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MarketScreener Homepage  >  Equities  >  OTC Bulletin Board  >  Barfresh Food Group Inc    BRFH

BARFRESH FOOD GROUP INC

(BRFH)
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BARFRESH FOOD : Management's Discussion and Analysis of Financial Condition and Results of Operations. (form 10-Q)

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08/14/2019 | 04:07pm EDT

The following discussion should be read in conjunction with the financial information included elsewhere in this Quarterly Report on Form 10-Q (this "Report"), including our unaudited condensed consolidated financial statements and the related notes. References in this Management's Discussion and Analysis of Financial Condition and Results of Operations section to "us", "we", "our" and similar terms refer to Barfresh Food Group Inc. This discussion includes forward-looking statements, as that term is defined in the federal securities laws, based upon current expectations that involve risks and uncertainties, such as plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors. Words such as "anticipate", "estimate", "plan", "continuing", "ongoing", "expect", "believe", "intend", "may", "will", "should", "could" and similar expressions are used to identify forward-looking statements.

We caution you that these statements are not guarantees of future performance or events and are subject to a number of uncertainties, risks and other influences, many of which are beyond our control, which may influence the accuracy of the statements and the projections upon which the statements are based. Any one or more of these uncertainties, risks and other influences could materially affect our results of operations and whether forward-looking statements made by us ultimately prove to be accurate. Our actual results, performance and achievements could differ materially from those expressed or implied in these forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statements, whether from new information, future events or otherwise.

Barfresh is a leader in the creation, manufacturing and distribution of ready to blend frozen beverages. The current portfolio of products includes smoothies, shakes and frappes. Products are packaged in two distinct formats. The Company's original single serve format features portion controlled and ready to blend beverage ingredient packs or "beverage packs". The beverage packs contain all of the solid ingredients necessary to make the beverage, including the base (either sorbet, frozen yogurt or ice cream), real fruit pieces, juices and ice - five ounces of water are added before blending.

The Company's bulk "Easy Pour" format also contains all of the solid ingredients necessary to make the beverage, packaged in gallon containers in a concentrated formula that is mixed "one to one" with water. The Company has recently launched a "no sugar added" version of the bulk "Easy Pour" format that is specifically targeted for the USDA national school meal program, including the School Breakfast Program, the National School Lunch Program, and Smart Snacks in Schools Program. The Company currently provides its products to over 400 school locations. In addition, the Company recently received approval from the United States Defense Logistics Agency ("DLA") to sell its smoothie products into all branches of the U.S. Armed Forces, and has begun to sell its bulk Easy Pour product into a number of military bases in the United States. The Company currently provides its products to over 150 military base locations.

Domestic and international patents and patents pending are owned by Barfresh, as well as related trademarks for all of the single serve products. Patent rights have been granted in 13 jurisdictions including the United States. In addition, the Company has purchased all of the trademarks related to the patented products.

The Company conducts sales through several channels, including National Accounts, Regional Accounts, and Broadline Distributors. Barfresh's primary broadline distribution arrangement is through an exclusive nationwide agreement with Sysco Corporation ("Sysco"), the U.S.'s largest broadline distributor, which was entered into during July 2014, and the exclusivity provisions of the contract were renewed for an additional two year term on October 2, 2017.

During 2016 and 2017 the Company announced that it had signed supply agreements with several of the major global on-site foodservice operators. On March 8, 2018, the Company announced that it had signed a new supply agreement with one of the largest of these foodservice operators, for exclusive distribution of four of Barfresh's single serve sku's. On November 14, 2018, the Company announced that it had received approval for multiple products to be rolled out to a national restaurant chain with over 2,500 locations.

