Business Context and Reporting Period
Barfresh Food Group Inc. filed its annual Form 10-K for the fiscal year ended December 31, 2020, filed April 14, 2021. The company develops, manufactures through contract manufacturers, and distributes ready-to-blend frozen beverages, including smoothies, shakes and frappes, in single-serve, bulk Easy Pour, WHIRLZ juice concentrate and Twist & Go bottled formats.
Sales are made through national and regional accounts, broadline distributors, schools, military bases and foodservice operators. The former exclusive Sysco distribution agreement expired in October 2019, expanding the company’s ability to use other distributors. COVID-19 materially affected restaurant, school and supply-chain activity during 2020.
Financial Performance and Position
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Revenue | $2.568 million | $4.307 million | Down 40% |
| Gross profit | $764,072 | $2.313 million | Down 67% |
| Gross margin | Approximately 30% | Approximately 54% | Down 24 percentage points |
| Operating loss | $4.209 million | $5.187 million | Improved $978,102 |
| Net loss | $4.153 million | $5.593 million | Improved $1.441 million, or 26% |
| Net loss per share | $0.03 | $0.04 | Based on weighted-average shares |
| Cash used in operations | $3.198 million | $3.353 million | Improved $155,544 |
Revenue declined because both single-serve and bulk sales were reduced by COVID-19. Gross margin also declined because of product mix, including the launches of the 8-ounce bottle and 5:1 juice concentrate, inventory adjustments and higher customer rebates.
General and administrative expense decreased 36% to $4.380 million, principally due to lower personnel, travel, marketing and selling costs. Research and development expense was $515,145, compared with $538,391 in 2019.
At December 31, 2020, cash was $1.817 million and restricted cash was $142,382. Working capital surplus was $1.197 million, compared with $146,337 at December 31, 2019. Total assets were $5.817 million, total liabilities were $3.493 million, and stockholders’ equity was $2.324 million.
Debt included $1.167 million of convertible notes, net of discounts, and $568,131 of PPP borrowings, of which $410,317 was current and $157,814 was long term. Convertible note principal due at face value was $168,000 in 2021 and $1.071 million in 2022. The company also had $41,475 of derivative liabilities at year-end.
Material Changes Versus the Prior Comparable Period
- Revenue fell $1.739 million, or 40%, primarily because of COVID-19-related restaurant closures, reduced foodservice activity and school closures.
- Gross profit fell $1.549 million, and gross margin decreased from approximately 54% to 30%.
- General and administrative expense fell $2.471 million, or 36%, reflecting reduced headcount, renegotiated distribution commissions, lower travel and lower shipping and storage expense.
- Interest expense decreased from $1.213 million to $479,144 following conversion and repayment of convertible notes.
- The company recorded a $379,200 net gain on extinguishment of debt and a $156,540 gain from changes in derivative liability.
- The company raised $3.825 million through a March 2020 private placement and issued 7,650,000 shares. Because the six-month volume-weighted average price was below the applicable threshold, an additional 5,322,868 shares and 2,652,868 warrants were issued in September 2020.
- Convertible debt principal of $1.848 million was converted into common stock during 2020, while other notes were extended. The company ended 2020 with 149,133,372 shares outstanding, compared with 130,341,737 at year-end 2019.
Cash Flow, Liquidity, Outlook and Risks
Cash flow remained negative: operations used $3.198 million, while financing activities provided $4.140 million, primarily from the equity offering and a $568,131 PPP loan. Capital expenditures were limited to $59,662 for equipment and $14,526 for patents and trademarks.
Management disclosed that recurring operating losses and negative operating cash flow raised substantial doubt about the company’s ability to meet obligations during the twelve months following filing. Management concluded that expense reductions, expected revenue recovery, the new Twist & Go products, the January 2021 second PPP loan and potential refinancing or additional equity or debt financing would alleviate the concern. The filing states that these actions may not produce the expected liquidity and that additional financing may be required.
The first PPP loan may be forgiven up to 100% if applicable requirements are met; no forgiveness income had been recorded at December 31, 2020. A second $568,131 PPP loan was received in January 2021 and was also subject to potential forgiveness.
Key risks include prolonged COVID-19 effects, dependence on contract manufacturers and a limited supplier base, inventory spoilage or shortages, volatile fruit, dairy, packaging and manufacturing costs, customer concentration, competition, continuing losses and potential shareholder dilution. Three customers represented approximately 31%, 21% and 11% of 2020 revenue.
Management reported a material weakness in internal control over financial reporting and ineffective disclosure controls as of December 31, 2020, attributable primarily to inadequate segregation of duties and limited continuity in the principal financial officer role. The company plans to hire additional financial personnel, but did not provide a specific remediation completion date.
The common stock trades on the OTCQB, where the company identifies limited liquidity, volatility, penny-stock restrictions and potential difficulty raising capital. No material pending legal proceedings were reported, although the company is defendant in one ordinary-course proceeding involving less than $100,000; management considers a material unfavorable outcome remote.
Important Facts for Investors to Verify
- Whether revenue from restaurants, schools, military bases and new Twist & Go products recovered after year-end 2020.
- Available cash, operating cash burn and the company’s ability to repay or refinance the $1.139 million of convertible note principal scheduled to mature in 2021 and 2022.
- The forgiveness status and remaining repayment obligations for both PPP loans.
- Whether the company can restore gross margin after the 2020 product-mix and rebate effects.
- Progress in remediating the material weakness in segregation of duties and improving disclosure controls.
- The fully diluted share count, including 7.641 million outstanding options and approximately 28.656 million warrants disclosed at December 31, 2020.
- Customer concentration, contract-manufacturing capacity, supply-chain disruption and inventory-aging exposure.
- Reliance on additional equity or debt financing and the resulting dilution risk.