020 (Unaudited) (Audited) Assets Current assets: Cash $ 6,261,275 $ 1,816,887 Restricted cash 142,382 142,382 Accounts receivable, net 1,181,633 425,029 Inventory, net 1,177,799 870,190 Prepaid expenses and other current assets 80,312 47,066 Total current assets 8,843,401 3,301,554 Property, plant and equipment, net of depreciation 1,737,917 1,922,912 Operating lease right-of-use assets, net 102,525 147,947 Intangible assets, net of amortization 386,274 430,216 Deposits 6,746 14,817 Total Assets $ 11,076,863 $ 5,817,446 Liabilities And Stockholders’ Equity Current liabilities: Accounts payable $ 1,418,191 $ 353,046 Accrued expenses 326,032 298,489 Advance payment 401,306 401,306 Accrued payroll 232,037 191,137 Accrued vacation 94,234 117,166 Accrued interest 33,600 68,627 Lease liability 71,859 65,007 Loan payable – Paycheck Protection Program 51,649 410,317 Convertible note, net of discount - 158,243 Derivative liabilities - 41,475 Total current liabilities 2,628,908 2,104,813 Long term liabilities: Accrued interest - 127,664 Lease liability 39,321 94,170 Loan payable – Paycheck Protection Program 516,482 157,814 Convertible note - related party, net of discount - 197,804 Convertible note, net of discount - 810,995 Total liabilities 3,184,711 3,493,260 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; 167,601,435 and 149,133,372 shares issued and outstanding at June 30, 2021 and December 31, 2020, respectively 168 149 Additional paid in capital 60,187,031 53,223,665 Accumulated deficit ( 52,295,047 ) ( 50,899,628 ) Total stockholders’ equity 7,892,152 2,324,186 Total Liabilities and Stockholders’ Equity $ 11,076,863 $ 5,817,446 See the accompanying notes to the condensed consolidated financial statements. 3 Barfresh Food Group Inc. Condensed Consolidated Statements of Operations For the three and nine months ended September 30, 2021 and 2020 For the three months ended September 30 For the nine months ended September 30 2021 2020 2021 2020 Revenue $ 1,930,546 $ 707,610 $ 4,246,608 $ 1,947,766 Cost of revenue 1,209,425 423,942 2,597,121 1,142,391 Depreciation of manufacturing equipment - 5,115 17,673 14,717 Gross profit 721,121 278,553 1,631,814 790,658 Operating expenses: General and administrative 1,065,330 976,208 2,834,295 3,284,673 Depreciation and amortization 162,451 138,729 455,748 442,377 Total operating expenses 1,227,781 1,114,937 3,290,043 3,727,050 Operating loss ( 506,660 ) ( 836,384 ) ( 1,658,229 ) ( 2,936,392 ) Other (income)/expenses (Gain)/Loss from derivative liability - ( 19,884 ) ( 16,305 ) ( 176,983 ) (Gain)/Loss from debt extinguishment - PPP - - ( 568,131 ) - (Gain)/Loss on extinguishment of debt - - 193,562 ( 379,200 ) Interest expense - 61,757 128,064 420,634 Total other (income) expense - 41,873 ( 262,810 ) ( 135,549 ) Net (loss) $ ( 506,660 ) $ ( 878,257 ) $ ( 1,395,419 ) $ ( 2,800,843 ) Per share information - basic and fully diluted: Weighted average shares outstanding 167,601,435 143,799,926 157,864,504 138,924,068 Net (loss) per share $ ( 0.00 ) $ ( 0.01 ) $ ( 0.01 ) $ ( 0.02 ) See the accompanying notes to the condensed consolidated financial statements. 4 Barfresh Food Group Inc. Condensed Consolidated Statements of Cash Flows For the nine months ended September 30, 2021 and 2020 2021 2020 Net Cash (used for) operating activities ( 1,093,967 ) ( 2,517,269 ) Investing Activities Purchase of property and equipment ( 137,405 ) ( 40,873 ) Purchase of intangibles ( 4,374 ) ( 11,622 ) Net Cash (used for) investing activities ( 141,779 ) ( 52,495 ) Financing Activities Cash received for stock 6,000,000 3,797,800 Proceeds from note payable 568,131 568,131 Repayment of convertible notes ( 840,000 ) ( 90,166 ) Payments for Debt issue cost ( 12,008 ) Payments of operating leases ( 47,997 ) ( 41,844 ) Net Cash from financing activities 5,680,134 4,221,913 Net change in cash and restricted cash 4,444,388 1,652,149 Cash and restricted cash, beginning of year 1,959,269 1,091,374 Cash and restricted cash, end of year $ 6,403,657 $ 2,743,523 Non-cash financing and investing activities Executive deferred compensation settled through issuance of warrants $ - $ 167,892 Net carrying value of convertible notes and accrued interest settled through issuance of stock (debt extinguishment) $ 466,658 $ 1,770,963 Accrued interest settled through issuance of stock $ 151,138 $ 379,350 Debt discount warrant and derivative liability $ - $ 107,611 Offering and debt issuance costs included in accounts payable $ - $ - Extinguishment of derivative liability $ 25,170 Equipment included in accrued liability $ 85,032 $ - See the accompanying notes to the condensed consolidated financial statements. 