The Company also sells to broadline distributors that supply products to the food services market place. Effective July 2, 2014, the Company entered into an exclusive agreement with Sysco Merchandising and Supply Chain Services, Inc. for resale by the Sysco Corporation ("Sysco") to the foodservice industry of the Company's ready-to-blend smoothies, shakes and frappes. Pursuant to that agreement, all Barfresh products are included in Sysco's national core selection of beverage items, making Barfresh its exclusive single-serve, pre-portioned beverage provider. The agreement is mutually exclusive; however, Barfresh may also sell the products to other foodservice distributors, but only to the extent required for such foodservice distributors to service multi-unit chain operators with at least 20 units and where Sysco is not such multi- unit chain operator's nominated distributor for our products. On October 2, 2017, the exclusivity provisions of the Sysco agreement were extended for an additional two year period, and expanded to cover bulk easy pour products, on a non-exclusive basis.



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On October 26, 2015, Barfresh signed a five year agreement with PepsiCo North America Beverages, a division of PepsiCo, to become its exclusive sales representative within the food service channel to present Barfresh's line of ready-to-blend smoothies and frozen beverages throughout the United States and Canada. Through this agreement, Barfresh' products are included as part of PepsiCo's offerings to its significant customer base. The agreement facilitates access to potential National customer accounts, through introductions provided by PepsiCo's one-thousand plus person foodservice sales team. Barfresh products have become part of PepsiCo's customer presentations at national trade shows and similar venues.

Barfresh utilizes contract manufacturers to manufacture all of the products in the United States. Production lines are currently operational at two locations. The first location is in Salt Lake City, which currently produces bulk easy pour products. The second location is with Yarnell Operations, LLC., a subsidiary of Shulze and Burch, located in Arkansas. The Yarnell's agreement, which was signed during February, 2016, secures the capacity to ramp up to an incremental production capacity of 100 million units. Yarnell's location enhances the company's ability to efficiently move product throughout the supply chain to destinations in the eastern United States, home to many of the country's large foodservice outlets.

During November, 2016, the Company received an equity investment from Unibel, the majority shareholder of the Bel Group ("Unibel"). The Bel Group is headquartered in Paris, France, with global operations in 33 countries, 30 production sites on 4 continents and nearly 12,000 employees. Its many branded products, including The Laughing Cow®, Mini Babybel® and Boursin®, are sold in over 130 countries around the world. Pursuant to the securities purchase agreement, Unibel purchased 15,625,000 shares of common stock at $0.64 per share ("Shares") and warrants to purchase 7,812,500 shares of common stock ("Warrants") for aggregate gross proceeds to Barfresh of $10 million. The Warrants are exercisable for a term of five years at a per share price of $.88 for cash. Pursuant to the Investor Rights agreement, Barfresh has registered the Shares and the Warrants, and Unibel was granted a seat on the Barfresh Board. This strategic investment provided Barfresh with necessary capital while leveraging Unibel's more than 150 years of industrial expertise, innovative capabilities, world-class marketing and branding expertise to accelerate our growth in new and existing markets and product channels.

On February 14, 2018, we announced the private placement of convertible notes with gross proceeds of $4.1 million The closing shall be no later than five (5) business days after receipt of notice from the Company that it has achieved certain milestones establishing significant sales to national accounts. One milestone is that the Company shall have entered into a material agreement or series of related agreements with a national account for the sale of its products into approximately 1,000 new locations. The first milestone was achieved on March 8, 2018, and according to the terms of the note the Company has received 60% of the principal amount. The remaining 40% of the principal amount will be received upon achieving a second milestone, which is entering into a material agreement or series of related agreements with a national account for the sale of its products into approximately 2,500 new locations.

The convertible notes are unsecured and have (i) a two-year term, (ii) a 10% annual coupon to be paid in cash or stock at the Company's discretion at a conversion price equal to 85% of the average closing bid prices of the Common Stock over the twenty (20) consecutive trading day period immediately preceding the payment date, but in no event lower than sixty cents ($0.60) per share of Common Stock. The investor's may elect to convert their principal into common stock at a conversion price equal to the lower of: (i) $0.88 per share of Common Stock, or (ii) 85% of the average closing bid prices of the Common Stock over the twenty (20) consecutive trading day period immediately preceding the date of investor's election to convert; but in no event lower than $0.60 per share of Common Stock. Investors also received warrant coverage of 25% of the number of shares that would be issuable upon a full conversion of the principal amount at an average of the twenty consecutive trading day period immediately preceding the applicable closing date. If any principal amount remains outstanding after the one-year anniversary of the closing, investors will be granted an additional warrant with identical terms. The warrants are exercisable for a period of three years for cash at the greater of 120% of the closing price or $0.70 per share of common stock. After the initial private placement, investors were offered the opportunity to accelerate the issuance of the additional warrant by increasing their convertible note investment by 10% to 20%. After the close of the first quarter, a number of investors took advantage of this acceleration opportunity, resulting in an increase in the amount of the total convertible note by $ 177,300 and the issuance of 930,332 additional warrants.

