Barfresh Food Group Inc. 10-Q Summary
Business Context and Reporting Period
Barfresh manufactures and distributes ready-to-drink and ready-to-blend frozen beverages, including smoothies, shakes and frappes. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2023, with comparisons to the restated 2022 periods.
The company reported 13,002,603 common shares outstanding at June 30, 2023 and 13,037,948 shares as of August 9, 2023. It is a smaller reporting company and emerging growth company.
Key Financial Metrics
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Revenue | $1.511 million, down 46% | $3.602 million, down 32% |
| Gross profit | $474,000; 31% margin | $1.329 million; 37% margin |
| Operating expenses | $1.216 million | $2.976 million |
| Net loss | $742,000, versus $716,000 | $1.647 million, versus $1.589 million |
| Net loss per share | $0.06 | $0.13 |
| Operating cash flow | Not separately provided | $(2.067) million |
At June 30, 2023, cash was $952,000, compared with $2.808 million at December 31, 2022. Restricted cash of $211,000 at year-end 2022 was released in June 2023. Working capital was $554,000, down from $1.801 million at December 31, 2022. Total assets were $3.400 million and total liabilities were $1.937 million.
The company had no outstanding debt reported at June 30, 2023. In August 2023, it received approximately $1.130 million of subscriptions toward a $2.0 million privately placed convertible debt offering. The debt bears 10% annual interest and is subject to mandatory and holder conversion provisions.
Material Changes Versus Prior Comparable Period
- Revenue declined $1.288 million, or 46%, in the second quarter and $1.723 million, or 32%, for the six-month period, primarily because of product withdrawals and limited supply following quality complaints involving a contract manufacturer.
- Six-month gross margin improved to 37% from 31%, largely because of product mix, despite additional inventory reserves and production-transition inefficiencies. Second-quarter gross margin was 31%, compared with 32%.
- Second-quarter selling, marketing and distribution expense decreased 11% to $625,000; six-month expense decreased 6% to $1.293 million. Six-month sales and marketing expense increased 20% because of product sampling and efforts to relaunch bulk product sales.
- General and administrative expense decreased 39% in the second quarter and 8% for the six-month period. Research and development spending declined 64% in the quarter and 56% year to date as activities were reduced to conserve working capital.
- Net losses increased by $26,000 in the quarter and $58,000 for the six-month period despite lower operating expenses, reflecting the significant revenue decline.
- The company restated prior financial information to correct depreciation errors. The December 31, 2022 balance sheet was adjusted to increase property and equipment, total assets and stockholders’ equity by $412,000. Restated 2022 net loss was reduced by $21,000 for the quarter and $42,000 for the six-month period.
Outlook, Risks, Contingencies and Unusual Items
- Management expects revenue to remain adversely affected unless it identifies and develops reliable alternative supply sources at sufficient volume. The timing is uncertain.
- The company terminated its supply agreement with the contract manufacturer involved in the quality dispute after withdrawing and destroying affected products. It withheld $499,000 of payments, recorded as disputed accounts payable. The company dismissed its federal complaint without prejudice and indicated it intended to re-file in California state court by the end of August 2023 if resolution was not reached. No gain contingency was recorded.
- The supply disruption is expected to continue affecting operations and cash flow. The company has partially mitigated the impact through single-serve smoothie cartons.
- Management states that the company has a history of operating losses and negative operating cash flow. Although management concluded that substantial doubt about going concern did not exist as of June 30, 2023, it cannot assure that additional financing or other liquidity measures will be available.
- Contract-manufacturer concentration presents supply risk. In the six months ended June 30, 2023, three manufacturers accounted for approximately 49%, 41% and 10% of finished-goods purchases, respectively.
- The company’s disclosure controls and internal control over financial reporting were determined to be ineffective as of June 30, 2023. Management identified a material weakness involving the control environment and inadequate segregation of duties, including information technology controls. Additional personnel were hired as part of remediation efforts.
- Stock-based compensation included a reversal of $67,000 in the second quarter related to the 2023 performance stock unit program because management did not expect performance targets to be achieved. The company also recorded compensation related to modified awards.
- The office lease was extended through September 30, 2023. The company reported no material off-balance-sheet arrangements.
- The company is a defendant in one additional legal proceeding involving less than $100,000; management and counsel consider a material unfavorable outcome remote.
Most Important Facts for Investors to Verify
- Whether the company can secure dependable contract manufacturing capacity and resolve or pursue the manufacturer dispute.
- The sufficiency of the $952,000 cash balance and approximately $1.130 million convertible-debt subscription relative to the company’s $2.067 million first-half operating cash burn.
- The final amount funded under the $2.0 million convertible debt offering, its interest and conversion terms, and potential dilution.
- Whether revenue and gross margins recover after the product withdrawal and production transition.
- Progress in remediating the material weakness in internal controls and whether further restatements or reporting issues arise.
- The status and financial impact of the $499,000 disputed payable and any related litigation or settlement.