Business Context and Reporting Period
Barfresh Food Group Inc. manufactures and distributes ready-to-blend smoothies, shakes, frappes, juice concentrates, and ready-to-drink beverages. The company sells through national, regional, and broadline distribution channels and uses contract manufacturers in the United States. This Form 10-Q covers the three and six months ended June 30, 2021; the financial statements are unaudited.
Barfresh had 14 employees and three consultants at quarter-end. It reported 167,601,435 common shares outstanding as of August 11, 2021.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 |
|---|---|---|---|---|
| Revenue | $1.301 million | $0.506 million | $2.316 million | $1.240 million |
| Gross profit | $0.561 million | $0.115 million | $0.911 million | $0.512 million |
| Gross margin | 43.1% | 22.8% | 39.3% | 41.3% |
| Operating loss | $(0.602) million | $(1.122) million | $(1.152) million | $(2.100) million |
| Net loss | $(0.297) million | $(1.180) million | $(0.889) million | $(1.923) million |
| Operating cash flow | Not separately provided | Not separately provided | $(0.651) million | $(1.930) million |
- Cash was $6.822 million at June 30, 2021, compared with $1.817 million at December 31, 2020. Restricted cash was $0.142 million, resulting in cash and restricted cash of $6.964 million.
- Working capital surplus was $6.745 million at June 30, 2021, compared with $1.197 million at December 31, 2020.
- Total assets were $10.813 million and total liabilities were $2.456 million at quarter-end. Stockholders’ equity was $8.357 million.
- Operating cash use for the first six months was $0.651 million; investing cash use was $0.041 million, principally for equipment. Financing activities provided $5.697 million.
- Debt consisted primarily of a $0.568 million second-draw PPP loan, bearing 1% interest. All convertible notes were settled by conversion, repayment, or other debt settlement during the period.
- The company recorded a $0.568 million gain from forgiveness of the first PPP loan and a $0.194 million loss on debt extinguishment during the six months.
Material Changes Versus the Prior Comparable Period
- Second-quarter revenue increased 157% to $1.301 million, attributed to growing Twist & Go sales and a gradual recovery in single-serve demand. Six-month revenue increased 87%.
- Second-quarter gross margin increased to 43% from 23%, reflecting higher volume and product mix. Six-month gross margin declined to 39% from 41%, primarily because Twist & Go initially carried lower margins.
- Second-quarter operating loss improved 46%; the six-month operating loss improved 45%, due mainly to higher sales and lower general and administrative costs.
- Six-month general and administrative expense declined 23% to $1.769 million. Personnel, legal, marketing, travel, research and development, and other expenses decreased, partly offset by higher shipping and storage and director fees.
- Shipping and storage expense increased 146% in the quarter and 66% for the six-month period, driven by higher sales volume, higher fuel costs, and relocation of materials.
- On June 1, 2021, Barfresh raised $6.000 million through a private placement of 16,666,666 shares at $0.36 per share. Debt holders also converted $399,000 of principal and $234,410 of interest into 1,741,873 shares.
- Convertible debt was eliminated during the period through $840,000 of cash repayment and debt conversions. The derivative liability was also extinguished.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management expects gross profit margin for the remainder of 2021 to be approximately 40%, supported by improving Twist & Go margins and a greater mix of higher-margin 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. Travel expenses are expected to increase toward 2019 levels during the second half of 2021.
- Management expected the second PPP loan to be forgiven in the second half of 2021. Until legally released, the $568,131 loan remains payable, with any unforgiven balance subject to repayment plus 1% interest.
- The company continues to generate operating losses and negative operating cash flow. Management stated that additional equity or debt financing may be required if profitable sales growth and expense reductions do not provide sufficient cash, with no assurance that financing will be available.
- A non-cancelable office lease expires March 31, 2023. The recorded lease liability was $127,771, with estimated remaining payments of $139,896 before imputed interest.
- The company is defendant in one legal proceeding involving less than $100,000; management and counsel believe a material unfavorable outcome is remote.
- Disclosure controls and procedures remained ineffective as of June 30, 2021 because of a material weakness involving inadequate segregation of duties. Management reported remediation efforts, including additional personnel, reassigned responsibilities, transaction sign-offs, and documented reviews.
- Outstanding equity-linked instruments included approximately 7.860 million stock options and 27.509 million warrants at June 30, 2021, creating potential future dilution.
Important Facts for Investors to Verify
- Verify whether the second PPP loan was subsequently forgiven and whether any repayment obligation remained.
- Assess whether revenue growth and the projected approximately 40% gross margin were sustained after June 30, 2021.
- Review the company’s ability to reduce operating cash burn and reach profitability without additional financing.
- Evaluate dilution from the June equity offering, debt conversions, options, and warrants.
- Confirm remediation and auditor or management conclusions regarding the material weakness in internal controls.
- Monitor customer and distribution concentration, including the continuing status of the PepsiCo arrangement and distribution relationships.