Currently we have 24 employees, 1 part time employee, and 1 consultant. There are currently 14 employees selling our products.

Critical Accounting Policies

Our financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America ("GAAP").



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Revenue Recognition


In accordance with ASC 606, Revenue from Contracts with Customers, revenue is recognized when a customer obtains ownership of promised goods. The Company adopted this standard at the beginning of fiscal year 2018, with no significant impact to its financial position or results of operations, using the modified retrospective method. The amount of revenue recognized reflects the consideration to which the Company expects to be entitled to receive in exchange for these goods. The Company applies the following five steps:



  1) Identify the contract with a customer

     A contract with a customer exists when (i) the Company enters into an
     enforceable contract with a customer that defines each party's rights, (ii)
     the contract has commercial substance and, (iii) the Company determines that
     collection of substantially all consideration for goods or services that are
     transferred is probable. For the Company, the contract is the approved sales
     order, which may also be supplemented by other agreements that formalize
     various terms and conditions with customers.

  2) Identify the performance obligation in the contract

     Performance obligations promised in a contract are identified based on the
     goods or that will be transferred to the customer. For the Company, this
     consists of the delivery of frozen beverages, which provide immediate benefit
     to the customer.

  3) Determine the transaction price

     The transaction price is determined based on the consideration to which the
     Company will be entitled in exchange for transferring goods, and is generally
     stated on the approved sales order. Variable consideration, which typically
     includes volume-based rebates or discounts, are estimated utilizing the most
     likely amount method.

  4) Allocate the transaction price to performance obligations in the contract

     Since our contracts contain a single performance obligation, delivery of
     frozen beverages, the transaction price is allocated to that single
     performance obligation.

  5) Recognize Revenue when or as the Company satisfies a performance obligation

     The Company recognizes revenue from the sale of frozen beverages when title
     and risk of loss passes, and the customer accepts the goods, which generally
     occurs at delivery. 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.

     The company evaluated the requirement to disaggregate revenue, and concluded
     that substantially all of its revenue comes from a single product, frozen
     beverages.




Impairments



We periodically evaluate whether the carrying value of long-lived assets has been impaired when circumstances indicate the carrying value of those assets may not be recoverable. The carrying amount is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. If the carrying value is not recoverable, the impairment loss is measured as the excess of the asset's carrying value over its fair value.




Share-based Compensation



We account for share-based employee compensation plans under the fair value recognition and measurement provisions in accordance with applicable accounting standards, which require all share-based payments to employees, including grants of stock options and restricted stock units (RSUs), to be measured based on the grant date fair value of the awards, with the resulting expense generally recognized on a straight-line basis over the period during which the employee is required to perform service in exchange for the award.



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.



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Results of Operations


Results of Operation for Three Months Ended June 30, 2019 as Compared to the Three Months Ended June 30, 2018



Revenue and cost of revenue


Revenue increased $296,499 (27%) from $1,086,166 in the three months ended June 30, 2018 to $1,382,665 in the three months ended June 30, 2019. The increase in revenue is primarily the result of the increasing popularity of our bulk Easy Pour product which was initially rolled out during the first quarter of 2017 and has continued to gain momentum, especially with school and military locations. Our products continue to be distributed through all 72 of Sysco's U.S. mainland distribution centers, as well as through new customers beyond the Sysco distribution network.

