Barfresh Food Group Inc. — Q3 FY2013 Form 10-Q Summary
Business Context and Reporting Period
The filing covers the quarter and nine months ended December 31, 2012, with comparative periods ended December 31, 2011. Barfresh develops and distributes ready-to-blend beverages, particularly smoothies, and remained a development-stage company with limited commercial revenue.
The company has established a manufacturing arrangement, completed production-line testing, begun producing products, shipped samples to prospective customers, and reported two sales to date. It had preliminary agreements with three potential customers representing approximately 9,000 outlets, but no assurance that these customers will ultimately purchase its products.
Key Financial Metrics
| Metric | Three Months Ended Dec. 31, 2012 | Nine Months Ended Dec. 31, 2012 | Comparable Prior Period |
|---|---|---|---|
| Revenue | $4,608 | $7,488 | $0 in 2011 |
| Cost of revenue | $3,859 | $6,115 | $0 in 2011 |
| Gross profit | $749 | $1,373 | $0 in 2011 |
| Gross margin | 16.3% | 18.3% | Not meaningful |
| Operating loss | $(590,987) | $(1,232,122) | $(24,474) and $(56,812), respectively |
| Net loss | $(675,196) | $(1,344,401) | $(24,474) and $(57,031), respectively |
| Net loss per share | $(0.01) | $(0.03) | $0.00 in 2011 |
| Operating cash flow | Not separately provided | $(541,246) | $(57,031) |
Cost of revenue was elevated by transportation costs on small shipments. Management expects transportation costs per unit to decline as shipment sizes increase.
- Cash was $196,775 at December 31, 2012, compared with $420,976 at March 31, 2012.
- Total current assets were $211,510 and current liabilities were approximately $470,824, resulting in negative working capital of $259,314.
- Total liabilities were $470,824, including $250,641 of convertible notes net of debt discount, $30,272 owed as a related-party advance, and $101,326 of accrued expenses.
- Property, plant and equipment increased to $253,369 from $149,141 at March 31, 2012, primarily reflecting investment in manufacturing equipment.
- Nine-month investing cash outflows were $153,227, principally for equipment.
- Nine-month financing cash inflows were $470,272, consisting of $440,000 of convertible notes and a $30,272 related-party advance.
- The company had 49,266,660 common shares outstanding at December 31, 2012.
Material Changes Versus the Prior Comparable Period
- Nine-month revenue increased from zero to $7,488, while quarterly revenue increased from zero to $4,608, reflecting initial product sales.
- Nine-month net loss increased to $1.34 million from $57,031, and quarterly net loss increased to $675,196 from $24,474, primarily because the company expanded operations and incurred substantially higher consulting, personnel, legal, travel, research, marketing, and stock-based compensation costs.
- General and administrative expense increased to $1.216 million for the nine months from $55,177 in the prior period. Consulting fees, personnel costs, legal and professional fees, stock-based compensation, and travel were significant components.
- Cash used in operations increased to $541,246 from $57,031 for the comparable nine-month period.
- The company invested $153,227 in equipment during the nine months, compared with no equipment purchases in the prior period.
- Debt increased materially following the August 2012 issuance of $440,000 of convertible notes. The notes bear 12% cash interest, mature September 6, 2013, and are convertible at $0.372 per share. The company also issued 956,519 warrants exercisable at $0.46 per share.
- During the quarter, the company sold 500,000 shares and warrants to purchase 250,000 shares for $150,000 gross proceeds, less $17,500 of offering costs, and issued 200,000 shares to a consulting firm.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management plans to use contract manufacturers and expects to require additional equipment and working capital to support production capacity, test marketing, and any rollout to major chains.
- The company is seeking additional equity or debt financing. Management states that there is no assurance that sufficient funding will be available.
- The financial statements contain a substantial doubt regarding the company’s ability to continue as a going concern. The company has accumulated losses of $1,755,122 and depends on additional capital and eventual profitable operations.
- Convertible notes are due in September 2013, creating a near-term refinancing, repayment, or conversion requirement.
- Non-cancelable office lease commitments totaled $139,974 through fiscal 2015.
- Potential future equity awards include additional shares and options under consulting and employment arrangements, subject to performance commitments. Outstanding warrants totaled 2,539,851 at December 31, 2012, excluding employee options.
- Interest expense included $94,679 of non-cash debt-discount amortization for the nine months. The filing states an estimated effective interest rate of approximately 216%, although the contractual cash interest rate is 12%.
- Management reported that disclosure controls were effective and that written procedures for revenue and purchasing processes were developed during the quarter. The company was continuing efforts to remediate a material weakness identified in its prior Form 10-K.
- The filing reports no material pending legal proceedings, no defaults upon senior securities, and no material off-balance-sheet arrangements.
Important Facts for Investors to Verify
- Whether the three prospective customer relationships convert into binding purchase agreements and meaningful recurring revenue.
- The company’s ability to raise capital before cash is depleted and before the convertible notes mature in September 2013.
- The composition and timing of the $1.216 million of nine-month general and administrative expense, including cash versus stock-based compensation.
- Whether transportation and manufacturing costs decline as shipment volumes increase and whether the company can achieve sustainable gross margins.
- The potential dilution from convertible notes, warrants, employee options, consulting awards, and other contingent equity commitments.
- Progress in remediating the previously identified material weakness in internal control over financial reporting.
- The accuracy of reported share counts and transaction descriptions, as the filing contains some apparent inconsistencies in historical share and recapitalization descriptions.