Barfresh Food Group Inc. — Fiscal 2022 Form 10-K Summary
Business Context and Reporting Period
Barfresh manufactures and distributes ready-to-drink and ready-to-blend frozen beverages, including smoothies, shakes and frappes. Products are sold through national accounts, regional accounts and broadline distributors, with targeted growth in school meal programs, military bases and food-service channels. The filing covers the fiscal year ended December 31, 2022, with comparative information for 2021. The company is listed on Nasdaq Capital Market under BRFH and had 12,971,330 common shares outstanding as of February 24, 2023.
- Products include Twist & Go ready-to-drink smoothies, Easy Pour bulk beverages and single-serve beverage packs.
- The company uses contract manufacturers and had 13 employees and three consultants as of March 1, 2023.
- The PepsiCo food-service sales representative agreement was terminated in February 2023; management does not anticipate a significant sales impact.
Financial Metrics
| Metric | 2022 | 2021 | Change |
|---|---|---|---|
| Revenue | $9.162 million | $6.700 million | Up 37% |
| Cost of revenue | $7.722 million | $4.193 million | Up 84% |
| Gross profit | $1.440 million | $2.507 million | Down $1.067 million |
| Gross margin | 16% | 37% | Down 21 percentage points |
| Operating loss | $6.219 million | $2.095 million | Loss increased $4.124 million |
| Net loss | $6.219 million | $1.265 million | Loss increased $4.954 million |
| Basic and diluted loss per share | $0.48 loss | $0.10 loss | Loss per share increased |
| Cash used in operating activities | $2.648 million | $1.861 million | Use increased $787,000 |
Sales and marketing expense increased 84% to $1.394 million, while storage and outbound freight increased 39% to $1.467 million. General and administrative expense rose 64% to $3.549 million. Research and development expense increased 56% to $382,000.
- Cash was $2.808 million and restricted cash was $211,000 at December 31, 2022, compared with cash of $5.533 million and restricted cash of $142,000 at December 31, 2021.
- Working capital declined to $1.801 million from $6.172 million.
- Total assets declined to $5.093 million from $9.719 million, and stockholders’ equity declined to $2.521 million from $8.176 million.
- Total liabilities were $2.572 million, including $499,000 of disputed accounts payable to the contract manufacturer. The company reported no outstanding debt and no interest expense in 2022.
- Capital expenditures were $13,000 in 2022, compared with $151,000 in 2021.
- The company reported no material off-balance-sheet arrangements.
Material Changes Versus the Prior Comparable Period
- Revenue increased substantially, primarily from growth in Twist & Go sales before product withdrawals.
- Profitability deteriorated sharply because of product quality-related costs, higher operating expenses and a $746,000 impairment charge on idle equipment.
- The company recorded $493,000 of customer refunds and administrative fees, a $330,000 estimated product return allowance and $932,000 of cost of revenue for disposal of unsaleable inventory.
- One contract manufacturer supplied approximately 52% of products in 2022 versus 42% in 2021. Product quality and packaging problems led to customer complaints, withdrawals and destruction of inventory.
- Sales and marketing investment increased because of additional employees, outside service providers, school-market brokers and education nutrition trade shows.
- In 2021, the company benefited from $1.136 million of PPP loan forgiveness income and completed a $6.0 million equity financing. No comparable financing activity occurred in 2022.
- Property and equipment declined to $389,000 from $1.588 million, primarily reflecting depreciation and impairment.
Guidance, Outlook, Risks and Unusual Items
Management did not provide quantified financial guidance. The near-term outlook depends heavily on replacing the terminated contract manufacturer, securing reliable production capacity and restoring customer confidence. Management expects the manufacturing dispute and supply disruption to adversely affect results and cash flow until suitable supply sources are developed, but the timing and financial impact are uncertain.
- The company filed a lawsuit against the manufacturer in November 2022 seeking economic damages. The complaint was voluntarily dismissed in January 2023 to permit possible out-of-court resolution, with the right to refile in California state court. No recovery has been recorded because the outcome and potential recovery cannot be estimated.
- The company withheld $499,000 of payments owed to the manufacturer, which is recorded as disputed accounts payable.
- Management identified a material weakness in internal control over financial reporting and concluded that disclosure controls were ineffective as of December 31, 2022, primarily because of inadequate segregation of duties, including information technology controls. Remediation has begun through additional financial personnel and improved systems.
- Management stated that the identified conditions did not raise substantial doubt about the company’s ability to continue as a going concern, but acknowledged uncertainty regarding additional financing and liquidity plans.
- The company has a history of operating losses and negative operating cash flow and may require additional debt or equity financing. Future financing could be costly or dilutive.
- Key risks include dependence on contract manufacturers, supply-chain disruption, inventory spoilage, volatile ingredient and packaging costs, competition, customer concentration, economic conditions, product liability and litigation.
- Three customers represented at least 10% of 2022 revenue, collectively accounting for 56%. Customer concentration and dependence on distributors may affect revenue predictability.
- The company had approximately $49.843 million of tax net operating loss carryforwards, subject to possible ownership-change limitations, but recorded a full valuation allowance against related deferred tax assets.
Important Facts for Investors to Verify
- Whether the company can replace the manufacturer that supplied approximately 52% of 2022 product volume and at what cost and production scale.
- The ultimate resolution, potential recovery and possible liabilities associated with the manufacturer dispute.
- The pace and magnitude of product returns, customer claims and additional inventory write-offs after year-end.
- Whether cash resources and operating performance are sufficient without additional financing, and the potential dilution or cost of such financing.
- Progress in remediating the material weakness in internal controls.
- Whether Twist & Go carton sales and school and military channels can offset the loss of supply capacity and the termination of the PepsiCo agreement.
- Actual 2023 gross margin, operating cash flow and customer retention, given the 2022 decline in gross margin from 37% to 16%.