Cost of revenue for the three months ended June 30, 2018 was $538,440 as compared to $531,619 for the three months ended June 30, 2019. Our gross profit was $547,726 (50.4%) for the three months ended June 30, 2018, and improved to $851,046 (61.6%) for the three months ended June 30, 2019. This improvement was driven by a number of factors, including leverage due to larger scale of production and product mix. We anticipate that our gross profit percentage for the remainder of 2019 will be comparable to the first half of 2019, or about approximately 58%.




Operating expenses



Our operations were primarily directed towards increasing sales and expanding our distribution network.

Our general and administrative expenses decreased $443,442 (20%) from $2,229,262 in the three months ended June 30, 2018, to $1,785,820, in the three months ended June 30, 2019. The improvement is driven by a number of factors, including lower personnel expenses resulting from the realignment of our sales force, increased efficiencies in our distribution network, lower rent expense resulting from the relocation of our headquarters office, and other cost savings initiatives. The following is a breakdown of our general and administrative expenses for the three months ended June 30, 2019 and 2018:



                                    three months       three months
                                       ended              ended
                                   June 30, 2019      June 30, 2018      Difference
Personnel costs                    $      687,994$      839,866$  (151,872 )
Stock based compensation/options          134,607            117,670          16,937
Legal and professional fees               134,751            132,353           2,398
Travel                                     99,108            127,312         (28,204 )
Rent                                       13,612             46,677         (33,065 )
Marketing and selling                     146,106            305,634        (159,528 )
Consulting fees                            28,083             17,925          10,158
Director fees                              67,837             50,000          17,837
Research and development                  116,786            153,329         (36,543 )
Shipping                                  155,055            278,787        (123,731 )
Storage                                    37,573             14,487          23,086
Other expenses                            164,308            145,222          19,086
                                        1,785,821          2,229,262        (443,442 )




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Personnel cost represents the cost of employees including salaries, bonuses, employee benefits and employment taxes and continues to be our largest cost. Personnel cost decreased $151,872 (18%) from $839,866 to $687,994. We had 25 full time employees and 3 consultants at the end of the second quarter of 2018, and we currently have 24 full time employees, 1 part time employee and 1 consultant.

Stock based compensation is used as an incentive to attract new employees and to compensate existing employees. Stock based compensation includes stock issued and options granted to employees and non-employees. Stock compensation for the current quarter was $134,607, an increase of $16,937, or 14%, from the year ago quarter expense of $117,670. The increase is primarily due to the timing of equity grants. The Company issues additional stock options to its employees from time to time under its Equity Compensation Plan.

Legal and professional fees increased $2,398 (2%) from $132,353 in the three months ended June 30, 2018, to $134,751 in the three months ended June 30, 2019. We anticipate legal fees related to our business and financing activities to increase as our business continues to grow.

Travel expenses decreased $28,204 (22%) from $127,312 in the three months ended June 30, 2018, to $99,108 in the three months ended June 30, 2019. The decrease is primarily due to reduction in travel costs associated with the reduced number of employees, as well as an increased management focus on controlling spending. We anticipate that travel expenses for the balance of this year will be comparable to the current quarter.

Rent expense decreased 71%, from $46,677 in the three months ended June 30, 2018, to $13,612 in the three months ended June 30, 2019. This improvement in rent expense results from the relocation of our headquarters office effective April 1, 2019, to our current location, at 3600 Wilshire Boulevard, Los Angeles, California pursuant to a new four year lease with monthly rent beginning at $6,547, as compared with $14,488 at our prior location.

Marketing and selling expenses decreased $159,528 (52%) from $305,634 in the three months ended June 30, 2018, to $146,106 in the three months ended June 30, 2019. Lower marketing and selling expenses were primarily due to changes that were made to certain sales commission agreement.

Consulting fees were $28,083 in the three months ended June 30, 2019, as compared with $17,925 in the three months ended June 30, 2018. Our consulting fees vary based on needs. We engaged consultants in the areas of sales and operations during the quarter. The need for future consulting services will be variable.

