Barfresh Food Group Inc. 10-K Summary
Reporting period: Fiscal year ended March 31, 2015, compared with fiscal 2014. The filing is an annual report rather than a quarterly “2014 Q4” filing.
Business Context
Barfresh develops, manufactures through contract manufacturers, and distributes portion-controlled frozen beverage packs for smoothies, shakes, frappes, cocktails, and mocktails. Products contain the required ingredients, including fruit, base, juice, and ice; customers add water and blend.
The company sells directly to national accounts and through an exclusive nationwide distribution agreement with Sysco, entered into in July 2014. At year-end, Barfresh was shipping through 20 of Sysco’s 74 distribution centers and expected a broader rollout over the following 12 months. National-account testing and rollout activity covered customers representing more than 20,000 restaurant locations.
Financial Performance and Position
| Metric | FY2015 | FY2014 |
|---|---|---|
| Revenue | $211,467 | $110,085 |
| Gross profit | $84,663 | $61,551 |
| Gross margin | 40.0% | 55.9% |
| Operating loss | $(3,261,466) | $(2,290,562) |
| Interest expense | $517,015 | $292,888 |
| Net loss | $(3,778,481) | $(2,583,450) |
| Basic loss per share | $(0.06) | $(0.05) |
| Cash flow used in operations | $(2,282,083) | $(1,885,160) |
| Cash flow from financing | $5,282,504 | $5,235,908 |
Cash increased to $5.36 million at March 31, 2015 from $2.63 million a year earlier. Working capital was $3.99 million. Total assets were $6.80 million, total liabilities were $1.62 million, and stockholders’ equity was $5.18 million.
Debt included $697,024 of short-term notes net of discount, $325,114 of convertible notes net of discount, and $36,467 of long-term debt and current maturities. Interest expense included $448,971 of non-cash debt-discount amortization. The convertible debt carries a stated interest rate of 12%; management estimated effective rates of approximately 53% on certain short-term notes and 74% on convertible notes.
Capital expenditures were $271,927 and patent and trademark purchases were $12,158. The company raised $5.28 million through the issuance of common stock and warrants. No cash dividends were paid or expected in the foreseeable future.
Material Changes Versus FY2014
- Revenue increased approximately 92%, primarily due to initial Sysco shipments and additional quick-service restaurant customers.
- Gross profit increased, but gross margin declined from 55.9% to 40.0%. Management attributed part of the business to low-margin blender and freezer sales and expected future gross-margin improvement.
- Operating expenses increased $944,638 to $3.21 million. Personnel costs, stock-based compensation, legal and professional fees, travel, marketing, investor relations, rent, and director fees generally increased as the company expanded its sales and support infrastructure.
- Stock-based compensation increased to $685,906 from $291,631, and interest expense increased 76.5%.
- The company expanded from six full-time employees at March 31, 2014 to approximately 11 or 12 at fiscal year-end and 25 by June 2015.
- Common shares outstanding increased to 77.72 million at March 31, 2015 from 65.25 million, excluding subsequent issuances and potential dilution from warrants and options.
- U.S. revenue increased to $204,499 from $44,325, while Australian revenue declined to $6,968 from $65,760. Three customers represented 64.3% of FY2015 revenue.
Liquidity, Outlook, and Risks
Management planned to use the Sysco relationship, national-account rollouts, additional sales personnel, expanded contract manufacturing, and international patent commercialization to drive growth. Existing contract-manufacturing capacity was stated at approximately 14 million units annually, with discussions underway for additional capacity of up to 100 million units.
Operations remained cash consumptive and unprofitable. Management stated that additional capital or debt financing would be required if operating cash flow and existing capital were insufficient, and there was no assurance that financing would be available on acceptable terms.
Subsequent to year-end, the company repaid one $25,000 note, paid $350,000 representing 50% of three notes, and converted another note into 71,429 common shares. The remaining $350,000 was payable September 20, 2015 and bore interest at 10% per annum, according to the financial-statement note.
Principal risks include continued operating losses, dependence on successful Sysco and national-account adoption, customer concentration, competition, volatile fruit and dairy costs, reliance on contract manufacturers and key personnel, product liability, intellectual-property challenges, financing and dilution risk, and limited OTCQB trading liquidity.
Management identified material weaknesses in internal control over financial reporting, including the absence of an effective audit committee, lack of a majority of independent directors, and inadequate segregation of duties. Management nevertheless concluded that disclosure controls and procedures were effective and planned to add accounting personnel when funding permitted. The independent auditor expressed an opinion on the financial statements but was not engaged to audit internal-control effectiveness.
Investor Verification Checklist
- Verify the sustainability, economics, and exclusivity terms of the Sysco distribution arrangement and the actual pace of rollout beyond 20 distribution centers.
- Reconcile reported revenue growth with customer concentration and determine whether national-account testing converts into recurring orders.
- Review gross-margin trends, including the effect of equipment sales and any expected margin improvement.
- Assess cash burn, remaining debt maturities, high effective borrowing costs, and the company’s need for additional financing.
- Quantify dilution from the 22.66 million private-placement warrants, 2.19 million note warrants, 1.68 million convertible-note warrants, and outstanding options.
- Monitor remediation of the disclosed material weaknesses and the independence and effectiveness of the audit committee.
- Confirm subsequent debt repayments, conversions, interest rates, and any later financing or equity issuances.
- Evaluate the enforceability and geographic coverage of the company’s patents, including the U.S. patent-pending status.