Barfresh Food Group Inc. — Form 10-Q Summary
Business context and reporting period
The filing covers the quarter and nine months ended December 31, 2014, for Barfresh Food Group Inc., a smaller reporting company. The company manufactures and distributes ready-to-blend smoothies, shakes and frappes using portion-controlled beverage packs. The filing indicates that the company was a shell company as of the filing date and had 66,326,828 common shares outstanding as of February 14, 2015.
Barfresh was expanding sales through contract manufacturing, foodservice distributors and customer testing. Under a July 2014 agreement, Sysco began reselling the company’s products, with management anticipating a rollout to approximately 74 distribution centers over the following 12 months.
Key financial metrics
| Metric | Three months ended Dec. 31, 2014 | Three months ended Dec. 31, 2013 | Nine months ended Dec. 31, 2014 | Nine months ended Dec. 31, 2013 |
|---|---|---|---|---|
| Revenue | $56,109 | $7,541 | $157,834 | $39,799 |
| Gross profit | $19,756 | $3,127 | $60,378 | $14,066 |
| Gross margin | 35% | 41% | 38% | 35% |
| Operating loss | $(620,049) | $(487,324) | $(2,093,374) | $(1,407,494) |
| Interest expense | $141,523 | $43,284 | $379,279 | $195,313 |
| Net loss | $(761,572) | $(530,608) | $(2,472,653) | $(1,602,807) |
| Net loss per share | $(0.01) | $(0.01) | $(0.04) | $(0.03) |
At December 31, 2014, cash was $821,309, compared with $2,632,612 at March 31, 2014. Total current assets were $1,088,966 and total current liabilities were $1,188,295, resulting in negative working capital of $99,329. Total assets were $2,311,303 and total liabilities were $1,203,724.
For the nine months, operating activities used $1,839,495 of cash, investing activities used $218,808, and financing activities provided $247,000, primarily from issuing common stock. Capital expenditures included $235,023 for equipment and $11,838 for patents. Cash declined by $1,811,303 during the period.
Debt at December 31, 2014 included $619,320 of short-term notes, net of discount; $283,243 of convertible notes, net of discount; and $19,286 of other notes payable and current note portions. The notes carried stated rates ranging from 2% to 12%, while management estimated effective rates of approximately 53% on the short-term notes and 74% on the convertible notes because of warrant and conversion-feature discounts.
Material changes versus the prior comparable period
- Nine-month revenue increased by $118,035, or approximately 296%, as the company began shipping to additional customers beyond limited product-testing activity.
- Nine-month gross margin improved to 38% from 35%, although quarterly gross margin declined to 35% from 41%. Sales included blenders and freezers on which the company earned only nominal profit.
- Nine-month operating expenses increased by $732,192 to $2,153,752. General and administrative expense increased by $693,498, including higher personnel, legal, travel, marketing, rent, director fees and stock-based compensation costs.
- The nine-month operating loss increased by $685,880, and the net loss increased by $869,846.
- Interest expense nearly doubled year over year, driven in part by non-cash amortization of debt discounts, which totaled $329,395 for the nine months versus $146,839 in the prior period.
- Cash declined substantially from March 31, 2014, while current liabilities exceeded current assets at December 31, 2014.
- The company issued 494,000 units for $247,000 during November 2014. Each unit included one common share and a warrant to purchase one-half share at $0.60 per share.
- The company issued shares for employee, director, legal and consulting services. Non-cash common-stock compensation and services totaled $476,332 for the nine months.
Guidance, outlook, risks and unusual items
- Management expected gross margin to improve for the remainder of fiscal 2014 in its quarterly discussion, while its nine-month discussion projected gross margin to approximate the current period.
- Management expected selling, marketing, personnel, travel, research and development, and other operating costs to increase as the customer base and Sysco relationship developed.
- The company stated that it had no assurance that potential customer tests or agreements would result in product supply contracts and acknowledged the risk of dependence on one or a few major customers, including Sysco.
- Management stated that additional capital or debt would be required if operating cash flow and existing capital were insufficient. The filing provides no assurance that additional financing would be available on acceptable terms.
- Short-term notes originally due December 20, 2014 were extended to September 19, 2015 at a 3% stated rate, with additional warrants. Convertible notes with $420,000 of principal were due September 6, 2015 and were convertible at $0.25 per share.
- Aggregate minimum operating-lease payments totaled $163,494 through the lease expiration in November 2016.
- The company reported material weaknesses in internal control over financial reporting, including no audit committee, lack of a majority of independent directors and inadequate segregation of duties. Although management concluded disclosure controls were effective, it considered internal control over financial reporting ineffective.
- Management identified no legal proceedings requiring disclosure and no subsequent events requiring recognition or disclosure.
Important facts for investors to verify
- Whether the Sysco agreement produces the anticipated distribution-center rollout and sustained revenue growth.
- The company’s ability to fund continuing operating losses and meet or refinance debt maturities, particularly the short-term notes and convertible notes due in 2015.
- Whether cash balances and available financing are sufficient given negative working capital and substantial operating cash use.
- The extent to which future losses and dilution may result from stock compensation, warrants, convertible debt and additional equity financing.
- Remediation progress for the disclosed material weaknesses in internal control over financial reporting.
- The implications of the filing’s indication that the company was a shell company and whether that status changes as commercial operations expand.