Business Context and Reporting Period
Barfresh Food Group Inc. develops, manufactures through contract manufacturers, and distributes portion-controlled ready-to-blend frozen beverages, including smoothies, shakes, and frappes. Products are sold primarily through national accounts and Sysco Corporation, with PepsiCo serving as an exclusive foodservice sales representative in the United States and Canada.
This Form 10-K covers the fiscal year ended December 31, 2016. The Company changed its fiscal year-end from March 31 to December 31; therefore, the audited comparable financial statements cover the nine months ended December 31, 2015, while certain management comparisons use unaudited twelve-month 2015 results. Comparisons should be interpreted accordingly.
Key Financial Metrics
| Metric | 2016 | Comparable 2015 |
|---|---|---|
| Revenue | $1,457,499 | $490,905, unaudited twelve-month basis |
| Gross profit | $684,672 | $210,257 |
| Gross margin | 47.0% | 42.8% |
| Operating loss | $(9,939,875) | $(6,783,818) |
| Net loss | $(10,190,725) | $(7,225,920) |
| Basic and diluted loss per share | $(0.11) | $(0.08) |
| Cash flow used in operations | $(8,024,788) | $(5,128,985), nine-month period |
| Cash and cash equivalents | $9,180,947 | $1,986,004 |
| Total debt | $12,807 | $2,625,873 total liabilities, including convertible and short-term notes |
General and administrative expenses increased to $10,415,933 from $6,819,183 on the twelve-month comparison, primarily due to sales-force expansion, personnel, travel, marketing, shipping, and stock-based compensation. Stock-based compensation was $1,133,149.
Working capital surplus was $8,751,702 at December 31, 2016. The balance sheet reported total assets of $11,823,390 and stockholders’ equity of $10,910,287. Capital expenditures, net of equipment sales, were $1,053,498, and patent and trademark investments were $64,089.
Material Changes Versus the Prior Comparable Period
- Revenue increased approximately 197% to $1.46 million, driven primarily by expansion through Sysco and shipments to quick-service restaurants and regional customers.
- Gross margin improved to 47.0% from 42.8%, partly reflecting an approximately 8% selling-price increase implemented in the first quarter of 2016.
- Operating loss expanded by approximately $3.16 million, and net loss increased by approximately $2.96 million, as operating expenses grew substantially faster than gross profit.
- Interest expense declined to $250,850 from $424,245 on the twelve-month comparison, principally because convertible debt was largely converted into equity during the first quarter of 2016.
- Cash increased by approximately $7.2 million, primarily from equity financing, despite $8.0 million of operating cash consumption and $1.1 million of investing cash use.
- Production capacity expanded through a February 2016 agreement with Yarnell Operations, which provided potential incremental capacity of up to 100 million units, in addition to approximately 14 million units of annual capacity at the Salt Lake City facility.
- The Company obtained a U.S. patent on August 16, 2016 and continued to hold international patents and pending applications.
- In November 2016, Unibel invested $10 million for 15,625,000 common shares and warrants to purchase 7,812,500 additional shares, and received board-designation rights.
Guidance, Outlook, Risks, and Unusual Items
Management expects growth to depend on scaling sales through Sysco, PepsiCo, national accounts, and the newly signed global on-site foodservice operator agreement. The filing does not provide formal revenue or earnings guidance.
- Management expected personnel expenses to decline by approximately $1.5 million on a full-year run-rate basis beginning in 2017 following a sales-force realignment that increased dedicated brokers and reduced sales employees.
- Management expected gross margin to improve with greater scale and expanded manufacturing operations, while research and development expenses were expected to increase as customized flavors were developed for national-account prospects.
- Customer concentration was significant: two customers represented 93.1% of 2016 revenue, with one customer representing 82.0%.
- The Company has a history of operating losses and used $8.0 million of cash in operations during 2016. Management stated that additional financing may be required if operating cash flow is insufficient; there is no assurance that additional capital will be available.
- Management concluded that disclosure controls and internal control over financial reporting were not effective as of December 31, 2016. Reported material weaknesses included inadequate segregation of duties and the absence of a fully independent audit committee.
- The common stock trades on the OTCQB and is thinly traded, subject to volatility, limited liquidity, and penny-stock restrictions. Future equity issuances, warrants, and options may dilute existing shareholders.
- The business is exposed to competition, discretionary consumer spending, volatile fruit and dairy costs, supply interruptions, product liability, intellectual-property challenges, dependence on key personnel, and reliance on contract manufacturers.
- Outstanding equity-linked instruments included 5,362,442 employee and director options and approximately 30.3 million warrants at December 31, 2016. The filing reports no material pending legal proceedings and no material off-balance-sheet arrangements.
Most Important Facts to Verify
- Reconcile the 2015 comparison basis: audited nine-month results differ from the unaudited twelve-month figures used in portions of the MD&A.
- Assess whether revenue growth and the 47% gross margin can continue as Sysco, PepsiCo, and national-account programs scale.
- Evaluate cash runway against the $8.0 million annual operating cash burn and the Company’s stated potential need for additional financing.
- Review customer concentration and the commercial status of national-account tests versus confirmed national rollouts.
- Confirm the terms, exercise prices, registration status, and potential dilution from the 2016 shares, warrants, options, and Unibel investment.
- Monitor remediation of the disclosed material weaknesses and the effectiveness of the Company’s planned additional financial staffing.
- Verify production utilization and contractual obligations associated with the Yarnell capacity arrangement and other contract manufacturers.