5 Barfresh Food Group Inc. Notes to Condensed Consolidated Financial Statements September 30, 2021 (Unaudited) Note 1. Summary of Significant Accounting Policies Barfresh Food Group Inc., (“we,” “us,” “our,” and the “Company”) was incorporated on February 25, 2010 in the State of Delaware. We are engaged in the manufacturing and distribution of ready to blend beverages, particularly, smoothies, shakes and frappes. The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). Basis of Consolidation The consolidated financial statements include the financial statements of the Company and our wholly owned subsidiaries, Barfresh Inc. and Barfresh Corporation Inc. (formerly known as Smoothie, Inc.). All inter-company balances and transactions among the companies have been eliminated upon consolidation. Use of Estimates The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities in the balance sheets and revenues and expenses during the years reported. Actual results may differ from these estimates. Concentration of Credit Risk The amount of cash on deposit with financial institutions can be in excess of the $ 250,000 federally insured limit. 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 September 30, 2021 and December 31, 2020, the Company had $ 142,382 and $ 142,382 , respectively, in restricted cash related to a 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. 6 Barfresh Food Group Inc. Notes to Condensed Consolidated Financial Statements September 30, 2021 (Unaudited) Our financial instruments consist of cash, accounts receivable, accounts payable, advanced payments, restricted cash, convertible debt, derivative liability and the PPP loan. The carrying value of our financial instruments approximates their fair value. The PPP loan approximates fair value as forgiveness is expected in the near term. Accounts Receivable Accounts receivable are typically unsecured. Our credit policy calls for payment generally within 30 days. The credit worthiness of a customer is evaluated prior to a sale. As of September 30, 2021 and December 31, 2020, the Company’s allowance for doubtful accounts was $ 131,576 and $ 133,424 , respectively. The allowance was estimated based on evaluation of collectability of outstanding accounts receivable. Inventory Inventory consists of raw materials and finished goods and is carried at the lower of cost or net realizable value on a first in first out basis. The Company monitors the remaining useful life of its inventory and establishes a reserve of obsolescence where appropriate. As of September 30, 2021 and December 31, 2020, the Company’s inventory reserve was $ 53,188 and $ 59,093 , 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 periods presented. Property, Plant, and Equipment Property, plant, and equipment is stated at cost less accumulated depreciation and accumulated impairment loss, if any. Depreciation is calculated on a straight-lined basis over the estimated useful lives of the assets. Leasehold improvements are being amortized over the shorter of the useful life of the asset or the lease term that includes any expected renewal periods that are deemed to be reasonably assured. The estimated useful lives used for financial statement purposes are: Furniture and fixtures: 5 years Manufacturing equipment and customer equipment: 3 years to 7 years Vehicles: 5 years 7 Barfresh Food Group Inc. Notes to Condensed Consolidated Financial Statements September 30, 2021 (Unaudited) Revenue Recognition In accordance with ASC 606, Revenue from Contracts with Customers, revenue is recognized when a customer obtains ownership of promised goods. The amount of revenue recognized reflects the consideration to which the Company expects to be entitled to receive in exchange for these goods. The Company applies the following five steps: 1) Identify the contract with a customer A contract with a customer exists when (i) the Company enters into an enforceable contract with a customer that defines each party’s rights, (ii) the contract has commercial substance and, (iii) the Company determines that collection of substantially all consideration for goods or services that are transferred is probable. For the Company, the contract is the approved sales order, which may also be supplemented by other agreements that formalize various terms and conditions with customers. 