Barfresh Food Group Inc. Q2 FY2023 Earnings Call

Good afternoon, everyone, and thank you for participating on today's Second Quarter 2023 Corporate Update Call for Barfresh Food Group. Joining us today is Barfresh Food Group's Founder and CEO, Riccardo Delle Coste; and Barfresh Food Group's CFO, Lisa Roger. The discussion today will include forward-looking statements. Except for historical information herein, matters set forth on this call are forward-looking within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, including statements about the company's commercial progress, success of its strategic relationships and projections of future financial performance. These forward-looking statements are identified by the use of words such as grow, expand, anticipate, intend, estimate, believe, expect, plan, should, hypothetical, potential, forecast and project, continue, could, may, predict and will and variations of such words and similar expressions are intended to identify such forward-looking statements. All statements other than statements of historical fact that address activities, events or developments that the company believes or anticipates will or may occur in the future are forward-looking statements. These statements are based on certain assumptions made based on experience, expected future developments and other factors that the company believes are appropriate under the circumstances. Such statements are subject to a number of assumptions, risks and uncertainties, many of which are beyond the control of the company. Should one or more of these risks and/or uncertainties materialize or should underlying assumptions prove incorrect, actual results may vary materially from those indicated or anticipated by such forward-looking statements. Accordingly, investors are cautioned not to take undue reliance on these forward-looking statements, which speak only of the date they are made. The contents of this call should be considered in conjunction with the company's recent filings with the Securities and Exchange Commission, including such as annual report on Form 10-K and the quarterly reports on Form 10-Q and current reports on Form 8-K, including any warnings, risk factors and cautionary statements contained therein. Furthermore, the company especially disclaims any current intention to update publicly any forward-looking statements after this call, whether as a result of new information, future events, changes in assumptions or otherwise. In order to aid in the understanding of the company's business performance, the company is also presenting certain non-GAAP measures, including adjusted EBITDA, which are reconciled in a table in the business update release to the most comparable GAAP measures. The reconciling items are nonoperational or noncash costs, including stock compensation, stock issued for services and other nonrecurring costs such as those associated with the product withdrawal and the company's NASDAQ uplist. Management believes that adjusted EBITDA provides useful information to the investor because it is directly reflective of the period-to-period performance of the company's core business. Now I will turn the call over to the CEO of Barfresh Group, Mr. Riccardo Delle Coste. Please go ahead, sir.

Good afternoon, everyone, and thank you for joining us for our second quarter 2023 earnings call. As expected, the second quarter was challenging as we work to regain school customers lost as a result of the issues with our largest bottle manufacturer and to get added back on to school menus before the end of the school year. The good news is that in the current quarter, we converted some of these customers over to a carton format and have been added back to some of their menus for the '23-'24 school year commencing this quarter. We gained new customers for the upcoming school year, and we more than doubled our production capacity for our smoothie carton format, thus setting us on a path to achieve sequential and year-over-year revenue growth in the third quarter. We are halfway through the third quarter and have already secured over $1.6 million in revenue and expect to end the quarter in the range of $2.6 million to $3 million as compared to $1.5 million in the second quarter of 2023 and $2.4 million in the third quarter of 2022. We also expect to be approximately adjusted EBITDA breakeven for the third quarter and achieve positive adjusted EBITDA for the fourth quarter of 2023. This quarter, we were able to maintain margins close to the prior year period at 31% and expect modest margin improvement in the back half of the year as carton capacity continues to expand and expect to be in the high 30s to low 40s. Our smoothie carton co-packer has completed the engineering changes required to increase the capacity and is in the process of hiring additional personnel required to meet our current and growing demand. Once fully staffed, we will have production capacity of approximately 25 million to 30 million units annually for our smoothie cartons alone. And it is our expectation that revenue will grow significantly as the capacity comes online, and we expect to achieve record revenue for fiscal year 2023. In addition to increased production of our smoothie carton format, I'm excited to share that we are in the contracting stage with a new bottle co-manufacturer that we expect to be up and running by the beginning of next fiscal year. Finding a partner with the right experience, infrastructure and available capacity was not an easy task. And we are fortunate to have found a co-manufacturer that checks all three. We believe exiting fiscal year 2023, we will have an even more robust customer base, and we'll now have the manufacturing capabilities necessary to service that base today and as it grows in the future. Our focus for the back half of this year will be continuing to work with our carton co-manufacturer to ramp up carton production to an annual run rate of 25 million to 30 million units by the end of fiscal year 2023, working with our new bottle manufacturer to have them up and running by the beginning of fiscal year 2024 and continuing to advance our operational margin improvement efforts. Our goal is to exit fiscal year 2023 back to the growth trajectory we were on last year before we ran into the issues with our largest bottle manufacturer.

