"And so you see, in each moment you must be catching up the distance between us, and yet I-at the same time-will be adding a new distance, however small, for you to catch up again."
In approximately 450 B.C.E, Greek philosopher Zeno described a paradox about a turtle that challenged the warrior Achilles to a race. The turtle bet that no matter how much faster Achilles may have been, as long as the turtle had a head start he would never be caught. The amphibian's logic told him that in the time Achilles took to cover the distance to where the turtle had been, the turtle would have moved ever so slightly forward. This process would then repeat for the next distance-and the next.
Always getting closer but never quite getting there. Welcome to Barfresh.
Barfresh Food Group Inc (OTCQB:BRFH), creates single serve smoothie packets for commercial use that ease several restaurant pain points. They eliminate waste, simplify the inventory process, and minimize preparation time while still allowing vendors to provide a high quality product to consumers.
I first wrote about this company in my article, Barfresh and the Cult of When Not If, and expressed concern that the company had been promising big wins for a while but not delivering. Furthermore, if those wins ever did materialize, investor returns would be hampered by all of the dilution that occurred in the intermediary.
Major accounts were coming management said in 2013 and 2014 and 2015 and now…
"And we've got a large, large top five national restaurant chains that we will crack the code this year and we will launch this year in one if not two or three of these accounts and that would immensely sizable and transform our company forever and that will happen in 2016."
" I believe we will absolutely be in a large-scale rollout this year and I believe that at least two gigantic ones, we believe we'll have all the systems up and running for 2017 when you tie every store in the chain."
The crazy thing is, though, that it feels like this time they are telling the truth.
Take the developments that have occurred since my previous article. Barfresh announced a relationship with PepsiCo, achieved placement in all 72 Sysco distribution centers, and even sort of landed a big national account of the type it had been predicting for years.
These first two developments produce similar benefits. They provide connections to the massive accounts the company really wants while simultaneously helping win smaller contracts. President Joe Cugine stated, "we are winning regional accounts, 15, 20, 50, 100 store chains, we are winning because of the contact with PepsiCo."
The quote hopefully also puts an end to management playing fast and loose with what constitutes a national chain. Whereas here, a 100 store chain is deemed "regional" it wasn't so long ago that Barfresh was stating," We recently announced that two of our national accounts have gone from testing its nationwide roll-out….[including] Shari's Pies and Cafés, a 100 location family restaurant chain in the Northwest." With all due respect to Shari's Pies and Cafes, it's not exactly McDonald's or Subway
The Sysco situation is similar and has the added benefit of being a case where Barfresh not only delivered on one of its promises but did so on time. On July 7th 2015 the company stated stated, "We expect to be in all 74 distribution centers across all 50 states by spring of next year," and they were recently able to confirm, "we will have representation in 72 opcos across the US in March….And we counted about 4000 leads, just from those first initial meetings, people sitting there, trying our products to sales reps, and said, oh, I got a great account for you." Barfresh has even achieved special status in Sysco's product catalogue as a Cutting Edge Solution which allows it to stand apart.
The third major accomplishment for Barfresh was the landing of its first truly national account, closing a deal with a vendor representing nearly 3,500 bowling centers nationwide. The impact of this relationship is very difficult to gauge as unlike in a restaurant, there is no expectation that customers will consume any beverage, let alone a smoothie. Still, it was Barfresh's largest single win to date.
Curious, then, is the fact that the bowling center deal was ignored in management's most recent business update. There's a chance the relationship has turned south, but distribution was only just set to begin so it seems more likely that the company just felt that the future was much more exciting. If true, this would be a major positive. A company with no need to tout past victories is one whose future is bright.
All of this progress, though, has only just begun to register on the income statement. The Sysco distribution centers weren't fully on board until a few weeks ago, and bowling center revenue, whatever it may be, was similarly set to begin arriving in the first quarter. All the while, expenses, especially impacted by the filling out of the sales team, continue to ramp.
Barfresh loses money now, and it sounds likely they will continue to lose money until they convert one of the mega accounts into a full scale customer. Pepsico and Sysco deals will allow them to stretch the funds they have, and it may be possible from the data available to take a stab at calculating a revenue level that will achieve cash flow positivity, but to a certain extent it would just be an intellectual exercise. Barfresh CEO Delle Coste said it best, "just one of the national accounts that we are working on would make us profitable and cash flow positive."
Additionally hampering projections is the fact that either revenue is proving very lumpy or there is something wrong with the latest company 10k. Sept-Dec revenue backs out to less than the 2014 period despite the quarters on either side, Q1 revenue being predisclosed, showing massive YoY growth
Still, the company needs money in the meantime and their only way to get it is by diluting. Since my last article, the company raised funds by pushing the shares outstanding from 78 million to 94 million.
To reiterate the thesis from my original article, when a company has to keep diluting, even if they do eventually achieve their goals, investors may find themselves with a much smaller piece of the pie than they once expected. I predict that even if a massive account signs on this year, unless it happens while there are still summer months in which to sell, the shares outstanding will eventually top 100 million.
The flip side of this hand wringing over needing the one giant account is that if it does happen revenue will be accompanied by minimal SG&A increases: "So my 40 person sales force should never get any larger. Whether we are $1 million or we are a $100 million business" This is part of what makes the risk/reward look so enticing here.
Barfresh has 114 million units of manufacturing capacity and suggested that there would be a need to expand beyond that if they landed the accounts they are pursuing. 114 million times approximately $1 per unit with a 50% margin is essentially the entire market cap of the company.
Barfresh is not there yet though, nor from a numbers perspective do they seem to be particularly close. The first quarter revenue that they disclosed along with their 10k indicates that they are still a long way from their first million unit quarter, never mind hundred million.
Will PepsiCo and Sysco inching them toward that first million and beyond this summer? That's pretty much guaranteed. Will a few thousand bowling centers having access to the product likely get them a few million more? I'd bet on that too. But neither five million nor even ten million are anywhere near 100 million.
In Zeno's story, the turtle is able to convince Achilles of the futility of his task so that he concedes, guaranteeing the turtle victory. By putting their money on the line, Barfresh investors refuse to play the role of the soldier. It's been at least thirty months since management promised a major deal was six months away, but for one reason or another they believe. I haven't joined them yet, but I'm tempted. Sysco, PepsiCo, and thousands of bowling centers...these six months really do seem as small as they've ever been
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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