2) Identify the performance obligation in the contract Performance obligations promised in a contract are identified based on the goods or services that will be transferred to the customer. For the Company, this consists of the delivery of frozen beverages, which provide immediate benefit to the customer. 3) Determine the transaction price The transaction price is determined based on the consideration to which the Company will be entitled in exchange for transferring goods and is generally stated on the approved sales order. Variable consideration, which typically includes volume-based rebates or discounts, are estimated utilizing the most likely amount method. 4) Allocate the transaction price to performance obligations in the contract Since our contracts contain a single performance obligation, delivery of frozen beverages, the transaction price is allocated to that single performance obligation. 5) Recognize Revenue when or as the Company satisfies a performance obligation The Company recognizes revenue from the sale of frozen beverages when title and risk of loss passes and the customer accepts the goods, which generally occurs at the time of delivery to a customer warehouse. Customer sales incentives such as volume-based rebates or discounts are treated as a reduction of sales at the time the sale is recognized. Shipping and handling costs are treated as fulfillment costs and presented in distribution, selling and administrative costs. Payments that are received before performance obligations are recorded are shown as current liabilities. The Company evaluated the requirement to disaggregate revenue and concluded that substantially all of its revenue comes from a single product, frozen beverages. Research and Development Expenditures for research activities relating to product development and improvement are charged to general and administrative expense as incurred. We incurred $ 34,454 and $ 147,738 , in research and development expenses for the three months ending September 30, 2021 and 2020, respectively. For the nine months ending September 30, 2021 and 2020, research and development costs totaled $ 172,900 and $ 326,892 , respectively. 8 Barfresh Food Group Inc. Notes to Condensed Consolidated Financial Statements September 30, 2021 (Unaudited) Shipping and Storage Costs Shipping and handling costs are included in general and administrative expenses. For the three months ending September 30, 2021 and 2020, shipping and storage costs totaled $ 335,414 and $ 126,737 , respectively. For the nine months ending September 30, 2021 and 2020, shipping and storage costs totaled $ 716,552 and $ 356,270 , respectively. 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. Derivative Liability The Company evaluates its convertible instruments, options, warrants or other contracts to determine if those contracts or embedded components of those contracts qualify as derivatives to be separately accounted for under ASC Topic 815, “Derivatives and Hedging.” The result of this accounting treatment is that the fair value of any derivative is marked-to-market each balance sheet date and recorded as a liability. In the event that the fair value is recorded as a liability, the change in fair value is recorded in the statement of operations as gain/loss from derivative liability. Upon conversion or exercise of a derivative instrument, the instrument is marked to fair value at the conversion date and then that fair value is reclassified to equity. We analyzed the derivative financial instruments in accordance with ASC 815. The objective is to provide guidance for determining whether an equity-linked financial instrument is indexed to an entity’s own stock. This determination is needed for a scope exception which would enable a derivative instrument to be accounted for under the accrual