Barfresh Food Group Inc. — Q2 2020 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 formats. The filing covers the three and six months ended June 30, 2020, with comparative periods ended June 30, 2019. Barfresh is a smaller reporting company and reported 143,643,146 common shares outstanding as of July 30, 2020.
Financial Performance and Position
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $506,276 | $1,382,665 | $1,240,156 | $2,217,199 |
| Gross profit | $115,306 | $851,046 | $512,105 | $1,285,750 |
| Gross margin | 22.8% | 61.6% | 41.3% | 58.0% |
| Operating loss | $(1,122,234) | $(1,089,848) | $(2,100,008) | $(2,860,565) |
| Net loss | $(1,179,520) | $(573,916) | $(1,922,586) | $(3,421,178) |
| Net loss per share | $(0.01) | $0.00 | $(0.01) | $(0.03) |
| Cash used in operations | Not separately reported for the quarter | $(1,930,045) | $(2,354,225) |
- Cash and restricted cash totaled $3,398,276 at June 30, 2020, including unrestricted cash of $3,029,694 and restricted cash of $368,582.
- Total assets were $7,435,635 versus $5,125,805 at December 31, 2019. Stockholders’ equity increased to $4,353,549 from $283,724, principally from equity financing and debt conversions.
- Total liabilities were $3,082,086 versus $4,842,081 at year-end 2019. Debt-related balances included $1,203,567 of convertible notes, a $568,131 PPP note payable, and $40,917 of derivative liabilities.
- Investing cash use was $38,658 for the first six months, primarily equipment purchases. Financing activities provided $4,275,605, including $3,825,000 from common stock issuance and $568,131 of PPP proceeds.
Material Changes Versus the Prior Comparable Period
- Second-quarter revenue declined 63%, and first-half revenue declined 44%, primarily because COVID-19 reduced restaurant activity and disrupted school-related sales. The new 8-ounce Twist & Go product partly offset the decline.
- Gross margin fell materially because of product mix and lower margins on the new 8-ounce bottle.
- General and administrative expense declined 39% in both the quarter and first half, to $1,084,040 and $2,308,465, respectively. The reductions primarily reflected lower headcount, lower travel and marketing costs, and renegotiated sales commission arrangements.
- Despite lower operating expenses, the quarterly operating loss increased 3% because the revenue decline and margin compression more than offset cost savings. The first-half operating loss improved 27%.
- In March 2020, the Company raised $3.825 million through a private placement, issued 7,650,000 shares, converted substantial portions of convertible debt into equity, and extended other note maturities. Common shares outstanding increased from 130,341,737 at December 31, 2019 to 143,543,146 at June 30, 2020.
- The Company recorded a $379,200 non-cash gain on debt extinguishment in the first half of 2020 and a $157,099 gain from changes in derivative liabilities. These items reduced reported losses but are not recurring operating cash benefits.
Guidance, Outlook, Risks and Unusual Items
- Management expects gross margin of approximately 40% for the remainder of 2020, compared with 22.8% in Q2 and 41.3% for the first half.
- Management expects continued operating-cost reductions, including reduced headcount, to generate approximately $400,000 of annual cash savings.
- The outlook assumes improved operating cash flow, additional contracts with schools and military bases, and rollout of the Twist & Go 8-ounce product. Barfresh reported products at more than 400 school locations and more than 150 military base locations.
- The Company received a $568,131 PPP loan, potentially forgivable up to 100% if requirements are met. No forgiveness income had been recorded by June 30, 2020; any unforgiven amount bears 1% interest and must be repaid.
- COVID-19 materially affected restaurant and school channels. The supply chain had not experienced disruption as of the filing, but reopening activity and future school operations remained uncertain.
- Management stated that the Company has a history of operating losses and negative operating cash flow. It concluded that substantial doubt about liquidity was mitigated by the equity financing and debt restructuring, but acknowledged uncertainty regarding forecasts, continued cost reductions, additional capital, and refinancing or extending debt maturing in November 2021 and March 2022.
- Convertible notes and warrants contain variable conversion or exercise provisions that may create additional dilution and derivative-liability volatility.
- Disclosure controls and procedures were reported as ineffective because of a material weakness related to inadequate segregation of duties due to limited personnel. Management stated that the weakness did not affect reported financial results.
Important Facts for Investors to Verify
- Whether COVID-19 recovery, school contracts, military-base sales and the Twist & Go launch support the stated revenue and margin outlook.
- Whether the PPP loan qualifies for forgiveness and the amount, if any, that must be repaid.
- The Company’s ability to fund ongoing operating cash burn without additional equity or debt financing.
- Required payments and refinancing prospects for convertible notes maturing in 2021 and 2022.
- The potential dilution from outstanding convertible notes, warrants, options and price-adjustment provisions.
- Progress in remediating the material weakness in internal control over financial reporting.