Barfresh Food Group Inc. — Form 10-Q Summary
Business context and reporting period
The filing covers the unaudited three months ended March 31, 2016, compared with the three months ended March 31, 2015. Barfresh develops, manufactures through contract manufacturers, and distributes ready-to-blend frozen smoothies, shakes, and frappes. Its principal channels include National Accounts and an exclusive Sysco distribution arrangement. The company also has a sales-representative agreement with PepsiCo for the U.S. and Canada.
During the quarter, Barfresh became one of five vendors on Sysco’s Cutting Edge Solution platform and reported product availability across all 70 mainland U.S. Sysco operating companies, compared with 20 distribution centers in the prior-year quarter. The company reported 44 employees and five consultants at March 31, 2016 and is classified as a smaller reporting company and a shell company in the filing.
Financial performance and position
| Metric | Three months ended March 31, 2016 | Three months ended March 31, 2015 |
|---|---|---|
| Revenue | $275,326 | $53,633 |
| Gross profit | $134,591 | $24,285 |
| Gross margin | 48.88% | 45.28% |
| Operating loss | $(2,486,222) | $(1,168,092) |
| Interest expense | $221,332 | $137,736 |
| Net loss | $(2,707,554) | $(1,305,828) |
| Net loss per share | $(0.03) | $(0.02) |
| Cash used in operations | $(1,612,451) | $(442,588) |
- Revenue increased $221,693, or 413%, primarily from the Sysco distribution rollout and an approximately 8% selling-price increase.
- General and administrative expense rose 123% to $2,574,066, principally because personnel costs increased to $1,557,304 from $299,010 as the sales force expanded. The current period also included an annual incentive-plan accrual.
- Cash capital expenditures were $421,131, compared with $49,248 in the prior-year quarter, primarily for equipment.
- Cash was $3,484,036 at March 31, 2016, compared with $1,986,004 at December 31, 2015. Total current assets were $4,072,609 and total current liabilities were $1,447,288.
- Total liabilities declined to $1,489,768 from $2,625,873 at December 31, 2015, largely because convertible notes were converted into equity. Stockholders’ equity increased to $4,281,075 from $1,069,692.
- The company generated $3,531,983 from financing activities, including $3,269,996 from common-stock and warrant issuances, $240,000 from warrant exercises, and $25,500 from option exercises.
Material changes versus the prior comparable period
- Revenue and gross profit grew substantially, but operating and net losses more than doubled because operating expenses increased faster than sales.
- Gross margin improved to 48.88% from 45.28%. Management expects the remainder of 2016 to be comparable to the first-quarter margin.
- Interest expense increased 61% to $221,332. It included $56,010 of direct interest and $165,322 of non-cash debt-discount amortization.
- Approximately 96% of the $2.67 million of convertible notes issued in late 2015 converted into equity during the quarter. The company issued 7,186,817 shares and warrants for gross proceeds of $5,749,454, consisting of a $3.27 million equity raise and conversion of $2,479,456 of note principal and interest. Subsequent related issuances increased the reported totals to 7,379,371 shares, 3,689,686 warrants, and $5,903,498 of aggregate gross proceeds.
- Shares outstanding increased to 94,048,285 at March 31, 2016 from 86,186,453 at December 31, 2015. The company also had 16,934,241 warrants from common-stock private placements and 3,570,000 outstanding employee and director options at quarter-end.
Guidance, outlook, risks, contingencies, and unusual items
- Management expects product placement across all 72 Sysco distribution locations during calendar 2016 and does not anticipate significant further increases in personnel-related selling costs during 2016. It expects travel costs to remain comparable to the first quarter and shipping and storage costs as a percentage of sales to decline as distribution becomes more efficient.
- In February 2016, Barfresh secured additional contract manufacturing capacity through Yarnell Operations. The arrangement is intended to provide incremental capacity of up to 100 million units, compared with approximately 14 million units of annual capacity at the existing manufacturer.
- The company states that it has historically financed operations through equity sales, convertible debt, and short-term debt. It warns that additional capital may be required if operating cash flow and existing capital are insufficient, with no assurance that additional financing will be available.
- $100,000 of short-term notes, including $50,000 owed to a related party and $50,000 owed to an unrelated party, were extended to June 30, 2016 at 10% interest. The company also had $42,480 of long-term debt and a non-cancelable office lease with $54,529 of remaining minimum payments through December 31, 2016.
- Management concluded that disclosure controls and internal control over financial reporting were not effective as of March 31, 2016. Cited material weaknesses included inadequate segregation of duties, lack of a majority of independent directors, and insufficient audit-committee oversight, including the absence of an audit-committee financial expert.
- No material pending legal proceedings or material off-balance-sheet arrangements were reported. The company stated that the filing text does not provide a formal full-year revenue or earnings forecast.
Important facts for investors to verify
- Whether the Sysco and PepsiCo relationships convert expanded distribution and marketing access into sustained, profitable sales.
- Whether revenue growth can outpace the company’s high operating-cost base and recurring cash burn.
- The timing and terms of repayment or refinancing for the short-term notes due June 30, 2016 and the company’s need for additional financing.
- The extent of dilution from issued and outstanding shares, warrants, options, and future equity-linked financings.
- Progress in resolving the disclosed material weaknesses in internal controls.
- Whether the Yarnell capacity arrangement creates meaningful incremental production capability and demand sufficient to utilize it.