Barfresh Food Group Inc. — FY2017 Form 10-K Summary
Business Context and Reporting Period
Barfresh develops, manufactures and distributes ready-to-blend frozen beverages, including smoothies, shakes and frappes, in single-serve beverage packs and bulk “Easy Pour” containers. The filing covers the fiscal year ended December 31, 2017, with comparisons to 2016. The company sells primarily through foodservice channels, including Sysco and PepsiCo’s foodservice sales organization, and uses contract manufacturers in the United States.
Financial Performance and Position
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Revenue | $1.997 million | $1.457 million | +37% |
| Gross profit | $0.911 million | $0.685 million | +33% |
| Gross margin | 46% | 47% | Down 1 percentage point |
| Operating loss | $8.912 million | $9.940 million | Improved $1.028 million |
| Net loss | $8.912 million | $10.191 million | Improved $1.279 million |
| Net loss per share | $0.08 | $0.11 | Improved |
| Cash used in operations | $7.334 million | $8.025 million | Improved $0.691 million |
- Operating expenses were $9.823 million, including $9.492 million of general and administrative expenses and $0.331 million of depreciation and amortization.
- Research and development expense increased to $574,989 from $432,146, primarily due to new production-line commissioning and development of customer-specific flavors.
- Shipping and storage expense increased 52% to $619,871, or 31% of revenue, partly reflecting inventory movement into forward warehouses and inventory preparation for expected national-account launches.
- Cash and cash equivalents declined to $1.305 million from $9.181 million. Inventory increased to $1.415 million from $318,000.
- Working capital surplus declined to $1.775 million from $8.752 million.
- The company reported no debt at December 31, 2017. Total liabilities were $1.271 million and total stockholders’ equity was $4.162 million.
- Capital expenditures, net of equipment sales, were $535,196; patent and trademark additions were $29,179.
Material Changes Versus the Prior Period
- Revenue growth reflected continued expansion with Sysco and the launch of the bulk Easy Pour product in early 2017.
- General and administrative expenses decreased 9% to $9.492 million, primarily because of sales-force restructuring and lower personnel costs.
- Personnel costs decreased 23% to $4.261 million, while stock-based compensation increased 20% to $1.361 million.
- The company reduced its workforce to 30 employees at year-end from 34 at December 31, 2016, after eliminating positions and expanding its broker network.
- Share-based compensation and service-related equity issuances increased additional paid-in capital; 6.715 million options and approximately 26.4 million warrants were outstanding at year-end.
- Customer concentration remained significant. One customer represented 62.3% of 2017 revenue, and the three largest disclosed customers represented 74.9%.
Guidance, Outlook, Risks and Unusual Items
- Management expects gross margins to improve as the business gains scale and manufacturing operations expand. It also expects research and development and certain operating expenses to continue increasing as national-account opportunities develop.
- On October 2, 2017, the Sysco agreement was extended for two years and expanded to cover bulk Easy Pour products on a non-exclusive basis.
- After year-end, Barfresh announced a supply agreement covering approximately 1,000 foodservice locations, with distribution expected to begin in April 2018. A second financing milestone related to approximately 2,500 locations was expected during 2018.
- The company disclosed substantial doubt about its ability to meet obligations over the twelve months following filing because of recurring losses, negative operating cash flow and working-capital requirements. Management stated that planned financing, cost reductions and salary deferrals were expected to alleviate the concern, but acknowledged that financing and liquidity actions were not certain.
- Subsequent financing included a planned $4.1 million convertible-note placement, with $2.5 million expected to become available after the first sales milestone, and a $250,000 unsecured six-month note issued March 5, 2018 at 12% interest. The convertible notes carry a 10% coupon, conversion features and warrant coverage, creating potential dilution and future cash obligations.
- Key risks include continued operating losses, dependence on additional financing, customer concentration, competition, volatile fruit and dairy costs, reliance on contract manufacturers and key personnel, product liability and intellectual-property risks, and limited liquidity of the OTCQB-traded common stock.
- Management reported ineffective disclosure controls and a material weakness in internal control over financial reporting due to inadequate segregation of duties. The company planned to add financial personnel to remediate the weakness.
- The independent auditor issued an unqualified opinion on the consolidated financial statements but did not audit or express an opinion on internal control effectiveness.
Important Facts for Investors to Verify
- Whether the 2018 national-account agreements convert into sustained revenue growth and whether the approximately 2,500-location milestone is achieved.
- Actual receipt, terms and availability of the remaining proceeds from the $4.1 million convertible-note financing.
- Cash burn, inventory conversion and the company’s ability to fund operations without repeated equity or debt issuance.
- Customer concentration and the effect of any change in Sysco-related volume or other major-customer relationships.
- Progress in remediating the material weakness and improving segregation of duties and disclosure controls.
- Potential dilution from outstanding options, warrants and convertible notes, as well as the company’s ability to refinance the $250,000 short-term note.