Director fees increased $17,837 from $50,000 in the three months ended June 30, 2018, to $67,837 in the three months ended June 30, 2019. Annual director fees are anticipated at $50,000 per non-employee director.

Research and development expenses decreased $36,543 (24%) from $153,329 in the three months ended June 30, 2018, to $116,786 in the three months ended June 30, 2019. These expenses relate to the services performed by our Director of Manufacturing and Product Development, and consultants supporting that employee. The decrease in research and development expense was primarily driven by timing of research activities.

Shipping expense decreased $123,731 (44%), from $278,787 in the three months ended June 30, 2018, to $155,055 in the three months ended June 30, 2019. Shipping expense as a percentage of revenue decreased from 26% in the three months ended June 30, 2018, to 11% in the three months ended June 30, 2019. The improvement in shipping expense is primarily due to the restructuring of our product distribution system, to move away from a forward warehouse system, in favor of a much higher utilization of a third party re-distribution system We anticipate that shipping expense as a percentage of sales will continue to improve during the balance of the year, as the Company continues to take advantage of more efficient distribution arrangements.

Storage expense increased $23,086 (159%), from $14,487 in the three months ended June 30, 2018 to $37,573 in the three months ended June 30, 2019. The increase in storage costs was primarily due to costs associated with the phase out of our forward warehouse program.

Other expenses consist of ordinary operating expenses such as investor relations, office, telephone, insurance, and stock related costs. We anticipate these expenses to be comparable for the balance of the year.



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We had operating losses of $1,089,848 and $1,812,407 for the three months ended June 30, 2019 and 2018, respectively. The improvement of $722,559, or 40%, was primarily due to higher gross profit margin on higher sales, and lower G&A expenses.

Gain/loss from derivative liability was a gain of $798,746 for the three months ended June 30 2019, as compared to a gain of $196,841 for the three months ended of June 30, 2018. The increase in the gain was due to the change in the company's stock price.

Interest expense in the three months ended June 30, 2019 was $282,814, as compared with $199,220 for the three months ended June 30, 2018. Interest relates to convertible debt in the amount of $2,527,500 that was issued on March 14, 2018, and in the amount of $1,363,200 that closed during December, 2018, each of which bears interest at 10%, and to a note payable in the amount of $250,000 that was issued on March 5, 2018, which bears interest at 12%. Interest expense includes amortization of $201,429 of the value of warrants issued with the convertible debt.

We had net losses of $573,916 and $1,814,786 in the three month periods ended June 30, 2019 and 2018, respectively.

Results of Operation for Six Months Ended June 30, 2019 as Compared to the Six Months Ended June 30, 2018




Revenue and cost of revenue



Revenue increased $507,962 (30%) from $1,709,237 in 2018 to $2,217,199 in 2019. The increase in revenue is primarily driven by the rollout of our new bulk Easy Pour product which began during the first quarter of 2017 which has continued to gain momentum, especially in the school and Military channels. Our product continues to be distributed through all 72 of Sysco's U.S. mainland distribution centers, as well as through new customers beyond the Sysco distribution network.

Cost of revenue for 2018 was $828,490 as compared to $931,449 in 2019. Our gross profit was $880,747 (51.5%) and $1,285,750 (58%) for 2018 and 2019, respectively. We anticipate that our gross profit percentage for the remainder of 2019 will be approximately 58%.



Operating expenses


Our operations were primarily directed towards increasing sales and expanding our distribution network.

Our general and administrative expenses decreased $534,661 (13%) from $4,323,925 in the first half of 2018 to $3,789,264 in the first half of 2019, with the improvement primarily driven by lower personnel expenses resulting from the realignment of our sales force. The following is a breakdown of our general and administrative expenses for the six months ended June 30, 2019 and 2018:



