Barfresh Food Group Inc. — Form 10-Q Summary
Business Context and Reporting Period
Barfresh develops, manufactures and distributes ready-to-blend smoothies, shakes and frappes using portion-controlled beverage packs. The filing covers the three and six months ended September 30, 2014, compared with the corresponding 2013 periods. The company is a smaller reporting company and identified itself as a shell company.
As of November 14, 2014, 66,326,828 common shares were outstanding. The company reported that its first production line in Salt Lake City was operational and that it had begun shipping products to Sysco under a July 2014 agreement. Management anticipated a national Sysco rollout to approximately 74 distribution centers over 18 months, but stated that there was no assurance of customer adoption or future orders.
Key Financial Metrics
| Metric | Three Months Ended September 30, 2014 | Three Months Ended September 30, 2013 | Six Months Ended September 30, 2014 | Six Months Ended September 30, 2013 |
|---|---|---|---|---|
| Revenue | $40,233 | $15,933 | $101,725 | $32,258 |
| Gross profit | $20,489 | $4,888 | $40,622 | $10,939 |
| Gross margin | 51% | 31% | 40% | 34% |
| Operating loss | $(787,507) | $(490,747) | $(1,473,325) | $(920,170) |
| Interest expense | $126,766 | $67,819 | $237,756 | $152,029 |
| Net loss | $(914,273) | $(558,566) | $(1,711,081) | $(1,072,199) |
| Loss per share | $(0.01) | $(0.01) | $(0.03) | $(0.02) |
Six-month operating cash flow was $(1,134,262), compared with $(1,028,338) in the prior-year period. Investing cash flow was $(200,710), primarily reflecting $191,249 of equipment purchases and $11,438 of patent purchases. There was no financing cash flow during the six months ended September 30, 2014. Cash declined to $1,297,640 from $2,632,612 at March 31, 2014.
At September 30, 2014, total assets were $2,795,996, total liabilities were $1,363,387 and stockholders’ equity was $1,432,609. Reported working capital was $458,130, including a $695,023 short-term note due in December 2014. Management stated it intended to exercise the available extension right, which it estimated would increase working capital to $1,153,153.
Debt included $775,000 of short-term notes, net of discount of $695,023, and $420,000 of convertible notes, net of discount of $247,496. Principal payments scheduled as of September 30, 2014 totaled $775,000 in fiscal 2015 and $420,000 in fiscal 2016. The short-term notes carried a 2% cash interest rate but an estimated effective rate of approximately 52% after warrant-related debt discounts. The convertible notes carried a 12% cash interest rate and an estimated effective rate of approximately 74% after discounts and the beneficial conversion feature.
Material Changes Versus the Prior Comparable Period
- Six-month revenue increased to $101,725 from $32,258, reflecting shipments to new customers rather than primarily product testing.
- Six-month gross margin improved to 40% from 34%; management attributed the prior-year results partly to equipment sales that generated only nominal profit.
- Six-month general and administrative expense increased to $1,456,031 from $902,632, primarily due to stock-based compensation, personnel, legal and professional fees, marketing, travel, rent and research and development.
- Six-month operating loss increased to $1,473,325 from $920,170, and net loss increased to $1,711,081 from $1,072,199.
- Interest expense increased 56.4% to $237,756, including $204,715 of non-cash debt-discount amortization.
- Cash used in operations increased to $1,134,262 from $1,028,338, while the prior-year period benefited from $1,988,583 of financing cash inflows; there were no financing proceeds in the current period.
- Common shares outstanding increased to 66,326,828 from 65,247,660 at March 31, 2014. The company also issued stock for services and recognized $476,333 of non-cash stock-based compensation and service-related expense during the six months.
Guidance, Outlook, Risks and Unusual Items
- Management expected gross margin for the remainder of fiscal 2015 to approximate the current-period level, but provided no revenue or earnings guidance.
- The Sysco agreement is mutually exclusive in specified foodservice distribution circumstances and may increase customer concentration. Management stated there was no assurance that the anticipated rollout would occur or that the company would supply any potential chain.
- The company expects personnel, marketing, travel, research and development, legal and other operating costs to increase as sales activity and customer development expand.
- Management stated that additional capital or debt financing may be required if operating cash flow is insufficient, and acknowledged that financing may not be available on acceptable terms or at all.
- The company had substantial recurring losses, negative operating cash flow and debt maturities beginning in December 2014. The filing text does not provide a clear formal going-concern conclusion.
- Cash interest rates materially understated the effective economic cost of certain debt because of warrant and conversion-related discounts. The company had 20,114,979 outstanding warrants at September 30, 2014, in addition to 800,000 employee options.
- Lease commitments totaled $182,505 through fiscal 2017. The office lease was renewed through November 2016.
- Management concluded that disclosure controls were effective, but also 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.
- The filing reported no legal proceedings requiring disclosure, no defaults upon senior securities and no material off-balance-sheet arrangements.
Important Facts for Investors to Verify
- Whether the Sysco relationship produces the anticipated national distribution rollout, recurring revenue and acceptable gross margins.
- How the $775,000 short-term note due December 2014 was repaid or extended, including any additional warrants or increased interest obligations.
- The company’s ability to fund continuing operating losses and capital expenditures without substantial additional equity or debt financing.
- Actual cash burn, liquidity and debt maturities relative to the reported $1.3 million cash balance.
- The effect of stock issuances, warrants, convertible notes and options on dilution and future ownership.
- Whether management remediates the disclosed internal-control material weaknesses.
- Whether patent rights, international commercialization plans and customer testing convert into enforceable contracts and material sales.