Barfresh Food Group Inc. — Form 10-Q Summary
Business Context and Reporting Period
Barfresh develops, manufactures through contract producers, and distributes ready-to-blend frozen beverages, including smoothies, shakes, and frappes. Products are sold in single-serve and bulk Easy Pour formats through national accounts, regional accounts, broadline distributors, Sysco, and PepsiCo’s foodservice sales channel.
This report covers the three months ended March 31, 2018, with comparable results for the three months ended March 31, 2017. The interim financial statements are unaudited. The company is a smaller reporting company and identified itself as a shell company in the filing.
Financial Performance and Position
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Revenue | $623,071 | $312,170 | +$310,901; 99% |
| Gross profit | $344,605 | $130,521 | +$214,084 |
| Gross margin | 55.3% | 41.8% | +13.5 percentage points |
| Operating loss | $(1,862,526) | $(2,359,040) | Loss narrowed 21% |
| Net loss | $(2,338,138) | $(2,359,040) | Loss narrowed by $20,902 |
| Basic and diluted loss per share | $(0.02) | $(0.02) | No change |
| Cash used in operations | $(1,491,691) | $(1,614,825) | Use decreased by $123,134 |
Cash was $2.39 million at March 31, 2018, compared with $1.30 million at December 31, 2017. Total current assets were $4.44 million and current liabilities were $2.10 million. Total assets were $7.23 million, while total liabilities increased to $4.84 million from $1.27 million at year-end 2017.
Debt included $250,000 of short-term notes bearing 12% interest and maturing in September 2018, $554,432 of related-party convertible notes, and $1.18 million of other convertible notes, net of discounts. Convertible notes issued during the quarter had gross principal of $2.53 million, a 10% annual coupon, and a March 2020 maturity. Derivative liabilities totaled $1.01 million at quarter-end.
Investing cash outflows were $174,524, including $172,231 for equipment. Financing activities provided $2.75 million, consisting principally of $2.50 million of net convertible-note proceeds and $250,000 of short-term note proceeds. The company had no material off-balance-sheet arrangements.
Material Changes Versus the Prior Comparable Period
- Revenue nearly doubled, primarily due to continued adoption of the bulk Easy Pour product and distribution through Sysco and other customers.
- Gross margin improved to 55.3%, reflecting greater production scale and favorable product mix.
- General and administrative expense decreased 14% to $2.09 million, primarily because of lower personnel costs and stock-based compensation.
- Personnel costs declined 30% to $897,803 following sales-force restructuring. The company reported 28 full-time employees at March 31, 2018, compared with 43 full-time employees during 2016, and expects annualized savings of $2.2 million to $2.7 million.
- Shipping and storage expense increased 159% to $166,071, or 26% of revenue, due partly to inventory movement to forward warehouses and preparation for a national-account launch.
- Research and development expense increased 66% to $190,341, primarily due to manufacturing-facility commissioning.
- The company recognized a $444,736 loss from remeasurement of derivative liabilities associated with variable-conversion convertible notes. This non-operating item contributed materially to the quarter’s net loss.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
Management expects gross margin to be approximately 50% for the remainder of 2018 and expects shipping and storage expense as a percentage of sales to decline as distribution becomes more efficient. The filing does not provide formal revenue or earnings guidance.
On March 8, 2018, the company announced a supply agreement with a major foodservice operator covering approximately 1,000 locations. Distribution through Sysco began in April 2018. A separate convertible-note financing contemplates an additional 40% of the stated $4.1 million commitment upon achieving a second milestone involving approximately 2,500 additional locations. After quarter-end, investors increased convertible-note investments by $177,300 and received 930,332 additional warrants.
Management stated that recurring operating losses and negative operating cash flow raise substantial doubt about the company’s ability to meet obligations over the following twelve months. Management expects additional financing and further cost reductions to alleviate the concern, but these actions had not yet been implemented and their availability and effectiveness are uncertain.
Additional risks include substantial convertible debt and warrant dilution, variable conversion provisions that generate derivative-liability volatility, a $250,000 note maturing in September 2018, continued dependence on future financing, and reliance on distribution and national-account expansion. The company also reported ineffective disclosure controls and a material weakness arising from inadequate segregation of duties due to limited personnel.
The company has non-cancelable office lease commitments totaling $173,851 through March 31, 2019. No material pending legal proceedings or required subsequent-event adjustments were reported.
Important Facts for Investors to Verify
- Whether the approximately 1,000-location national-account rollout produces the expected sales ramp beginning in April 2018.
- Whether the second national-account milestone is achieved and the remaining convertible-note funding becomes available.
- Availability and terms of additional financing needed to address the going-concern uncertainty.
- Cash burn, working-capital requirements, and the company’s ability to repay or refinance the September 2018 short-term notes.
- Potential dilution from convertible notes, approximately 6.46 million outstanding stock options, and approximately 28.08 million outstanding warrants across the disclosed categories.
- Whether gross margin remains near management’s approximately 50% expectation after product mix and distribution costs.
- Remediation of the ineffective disclosure controls and inadequate segregation of duties.