method. The classification of a non-derivative instrument that falls within the scope of ASC 815-40-05 “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock” also hinges on whether the instrument is indexed to an entity’s own stock. A non-derivative instrument that is not indexed to an entity’s own stock cannot be classified as equity and must be accounted for as a liability. There is a two-step approach in determining whether an instrument or embedded feature is indexed to an entity’s own stock. First, the instrument’s contingent exercise provisions, if any, must be evaluated, followed by an evaluation of the instrument’s settlement provisions. The Company utilized the fair value standard set forth by the Financial Accounting Standards Board, defined as the amount at which the assets (or liability) could be bought (or incurred) or sold (or settled) in a current transaction between willing parties, that is, other than in a forced or liquidation sale. 9 Barfresh Food Group Inc. Notes to Condensed Consolidated Financial Statements September 30, 2021 (Unaudited) Debt Extinguishment The Company evaluates its convertible instruments in accordance with ASC 470-50, “Debt Modifications and Extinguishments.” For all extinguishments of debt, ASC 470-50 requires the difference between the reacquisition price (including any premium) and the net carrying amount of the debt being extinguished (including any deferred debt issuance costs) to be recognized as a gain or loss when the debt is extinguished. Accordingly, the Company recorded a net loss of $ 193,562 and net gain of $ 379,200 , respectively, non-cash gain/loss on extinguishment of debt in its statements of operations for the nine months ended September 30, 2021 and 2020, and zero net loss for the three months ended September 30, 2021 and 2020 respectively. Earnings per Share We calculate net loss per share in accordance with ASC Topic 260. Basic net loss per share is computed by dividing net loss by the weighted average number of shares of common stock outstanding for the period, and diluted earnings per share is computed by including common stock equivalents outstanding for the period in the denominator. At September 30, 2021 and 2020 any equivalents would have been anti-dilutive as we had losses for the periods then ended. 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. Note 2. Inventory Inventory consists of the following at September 30, 2021 and December 31, 2020: Schedule of Inventory 2021 2020 Raw materials $ 259,519 $ 130,296 Finished goods, net of reserve 918,280 739,894 Inventory, net $ 1,177,799 $ 870,190 Note 3. Property Plant and Equipment Major classes of property and equipment at September 30, 2021 and December 31, 2020: Schedule of Major Classes of Property and Equipment 2021 2020 Furniture and fixtures $ 1,524 $ 1,524 Manufacturing Equipment and customer equipment 3,800,238 3,573,527 Leasehold Improvements 4,886 4,886 Vehicles 29,696 29,696 3,836,344 3,609,633 Less: accumulated depreciation ( 2,744,758 ) ( 2,331,034 ) 1,091,586 1,278,599 Equipment not yet placed in service 646,331 644,313 Property and equipment, net of depreciation $ 1,737,917 $ 1,922,912 10 Barfresh Food Group Inc. Notes to Condensed Consolidated Financial Statements September 30, 2021 (Unaudited) We recorded depreciation expense related to these assets of $ 146,346 and $ 122,827 for the three-months ended September 30, 2021 and 2020, respectively and $ 407,432 and $ 394,670 for the nine months ended September 30, 2021 and 2020, respectively. Depreciation expense in Cost of Goods Sold was $ 0 and $ 5,115 for three months ended September 30, 2021 and 2020, respectively, and $ 17,673 and $ 14,717 for the nine months ended September 30, 2021 and 2020, respectively. Note 4. Intangible Assets As of September 30, 2021, intangible assets consist of patent costs of $ 768,138 , trademarks of $ 124,285 and accumulated amortization of $ 506,149 . As of December 31, 2020, intangible assets consist of patent costs of $ 768,138 , trademarks of $ 119,911 and accumulated amortization of $ 457,833 . 