Business Context and Reporting Period
Barfresh Food Group Inc. filed this Form 10-K for the fiscal year ended March 31, 2012. The supplied request identifies “2011 Q4,” but the filing is an annual report covering fiscal 2012 and comparative fiscal 2011 results.
The company is a development-stage manufacturer and distributor of ready-to-blend smoothies, cocktails, and mocktails using portion-controlled ingredient packs. It generated no revenue through March 31, 2012. The company’s U.S. operations were focused on product development, customer discussions, manufacturing-line testing, and preparation of sample products.
On January 10, 2012, the company acquired Barfresh Inc. in a reverse takeover and recapitalization, spun out its former movie-related operations, changed its name from Moving Box Inc. to Barfresh Food Group Inc., and subsequently completed a four-for-one forward stock split.
Financial Metrics
| Metric | Fiscal 2012 | Fiscal 2011 |
|---|---|---|
| Revenue | $0 | $0 |
| Net loss | $345,880 | $63,841 |
| Operating expenses | $345,880 | $63,841 |
| Net loss per share | $0.01 | $0.00 |
| Net cash used in operations | $402,986 | Net cash provided of $37,085 |
| Net cash used in investing | $149,141 | $37,085 |
| Net cash provided by financing | $973,103 | $0 |
| Cash at year-end | $420,976 | $0 |
| Total assets | $608,282 | $36,344 |
| Total liabilities | $22,676 | $100,185 |
| Working capital | $402,300 | Not clearly provided |
The filing does not provide a meaningful gross margin, operating margin, or revenue growth rate because the company had no revenue. The accumulated loss from inception through March 31, 2012 was $410,721.
Fiscal 2012 operating expenses included research and development of $113,820, marketing and selling expenses of $16,012, consulting fees of $82,429, travel of $58,197, legal and professional fees of $53,440, exchange losses of $11,846, and other general and administrative expenses of $7,955.
The company had no conventional long-term debt disclosed. A related-party balance of $100,185 outstanding at March 31, 2011 was repaid by March 31, 2012. There were no material non-cancelable lease commitments or material off-balance-sheet arrangements disclosed.
Material Changes Versus the Prior Comparable Period
- Revenue remained at zero, but the net loss increased to $345,880 from $63,841.
- Operating expenses increased by $282,039, or approximately 442%.
- Research and development increased by $110,667, primarily for equipment and automated product-dispensing research.
- Consulting, travel, legal, and professional costs increased as the company expanded sales efforts, negotiated manufacturing arrangements, and completed SEC-related work.
- Operating cash use increased to $402,986 from net operating cash inflow of $37,085.
- The company invested $149,141 in equipment for its contract-manufacturing program.
- Cash resources were primarily created through a January 2012 private offering that generated gross proceeds of $999,998 and net proceeds of $973,103 after offering costs.
- Shares outstanding increased to 47,166,660 at March 31, 2012 from 37,258,810 at March 31, 2011, with additional dilution potential from warrants and stock issued for services.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
Management planned to use a U.S. contract manufacturer and had installed proprietary equipment at a Utah facility. The manufacturing line was producing samples for prospective customer trials. The company had engaged two sales consultants and was in preliminary discussions with restaurant chains, food-service companies, stadiums, arenas, and universities, but had no assurance that any customer would place orders.
Management stated that additional capital would likely be required for manufacturing modifications, engineering, test marketing, and any rollout to major chains. The filing states that substantial doubt exists about the company’s ability to continue as a going concern because it has recurring losses, no operating revenue, and depends on additional equity or debt financing and eventual profitable operations.
The company faces significant competition from juice bars, fast-food and fast-casual chains, syrup-based smoothie products, and other portion-pack products. It had no binding raw-material supply agreements and could become dependent on one or a few major customers.
The company’s U.S. and Canadian patent applications remained pending. Patent-related intangible assets totaled $34,165 net at March 31, 2012, and no impairment was recorded.
Management identified a material weakness in internal control over financial reporting due to insufficient segregation of duties and concluded that internal controls were ineffective. The company planned to hire additional accounting personnel when funding became available. No auditor attestation report on internal controls was required or provided because of the company’s smaller reporting company status.
Other notable items included the issuance of 500,000 shares for sales consulting services, 1,333,332 five-year warrants with a $1.50 exercise price, and control of approximately 79.2% of the outstanding common stock by the CEO and another director through controlled entities. The filing reports no material litigation.
The filing contains an apparent market-status inconsistency: it states that the common stock trades on the OTCQB, but also states that the stock was delisted to the Pink Sheets on March 21, 2012. The reported June 20, 2012 bid range was $0.40 to $1.18.
Important Facts for Investors to Verify
- Verify the filing period: the report is for the fiscal year ended March 31, 2012, not a standalone 2011 fourth quarter report.
- Confirm that the company had generated no revenue and remained dependent on external financing.
- Review the going-concern qualification and the company’s projected cash needs after the $973,103 net financing proceeds.
- Assess whether contract manufacturing, product trials, customer discussions, and pending patents have translated into commercial orders after year-end.
- Verify the company’s actual trading venue and current quotation status, given the OTCQB/Pink Sheets inconsistency.
- Evaluate dilution from the 1,333,332 warrants, the 500,000 shares issued for services, and any future capital raises.
- Review the material weakness in internal controls and whether segregation-of-duties deficiencies were remediated.
- Review related-party arrangements, including prior advances, shared control with the Australian business, and free use of office space owned by the CFO’s company.