Barfresh Food Group Inc. — Q3 2021 Form 10-Q Summary
Business Context and Reporting Period
Barfresh manufactures and distributes ready-to-blend smoothies, shakes, frappes, juice concentrates, and ready-to-drink smoothies through national accounts, regional accounts, and distributors. The filing covers the three and nine months ended September 30, 2021. The company is a smaller reporting company and emerging growth company.
Key Financial Metrics
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Revenue | $1.93 million | $0.71 million | $4.25 million | $1.95 million |
| Gross profit | $0.72 million | $0.28 million | $1.63 million | $0.79 million |
| Gross margin | 37.4% | 39.4% | 38.4% | 40.6% |
| Operating loss | $(0.51) million | $(0.84) million | $(1.66) million | $(2.94) million |
| Net loss | $(0.51) million | $(0.88) million | $(1.40) million | $(2.80) million |
| Operating cash flow | Not separately provided | Not separately provided | $(1.09) million | $(2.52) million |
At September 30, 2021, cash was $6.26 million and restricted cash was $0.14 million. Working capital was $6.21 million, compared with $1.20 million at December 31, 2020. Total assets were $11.08 million and total liabilities were $3.18 million. The company reported $7.89 million of stockholders’ equity and an accumulated deficit of $52.30 million.
The remaining PPP loan was $568,131, consisting of $51,649 current and $516,482 long term. The first $568,131 PPP loan was forgiven in May 2021. Convertible notes and derivative liabilities were reduced to zero during the period through repayment, conversion, and settlement. The company had lease liabilities of $111,180 at September 30, 2021.
Material Changes Versus the Prior Comparable Period
- Q3 revenue increased 173% year over year, primarily due to growth in Twist & Go and a gradual recovery in single-serve and bulk demand.
- Nine-month revenue increased 118% year over year, while the nine-month gross margin declined from 40.6% to 38.4%, reflecting product mix and lower-margin Twist & Go sales.
- Q3 operating loss improved by 39%, and the nine-month operating loss improved by 44%, due mainly to higher sales and lower general and administrative expenses.
- Q3 general and administrative expense increased 9%, primarily because shipping and storage costs rose 165% to $335,414. For the nine-month period, shipping and storage costs increased 101% to $716,552.
- The company completed a June 2021 private placement of 16,666,666 shares for gross proceeds of $6.0 million, increasing shares outstanding to 167,601,435 from 149,133,372 at December 31, 2020.
- Debt holders converted principal and interest into shares, while $840,000 of debt was repaid. These transactions eliminated the company’s convertible debt but caused dilution and a $193,562 debt-extinguishment loss for the nine-month period.
- Cash increased by $4.44 million during the first nine months, primarily because of the $6.0 million equity raise and other financing activities, partially offset by operating and investing cash usage.
Outlook, Commentary, Risks, and Unusual Items
- Management expects gross margin for the remainder of 2021 to be approximately 39%, citing improving Twist & Go margins and a higher mix of bulk and single-serve products.
- Management expects shipping and storage expense as a percentage of sales to decline as distribution becomes more efficient and shipment volumes increase.
- Management expected the second PPP loan to be forgiven in the second half of 2021. As of the filing date, the loan remained recorded as a liability, and any unforgiven amount would require repayment with 1% interest.
- The company states that future liquidity depends on ramping sales profitably and controlling variable and fixed costs. It may need additional equity or debt financing if operating cash flow and existing capital are insufficient; management provides no assurance that financing will be available.
- Supply-chain costs, fuel prices, labor shortages, product mix, customer demand, reliance on distribution relationships, and COVID-19-related conditions may affect results.
- The company has 14 employees and three consultants and relies on contract manufacturers for all products.
- Management concluded that disclosure controls and procedures were not effective as of September 30, 2021 because of a material weakness involving inadequate segregation of duties. Remediation steps included hiring personnel, reassigning control responsibilities, and implementing preparer-reviewer sign-offs.
- The notes disclose one ordinary-course legal proceeding involving less than $100,000, with management and counsel considering a materially unfavorable outcome remote. The filing’s Part II disclosure states that no material legal proceedings are pending.
Investor Verification Checklist
- Verify subsequent forgiveness or repayment status of the $568,131 PPP loan.
- Assess whether revenue growth and the projected approximately 39% gross margin continued after September 30, 2021.
- Review cash burn, operating cash flow, and the company’s need for additional financing.
- Evaluate dilution from the June equity offering, debt conversions, approximately 7.87 million outstanding options, and approximately 27.65 million outstanding warrants.
- Monitor remediation and independent auditor implications of the material weakness in internal controls.
- Review customer and distributor concentration, including the status of the PepsiCo relationship and the post-2019 expiration of the exclusive Sysco agreement.