My point on COGS is that a ~33% margin is not going to work when your opex is so high. They could offset it by continuing to increase topline growth as you've suggested, but that will only work if opex holds steady or increases at a rate that is substantially less than topline revenue growth.
Look at Chipotle's opex. Very low overhead below the gross profit line. That is how they make it work. This company conversely has very high overhead costs below the gross profit line. That is the central problem of this company.
I will admit that the company has made some strides in this regard -- the numbers don't lie. It is increasingly moving towards profitability. What took the wind out of the sales is that we thought it had finally crossed that inflection point earlier this year, only to learn that they had to restate financials and were actually at an operating loss.
Then we see in Q3 that they needed to use an accounting fiction to generate a profit. As I stated, they won't have the benefit of that BZNE "bargain purchase gain" going forward.
I continue to think that the company has promise. The nutritionals sector continues to experience very strong growth. However, there are very real challenges that will need to be addressed for the company to realize this promise, namely:
Short-term:
- decreasing opex. That ~$5M shortfall may have been addressed in the reported financials through the accounting fiction described above, but that liability still needed to be paid out. Stated differently, that bargain purchase gain didn't somehow offset its obligations to pay sponsors, pay salary, etc. in the practical sense. That needed to get settled somehow - either through cash on hand or by drawing on the revolving credit facility. The company cannot continue to generate this type of shortfall without having to conduct another financing or take on additional debt. Put a lid on salaries and endorsement deals.
- cease dilution. It's the ball and chain that is preventing the stock from appreciating. There is no reason why a departing executive should receive full acceleration of their unvested incentive shares. That is not market. It's an irresponsible move. The unvested shares should have been re-allocated to new employees.
Long-term:
- transition out existing management. Brad and co. need to turn the keys over to an experienced management team. I don't care if he sits on the board. He has no business running the day-to-day operations of this company. He sounds like a clown on the quarterly calls. Any educated person could see through his rehearsed routine.
- cut COGS by responsibly bringing manufacturing in-house. This is where I agree with you re: re-investment. You are talking about material margin increases if manufacturing is brought in-house. My gut tells me that this is a pipe dream considering the amount of capex required to make it happen. But a man can dream.
