Barfresh Food Group Inc. — Form 10-K Summary
Reporting period: Fiscal year ended March 31, 2013, with comparison to fiscal 2012. Although the request references “2012 Q4,” the filing is an annual report rather than a quarterly filing.
Business Context
Barfresh is a development-stage company manufacturing and distributing portion-controlled, ready-to-blend smoothie, shake and frappe ingredient packs. Products contain fruit, juice, dairy or sorbet and ice, and are targeted primarily at quick-service restaurants, casual dining establishments, food-service organizations and distributors.
The Company completed a reverse merger in January 2012, installed and commissioned its first production line in Salt Lake City, Utah, developed its standard product range and began limited commercial shipments. It reported five full- or part-time employees as of June 20, 2013.
Financial Highlights
| Metric | FY2013 | FY2012 |
|---|---|---|
| Revenue | $8,928 | $0 |
| Cost of revenue | $8,884 | $0 |
| Gross profit | $44 | $0 |
| Operating expenses | $1,839,543 | $345,556 |
| Operating loss | $1,839,499 | $345,556 |
| Net loss | $2,035,988 | $345,880 |
| Net loss per share | $0.04 | $0.01 |
| Net cash used in operations | $992,241 | $402,986 |
| Capital expenditures | $195,550 | $149,141 |
| Cash at period end | $85,957 | $420,976 |
Revenue remained immaterial, and the implied gross margin was approximately 0.5%. Management attributed the very high cost of revenue to transportation costs on small freezer-truck shipments and expected unit economics to improve with larger shipments.
General and administrative expense increased to $1,804,167 from $343,375. Major FY2013 components included consulting fees of $569,514, personnel costs of $434,747, legal and professional fees of $173,353, travel of $156,921, stock-based compensation and options of $103,488, research and development of $103,293, and marketing and selling expense of $82,817.
Liquidity, Debt and Capital Resources
- Current assets were $346,224 versus current liabilities of $791,767, resulting in negative working capital of $445,543.
- Total assets were $700,436 and total liabilities were $791,767, producing stockholders’ deficit of $91,331 at March 31, 2013.
- Operations consumed $992,241 of cash, while equipment purchases consumed $195,550.
- Financing cash inflows included $440,000 of convertible notes, $382,500 from common stock and warrants, and $30,272 of related-party advances.
- The convertible notes bear 12% cash interest, mature September 6, 2013, and are convertible at $0.372 per share. They were accompanied by 956,519 warrants exercisable at $0.46 per share. The filing reports an effective interest rate of approximately 216% after non-cash discounts and beneficial conversion features.
- Subsequent to year-end, the Company raised an additional $400,000 through units consisting of common stock and warrants. The full offering, including amounts raised before year-end, totaled $800,000 gross, or $785,000 net of offering costs.
- Management was seeking up to an additional $2 million through a placement-agent offering, with no assurance that the financing would be completed.
Material Changes Versus FY2012
- Revenue began in FY2013 but remained only $8,928; FY2012 had no revenue.
- Net loss increased approximately 489% to $2.04 million from $345,880.
- Operating cash use increased to $992,241 from $402,986.
- Cash declined by $335,019 during FY2013, from $420,976 to $85,957.
- Property, plant and equipment increased to $311,496 from $149,141 as the first production line was installed and commissioned.
- Accounts payable increased to $247,682 from $10,896, and accrued expenses increased to $187,096 from $11,780.
- Consulting, personnel, legal, travel, marketing and public-relations costs rose materially as the Company built its manufacturing and sales infrastructure.
- Common shares outstanding increased to 50,366,660 at March 31, 2013 from 47,166,660 at March 31, 2012, before subsequent issuances.
Outlook, Commentary and Risks
Management planned to expand production through additional contract manufacturers, develop customized flavors for large accounts, use distributors to broaden market access and pursue equipment-financing programs for restaurant customers. The Company stated that it had preliminary agreements or testing arrangements involving three potential customers representing approximately 9,000 outlets, but emphasized that there was no assurance any customer would ultimately purchase its products.
The independent auditor included a going-concern explanatory paragraph. The Company has recurring losses, negative operating cash flow, a working-capital deficiency and a net equity deficiency. Continued operations depend on obtaining additional financing, controlling expenditures, increasing operating efficiency and generating profitable revenue.
- Significant competition exists from juice bars, restaurant chains, syrup-based products and other portion-pack products.
- Fruit, dairy, transportation and other supply costs may be volatile and could pressure margins.
- The Company may become dependent on a small number of customers or distributors.
- The U.S. patent remained pending, while the Canadian patent had been granted; intellectual-property protection may be challenged or insufficient.
- Product liability, regulatory compliance, supply interruptions and loss of key personnel could materially affect results.
- Convertible debt was due in September 2013, creating a near-term refinancing or repayment requirement.
- Management identified a material weakness in internal control over financial reporting due to inadequate segregation of duties and limited personnel. The Company planned to hire additional accounting personnel when funding permitted.
- The common stock trades on the OTCQB and is thinly traded, volatile and subject to penny-stock restrictions. Two principal stockholders collectively controlled more than 50% of voting power.
Investor Verification Checklist
- Verify post-year-end financing proceeds, use of funds and whether the September 2013 convertible notes were repaid, converted or refinanced.
- Confirm whether customer testing converted into recurring commercial orders, especially for the potential accounts representing approximately 9,000 outlets.
- Review subsequent revenue, gross margin and shipping economics to determine whether larger shipments reduced transportation costs.
- Assess available cash, working-capital needs, production capacity and the Company’s ability to obtain additional financing.
- Review the material weakness remediation and any subsequent auditor or management assessment of internal controls.
- Track dilution from outstanding convertible notes, warrants, options and additional equity offerings.
- Confirm the status and enforceability of the U.S. patent application and Canadian patent.