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 Easy Pour formats. The company serves foodservice, school, military and national-account channels and uses contract manufacturers. This report covers the unaudited quarter and nine months ended September 30, 2019, compared with the corresponding 2018 periods. Barfresh is a smaller reporting company and reported 130,341,737 common shares outstanding as of November 8, 2019.
Financial performance and condition
| Metric | Three months ended September 30 | Nine months ended September 30 | ||
|---|---|---|---|---|
| 2019 | 2018 | 2019 | 2018 | |
| Revenue | $1.565 million | $1.620 million | $3.782 million | $3.329 million |
| Gross profit | $0.851 million | $0.878 million | $2.137 million | $1.759 million |
| Gross margin | 54.4% | 54.2% | 56.5% | 52.8% |
| Operating loss | $(0.950) million | $(1.407) million | $(3.810) million | $(5.082) million |
| Net loss | $(0.529) million | $(1.900) million | $(3.950) million | $(6.053) million |
| Net loss per share | $0.00 | $(0.02) | $(0.03) | $(0.05) |
- Cash was $1.318 million at September 30, 2019, versus $1.042 million at December 31, 2018.
- Operating cash flow was negative $3.192 million for the first nine months of 2019, compared with negative $3.536 million in 2018. Investing cash flow was negative $0.419 million, primarily for equipment purchases.
- Financing provided $3.888 million, consisting principally of $2.400 million from stock issuance and $1.500 million from warrant exercises.
- Total assets were $6.592 million and total liabilities were $4.566 million at September 30, 2019. Stockholders’ equity was $2.027 million, compared with a deficit of $0.035 million at December 31, 2018.
- Convertible notes, net of discounts, totaled approximately $2.539 million at September 30, 2019, including approximately $1.097 million held by related parties. The notes carry 10% interest, with principal maturities primarily in 2020.
- Current liabilities were $3.283 million, including $1.723 million of current convertible notes, $0.293 million of accrued interest and $0.229 million of lease liabilities and related current obligations.
Material changes versus the prior comparable period
- Third-quarter revenue declined 3% year over year, while nine-month revenue increased 14%, driven primarily by increased adoption of the bulk Easy Pour product and new customers outside the Sysco distribution network.
- Gross margin improved to 56.5% for the first nine months from 52.8%, primarily because of product mix. Third-quarter gross margin was broadly stable.
- General and administrative expense declined 22% in the quarter and 16% year to date. Savings reflected lower personnel, marketing and selling, stock-based compensation, professional-fee, travel and rent costs.
- The operating loss improved by 33% in the quarter and 25% year to date, although the company remained significantly unprofitable.
- Net loss benefited from a $0.705 million third-quarter and $1.098 million year-to-date gain from remeasurement of derivative liabilities. These non-cash gains were driven primarily by changes in the company’s stock price and materially affected reported net loss.
- Interest expense increased to $0.930 million for the first nine months from $0.426 million, including amortization of debt discounts associated with warrants.
- Shares outstanding increased from 122.8 million at December 31, 2018 to 130.3 million at September 30, 2019, reflecting warrant exercises, stock issued for services and a $2.4 million capital raise.
Guidance, outlook, risks and unusual items
- Management expected fourth-quarter 2019 gross margin to remain consistent with the most recent quarter.
- The company forecast continued improvement in operating cash flow through expense reductions, additional school and military-base contracts, and a planned rollout to a national account with more than 2,500 locations.
- Management estimated that headquarters relocation and a new personnel-services contract would produce approximately $0.2 million of annual cash savings. New logistics arrangements were also expected to reduce freight costs.
- The exclusive Sysco distribution arrangement expired on October 2, 2019, potentially allowing Barfresh to expand distribution through other distributors but also changing an important channel relationship.
- Management disclosed substantial doubt regarding the company’s ability to continue as a going concern. The company has a history of operating losses and negative operating cash flow and expects approximately $1.9 million of convertible short-term debt to mature in March 2020. Management expects it may extend the debt, particularly the portion held by insiders, but stated that the outcome is uncertain.
- Barfresh adopted lease accounting under ASC 842 and recorded a $0.216 million right-of-use asset and $0.229 million lease liability for its new office lease, which expires in March 2023.
- The company reported no material pending legal proceedings and no material off-balance-sheet arrangements. Its disclosure controls were determined to be effective as of September 30, 2019.
- Raffi Loussararian became Principal Accounting Officer on September 11, 2019. The former Chief Financial Officer’s employment ended September 20, 2019, and a subsequent release agreement extended the post-termination exercise period for vested options.
Important facts for investors to verify
- Whether the company can generate sufficient cash or secure extensions, refinancing or other financing before the March 2020 convertible-debt maturities.
- Whether cost reductions and logistics savings are recurring and sufficient to offset ongoing negative operating cash flow.
- The conversion, warrant and derivative terms of the convertible notes, including potential future dilution and volatility in non-cash derivative gains or losses.
- Whether the Easy Pour product, school and military channels, and the anticipated national-account rollout produce sustained revenue growth.
- The effect of expiration of Sysco exclusivity on distribution reach, pricing, customer concentration and sales growth.
- Future dilution from the 8.0 million outstanding stock options and approximately 43.3 million reported warrants, subject to verifying the filing’s warrant table because one warrant count appears typographically unclear.