                                     six months          six months
                                        ended               ended
                                    June 30, 2019       June 30, 2018      Difference
Personnel costs                    $     1,646,860$     1,737,671$   (90,811 )
Stock based compensation/options           271,548             364,445         (92,897 )
Legal and professional fees                193,748             239,724         (45,976 )
Travel                                     210,867             211,160            (293 )
Rent                                        50,813             100,583         (49,770 )
Marketing and selling                      305,535             466,014        (160,479 )
Consulting fees                             33,499              35,659          (2,161 )
Director fees                              130,337             112,500          17,837
Research and development                   272,985             343,670         (70,685 )
Shipping                                   253,394             434,422        (181,028 )
Storage                                     88,880              24,923          63,957
Other expenses                             330,799             253,154          77,625
                                         3,789,264           4,323,925        (534,661 )




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Personnel cost represents the cost of employees including salaries, bonuses, employee benefits and employment taxes and continues to be our largest cost. Personnel cost decreased $90,811 (5%) from $1,737,671 in 2018, to $1,646,860 in 2019. During the fourth quarters of 2016 and 2017, we realigned ours sales force to a more efficient model, by increasing the number of dedicated sales brokers that represent our products, and reducing the number of sales force employees. We had 25 full time employees and 3 consultants at the end of the second quarter of 2018, and we currently have 24 full time employees, 1 part time employee, and 1 consultant.

Stock based compensation is used as an incentive to attract new employees and to compensate existing employees. Stock based compensation includes stock issued and options granted to employees and non-employees. Stock compensation for the six months ended June 30, 2019 was $271,548, a decrease of $92,897, or 26%, from the year ago period expense of $364,445. The decrease is primarily due to the reductions in our work force and the timing of equity grants. The Company issues additional stock options to its employees from time to time under its Equity Compensation Plan.

Legal and professional fees decreased $45,976 (19%) from $239,724 in 2018 to $193,748 in 2019. The decrease was primarily due to a timing of legal services required. We anticipate legal fees related to our business and financing activities to increase as our business continues to grow.

Travel expenses was $211,160 in 2018, and reduced slightly to $210,867 in 2019. We anticipate that travel expenses for the balance of this year will be about $30,000 lower than the first half of this year due to our increased focus on controlling costs.

Rent expense is primarily for our headquarter location, which was located in Beverly Hills, California during the first quarter of 2019. Rent expense for the Beverly Hills office was approximately $14,488 per month. Effective April 1, 2019, we relocated our headquarters office to our current location, at 3600 Wilshire Boulevard, Los Angeles, California pursuant to a new four year lease, with monthly rental cost of $6,173.50.

Marketing and selling expenses decreased $160,479 (34%) from $466,014 in 2018 to $305,535 in 2019. Lower marketing and selling expenses were due to changes that were made to certain sales commission agreement.

Consulting fees were $33,499 in 2019, as compared with $35,659 in 2018. Our consulting fees vary based on needs. We engaged consultants in the areas of sales and operations during the period. The need for future consulting services will be variable.

Director fees increased $17,837 from $112,500 in 2018 to $130,337 in 2019. Annual director fees are $50,000 per non-employee director.

Research and development expenses decreased $70,685 (21%) from $343,670 in 2018 to $272,985 in 2019. These expenses relate to the services performed by our Director of Manufacturing and Product Development, consultants supporting that employee, and certain commissioning expenses at our contract manufacturing locations

Shipping expense decreased $181,028 (42%) from $434,422 in 2018 to $253,394 in 2019. Shipping expense as a percentage of revenue was comparable at 25.4% in 2018, and improved to 11.4% in 2019. The improvement in shipping expense is primarily due to the restructuring of our product distribution system, to move away from a forward warehouse system, in favor of a much higher utilization of a third party re-distribution system. We anticipate that shipping and storage expense as a percentage of sales will continue to improve during the balance of the year, as the Company is able to take advantage of more efficient distribution arrangements.

Storage expense increased $63,957 (257%), from $24,923 in 2018 to $88,880 in 2019. The increase in storage costs was primarily due to costs associated with the phase out of our forward warehouse program.

Other expenses consist of ordinary operating expenses such as investor relations, office, telephone, insurance, and stock related costs. We anticipate these expenses to be comparable for the balance of the year.

