Barfresh Food Group Inc. — Form 10-Q Summary
Business context and reporting period
The filing covers the quarter and six months ended September 30, 2013, the company’s first fiscal year as an operating company rather than a development-stage company. Barfresh develops and distributes ready-to-blend beverages, including smoothies, shakes and frappes, using sealed packs of ingredients. The company had begun shipping products to one contracted customer and several smaller customers, while continuing product testing and negotiations with larger quick-service restaurant and food-service operators.
Financial performance and position
| Metric | Three months ended September 30, 2013 | Six months ended September 30, 2013 |
|---|---|---|
| Revenue | $15,933 | $32,258 |
| Gross profit | $4,888 | $10,939 |
| Gross margin | 30.7% | 33.9% |
| Operating loss | $490,747 | $920,170 |
| Interest expense | $67,819 | $152,029 |
| Net loss | $558,566 | $1,072,199 |
| Basic and diluted loss per share | $0.01 | $0.02 |
At September 30, 2013, cash was $1.02 million, working capital was $825,508, total assets were $1.49 million and total liabilities were $467,412. Stockholders’ equity was $1.03 million, compared with a deficit of $91,331 at March 31, 2013. The company reported accumulated deficit of $3.52 million.
Cash used in operations for the six months was $1.03 million, and capital expenditures were $24,486. Financing provided $1.99 million, principally from common-stock issuances. The company had $420,000 of convertible-note principal outstanding, net carrying value of $155,290 after debt discounts, with stated interest of 12% and maturity in September 2015. The effective interest rate, including debt discounts, was estimated at approximately 74%.
Material changes versus the prior comparable period
- Six-month revenue increased to $32,258 from $2,880, reflecting initial customer testing and shipments.
- Six-month gross margin declined to 33.9% from 45.0%; management stated that the 2013 margin was more indicative of expected future results.
- Six-month operating loss increased to $920,170 from approximately $641,000, and net loss increased to $1.07 million from $669,205.
- General and administrative expense increased to $902,632 from $635,385, driven primarily by higher personnel, investor-relations, travel, marketing and rent costs. Consulting expense declined materially.
- Interest expense increased to $152,029 from $28,070, substantially because of non-cash amortization of convertible-debt discounts.
- Cash increased from $85,957 at March 31, 2013 to $1.02 million at September 30, 2013, primarily from equity financing.
- The company issued approximately 9.23 million common shares and warrants during the six months, generating reported net financing proceeds of approximately $2.31 million in the MD&A discussion.
- Outstanding convertible notes were restructured: $40,000 was repaid, $400,000 was exchanged into new notes and an additional $20,000 note was issued. The original warrants were cancelled and 1.68 million new warrants were issued.
Guidance, outlook, risks and unusual items
- Management expects to use contract manufacturers and stated that its first production line had been installed and commissioned in Salt Lake City.
- The company had preliminary agreements or testing relationships involving potential customers representing approximately 10,000 outlets, but emphasized that there was no assurance these relationships would result in product supply or broad commercial rollouts.
- Management stated that recent financing should fund operations for the foreseeable future, but acknowledged that additional equity or debt financing may be required if operating cash flow remains insufficient.
- The financial statements contain a going-concern warning. The company has recurring losses, limited revenue and dependence on external financing; management stated that there is substantial doubt about its ability to continue as a going concern without additional capital and ultimately profitable operations.
- Subsequent to quarter-end, the company acquired international patent rights and related trademarks from National Australia Bank for approximately US$678,000, payable in Australian dollars. The patents had been granted in 13 jurisdictions and were pending in others.
- The company disclosed a material weakness in internal control related to inadequate segregation of duties because of limited personnel, although management concluded that the weakness did not affect reported financial results.
- The company had no material off-balance-sheet arrangements and no disclosed material legal proceedings.
Important facts for investors to verify
- Whether customer testing converts into recurring commercial orders, particularly with larger restaurant and food-service chains.
- The company’s ability to generate operating cash flow and obtain additional financing before available cash is exhausted.
- The terms, dilution potential and maturity of the convertible notes and the substantial warrant overhang.
- The cash funding, accounting treatment and commercial strategy associated with the approximately $678,000 international intellectual-property acquisition.
- Whether gross margins stabilize near the reported 33.9% six-month level as production scales.
- The remediation and subsequent status of the disclosed segregation-of-duties material weakness.
- The filing contains a minor numerical inconsistency in MD&A: the six-month 2012 operating loss is stated there as $641,431, while the financial statements report $641,135.