Barfresh Food Group Inc. — Q1 2019 Form 10-Q Summary
Business context and reporting period
Barfresh manufactures and distributes ready-to-blend frozen beverages, including smoothies, shakes and frappes, in single-serve and bulk Easy Pour formats. The company sells through national accounts, regional accounts, distributors, Sysco and PepsiCo’s foodservice channel. The filing covers the unaudited three months ended March 31, 2019, compared with the three months ended March 31, 2018.
Financial results and key metrics
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Revenue | $834,534 | $623,071 | +34% |
| Gross profit | $434,704 | $333,021 | +31% |
| Gross margin | 52.1% | 53.4% | Down approximately 1.3 percentage points |
| Operating loss | $(1,770,717) | $(1,862,526) | Improved by $91,809 |
| Net loss | $(2,847,262) | $(2,338,138) | Loss increased by $509,124 |
| Net loss per share | $(0.02) | $(0.02) | No stated change |
| Cash used in operating activities | $(1,873,982) | $(1,491,691) | Use increased by $382,291 |
| Capital expenditures | $160,590 | $172,231 | Decreased by $11,641 |
| Cash balance at period end | $2,907,307 | $2,391,901 | Increased by $515,406 year over year |
Cost of revenue, including manufacturing-equipment depreciation, was approximately $399,830 in Q1 2019 versus $290,050 in Q1 2018. General and administrative expense declined 4% to $2.0 million. Depreciation and amortization increased to $201,977 from $100,883. Interest expense increased to $363,073 from $30,876, primarily because of convertible debt and amortization of warrant-related debt discounts. The company also recorded a $406,012 loss from remeasurement of derivative liabilities and a $307,460 warrant modification expense.
At March 31, 2019, total assets were $7.95 million, total liabilities were $5.16 million and stockholders’ equity was $2.79 million, compared with a deficit of $35,048 at December 31, 2018. Cash increased from $1.04 million at December 31, 2018 to $2.91 million, primarily due to equity and warrant financing. Current liabilities were $3.77 million, including $1.55 million of current convertible notes and $973,021 of current derivative liabilities.
Material changes versus the prior comparable period
- Revenue increased $211,463, or 34%, driven primarily by continued adoption of the bulk Easy Pour product and distribution beyond the Sysco network.
- Gross margin declined modestly to approximately 52% from approximately 53%, while management expected the gross margin percentage to remain broadly consistent for the rest of 2019.
- Operating loss improved modestly, but net loss worsened because of higher interest expense, derivative-liability losses and the warrant modification expense.
- Operating cash usage increased despite higher revenue. Management attributed the first-quarter cash usage partly to settling large vendor payables and paying $243,623 of deferred executive compensation in cash.
- The company raised approximately $4.3 million during the quarter: $2.4 million through a private placement of 4.0 million common shares and approximately $1.9 million through warrant exercises. The filing separately reports $1.5 million of warrant-exercise cash receipts in the cash-flow statement.
- Common shares outstanding increased to approximately 130.1 million at March 31, 2019 from 122.8 million at December 31, 2018. The company also issued shares and options for services, director fees and employee compensation.
Guidance, outlook, risks and unusual items
- Management projected improved operating cash flow over the next twelve months from anticipated growth in school and military contracts and the planned rollout of a national account with more than 2,500 locations.
- The company stated that cost-reduction measures, including relocating its headquarters and entering a new personnel-services contract, were expected to produce approximately $200,000 of annual cash savings.
- Management had received proposed term sheets for a potential asset-based lending facility but could not assure that financing would be available on acceptable terms.
- The filing states that historical operating losses and negative operating cash flow raise substantial doubt about the company’s ability to meet obligations for the twelve months following the filing. Management concluded that planned financing, cost reductions and growth initiatives mitigated the going-concern uncertainty, but acknowledged that the outcome was not certain.
- Approximately $1.9 million of convertible short-term debt was due in March 2020, with approximately half held by insiders. The filing indicates that refinancing may be required if cash is insufficient at maturity.
- Convertible notes had an aggregate face value of $3.26 million due in 2020 and an outstanding net carrying value of $2.14 million at March 31, 2019. The notes generally bear 10% interest and have variable conversion provisions.
- Derivative liabilities, measured using Level 3 valuation inputs, increased from $1.33 million at December 31, 2018 to $1.73 million at March 31, 2019. Changes in fair value can materially affect reported earnings without corresponding operating cash flows.
- A new four-year office lease began April 1, 2019. The estimated present value of lease liabilities was approximately $258,140, with total undiscounted payments of approximately $309,929.
- The company reported no material pending legal proceedings, no material off-balance-sheet arrangements and effective disclosure controls as of March 31, 2019.
Important facts for investors to verify
- Whether revenue growth from Easy Pour, school contracts, military bases and the prospective national account converts into sustained positive operating cash flow.
- The availability and terms of any asset-based lending facility or other required refinancing before the 2020 convertible-debt maturities.
- The accuracy and continuing impact of the reported $4.3 million first-quarter funding total, given differing warrant-cash figures presented in the filing.
- The potential dilution from approximately 130.1 million shares outstanding, convertible notes, approximately 7.5 million employee and director options, and substantial outstanding warrants.
- The valuation sensitivity of the $1.73 million derivative liability to the company’s share price, volatility and other Level 3 assumptions.
- Whether management’s projected $200,000 annual cost savings and expected gross-margin stability are achieved.
- The company’s ability to fund recurring operating losses, capital expenditures, debt service and working-capital requirements without additional equity issuance.