Barfresh Food Group Inc. — 2017 First-Quarter Form 10-Q
Business context and reporting period
Barfresh develops, manufactures through contract manufacturers, and distributes ready-to-blend frozen beverages, including smoothies, shakes, and frappes. The company sells through national accounts, foodservice distributors, Sysco, and PepsiCo’s foodservice sales channel. This report covers the three months ended March 31, 2017; comparative results are for the three months ended March 31, 2016. The financial statements are unaudited.
Financial performance and liquidity
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Revenue | $312,170 | $275,326 | 13% increase |
| Gross profit | $130,521 | $134,591 | 3% decrease |
| Gross margin | 42% | 49% | Down 7 percentage points |
| Operating loss | $(2,359,040) | $(2,486,222) | Improved by $127,182 |
| Net loss | $(2,359,040) | $(2,707,554) | Improved by $348,514 |
| Basic and diluted loss per share | $(0.02) | $(0.03) | Improved |
| Cash used in operations | $(1,614,825) | $(1,612,451) | Essentially unchanged |
General and administrative expense declined 5% to $2.43 million, primarily because of lower personnel and travel costs. Research and development expense increased 67% to $114,601, while stock-based compensation increased to $344,268 from $244,789.
Cash and cash equivalents were $7.45 million at March 31, 2017, down from $9.18 million at December 31, 2016. Total current assets were $8.06 million and current liabilities were $1.09 million. Total debt was approximately $11,847, consisting of an interest-free vehicle installment agreement. The company reported no interest expense in the quarter.
Cash used in investing activities was $150,632, including $146,440 for equipment. Financing activities provided $34,441, primarily from warrant exercises. The company stated that existing cash and working capital may not be sufficient for all projected needs and intends to seek additional equity or debt financing, with no assurance that financing will be available.
Material changes versus the prior comparable period
- Revenue increased 13%, attributed primarily to continued distribution through all 72 Sysco mainland U.S. distribution centers and additional customers outside the Sysco network.
- Gross margin declined to 42% from 49%, which management attributed to a greater proportion of revenue from larger national accounts in test mode. Management expects the remainder of 2017 to be comparable to the quarter.
- Operating and net losses narrowed despite the lower gross profit, reflecting reduced general and administrative costs and the absence of $221,332 of prior-year interest expense.
- The company’s sales-force restructuring reduced full-time employees from 46 at the end of the prior comparable period to approximately 33 at the end of the current quarter. Management expects annualized overhead savings of $1 million to $1.5 million and does not anticipate further significant personnel changes during 2017.
- Equipment purchases decreased from $421,131 to $146,440.
- Equity activity included the issuance of 31,250 shares for services, issuance of 364,249 director options, cash exercise of 59,000 options, and cashless exercises of options and warrants.
Guidance, outlook, commentary, risks, and unusual items
- Management is focused on converting national-account product tests into broader rollouts. The filing cites new or expanding relationships involving PepsiCo, Sysco, Aramark, Centerplate, Aquarium of the Pacific, Statue of Liberty foodservice locations, and Bubba Gump Shrimp Co.
- Production capacity was stated at 14 million units annually at the Salt Lake City contract manufacturer, with access to an additional potential 100 million units through Yarnell Operations.
- Management expects shipping and storage costs as a percentage of sales to decline as distribution becomes more efficient. It expects travel costs to remain generally consistent with the first quarter.
- The company intends to monetize international patents through contract manufacturing, sales agents, internal sales personnel, or licensing and royalty arrangements.
- Liquidity is a significant risk because the company continues to incur substantial operating cash burn and expects to raise capital. The filing does not provide a quantified forecast of when existing cash would be exhausted.
- The company depends on contract manufacturers and has no contracts with suppliers for raw materials, although management believes alternative sources are available.
- Disclosure controls and procedures were concluded to be ineffective as of March 31, 2017. Reported material weaknesses include inadequate segregation of duties and insufficient audit committee oversight, including the absence of an audit committee financial expert.
- Non-cancelable office leases require aggregate minimum payments of $310,557 through March 2019. No material pending legal proceedings or material off-balance-sheet arrangements were reported.
- The company is a smaller reporting company and identified itself as a shell company in the filing’s cover-page checkboxes.
Most important facts for investors to verify
- Whether national-account tests convert into recurring commercial volumes and whether revenue growth accelerates beyond the reported $312,170 quarterly level.
- Whether the 42% gross margin stabilizes or improves as product mix and account testing change.
- Cash burn, remaining liquidity, and the timing, structure, and dilution impact of any required financing.
- Progress in addressing ineffective disclosure controls, inadequate segregation of duties, and audit committee oversight weaknesses.
- Actual production utilization and the ability of contract manufacturers to support anticipated growth.
- Outstanding options and warrants, including approximately 4.83 million options and 23.37 million warrants reported as outstanding at March 31, 2017, and their potential dilution.
- The commercial and financial contribution of the Unibel strategic investment and related partnership opportunities.