Barfresh Food Group Inc. — Form 10-Q Summary
Business Context and Reporting Period
This quarterly report covers the three and six months ended June 30, 2017, with comparative periods ended June 30, 2016. Barfresh develops, manufactures through contract manufacturers, and distributes ready-to-blend frozen beverages, including smoothies, shakes, frappes, portion-controlled beverage packs, and bulk Easy Pour products. Distribution channels include Sysco, PepsiCo’s foodservice sales organization, national accounts, other distributors, and direct customers.
The company reported 118,322,070 common shares outstanding as of August 8, 2017 and identified itself as a smaller reporting company. It reported that it was not a shell company.
Financial Results and Key Metrics
| Metric | Three Months Ended June 30, 2017 | Three Months Ended June 30, 2016 | Six Months Ended June 30, 2017 | Six Months Ended June 30, 2016 |
|---|---|---|---|---|
| Revenue | $629,000 | $559,000 | $941,000 | $834,000 |
| Gross profit | $322,000 | $281,000 | $453,000 | $416,000 |
| Gross margin | 51% | 50% | 48% | 50% |
| Operating loss | $(2.16) million | $(2.50) million | $(4.52) million | $(4.98) million |
| Net loss | $(2.16) million | $(2.51) million | $(4.52) million | $(5.22) million |
| Net loss per share | $(0.02) | $(0.03) | $(0.04) | $(0.06) |
General and administrative expense was $2.40 million in the second quarter and $4.84 million for the first six months, compared with $2.72 million and $5.30 million, respectively, in the prior-year periods. Stock-based compensation was $272,000 for the quarter and $616,000 year to date.
Cash used in operations was $3.29 million for the six months ended June 30, 2017, compared with $3.73 million in the prior-year period. Investing cash use was $225,000, including $220,000 for equipment. Financing activities provided $33,000, principally from warrant exercises.
Cash was $5.70 million at June 30, 2017, down from $9.18 million at December 31, 2016. Current assets were $6.54 million and current liabilities were $1.41 million. Total debt was approximately $10,900, consisting of a non-interest-bearing vehicle installment agreement, with approximately $3,800 classified as current. The company had $286,000 of remaining minimum operating lease commitments as of June 30, 2017.
Material Changes Versus the Prior Comparable Period
- Second-quarter revenue increased 12.5% and first-half revenue increased 12.8%, primarily from the rollout and increased momentum of the bulk Easy Pour product, higher national-account testing, and additional customers outside the Sysco network.
- Second-quarter gross margin improved to 51% from 50%, while first-half gross margin declined to 48% from 50%.
- Operating and net losses narrowed year over year, primarily because of lower personnel costs, reduced marketing and selling expense, and the elimination of interest expense.
- Personnel expense declined following the November 2016 sales-force restructuring, which eliminated 13 full-time sales positions and expanded brokerage coverage.
- Research and development expense increased to $340,603 for the first six months from $176,635, reflecting expanded product development and commissioning costs at the Arkansas production facility.
- Shares outstanding increased from 117.1 million at December 31, 2016 to 118.3 million at June 30, 2017. The company also had 4.77 million outstanding employee and director options and approximately 23.37 million outstanding warrants.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
Management expects second-half gross margin to be comparable to the first-half percentage and does not anticipate significant further personnel changes in 2017. It expects travel expense to remain consistent with the second quarter or first six months and anticipates that shipping and storage expense as a percentage of sales will decline as distribution becomes more efficient.
Management stated that existing cash and working capital may not be sufficient to fund all projected business needs and that the company intends to raise additional capital through equity or debt financing. The filing provides no assurance that such financing will be available on acceptable terms or at all.
Growth initiatives include expansion of Easy Pour products, national-account rollouts, use of Sysco’s 72 mainland distribution centers, new foodservice and institutional customers, and potential international manufacturing, sales, licensing, or royalty arrangements. The company has contract manufacturing capacity of approximately 14 million units annually in Salt Lake City and access to incremental capacity of up to 100 million units through Yarnell Operations.
The company reported no material pending legal proceedings and no material off-balance-sheet arrangements. Cash balances exceeded federally insured limits, although management considers the related loss risk minimal. The company also disclosed that its disclosure controls and procedures were not effective as of June 30, 2017 because of material weaknesses involving audit committee oversight and inadequate segregation of duties.
During the first six months, the company issued shares and options for services and director compensation, including options valued at approximately $216,000. It also received $35,400 from cash warrant exercises and issued shares through cashless option and warrant exercises.
Investor Verification Points
- Verify whether revenue growth from Easy Pour and national-account testing converts into recurring, scaled sales rather than temporary test activity.
- Assess the company’s ability to fund operations given $3.29 million of first-half operating cash burn, $5.70 million of cash, continuing net losses, and management’s stated need for additional financing.
- Review the effect of the large option and warrant overhang on future dilution, including approximately 4.77 million options and 23.37 million warrants outstanding at June 30, 2017.
- Monitor gross-margin performance, shipping and storage costs, and whether management’s expected distribution efficiencies materialize.
- Evaluate remediation of the disclosed material weaknesses in internal control and disclosure controls.
- Confirm the execution and economics of contract manufacturing capacity, Sysco and PepsiCo channel relationships, and reported customer placements.