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 patents, which is December 2025. The amount charged to amortization was $ 16,105 and $ 15,902 for the three months ended September 30, 2021 and 2020, respectively, and $ 48,316 and $ 47,707 for the nine months ended September 30, 2021 and 2020, respectively. Estimated future amortization expense related to patents as of September 30, 2021, is as follows: Schedule of Estimated Future Amortization Expense Related to Intangible Property Total Amortization Years ending December 31, 2021 $ 16,105 2022 64,421 2023 64,421 2024 64,219 2025 52,823 Intangible asset, net of amortization $ 261,989 Note 5. Related Parties As disclosed below in Note 7, members of management and directors invested in the Company’s convertible notes; and in Note 10, members of management and directors have received shares of stock and options in exchange for services. Note 6. Paycheck Protection Program (PPP) loan On May 7, 2020 the Company was granted a $ 568,131 loan under the PPP administered by a Small Business Administration (SBA) approved partner. The loan, which was to mature in two years , was uncollateralized and was fully guaranteed by the Federal government. The Company was eligible for loan forgiveness of up to 100 % of the loan, upon meeting certain requirements. On May 20, 2021 the loan for $ 568,131 was legally released and forgiven by the SBA. Forgiveness income of $ 568,131 has been recorded for the nine months ended September 30, 2021. On January 27, 2021, the Company was granted a second $ 568,131 loan under the PPP administered by an SBA approved partner. The loan, which matures in five years , has 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. 11 Barfresh Food Group Inc. Notes to Condensed Consolidated Financial Statements September 30, 2021 (Unaudited) The repayment for the PPP loan as of September 30, 2021, are as follows: Schedule of Repayment of Paycheck Protection Program (PPP) Loan Total Repayment Years ending December 31, 2021 (three months remaining) $ - 2022 90,384 2023 154,945 2024 154,945 2025 154,945 Later years 12,912 Repayment of debt $ 568,131 Note 7. Convertible Notes (Related and Unrelated Party) As of September 30, 2021, the Company settled all outstanding convertible note which included the $ 1,071,000 Series CN Note 1 noteholders. The debt settlement consisted of debt converted to company stock of $ 231,000 ($ 30,000 related party) in principal and $ 192,663 ($ 37,689 related party) in interest into 1,159,243 shares of common stock, and debt in the amount of $ 840,000 ($ 180,000 related party) was repaid. The convertible notes consist of the following components as of September 30, 2021 and December 31, 2020: Schedule of Convertible Notes September 30, 2021 December 31, 2020 Convertible notes $ 1,181,167 $ 1,181,167 Less: Debt discount (warrant value) ( 92,266 ) ( 92,266 ) Less: Debt discount (derivative value) (Note 8) Less: Debt discount (issuance costs paid) ( 6,004 ) ( 6,004 ) Less: Note conversion/settlements ( 1,181,167 ) ( 110,166 ) Add: Debt discount amortization 98,270 38,173 Total convertible notes $ - $ 1,010,904 As of September 30, 2021, the Company settled all outstanding convertible note holders which included the $ 168,000 Series CN Note 2 noteholders. The debt settlement consisted of debt converted to company stock of $ 168,000 in principal and $ 41,747 in interest into 582,630 shares of common stock. The convertible notes consist of the following components as of September 30, 2021 and December 31, 2020: Schedule of Convertible Notes September 30, 2021 December 31, 2020 Convertible notes $ 235,200 $ 235,200 Less: Debt discount (warrant value) ( 1,817 ) ( 1,817 ) Less: Debt discount (derivative value) (Note 8) ( 13,528 ) ( 13,528 ) Less: Debt discount (issuance costs paid) ( 6,004 ) ( 6,004 ) Less: Note conversion/settlements ( 235,200 ) ( 67,200 ) Add: Debt discount amortization 21,349 9,487 Total convertible notes $ - $ 156,138 The total of $ 1,167,042 shown in the two tables above at December 31, 2020, are presented in the balance sheet as Current Liabilities: $ 158,243 Convertible Note-Net of Discount and Long-Term Liabilities: Convertible Note – related party net of Discount of $ 197,804 , and Convertible Note – net of Discount $ 810,995 . 