Barfresh Food Group Inc. — Form 10-Q Summary
Business Context and Reporting Period
Quarterly report for the three and six months ended June 30, 2016, filed August 15, 2016. Barfresh develops, manufactures through contract manufacturers, and distributes portion-controlled ready-to-blend smoothies, shakes, and frappes. Sales are primarily through national accounts and Sysco Corporation, with PepsiCo serving as an exclusive foodservice sales representative. The company reported 48 employees and operated in one business segment.
The filing identifies the company as a smaller reporting company and as a shell company under Rule 12b-2. There were 95,157,137 common shares outstanding as of August 4, 2016.
Financial Highlights
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Revenue | $559,172 vs. $168,099 | $834,497 vs. $221,732 |
| Gross profit | $281,238 vs. $77,897 | $415,827 vs. $102,182 |
| Gross margin | 50% vs. 46% | 50% vs. 46% |
| Operating loss | $(2,495,473) vs. $(1,581,738) | $(4,981,697) vs. $(2,749,830) |
| Net loss | $(2,509,615) vs. $(1,729,479) | $(5,217,170) vs. $(3,035,307) |
| Net loss per share | $(0.03) vs. $(0.02) | $(0.06) vs. $(0.04) |
| Operating cash flow | Not separately presented | $(3,728,465) vs. $(2,435,727) |
Revenue increased 233% in the quarter and 276% for the six-month period, primarily from the rollout of Barfresh products to all 72 mainland U.S. Sysco distribution centers. Gross margin improved to approximately 50% from 46%, while operating expenses substantially exceeded gross profit.
General and administrative expense was $2.7 million in the quarter and $5.3 million for the six months, including personnel costs, stock-based compensation, selling and distribution costs, professional fees, and shipping and storage. Interest expense declined to $14,142 in the quarter and $235,473 for the six months.
Balance Sheet, Debt, and Liquidity
| Balance Sheet Metric | June 30, 2016 | December 31, 2015 |
|---|---|---|
| Cash | $1,305,126 | $1,986,004 |
| Accounts receivable | $318,874 | $28,596 |
| Inventory | $265,189 | $327,961 |
| Total assets | $3,970,454 | $3,695,565 |
| Total liabilities | $1,558,742 | $2,625,873 |
| Stockholders’ equity | $2,411,712 | $1,069,693 |
Cash declined by $680,878 during the first six months. Cash used in operations was $3.7 million, and capital expenditures were $796,270, primarily for equipment. Financing activities provided $3.8 million, including $3.57 million from common stock and warrant issuances, $265,000 from warrant exercises, and $25,500 from option exercises.
Debt at June 30, 2016 included $100,000 of short-term notes, $234,045 of convertible notes net of discount, and $42,362 of long-term vehicle debt, of which $11,378 was current. Two $50,000 short-term notes, including one owed to a related party, were extended to October 31, 2016 at 10% interest. Management stated that existing cash and working capital may not be sufficient and that additional equity or debt financing may be required, with no assurance that financing will be available.
Material Changes Versus the Prior Comparable Period
- Revenue grew from $168,099 to $559,172 in the quarter and from $221,732 to $834,497 for the six months.
- Gross margin increased from 46% to 50%.
- Operating losses widened to $2.5 million for the quarter and $5.0 million for the six months, driven by increased personnel, stock compensation, distribution, and other operating costs.
- Six-month net loss increased from $3.0 million to $5.2 million.
- Six-month operating cash usage increased from $2.4 million to $3.7 million, while equipment purchases increased from $137,803 to $796,270.
- Convertible debt was substantially reduced through an equity financing and conversion of approximately $2.5 million of principal and interest into common equity. Convertible notes, net of discount, declined from $2.1 million at year-end to $234,045.
- Common shares outstanding increased from 86,186,453 at December 31, 2015 to 94,714,583 at June 30, 2016. The company also issued warrants and granted substantial employee and director stock options.
Guidance, Outlook, Risks, and Unusual Items
- Management expected gross margin for the remainder of 2016 to remain comparable to approximately 50%.
- Management did not anticipate significant additional personnel-related selling costs during 2016, although other expenses and legal fees could increase as the business grows.
- Management expected shipping and storage costs as a percentage of sales to decline as distribution arrangements became more efficient.
- The company reported access to potential growth through Sysco’s national rollout, PepsiCo’s foodservice sales network, a July 2016 supply agreement covering more than 2,000 potential customer accounts, and additional contract manufacturing capacity. These opportunities are not guarantees of future sales.
- Production capacity included approximately 14 million units annually at one contract manufacturer and potential incremental capacity of up to 100 million units through Yarnell Operations. Yarnell began shipping for Barfresh in June 2016.
- The company has no long-term raw-material supply contracts and could face supply, manufacturing, distribution, customer adoption, and execution risks.
- Management stated that existing liquidity may not fund planned operations and that additional financing is likely to be needed. The company remained loss-making and cash-flow negative.
- Disclosure controls and procedures were deemed ineffective. Reported material weaknesses included inadequate segregation of duties, insufficient independent board oversight, and limitations related to audit committee financial expertise.
- The company had a non-cancelable office lease expiring in November 2016, with aggregate minimum lease requirements of approximately $31,200.
- The filing reported no material pending legal proceedings and no material off-balance-sheet arrangements.
Important Facts for Investors to Verify
- Whether Sysco’s nationwide distribution rollout and the PepsiCo relationship produce sustained revenue growth and improved operating leverage.
- The company’s ability to fund continuing operating losses and capital expenditures without substantial further dilution or additional debt.
- Terms, maturity, and repayment or refinancing plans for the $100,000 of short-term notes, including the related-party note due October 31, 2016.
- The potential dilution from approximately 4.8 million outstanding options and more than 22 million outstanding warrants at June 30, 2016.
- Whether the reported material weaknesses in internal controls are remediated.
- Customer concentration, contract manufacturing performance, production capacity utilization, and the conversion of customer tests into recurring national accounts.
- The effect of continued stock-based compensation, personnel expansion, distribution costs, and other operating expenses on the path to profitability.