Barfresh Food Group Inc. — Form 10-Q Summary
Business Context and Reporting Period
Barfresh develops, manufactures through contract manufacturers, and distributes ready-to-blend frozen beverages, including smoothies, shakes, and frappes. Products are sold in single-serve and bulk “Easy Pour” formats through Sysco, PepsiCo’s foodservice channel, national and regional accounts, distributors, schools, and military bases. The report covers the three and nine months ended September 30, 2018, with comparative periods ended September 30, 2017. The filing was signed November 14, 2018.
Financial Performance and Position
| Metric | Three Months Ended September 30 | Nine Months Ended September 30 |
|---|---|---|
| Revenue | $1.62 million, versus $0.68 million | $3.33 million, versus $1.62 million |
| Gross profit | $0.90 million; 55.3% margin | $1.81 million; 54.3% margin |
| Operating loss | $1.41 million, versus $2.09 million | $5.08 million, versus $6.60 million |
| Net loss | $1.90 million, versus $2.09 million | $6.05 million, versus $6.60 million |
| Net loss per share | $0.02 | $0.05 |
| Cash used in operating activities | Not separately provided | $3.54 million, versus $5.22 million |
At September 30, 2018, cash was $316,014, accounts receivable were $656,728, inventory was $1.08 million, and total current assets were $2.15 million. Total assets were $5.15 million. Current liabilities were $2.14 million, including $200,000 of short-term notes payable. Long-term liabilities included $613,095 of related-party convertible notes, $1.36 million of other convertible notes, $892,794 of derivative liabilities, and $162,941 of accrued interest. Total liabilities of $5.17 million exceeded stockholders’ equity, which was negative $24,513.
Capital expenditures and other investing outflows totaled $880,456 for the first nine months, primarily reflecting $912,102 of equipment purchases. Financing activities generated $3.43 million, including $2.70 million of convertible-note proceeds and $550,000 from warrant exercises. Cash declined by $988,902 from year-end 2017.
Material Changes Versus the Prior Comparable Period
- Third-quarter revenue increased 138%, and nine-month revenue increased 105%, primarily due to continued adoption of the bulk Easy Pour product and expanded distribution beyond Sysco.
- Gross margin improved from 50.8% to 55.3% in the quarter and from 49.2% to 54.3% year to date, reflecting production scale and product mix.
- General and administrative expense declined 8.5% in the quarter and 10.0% year to date, principally from lower personnel and stock-based compensation following sales-force realignment and workforce reductions.
- Marketing and selling expense increased 103% in the quarter and 87% year to date, primarily from higher sales commissions.
- Operating losses narrowed, but the company remained unprofitable. Nine-month net loss improvement was partly offset by $970,404 of other expense, including interest, derivative-liability remeasurement, and warrant modification expense.
- Debt and related liabilities increased substantially from December 31, 2017, when the filing reported no convertible notes, accrued interest, or derivative liabilities.
Guidance, Outlook, Risks, and Unusual Items
- Management expected fourth-quarter 2018 gross margin of approximately 50%; third-quarter margin was 55.3%.
- Management expected shipping and storage expense as a percentage of sales to continue declining as distribution efficiency improves.
- The company disclosed substantial doubt about its ability to meet obligations over the following twelve months because of recurring losses, negative operating cash flow, and expected working-capital needs. Management believed additional capital raising and cost reductions would mitigate the concern, but financing plans had not yet been implemented and outcomes were uncertain.
- The company’s $2.70 million of convertible notes generally bear 10% interest and mature in 2020. Conversion terms are variable and include a $0.60 minimum conversion price, resulting in an $892,794 Level 3 derivative liability at September 30, 2018.
- The company recorded $290,300 of warrant modification expense, $253,807 of derivative-liability loss for the first nine months, and $426,297 of interest expense, including amortization of warrant-related debt discounts.
- The filing identified ineffective disclosure controls and a material weakness arising from inadequate segregation of duties because of limited personnel. Management stated that the weakness did not affect reported financial results.
- The company had 24 employees and two consultants at the reporting date and leased office space through March 31, 2019, with aggregate minimum lease requirements of $86,926.
- The company adopted ASC 606 in 2018 using the modified retrospective method and reported no significant impact on its financial position or results of operations.
Investor Verification Priorities
- Verify the company’s ability to raise additional capital and fund operations given $316,014 of cash, negative equity, recurring losses, and the disclosed going-concern uncertainty.
- Review the maturity, conversion mechanics, related-party participation, interest obligations, warrants, and potential dilution associated with the convertible notes.
- Assess whether Easy Pour growth, Sysco distribution, national-account contracts, school sales, and military-base contracts can continue supporting the reported revenue growth.
- Reconcile gross-margin guidance with actual margins and determine whether production scale and distribution efficiencies are sustainable.
- Monitor remediation of the material weakness in segregation of duties and any future changes in disclosure controls.
- Confirm the effect of outstanding options and warrants on future dilution; the filing reported 7.49 million outstanding options and approximately 26.16 million outstanding warrants at September 30, 2018.