12 Barfresh Food Group Inc. Notes to Condensed Consolidated Financial Statements September 30, 2021 (Unaudited) Note 8. Derivative Liabilities As discussed in Note 7, Convertible Notes, the Company had $ 168,000 of principal outstanding in CN Notes 2 that contained variable conversion provisions. The conversion terms of the convertible notes were 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 was 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 was indeterminate. The Company fair valued the variable conversion provisions each reporting period. The fair value was reported as a derivative liability in the accompanying consolidated balance sheets and the change in value was recorded as a gain or loss in the accompanying consolidated statements of operations. The fair values of the Company’s derivative liabilities are estimated at the issuance date and are revalued at each subsequent reporting date. As of September 30, 2021, the Convertible Noteholders discussed in Note 7 were settled. Upon debt extinguishment the Company’s derivative liability was revalued at May 26, 2021 with value of $ 25,170 , which resulted in a gain of $ 16,305 for the nine months ended September 30, 2021. The fair value of the derivative liabilities for CN Notes 2 was calculated using the Black-Scholes model using the following assumptions. Schedule of Fair Value of the Derivative Liability 26-May-21 31-Dec-20 Expected life 0.46 0.92 Volatility (based on comparable company) 101.32 % 120.38 % Risk Free interest rate 0.04 % 0.1 % Dividend yield (on common stock) - - Reconciliation of the derivative liability measured at fair value on a recurring basis with the use of significant unobservable inputs (level 3) from December 31, 2020 to September 30, 2021: Schedule of Derivative Liability Measured at Fair Value on a Recurring Basis December 31, 2020 $ 41,475 Net gain from change in value ( 16,305 ) Extinguishment change in derivative from debt settlement ( 25,170 ) September 30, 2021 $ - The following table presents the Company’s fair value hierarchy for applicable assets and liabilities measured at fair value as of December 31, 2020 and September 30, 2021: Schedule of Fair Value Hierarchy of Assets and Liabilities Level 1 Level 2 Level 3 Total Derivative Liability December 31, 2020 $ - - 41,475 $ 41,475 Level 1 Level 2 Level 3 Total Derivative Liability September 30, 2021 $ - - - $ - Note 9. Commitments and Contingencies We lease office space under a non-cancelable operating lease which expires on March 31, 2023 . Our periodic lease cost and operating cash flows were $ 19,818 and $ 19,813 for the three months ended September 30, 2021 and 2020, respectively. Our periodic lease cost and operating cash flow were $ 59,489 and $ 59,657 for the nine months ended September 30, 2021 and 2020, respectively. As of September 30, 2021, our right of use asset and related liability was $ 102,525 and $ 111,180 . 13 Barfresh Food Group Inc. Notes to Condensed Consolidated Financial Statements September 30, 2021 (Unaudited) In determining the present value of our operating lease right-of-use asset and liability, we used a 10 % discount rate (which approximated our borrowing rate). The remaining term on the lease is 3 years. The following table presents the future operating lease payment as of September 30, 2021: Schedule of Estimate Future Maturities of Lease Liabilities 2021 (three months remaining) 19,648 2022 80,361 2023 20,238 Total Lease payments 120,247 Less: imputed interest ( 9,067 ) Total lease liability $ 111,180 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. Note 10. Stockholders’ Equity During the nine months ended September 30, 2021, we issued 539,998 options to purchase our common stock to employees. The exercise price of the options were $ 0.38 -$ 0.59 per share, with a combination of both cliff and graded vesting over 3 years and are exercisable for a period of 8 years. The fair value of the options issued ($ 177,751 , in the aggregate) was calculated using the Black-Scholes option pricing model, based on the criteria shown below. Summary of Fair Value of Options Using Black-Sholes Option Pricing Model Expected life (in years) 5.5 - 8 Volatility (based on a comparable company) 85.05 %- 89.37 % Risk Free interest rate .725 %- 1.32 % Dividend yield (on common stock) - For the nine months ended September 30, 2021, the Company issued 148,810 options for board director compensation, and 460,000 options were cancelled. The total