Barfresh Food Group Inc. — Fiscal 2014 Form 10-K Summary
Reporting period: Fiscal year ended March 31, 2014, compared with fiscal 2013. The filing is an annual report, not a quarterly report. Barfresh develops and sells portion-controlled, ready-to-blend smoothie, shake and frappe beverage packs using natural ingredients. Fiscal 2014 was the Company’s first year as an operating company rather than a development-stage company.
Business Context and Operating Developments
- The Company began shipping products to one contracted customer and several smaller customers during fiscal 2014.
- Approximately 10,000 potential customer outlets were covered by agreements to develop flavors and test products, but no assurance exists that these opportunities will convert into commercial rollouts.
- The first Australian order shipped in January 2014. Fiscal 2014 revenue included $65,760 from Australia and $44,325 from the United States.
- Barfresh acquired international patent rights and related trademarks on October 15, 2013. The acquisition included patents granted in 13 jurisdictions and pending applications elsewhere under the Patent Cooperation Treaty.
- The Company uses contract manufacturing and has an operating production line in Salt Lake City. It reported seven full-time employees and two employees focused on sales, together with consultants.
Financial Highlights
| Metric | FY2014 | FY2013 | Change |
|---|---|---|---|
| Revenue | $110,085 | $8,928 | Substantial increase |
| Gross profit | $61,551 | $44 | Gross margin increased to 55.9% |
| Operating loss | $(2,290,562) | $(1,839,499) | Loss widened |
| Interest expense | $292,888 | $196,489 | Increased |
| Net loss | $(2,583,450) | $(2,035,988) | Loss widened |
| Basic loss per share | $(0.05) | $(0.04) | Loss per share increased |
| Cash flow used in operations | $(1,885,160) | $(992,241) | Use of cash increased |
| Cash balance | $2,632,612 | $85,957 | Increased through financing |
| Working capital | $1,824,889 | Not clearly provided | — |
| Total liabilities | $1,158,342 | $791,767 | Increased |
Gross margin improved primarily because overseas selling prices generated higher margins. Management stated that the fiscal 2014 margin may be more indicative of expected future results than the unusually low fiscal 2013 margin.
Operating expenses were $2,352,113, including $2,267,270 of general and administrative expenses and $84,843 of depreciation and amortization. General and administrative expense increased by $463,105, driven principally by higher personnel costs and stock-based compensation.
Cash Flow, Debt and Liquidity
- Operating activities consumed $1.89 million of cash, while investing activities consumed $804,093, including $699,561 for patents and $104,532 for equipment.
- Financing activities provided $5.24 million, including $4.51 million net proceeds from issuing 14,226,000 common shares and warrants.
- At March 31, 2014, current liabilities were $965,283 and current assets were $2,790,172.
- Short-term notes had $775,000 of principal, stated interest of 2%, and were due December 20, 2014, with a right to extend to June 19, 2015 under specified conditions. The notes were issued with warrants to purchase 1,291,667 shares at $0.45 per share.
- Convertible notes had $420,000 of principal outstanding, net carrying value of $193,059 after debt discounts, stated interest of 12%, and maturity in September 2015. The notes were convertible at $0.25 per share and accompanied by 1,680,000 warrants.
- Management stated that additional equity or debt financing would be required if operating cash flow and existing capital are insufficient. No assurance was given that additional financing will be available.
- The Company had no material off-balance-sheet arrangements.
Material Changes Versus Prior Period
- Revenue increased from $8,928 to $110,085 as commercial shipments began.
- Gross margin increased from approximately 0.5% to 55.9%, primarily due to higher-margin overseas sales.
- Net loss increased by $547,462, reflecting higher personnel, stock-based compensation, depreciation and interest costs.
- Cash used in operations increased by $892,919.
- International patents and trademarks were acquired, increasing intangible assets from $31,985 to $700,654, net.
- Common shares outstanding increased from 50,366,660 to 65,247,660, with additional dilution potential from warrants, convertible notes and options.
- Stockholders’ equity improved from a deficit of $91,331 to positive equity of $2,709,023, primarily because of equity financing.
Outlook, Commentary and Risks
Management expects to pursue customer testing, customized flavor development, broader food-service distribution, Australian expansion and potential international manufacturing, licensing or royalty arrangements. The filing does not provide formal revenue, earnings or margin guidance.
- The Company has a history of operating losses and may not achieve or sustain profitability.
- Revenue remains dependent on converting preliminary customer agreements and tests into recurring commercial orders. Three customers represented approximately 89.8% of reported fiscal 2014 revenue based on the customer concentration table.
- Competition is substantial, including juice bars, fast-food and fast-casual chains, syrup-based products and other portion-pack products.
- Fruit, dairy and other ingredient costs may be volatile, and the Company does not have long-term raw-material supply contracts.
- The Company disclosed material weaknesses in internal control over financial reporting, including no audit committee, no majority of independent directors and inadequate segregation of duties. Management nevertheless concluded that disclosure controls and procedures were effective.
- All directors were considered non-independent, and the Company had no audit, nominating or compensation committee.
- Related parties participated in debt financings and provided advances. The two principal shareholders and directors collectively controlled more than 50% of voting power.
- The common stock trades on the OTCQB, is thinly traded and may be subject to substantial volatility, limited liquidity and dilution from future securities issuances.
- The U.S. patent remained pending, while the Canadian patent had been granted and international rights had varying granted or pending status.
Investor Verification Items
- Verify whether customer testing and preliminary agreements convert into recurring orders and whether the Company remains dependent on a small number of customers.
- Reconcile customer concentration disclosures: the filing reports Customer A revenue of $67,760, while geographic revenue lists Australian revenue of $65,760.
- Assess cash runway against operating cash burn, the $775,000 short-term note maturity and the September 2015 convertible-note maturity.
- Quantify potential dilution from 19.8 million reported outstanding warrants, convertible debt conversion rights and 800,000 vested options, subject to the detailed capitalization records.
- Monitor remediation of the disclosed material weaknesses and the planned addition of accounting personnel.
- Confirm the status and enforceability of U.S. and international patents, trademarks and related licensing or commercialization arrangements.
- Review related-party financing terms, control arrangements and the absence of independent directors and board committees.