Barfresh Food Group Inc. 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 unaudited Form 10-Q covers the three months ended March 31, 2023, compared primarily with the three months ended March 31, 2022. The company is a smaller reporting company and emerging growth company.
Key Financial Metrics
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Revenue | $2.091 million | $2.526 million | Down 17% |
| Gross profit | $855,000 | $764,000 | Up $91,000 |
| Gross margin | 41% | 30% | Up 1,100 basis points |
| Operating expenses | $1.765 million | $1.659 million | Up $106,000 |
| Net loss | $910,000 | $895,000 | Loss increased $15,000 |
| Net loss per share | $0.07 | $0.07 | Unchanged |
| Net cash used in operations | $1.242 million | $1.132 million | Use increased $110,000 |
At March 31, 2023, cash was $1.566 million and restricted cash was $211,000, for total cash and restricted cash of $1.777 million. Working capital was $1.250 million, compared with $1.801 million at December 31, 2022. Total assets were $4.178 million and total liabilities were $2.333 million. The company reported no debt, although current liabilities included $499,000 of disputed accounts payable to a former co-manufacturer.
Accounts receivable increased to $571,000 from $126,000 at December 31, 2022, while inventory was approximately $1.055 million. Stockholders’ equity declined to $1.845 million from $2.521 million, primarily reflecting the quarterly net loss. Weighted-average shares outstanding increased to 12.977 million from 12.909 million.
Material Changes Versus the Prior Comparable Period
- Revenue declined $435,000, or 17%, primarily because product was withdrawn following quality complaints involving a contract manufacturer and supply became limited.
- Cost of revenue declined to $1.236 million from $1.762 million. Management attributed the improved gross margin partly to lower costs relative to revenue for the smoothie carton product.
- Selling, marketing and distribution expense was approximately flat at $667,000. Sales and marketing increased 23% to $356,000, while storage and outbound freight declined 19% to $311,000.
- General and administrative expense increased 21% to $994,000. Personnel costs rose 58% to $489,000, and stock-based compensation increased 146% to $209,000, largely due to modifications to the 2022 performance stock unit program.
- Operating cash use increased to $1.242 million, driven in part by a $445,000 increase in accounts receivable and a $228,000 reduction in accounts payable.
- The company issued 32,203 shares for services valued at $83,000 and recorded $175,000 of stock-based compensation. No cash was raised from financing activities during the quarter.
Guidance, Outlook, Risks and Unusual Items
The filing provides no specific quantitative revenue or earnings guidance. Management expects revenue, cash flow and operating results to remain adversely affected unless new reliable sources of product supply at sufficient volume are identified and developed. The timing of that replacement supply is uncertain.
The company’s former contract manufacturer supplied a significant portion of its products and was subject to a supply agreement originally running through September 2025. Following quality issues, the company withdrew and destroyed product and withheld $499,000 of payments. The manufacturer terminated the supply agreement. Barfresh voluntarily dismissed its federal complaint in January 2023 to allow potential resolution outside court, while retaining the right to refile in California state court. The company cannot estimate the outcome or any potential recovery and has recorded no gain contingency.
Management states that the dispute may continue to cause supply disruption, additional legal costs, and adverse effects on revenue, cash flow and financial condition. Although management concluded that the conditions did not raise substantial doubt about going-concern status as of March 31, 2023, it acknowledged uncertainty regarding additional financing and other liquidity actions. The company may need additional equity or debt financing if operating cash flow remains insufficient.
The company had no material off-balance-sheet arrangements. Its vendor concentration creates supply risk: two contract manufacturers accounted for 49% and 46% of finished-goods purchases in Q1 2023. The company also disclosed that its disclosure controls and internal control over financial reporting were not effective due to a material weakness involving inadequate segregation of duties, including information technology control activities.
Unusual items included approximately $25,000 of inventory disposal costs related to the manufacturer dispute and increased stock-based compensation resulting from award modifications. A non-cancellable office lease that expired March 31, 2023 was extended through June 30, 2023.
Important Facts for Investors to Verify
- Whether Barfresh secures reliable replacement manufacturing capacity and restores sufficient product supply.
- The status and potential financial impact of the manufacturer dispute, including the $499,000 disputed payable and any possible recovery or litigation costs.
- The company’s ability to reduce its approximately $1.242 million quarterly operating cash burn and obtain additional financing if needed.
- Whether the revenue decline continues and whether the 41% gross margin is sustainable at future sales volumes.
- Progress in remediating the material weakness in internal controls and improving segregation of duties.
- The effect of increased equity compensation, new equity awards and potential dilution on shareholders.