amount of equity-based compensation included in additional paid in capital was $ 41,574 and $ 45,692 for the three months ended September 30, 2021 and 2020, respectively. The total amount of equity-based compensation included in additional paid in capital was $ 51,857 and $ 240,216 for the nine months ended September 30, 2021 and 2020, respectively. The following is a summary of outstanding stock options issued to employees and directors as of September 30, 2021: Summary of Outstanding Stock Options Issued to Employees and Directors Number of Options Exercise price per share $ Average remaining term in years Aggregate intrinsic value at date of grant $ Outstanding January 1, 2021 7,640,959 .34 - .87 2.97 - Issued - Employees 539,998 .43 - .46 7.69 - Issued - Directors 148,810 .42 7.56 Cancelled/Expired ( 460,000 ) Outstanding September 30 2021 7,869,767 .34 - .87 3.21 - Exercisable, September 30, 2021 6,693,669 .34 - .87 3.10 - 14 Barfresh Food Group Inc. Notes to Condensed Consolidated Financial Statements September 30, 2021 (Unaudited) As of September 30, 2021, the Company has $ 192,500 of total unrecognized share-based compensation expense related to unvested options, which is expected to be amortized over the remaining weighted average period of 3.21 years . The following is Changes in Stockholders’ Equity as of September 30, 2020 and September 30, 2021: Schedule of Changes in Stockholders' Equity Additional Common Stock paid in Accumulated Shares Amount Capital (Deficit) Total Balance January 1, 2020 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 12,955,725 8 3,797,792 - 3,797,800 Conversion of debt 4,778,043 5 1,333,757 - 1,333,762 Interest paid in shares 632,251 - 379,350 - 379,350 Issuance of stock for services 263,946 - 105,000 - 25,000 Equity based compensation - - 240,216 - 194,524 Warrants issued to management - - 167,892 - 167,892 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 - - - ( 2,800,843 ) ( 2,800,843 ) Balance September 30, 2020 149,093,829 $ 143 $ 53,148,806 ( 49,547,965 ) $ 3,600,984 15 Barfresh Food Group Inc. Notes to Condensed Consolidated Financial Statements September 30, 2021 (Unaudited) Additional Common Stock paid in Accumulated Shares Amount Capital (Deficit) Total Balance January 1, 2021 149,133,372 $ 149 $ 53,223,665 ( 50,899,628 ) $ 2,324,186 Issuance of stock for capital raise, 16,666,666 17 5,999,983 - 6,000,000 Conversion of debt and accrued interest 1,489,976 2 685,388 - 685,390 Interest paid in shares 251,897 - 151,138 - 151,138 Issuance of stock for services 59,524 - 75,000 - 75,000 Equity based compensation - - 51,857 - 51,857 Net (loss) for the year - - - ( 1,395,419 ) ( 1,395,419 ) Balance September 30, 2021 167,601,435 $ 168 $ 60,187,031 ( 52,295,047 ) $ 7,892,152 On June 1, 2021, the Company completed a private placement of 16,666,666 shares of its common stock at $ 0.36 per share, resulting in gross proceeds of $ 6,000,000 . In addition, holders of debt converted a total of $ 399,000 in principal and $ 234,410 in interest into 1,741,873 shares of common stock, and debt in the amount of $ 840,000 was retired. Note 11. Outstanding Warrants The following is a summary of all outstanding warrants as of September 30, 2021: Summary of Outstanding Warrants Number of warrants Price per share Remaining term in years Intrinsic value at date of grant Warrants issued in connection with private placements of common stock 20,873,817 $ 0.50 - $ 1.00 0.95 $ - Warrants issued in connection with private placement of notes 3,465,501 $ 0.70 0.85 $ - Warrants issued in connection with settlement of deferred compensation 3,169,599 $ 0.27 – 0.70 3.00 $ - Warrants issued in connection with Settlement of services 137,151 $ 0.24 – 0.42 0.87 $ - Note 12. Income Taxes ASC 740 requires a valuation allowance to reduce the deferred tax assets reported if, based on the weight of evidence, it is more than likely than not that some portion or all of the deferred tax assets will not be recognized. Accordingly, at this time the Company has placed a valuation allowance on all tax assets. As of September 30, 2021, the estimated effective tax rate for the year will be zero . Our policy is to account for income tax related interest and penalties in income tax expense in the statement of operations. 16