Barfresh Food Group Inc. — Q1 2021 Form 10-Q Summary
Business Context and Reporting Period
Barfresh manufactures and distributes ready-to-blend smoothies, shakes, frappes, juice concentrates and ready-to-drink “Twist & Go” smoothies. This unaudited quarterly report covers the three months ended March 31, 2021, compared with the three months ended March 31, 2020. The Company is a smaller reporting company and emerging growth company.
Key Financial Metrics
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Revenue | $1.015 million | $0.734 million | Up 38% |
| Gross profit | $0.349 million | $0.397 million | Down 12% |
| Gross margin | 34% | 54% | Down 20 percentage points |
| Operating loss | $0.549 million | $0.978 million | Improved 44% |
| Net loss | $0.592 million | $0.743 million | Improved 20% |
| Net loss per share | $0.00 | $0.01 | Loss per share decreased |
| Cash used in operating activities | $0.394 million | $0.974 million | Improved $0.579 million |
| Cash and restricted cash at period-end | $2.112 million | $2.411 million | Down $0.299 million |
Cost of revenue increased to $659,423 from $328,634, exceeding the rate of revenue growth and reducing gross margin. General and administrative expense declined 39% to $751,601, primarily from lower personnel, marketing and selling costs, renegotiated commissions and lower other expenses. Interest expense declined to $59,091 from $295,394. A $16,787 derivative-liability gain was recognized in Q1 2021; Q1 2020 also included a $379,200 gain on extinguishment of debt.
At March 31, 2021, total assets were $5.897 million, total liabilities were $4.199 million and stockholders’ equity was $1.698 million. Working capital surplus was $22,435, compared with $1.197 million at December 31, 2020. Accounts receivable were $578,687 and inventory was $764,023.
Debt, Liquidity and Capital Resources
- Convertible notes totaled $1.182 million net of discounts and are classified as current liabilities. Face-value maturities include $168,000 due in 2021 and $1.071 million due in 2022. Certain notes bear interest at 10% or 15% and include variable conversion provisions.
- PPP loans totaled approximately $1.136 million at March 31, 2021, including a second $568,131 loan received in January 2021. The Company expects to seek forgiveness, but no forgiveness income had been recorded.
- Cash increased $152,910 during the quarter, primarily from $568,131 of note proceeds, partly offset by operating and investing cash use.
- Management states that current plans, expected operating cash-flow improvement, revenue recovery and potential refinancing, equity issuance or new debt are expected to provide liquidity for operations and approximately $1.139 million of debt due over the next 12 months.
- The Company has a history of operating losses and negative operating cash flow. Management concluded that its plans alleviated substantial doubt regarding going-concern status, but warned that financing and cash-flow outcomes are uncertain.
Material Changes, Outlook and Risks
- Revenue growth reflected increasing “Twist & Go” sales and a gradual return of single-serve demand following COVID-19 disruption.
- Management expects gross margin to improve as “Twist & Go” margins improve and the mix shifts toward higher-margin bulk and single-serve products. The filing estimates approximately 40% gross margin for the remainder of 2021.
- Management expects continued improvement in operating cash flow, revenue recovery from COVID-19 effects and additional contribution from “Twist & Go” products.
- Liquidity remains highly dependent on profitable sales growth, expense control, debt refinancing or conversion, and access to additional equity or debt financing.
- The Company’s disclosure controls and procedures were determined to be ineffective as of March 31, 2021 due to a material weakness in the control environment and inadequate segregation of duties. Management reported remediation efforts, including hiring personnel and reallocating control responsibilities.
- The Company was defendant in one legal proceeding involving less than $100,000; management and counsel considered a material unfavorable outcome remote.
- The Company had 149,133,372 common shares outstanding at May 15, 2021, plus 7,440,959 outstanding employee and director options and approximately 28.7 million outstanding warrants. Potential dilution should be considered.
Important Facts for Investors to Verify
- Whether PPP loans are forgiven and the resulting effect on debt, cash flow and earnings.
- Whether revenue growth and “Twist & Go” sales translate into the projected approximately 40% gross margin.
- Whether operating cash flow improves sufficiently to fund operations and the $1.139 million of convertible-note maturities.
- Availability and terms of any refinancing, debt conversion, equity issuance or other required financing.
- Progress in remediating the material weakness in internal controls and whether future filings report effective controls.
- Potential dilution from convertible notes, options and warrants, including variable conversion provisions.