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, frappes, portion-controlled beverage packs, and bulk Easy Pour products. Its distribution relationships include Sysco and PepsiCo, with sales to foodservice, education, national-account, and other customers.
This unaudited quarterly report covers the three and nine months ended September 30, 2017, compared with the corresponding 2016 periods. The company is a smaller reporting company. As of November 6, 2017, 118,428,967 common shares were outstanding.
Financial Performance and Position
| Metric | Q3 2017 | Q3 2016 | 9M 2017 | 9M 2016 |
|---|---|---|---|---|
| Revenue | $680,000 | $479,000 | $1.621 million | $1.313 million |
| Gross profit | $346,000 | $214,000 | $798,000 | $629,000 |
| Gross margin | 50.8% | 44.6% | 49.2% | 47.9% |
| Operating loss | $(2.086) million | $(2.359) million | $(6.603) million | $(7.340) million |
| Net loss | $(2.086) million | $(2.366) million | $(6.603) million | $(7.584) million |
| Net loss per share | $(0.02) | $(0.02) | $(0.06) | $(0.08) |
| Cash used in operations | Not separately provided | Not separately provided | $(5.225) million | $(5.591) million |
At September 30, 2017, cash was $3.548 million, compared with $9.181 million at December 31, 2016. Total current assets were $5.028 million and current liabilities were $1.412 million. Accounts receivable increased to $611,000 from $131,000, and inventory increased to $752,000 from $318,000. Total assets were $7.405 million, compared with $11.823 million at year-end 2016.
Reported debt consisted of $9,928 of interest-free vehicle installment debt, including $3,849 classified as current. Management nevertheless states that the company currently has no debt. The filing does not provide a clear reconciliation of this apparent inconsistency.
Capital expenditures were $413,000 during the first nine months, and trademark spending was $28,000. Financing activities provided $33,000, primarily from warrant exercises. No cash was raised through common-stock issuance during the period. Equity-based compensation was $1.182 million for the first nine months, compared with $515,000 in the prior-year period.
Material Changes Versus the Prior Comparable Period
- Third-quarter revenue increased 42% year over year, while nine-month revenue increased 23%, primarily due to the rollout and growing adoption of bulk Easy Pour products.
- Gross margin improved to approximately 51% in the quarter and 49% for the first nine months, compared with approximately 45% and 48%, respectively, in the prior periods.
- Operating and net losses narrowed, primarily because of higher gross profit, lower personnel costs, and lower interest expense.
- General and administrative expense decreased 7% in the quarter and 8% for the first nine months. Personnel costs declined following a 2016 sales-force restructuring that eliminated 13 positions and expanded brokerage coverage.
- After quarter-end, management eliminated an additional five sales positions and expects approximately $700,000 of incremental annualized savings. Total annualized savings from the two restructurings are estimated at $2.2 million to $2.7 million.
- Shipping and storage expense increased 107% in the quarter and 47% year to date, reflecting Canadian expansion, forward-warehouse activity, trade-show and demonstration inventory, and special raw-material orders.
- Research and development expense increased 74% year to date, reflecting product expansion and commissioning costs at the Arkansas production facility.
- Interest expense fell to zero from $8,000 in the quarter and $243,000 year to date because prior convertible and short-term debt had been repaid or converted.
- Cash declined by $5.633 million during the first nine months, compared with a $499,000 decline in the prior-year period, largely reflecting continued operating cash use and the absence of the prior-year $5.687 million stock issuance.
Guidance, Outlook, Risks, and Unusual Items
- Management expects gross margin to be approximately 50% for the remainder of 2017 and expects shipping and storage as a percentage of sales to decline as distribution becomes more efficient.
- The company is pursuing growth through Sysco’s 72 U.S. mainland distribution centers, PepsiCo’s foodservice sales organization, national accounts, education customers, Canadian distribution, and additional international commercialization or licensing opportunities.
- Management disclosed a history of operating losses and negative operating cash flow that raises substantial doubt about the company’s ability to meet obligations during the twelve months following the filing. Management believes cost reductions and additional financing, including potential loans, will alleviate the concern, but these plans had not yet been implemented and financing availability is uncertain.
- The company relies on contract manufacturers and currently has stated production capacity of 14 million units annually at its Salt Lake City manufacturer, with potential incremental capacity of up to 100 million units through Yarnell Operations.
- The company’s disclosure controls and procedures were ineffective as of September 30, 2017 because of a material weakness involving inadequate segregation of duties due to limited personnel. Management stated that the weakness did not affect reported financial results.
- The company had no material pending legal proceedings and no material off-balance-sheet arrangements. Minimum remaining office-lease payments were reported at $249,000 through March 2019.
- Outstanding equity-linked instruments included approximately 6.242 million stock options and 23.369 million warrants at September 30, 2017, creating potential future dilution.
- No subsequent events requiring recognition or disclosure were identified in the filing.
Important Facts for Investors to Verify
- Whether the Easy Pour rollout and expanded distribution relationships can produce sustained revenue growth and operating leverage.
- The timing, terms, and availability of additional financing needed to address the disclosed going-concern uncertainty.
- The apparent inconsistency between the balance sheet’s $9,928 of vehicle debt and management’s statement that the company has no debt.
- Whether the projected $2.2 million to $2.7 million of annualized sales-force savings are achieved without impairing revenue growth.
- Whether shipping, storage, research and development, and stock-based compensation costs remain elevated as the company expands.
- The remediation of the inadequate segregation-of-duties material weakness and the effectiveness of future internal controls.
- The potential dilution from outstanding options, warrants, and other equity compensation.