BARFRESH FOOD GROUP INC. quarterly report, Q1 FY2020

Full document

Business Context and Reporting Period

Barfresh Food Group Inc. manufactures and distributes ready-to-blend frozen beverages, including smoothies, shakes and frappes, in single-serve and bulk formats. This Form 10-Q covers the quarter ended March 31, 2020. The company is a smaller reporting company and reported 143,247,603 common shares outstanding as of June 15, 2020.

Financial Highlights

  • Revenue: $733,880, down 12% from $834,534 in the first quarter of 2019, primarily because of lower single-serve product sales.
  • Gross profit: $396,799 versus $434,704. Gross margin improved to 54.1% from 52.1%.
  • Operating loss: $977,774, improved from $1,770,717, principally due to lower general and administrative expenses.
  • Net loss: $743,066, or $0.01 per share, compared with a net loss of $2,847,262, or $0.02 per share.
  • Operating expenses: $1,374,573, down from $2,205,421. General and administrative expenses decreased 39% to $1,224,425, including lower personnel, marketing, travel and research costs.
  • Operating cash flow: Cash used in operating activities was $973,554, compared with $1,873,982 used in the prior-year quarter.
  • Investing cash flow: Cash used was $18,389, including $16,575 for equipment purchases.
  • Financing cash flow: Cash provided was $2,311,767, primarily reflecting proceeds from the March 2020 stock offering held in escrow.
  • Cash and restricted cash: $2,411,198 at March 31, 2020, consisting of unrestricted cash, $2,325,000 in escrow and $70,064 of restricted cash. An additional $1,500,000 of offering proceeds was recorded as a receivable and was collected in April 2020.
  • Assets and equity: Total assets were $8,109,758 and stockholders’ equity was $5,444,757, compared with $5,125,805 and $283,724, respectively, at December 31, 2019.
  • Debt: Convertible notes, net of discounts, totaled $1,298,396 at March 31, 2020, compared with $2,740,561 at December 31, 2019. Accrued interest was $72,154, and derivative liabilities were $47,114.

Material Changes Versus the Prior Comparable Period

  • Revenue declined $100,654, or 12%, while gross margin increased by approximately 2 percentage points.
  • General and administrative expense declined $779,019, or 39%, driven largely by reduced headcount, lower personnel costs and renegotiated sales commission arrangements. Headcount declined from 28 full-time employees at the end of the first quarter of 2019 to 16 at March 31, 2020.
  • The company recorded a $150,902 gain from the change in fair value of derivative liabilities, compared with a $406,012 loss in the prior-year quarter.
  • The company recorded a $379,200 non-cash gain on extinguishment of debt, primarily related to convertible note conversions.
  • On March 20, 2020, the company completed a $3,825,000 private placement at $0.50 per share and issued 7,650,000 shares. Certain convertible notes were converted into equity, while other note maturities were extended.
  • Common shares outstanding increased from 130,341,737 at December 31, 2019 to 143,247,603 at March 31, 2020, creating dilution risk for existing holders. The offering also included warrants and potential price-adjustment provisions.

Guidance, Outlook, Risks and Unusual Items

  • Management expects gross margin for the remainder of 2020 to be consistent with the first quarter and expects further cash savings from cost reductions, including reduced headcount. Annual general and administrative cash savings are estimated at approximately $400,000.
  • The company expects improved operating cash flow from expense reductions, increased contracts with schools and military bases, and a planned Twist & Go 8-ounce bottle launch. The filing does not provide formal revenue or earnings guidance.
  • Management states that the company has a history of operating losses and negative operating cash flow and expects significant working-capital needs as operations grow. Management concluded that substantial doubt about going concern was not raised because of the equity financing and debt restructuring, but acknowledged uncertainty regarding forecasts, additional financing and future debt extensions.
  • COVID-19 began affecting operations near quarter-end. Restaurant closures and furloughs reduced opportunities for single-serve products, while school closures affected bulk-product sales. The company reported no manufacturing supply-chain disruption as of the filing.
  • The company obtained an approximately $568,000 Paycheck Protection Program loan and believed it could be completely forgiven under the extended forgiveness period. The filing does not establish the ultimate forgiveness outcome.
  • The company’s disclosure controls and procedures were ineffective as of March 31, 2020 because of a material weakness involving inadequate segregation of duties due to limited personnel.
  • Convertible notes include variable conversion, warrant and price-adjustment provisions that can result in additional equity issuance and derivative-liability volatility. Face-value maturities include approximately $177,366 in 2020, $168,000 in 2021 and $1,071,000 in 2022.
  • The exclusive Sysco distribution provisions expired on October 2, 2019, potentially allowing expansion through other distributors but also changing the company’s distribution arrangements.

Important Facts for Investors to Verify

  1. Whether COVID-19-related restaurant and school disruptions materially reduced second-quarter and full-year sales.
  2. Whether the company converted the $1,500,000 offering receivable and released the $2,325,000 escrow proceeds as expected.
  3. Whether operating cash-flow improvements and the estimated $400,000 annual cost savings are sustained.
  4. The final forgiveness status and accounting treatment of the approximately $568,000 PPP loan.
  5. The company’s ability to fund continuing operating losses and meet or refinance convertible-note maturities, particularly the obligations due in 2022.
  6. The potential dilution from outstanding warrants, options, convertible notes and the private-placement price-adjustment provisions.
  7. Management’s remediation of the material weakness in segregation of duties and whether disclosure controls become effective.
  8. The impact of the expired Sysco exclusivity provisions and the company’s ability to expand through new distribution channels.