Barfresh Food Group Inc. — Form 10-Q Summary
Business Context and Reporting Period
Quarterly report for the three months ended June 30, 2013, filed August 13, 2013. Barfresh manufactures and distributes ready-to-blend beverages, including smoothies, shakes and frappes. Fiscal 2014 is the company’s first year as an operating company rather than a development-stage company.
The company began shipping products during the quarter to one contracted customer and several smaller customers. It operates one business segment and one geographic location.
Financial Performance and Position
| Metric | Three months ended June 30, 2013 | Three months ended June 30, 2012 |
|---|---|---|
| Revenue | $16,325 | $0 |
| Cost of revenue | $10,274 | $0 |
| Gross profit | $6,051 | $0 |
| Gross margin | 37.1% | Not applicable |
| Operating loss | $(429,423) | $(280,244) |
| Interest expense | $84,210 | $0 |
| Net loss | $(513,633) | $(280,244) |
| Net loss per share | $(0.01) | $(0.01) |
| Cash used in operations | $(448,542) | $(157,814) |
Cash declined from $85,957 at March 31, 2013 to $19,061 at June 30, 2013. Capital expenditures were $18,354. Financing activities provided $400,000 from the issuance of common stock and warrants.
At June 30, 2013, total assets were $560,369, current assets were $192,032, total liabilities were $883,569, and stockholders’ deficit was $(323,200). Current liabilities exceeded current assets by $691,537. Current liabilities included $348,040 of convertible notes, net of discount, and $44,620 of related-party convertible notes, net of discount.
The company’s $440,000 convertible note offering bears 12% cash interest, is due September 6, 2013, and is convertible at $0.372 per share. Non-cash amortization of debt discount contributed $71,090 to quarterly interest expense; the filing states an estimated effective interest rate of approximately 216%.
Material Changes Versus the Prior Comparable Period
- Revenue began in 2013, totaling $16,325, while the prior-year quarter had no revenue.
- Gross profit was $6,051, but the company remained substantially unprofitable.
- Net loss increased by $233,389, or approximately 83%, from $280,244 to $513,633.
- General and administrative expense increased by $145,207 to $424,906, primarily reflecting $230,384 of personnel costs, higher investor and public-relations spending, rent, travel and other operating costs.
- Interest expense increased to $84,210, principally because of convertible-note interest and debt-discount amortization.
- Operating cash use increased by $290,728 to $448,542.
- The company had five employees at June 30, 2013, compared with no employees in the prior-year quarter.
- Previously recognized equity-based compensation of $103,488 was reversed following an employee termination, contributing to lower reported operating expenses.
Guidance, Outlook, Risks and Unusual Items
Management provided no formal quantitative revenue or earnings guidance. It expects continued spending on research and development and other operating activities, and anticipates additional increases in certain expenses. Management stated that the production line in Salt Lake City had been installed and commissioned and was producing products for customers and product development.
The company had agreements with potential customers representing approximately 10,000 outlets, but stated that there is no assurance these customers will ultimately purchase or that the company will avoid dependence on a small number of major customers.
The financial statements contain a going-concern warning. The company has incurred cumulative losses of $2,960,343, has negative working capital of $691,537, and depends on additional equity or debt financing and eventual profitable operations. Management stated that financing availability is uncertain.
Subsequent to June 30, 2013, the company sold 7,626,000 units for total consideration of $1,906,500. The units included 7,626,000 common shares and warrants to purchase up to 11,439,000 shares. Estimated offering expenses were approximately $250,000. Management stated that these proceeds should fund operations for the foreseeable future, but acknowledged that additional capital may be required.
The company leases office space through October 31, 2014, with aggregate minimum remaining lease payments of approximately $99,982. Management reported no material off-balance-sheet arrangements and no known legal proceeding expected to have a material adverse effect.
Management concluded that disclosure controls were effective, but identified a material weakness in internal control over financial reporting due to inadequate segregation of duties and insufficient personnel. The company plans to hire additional accounting personnel when funds are available.
Facts Investors Should Verify
- Whether the $440,000 convertible notes due September 6, 2013 were repaid, converted or otherwise refinanced.
- Whether the post-quarter-end $1.9 million unit offering was completed as described and the net proceeds remaining after approximately $250,000 of offering costs.
- Whether initial customer shipments developed into recurring commercial revenue and whether customer concentration increased.
- Actual cash burn, liquidity and financing requirements following the quarter-end offering.
- Remediation of the segregation-of-duties material weakness.
- The filing contains an apparent inconsistency: the general and administrative expense table reports investor and public-relations expense of $46,004 for 2013, while accompanying narrative text refers to $144,095. The definitive value should be verified against the filed financial statements or subsequent filings.