Barfresh Food Group Inc. — Form 10-Q Summary
Reporting period: Three months ended June 30, 2014, the company’s fiscal first quarter. The filing was signed August 13, 2014. Barfresh develops and distributes portion-controlled, ready-to-blend smoothies, shakes and frappes. The company operated in one business segment and reported as a smaller reporting company and shell company.
Financial Performance and Position
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Revenue | $61,492 | $16,325 |
| Gross profit | $20,133 | $6,051 |
| Gross margin | 33% | 37% |
| Operating loss | $(685,818) | $(429,423) |
| Interest expense | $110,990 | $84,210 |
| Net loss | $(796,808) | $(513,633) |
| Basic and diluted loss per share | $(0.01) | $(0.01) |
| Net cash used in operations | $(480,439) | $(448,542) |
Revenue increased approximately 277%, primarily because the company began shipping to new customers; the prior-year period primarily reflected limited product testing. Gross profit increased, but gross margin declined to 33% from 37%. General and administrative expense rose to $677,231 from $424,906, including $204,000 of stock-based compensation for shares issued to an officer and director.
At June 30, 2014, cash was $2.02 million, working capital was $1.16 million, and total assets were $3.37 million. Total liabilities were $1.26 million, including $614,682 of short-term notes payable and $217,683 of convertible notes, net of discounts. Stockholders’ equity was $2.12 million.
Material Changes and Financing
- Cash declined by $608,689 during the quarter, from $2.63 million to $2.02 million.
- Investing cash outflows were $128,250, including $119,594 for equipment and $11,277 for patents. There was no financing cash flow in the quarter.
- Debt principal of $775,000 is due in fiscal 2015 and $420,000 is due in fiscal 2016. The $775,000 short-term notes mature December 20, 2014, with an extension option to June 19, 2015 subject to specified conditions.
- During the quarter, 400,000 restricted common shares were issued to an officer and director for services, producing $204,000 of stock-based compensation expense. Cashless exercise of warrants resulted in issuance of 223,724 shares.
Outlook, Commentary, Risks and Unusual Items
Management reported preliminary agreements with three potential customers and ongoing negotiations with additional quick-service restaurant and foodservice companies. Effective July 2, 2014, Barfresh entered into an agreement with Sysco for resale of its products through Sysco’s foodservice network and stated that shipments had begun. The filing provides no quantified revenue or earnings guidance.
Management expects gross margin of approximately 33% to be indicative of future results, but stated that overhead, personnel, travel, marketing, research and development, and other expenses may increase as sales expand. Management also stated that it may need to raise additional equity or debt if operating cash flow is insufficient; there is no assurance that financing will be available.
Interest expense included $94,560 of non-cash debt-discount amortization. The company estimated effective interest rates of approximately 72% on short-term debt and 74% on convertible notes, compared with substantially lower stated cash rates. The company had no material off-balance-sheet arrangements and disclosed no subsequent events requiring recognition or disclosure.
Management concluded that disclosure controls were effective, but identified material weaknesses in internal control over financial reporting, including the absence of an audit committee, lack of a majority of independent directors and inadequate segregation of duties. Management considered internal control over financial reporting ineffective, although it stated that the weaknesses did not affect reported financial results.
Investor Verification Points
- Verify the timing, commercial terms and expected volume of the Sysco relationship and whether customer testing converts into recurring orders.
- Assess liquidity against the $775,000 short-term debt maturity and the company’s continuing operating cash burn.
- Review the dilution implications of outstanding warrants, convertible notes and equity compensation.
- Evaluate the sustainability of the reported 33% gross margin as production and distribution scale.
- Review the disclosed material weaknesses and the company’s remediation plans.
- Confirm the company’s shell-company status and the implications for financing, customer adoption and investor liquidity.