Barfresh Food Group Inc. — Form 10-Q Summary
Business Context and Reporting Period
Barfresh manufactures and distributes ready-to-blend frozen beverages, including smoothies, shakes and frappes, in single-serve and bulk formats. The company sells through foodservice, school, military, national-account and distributor channels. This report covers the three and nine months ended September 30, 2020, with comparisons to the same periods in 2019. Barfresh is a smaller reporting company and identified itself as a shell company in the filing.
Financial Performance and Liquidity
| Metric | Three Months Ended Sept. 30, 2020 | Three Months Ended Sept. 30, 2019 | Nine Months Ended Sept. 30, 2020 | Nine Months Ended Sept. 30, 2019 |
|---|---|---|---|---|
| Revenue | $707,610 | $1,565,176 | $1,947,766 | $3,782,375 |
| Gross profit | $278,553 | $851,207 | $790,658 | $2,136,957 |
| Gross margin | 39.4% | 54.4% | 41.0% | 56.5% |
| Operating loss | $(836,384) | $(949,789) | $(2,936,392) | $(3,810,354) |
| Net loss | $(878,257) | $(528,700) | $(2,800,843) | $(3,949,878) |
| Cash used in operating activities | Not separately provided for the quarter | $(2,517,269) | $(3,191,642) |
- Revenue declined 55% in the third quarter and 49% for the first nine months, primarily because COVID-19 reduced restaurant and school-channel activity.
- Gross margin declined because of product mix, including the lower-margin 8-ounce Twist & Go bottles and 5:1 juice concentrate, along with product write-downs.
- General and administrative expense declined 41% in the quarter and 40% for the nine months, to $976,208 and $3,284,673, respectively.
- Cash and restricted cash totaled $2,743,523 at September 30, 2020, including $2,374,941 of cash and $368,582 of restricted cash.
- Total assets were $6,755,264 and total liabilities were $3,154,280. Stockholders’ equity was $3,600,984, compared with $283,724 at December 31, 2019.
- Net debt-related liabilities included $1,218,904 of convertible notes, $568,131 of PPP debt, accrued interest of $163,946 and lease liabilities of $174,025. The filing presents convertible notes net of discounts and by current, related-party and long-term classifications.
- The company had 149,093,829 common shares outstanding at September 30, 2020 and 149,110,972 shares outstanding as of November 4, 2020.
Material Changes Versus the Prior Comparable Period
- COVID-19 materially reduced demand from restaurants and schools, causing the substantial revenue decline.
- Operating loss improved by $113,405 for the quarter and $873,962 for the nine months because cost reductions more than offset the effects of lower revenue and margins.
- Interest expense decreased to $61,757 in the quarter and $420,634 for the nine months, compared with $283,709 and $929,596, respectively, in 2019.
- Derivative-liability gains decreased to $19,884 for the quarter and $176,983 for the nine months, compared with $704,798 and $1,097,532, respectively, in 2019. These gains are non-operating and can be volatile.
- The company raised $3,797,800 net from common-stock issuance and received $568,131 of PPP loan proceeds during the nine months. Convertible-note principal and interest were also converted into equity.
- Common shares increased from 130,341,737 at December 31, 2019 to 149,093,829 at September 30, 2020. The company also issued additional shares and warrants after the private-placement price adjustment.
Guidance, Outlook, Risks and Unusual Items
- Management expected gross margin to be approximately 40% for the remainder of 2020 because of the product mix.
- Management forecast continued improvement in operating cash flow from expense reductions, additional school and military contracts, and the rollout of Twist & Go 8-ounce bottles. Planned cost reductions, including reduced headcount, were estimated to produce approximately $400,000 of annual cash savings.
- Management stated that substantial doubt regarding liquidity was mitigated, but acknowledged uncertainty regarding forecasts, continued cost cutting, additional capital raising and extending debt maturities. The filing identifies convertible-note maturities in November 2021 and March 2022.
- The $568,131 PPP loan is unsecured, matures in two years and may be forgiven up to 100% if applicable requirements are met. No forgiveness income had been recorded as of September 30, 2020; any unforgiven balance bears 1% interest and must be repaid.
- COVID-19 continued to affect restaurant and school demand, although the company reported no supply-chain disruption. The duration and pace of recovery remained uncertain.
- The company recorded a $379,200 non-cash gain on debt extinguishment for the nine months, associated with conversion and modification of convertible notes.
- At September 30, 2020, management concluded that disclosure controls and procedures were not effective because of inadequate segregation of duties and insufficient personnel. Management stated that the weakness did not affect reported financial results.
- The company had no material pending legal proceedings or material off-balance-sheet arrangements. A subsidiary president resigned on November 12, 2020 and continued as a director; the resignation was not attributed to disagreement.
Facts Investors Should Verify
- Whether revenue recovers in restaurant and school channels and whether new military, school and distribution contracts generate sustainable volume.
- Whether approximately 40% gross margins are achieved and whether lower-margin new products or inventory write-downs continue to pressure profitability.
- The company’s ability to fund ongoing operating cash burn without additional equity financing, debt financing or warrant exercises.
- The amount and timing of any PPP loan forgiveness and the cash requirements for any unforgiven balance.
- Future dilution from outstanding convertible notes, approximately 30 million disclosed warrants, stock options and price-adjustment provisions.
- Whether debt maturities in November 2021 and March 2022 can be repaid or extended.
- Remediation of the material weakness in internal control over financial reporting.
- The impact of the company’s shell-company status, limited operating scale and history of operating losses and negative operating cash flow.