Barfresh Food Group Inc. — Form 10-Q Summary
Reporting period: Three months ended June 30, 2015, compared with the three months ended June 30, 2014. The company develops and distributes ready-to-blend frozen smoothies, shakes and frappes. It reported as a smaller reporting company and identified itself as a shell company. The filing was signed August 14, 2015.
Financial performance and position
| Metric | Three months ended June 30, 2015 | Three months ended June 30, 2014 |
|---|---|---|
| Revenue | $168,099 | $61,492 |
| Gross profit | $77,897 | $20,133 |
| Gross margin | 46.3% | 32.7% |
| Operating loss | $(1,581,738) | $(685,818) |
| Interest expense | $147,741 | $110,990 |
| Net loss | $(1,729,479) | $(796,808) |
| Net loss per share | $(0.02) | $(0.01) |
| Cash used in operations | $(1,401,136) | $(480,439) |
- Revenue increased $106,607, or 173%, primarily because products were distributed through a national broadline food distributor.
- General and administrative expense increased 136% to $1.61 million. Major increases included personnel costs, marketing and selling expenses, and travel.
- Cash declined from $5.36 million at March 31, 2015 to $3.49 million at June 30, 2015. Total assets were $5.16 million and total liabilities were $1.49 million at June 30, 2015.
- Debt included $296,996 of related-party short-term notes, $49,517 of other short-term notes, $376,855 of convertible notes, and $66,940 of current and long-term debt, net of applicable discounts.
- Interest expense included $129,717 of non-cash debt-discount amortization. The company estimated effective interest rates of approximately 53% on short-term debt and 74% on convertible notes.
Material changes and unusual items
- On June 20, 2015, certain short-term notes were amended or redeemed. The company repaid $25,000 in cash, paid 50% of three notes totaling $350,000, converted a $50,000 note into 71,429 common shares, and extended $350,000 of remaining principal to September 20, 2015. The extended notes bear interest at 12%.
- The company issued 1,740,000 stock options and granted restricted stock rights covering 1,350,000 shares. Stock-based compensation expense was $168,342 for the quarter.
- Warrant holders exercised 667,560 warrants, resulting in issuance of 437,316 common shares, including 427,316 shares from cashless exercises.
- The board adopted a 15-million-share equity incentive plan and increased authorized capitalization to 295 million common shares and 5 million preferred shares.
- The company purchased $107,106 of equipment and repaid $378,528 of debt during the quarter.
Business outlook, liquidity and risks
- The company continued expanding through National Accounts and its exclusive Sysco distribution arrangement. It had begun shipping to 30 of Sysco’s 74 distribution centers and anticipated a national rollout over the following 12 months.
- Management expected gross margin to improve and anticipated higher sales, marketing, travel and personnel costs as distribution and customer activity expanded. No specific revenue or earnings guidance was provided.
- Existing contract manufacturing capacity was stated at approximately 14 million units annually. The company was discussing additional manufacturers that could provide approximately 100 million units of potential annual capacity.
- Management stated that continued operations may require additional capital or debt because operating cash flow was insufficient, and disclosed that there was no assurance such financing would be available.
- The $400,000 convertible note balance was due September 6, 2015, and the remaining $350,000 of amended short-term notes was due September 20, 2015, creating near-term refinancing or repayment requirements.
- The company had a non-cancelable office lease expiring in November 2016, with aggregate remaining minimum payments of $123,154.
- Management reported effective disclosure controls as of June 30, 2015, but determined internal control over financial reporting was ineffective due to material weaknesses involving audit committee oversight, board independence and inadequate segregation of duties.
- No material pending legal proceedings or material off-balance-sheet arrangements were disclosed.
Investor verification points
- Verify the pace and profitability of the Sysco rollout, including the number of active distribution centers, customer orders and repeat sales.
- Assess whether revenue growth can offset the substantial increase in personnel, marketing and other operating expenses.
- Confirm repayment, refinancing or conversion of the debt maturities due in September 2015 and the availability of additional financing.
- Evaluate dilution from outstanding options, warrants, restricted stock and convertible notes; 78,229,533 common shares were outstanding as of August 13, 2015.
- Review remediation of the disclosed material weaknesses in internal control over financial reporting.
- Confirm manufacturing capacity, supplier arrangements and the company’s ability to scale production without materially reducing margins.