Barfresh Food Group Inc. — Form 10-Q Summary
Business context and reporting period
Barfresh manufactures and distributes ready-to-drink and ready-to-blend beverages, including smoothies, shakes and frappes. This quarterly report covers the three and six months ended June 30, 2022; interim financial statements are unaudited. The company is a smaller reporting company and emerging growth company, with common stock trading on Nasdaq under BRFH.
Financial performance and position
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $2.799 million | $1.301 million | $5.325 million | $2.316 million |
| Gross profit | $883,000 | $562,000 | $1.647 million | $911,000 |
| Gross margin | 32% | 43% | 31% | 39% |
| Operating loss | $(737,000) | $(602,000) | $(1.631) million | $(1.151) million |
| Net loss | $(737,000) | $(297,000) | $(1.631) million | $(889,000) |
| Net loss per share | $(0.06) | $(0.02) | $(0.13) | $(0.08) |
| Net cash used in operating activities | Not separately presented | $(1.923) million | $(684,000) |
- Revenue increased 115% in the quarter and 130% year to date, driven by growth in Twist & Go and a gradual recovery in single-serve demand.
- Gross profit increased, but gross margin declined because the product mix included Twist & Go products with slightly lower margins.
- Operating expenses were $1.620 million in Q2 and $3.278 million year to date. Selling and marketing expenses increased 56% in Q2 and 75% year to date; general and administrative expenses increased 41% and 66%, respectively.
- Cash and restricted cash totaled $3.744 million at June 30, 2022, consisting of $3.533 million of cash and $211,000 of restricted cash. Cash and restricted cash declined from $5.675 million at December 31, 2021.
- Working capital was approximately $4.996 million at June 30, 2022, compared with $6.172 million at December 31, 2021.
- Inventory increased to $1.570 million from $705,000 at year-end, while accounts payable increased to $1.277 million from $974,000.
- Total liabilities were $1.761 million, primarily current liabilities. The filing reports no outstanding convertible notes or other conventional debt at June 30, 2022. Lease liabilities totaled $58,000, with the office lease expiring March 31, 2023.
- Net cash used in investing activities was $13,000, primarily for equipment purchases. Financing activities provided $5,000 from a warrant exercise.
Material changes versus the prior comparable period
- Despite substantial revenue growth, the six-month operating loss widened by $480,000, or 42%, as operating expenses grew faster than gross profit.
- The six-month net loss increased by $742,000, primarily because the prior-year period included a $568,000 gain from forgiveness of a Paycheck Protection Program loan and other prior-year debt-related gains.
- Interest expense was zero in 2022 compared with $128,000 for the first six months of 2021, following the repayment and conversion of convertible notes in 2021.
- Six-month operating cash use increased to $1.923 million from $684,000, reflecting the larger net loss and an $865,000 increase in inventory.
- Six-month stock-based compensation increased to $93,000 from $10,000. The company also incurred approximately $168,000 of one-time costs related to uplisting its common stock to Nasdaq.
- Shares outstanding increased modestly to 12,919,899 at June 30, 2022 from 12,905,112 at December 31, 2021. The company issued 13,801 shares for services and 986 shares upon warrant exercise during the six months.
Guidance, outlook, risks and unusual items
- The filing does not provide formal revenue, earnings or cash-flow guidance. Management states that liquidity depends on the pace of profitable sales growth and its ability to control variable operating expenses and fixed overhead.
- Management states that additional equity or debt financing may be required if operating cash flow and existing capital are insufficient. The filing cautions that there is no assurance the company will obtain necessary financing.
- The company incurred operating losses and negative operating cash flow and remains dependent on successfully scaling sales to achieve profitability.
- Management identified a material weakness in internal control over financial reporting related to inadequate segregation of duties. Disclosure controls and procedures were deemed ineffective as of June 30, 2022. Remediation efforts include hiring personnel, reallocating control responsibilities and implementing a new enterprise resource planning system.
- The company is defendant in one legal proceeding involving less than $100,000; management and counsel believe a material unfavorable outcome is remote.
- The company has approximately $60,000 of remaining non-cancellable lease payments as of June 30, 2022. No material off-balance-sheet arrangements were reported.
- All deferred tax assets are subject to a valuation allowance, and the estimated 2022 effective tax rate was zero.
Important facts for investors to verify
- Whether the sharp revenue growth in Twist & Go and single-serve products is sustainable and can improve or preserve gross margins.
- Whether inventory growth converts into sales and cash without increasing write-down or obsolescence risk.
- The company’s rate of operating cash burn and the timing and terms of any required equity or debt financing.
- Progress in remediating the material weakness and whether future filings conclude that internal controls are effective.
- The effect of increased personnel, marketing, freight, stock compensation and uplisting costs on the path to profitability.
- Potential dilution from 662,658 outstanding stock options, 39,800 unvested restricted shares or units, and other equity instruments.