We had operating losses of $2,860,565 and $3,674,932 for the six month periods ended June 30 2019 and 2018, respectively. The improvement of $814,367 or 22.2%, was primarily due to higher gross margin percent on higher sales, and lower G&A expenses.



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Gain/loss from derivative liability was a gain of $392,734 for the six months ended June 30 2019, as compared to a loss of $247,896 for the six months ended of June 30, 2018. The increase in the gain was due to the change in the company's stock price. Interest expense for the six months ended June 30, 2019 was $645,887 and was $230,096 for the six months ended June 30, 2018. Interest relates to convertible debt in the amount of $2,527,500 that was issued on March 14, 2018, and in the amount of $1,363,200 that closed during December, 2018, each of which bear interest at 10%, and to a note payable in the amount of $250,000 that was issued on March 5, 2018, which bears interest at 12%, and to acceleration notes in the amount of $177,300, issued on April 11, 2018, which bear interest at 10%. Interest expense includes amortization of $479,015 of the value of warrants issued with the convertible debt.

We had net losses of $3,421,178 and $4,152,924 in the six month periods ended June 30, 2019 and 2018.

Liquidity and Capital Resources

Liquidity During the six months ended June 30, 2019: We used cash for operations of $2,354,225, and purchased equipment for $319,157. We raised cash from the issuance of stock in the amount of $2,400,000, and we received cash for the exercise of warrants in the amount of $1,500,310. During the six months ended June 30, 2018, we used $2,732,466 of cash for operations, $678,287 for the purchase of equipment, received $37,968 from the sale of equipment, and used $6,062 for trademarks. We raised cash in the amount of $2,677,799 from the issuance of convertible notes, net of issuance costs, and $250,000 from the issuance of short term notes.

We have a history of operating losses and negative cash flow. As our operations grow, we expect to experience significant increases in our working capital requirements. These conditions raise substantial doubt over the Company's ability to continue as a going concern within one year after the date the financial statements are issued.

As of June 30, 2019, we had $2,268,315 of cash on the balance sheet. We have continued to significantly reduce core operating expenses, reducing total General and Administrative Expense in the first six months of 2019 by $534,661, or 12.4%, as compared with the first six months of 2018. Cash used in operations in the second quarter of 2019 improved to $160,081 per month, as compared with $624,661 per month in the first quarter of 2019. The Company's forecast for the next twelve months reflects a continuation of the improvement in cash flow from operations as the Company continues to reduce operating expenses and increase contracts with school locations, and military bases, and anticipates the roll-out of a National Account with over 2,500 locations. The Company has implemented numerous cost reduction measures which will reduce cash expenses over the next twelve months, including relocation of its headquarters office, as well as entering into a new contract for personnel related services. These two measures alone will yield $200,000 per year in cash savings, and the Company continues to pursue additional measures to reduce cash expenses. In addition, the Company has implemented new logistics arrangements which have already yielded substantial savings in the first half of 2019, which is expected to continue and accelerate over the next twelve months.

The Company has $1.8 million of convertible short term debt coming due in March of 2020. Approximately half of this debt is held by insiders. The Company expects that if available cash upon maturity of this debt is not adequate to repay the convertible short term debt, it will be able to extend the maturity date of that debt, in particular the portion held by insiders.

Management has evaluated these conditions, and concluded that there is substantial doubt over the Company's ability to continue as a going concern. The actions discussed in this footnote could mitigate the substantial doubt raised by our historical operating results, and satisfying our liquidity needs twelve months from the issuance of the financial statements. However, the Company cannot predict, with certainty, the outcome of its actions to preserve liquidity, including the accuracy of its financial forecast, the ability to sustain the current trend of cost cutting, or the ability to extend the maturity date of the debt that is maturing in March of 2020.

Off-Balance Sheet Arrangements

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

© Edgar Online, source Glimpses

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Managers
NameTitle
Riccardo Delle Coste Chairman, President & Chief Executive Officer
Joseph S. Tesoriero Chief Financial Officer
Arnold Tinter Secretary & Director
Steven Lang Independent Director
Joseph M. Cugine Director
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