Business Context and Reporting Period
Barfresh Food Group Inc. manufactures and distributes ready-to-drink and ready-to-blend beverages, including smoothies, shakes and frappes. This unaudited Form 10-Q covers the three months ended March 31, 2022, compared with the three months ended March 31, 2021.
Financial Performance and Position
- Revenue: $2.526 million, up 149% from $1.015 million.
- Gross profit: $816,000, compared with $349,000. Gross margin was approximately 32%, down from 34%, primarily due to product mix, including lower-margin Twist & Go products.
- Operating loss: $895,000, compared with $549,000, as higher gross profit was more than offset by increased operating expenses.
- Net loss: $895,000, or $0.07 per basic and diluted share, compared with a $592,000 loss, or $0.05 per share.
- Operating expenses: $1.710 million, up from $899,000. General and administrative expense increased 106% to $1.549 million.
- Cash flow: Operating activities used $1.132 million, compared with $411,000 used in the prior-year period. Capital expenditures were $14,000.
- Liquidity: Cash was $4.284 million and restricted cash was $250,000 at March 31, 2022. Working capital was approximately $5.559 million, down from $6.171 million at December 31, 2021.
- Balance sheet: Total assets were $9.326 million and total liabilities were $1.914 million. Stockholders’ equity was $7.413 million.
- Debt and obligations: The 2018 convertible notes were repaid and converted during the second quarter of 2021. The balance sheet included $33,600 of accrued interest and $76,731 of current operating lease liabilities; no interest expense was recorded in the quarter.
Material Changes Versus the Prior Comparable Period
- Revenue growth reflected increased Twist & Go sales and a gradual recovery in single-serve demand.
- General and administrative expense increased by $797,000, driven by personnel, stock-based compensation, shipping and storage, professional fees, marketing and other costs.
- Shipping and storage costs rose 204% to $437,000, reflecting higher sales and increased supply-chain costs attributed to the COVID-19 pandemic and geopolitical events.
- Personnel costs increased 60% to $500,000 as full-time equivalent employees increased from 11 to 15.
- Other general and administrative expense included approximately $102,000 of one-time costs related to the company’s Nasdaq uplisting.
- The prior-year period included a $16,787 derivative-liability gain and $59,091 of interest expense; neither item occurred in the current quarter.
- Cash and restricted cash declined by $1.141 million during the quarter, compared with an increase of $153,000 in the prior-year period.
Guidance, Outlook, Risks and Unusual Items
- The filing does not provide numerical revenue, earnings or cash-flow guidance.
- Management stated that liquidity depends on the pace of profitable sales growth and its ability to control variable operating expenses and fixed overhead.
- Management warned that additional equity or debt financing may be required if operating cash flow and existing capital are insufficient; no assurance was given that additional capital will be available.
- The company reported a material weakness in internal control over financial reporting related to inadequate segregation of duties. Disclosure controls and procedures were concluded to be ineffective as of March 31, 2022. Management stated that the weakness did not affect reported financial results and that additional personnel and reassigned responsibilities are being used for remediation.
- The company had a non-cancelable office lease with approximately $81,000 of remaining minimum payments as of March 31, 2022, expiring March 31, 2023.
- The company is a defendant in one legal proceeding involving less than $100,000; management and counsel believe a materially unfavorable outcome is remote.
- The company issued 13,801 shares for services valued at approximately $98,333 and issued 986 shares upon warrant exercise for $5,000 during the quarter.
- Approximately $391,000 of unrecognized equity-based compensation remained at March 31, 2022, comprising approximately $189,000 related to options and $202,000 related to restricted awards and units.
Important Facts for Investors to Verify
- Whether revenue growth, particularly Twist & Go demand, continues at a level sufficient to offset operating losses and cash usage.
- Whether gross margins recover from approximately 32% and whether product mix or supply-chain costs place further pressure on profitability.
- The rate of quarterly operating cash burn and the timing or terms of any required equity or debt financing.
- Progress in remediating the material weakness and whether future filings report effective internal controls.
- The company’s ability to manage shipping, storage, personnel and other overhead costs as sales expand.
- The status and potential exposure of the disclosed legal proceeding and the remaining office lease obligations.