Thank you, Riccardo. Revenue for the second quarter of 2023 was $1.5 million compared to $2.8 million for the second quarter of 2022. The year-over-year decline is a result of limited supply caused by the loss of our largest bottle manufacturer of Twist & Go. As Riccardo stated, we have already secured over $1.6 million in revenue for the third quarter and are heading into our heavy selling season. We expect to end the quarter with revenue between $2.6 million and $3 million. For the full year, we expect to achieve record revenue as capacity and demand continue to ramp for our smoothie carton format. Gross margins for the second quarter of 2023 were similar to the prior year-end at 31% and 32% for the second quarter of fiscal years 2023 and 2022, respectively. We expect modest margin improvement throughout the back half of the year as a result of product mix as smoothie carton sales increase. Our net loss for the second quarter of 2023 was $742,000 as compared to a net loss of $716,000 in the second quarter of 2022. Selling, marketing and distribution expense for the second quarter of 2023 decreased 11% to $625,000 compared to $701,000 in the second quarter of 2022. The decline was primarily due to a 21% decrease in storage and outbound freight expense this year as a result of the decline in revenue, partially offset by the cost to retain outside service providers, including brokers specializing in the school market that were hired in the third quarter of 2022. G&A expenses for the second quarter of 2023 decreased 39% to $493,000 compared to $802,000 in the same period last year. The decrease in G&A was driven by a decrease in personnel costs and stock-based compensation resulting primarily from the confirmation and recognition of our 2021 COVID-related tax credit, a reduction in headcount resulting from technology-driven administrative efficiencies and reversal of previously recognized compensation under our 2023 performance stock unit program. For the second quarter of 2023, our adjusted EBITDA was a loss of approximately $617,000 as compared to a loss of approximately $431,000 for the second quarter of 2022. We expect to be approximately adjusted EBITDA breakeven for the third quarter of 2023 and achieve positive adjusted EBITDA for the fourth quarter of 2023 as a result of increased sales volume, gross margin improvements, headcount reductions taken late in the second quarter of 2023 and relatively fixed operating costs with the exception of outbound freight. Now moving on to our balance sheet. As of June 30, 2023, we had approximately $1 million in cash and approximately $1 million of inventory on our balance sheet compared to $3 million of cash and $1 million inventory as of December 31, 2022.

Thank you, Lisa. We believe we are turning the corner as we enter the back half of this year with our customers coming back, our new smoothie carton capacity increasing and a replacement bottle manufacturer being worked on and expected to be producing by January 2024. We are expecting sequential and year-over-year improvement in our top and bottom line as capacity for our smoothie carton format starts to significantly ramp up heading towards 25 million to 30 million units annually by the end of this fiscal year. We believe we are engaging with the right partners who will be able to grow with us and help us on our path towards sustainable long-term growth. And with that, I would like to open up the line for questions.

Our first question is from Nick Sherwood of Maxim Group. Please go ahead.

Hi, thank you for taking my question. Can you go into any detail about the visibility you have on the contracts for the upcoming school year, the type of school districts you're working with and things of that nature?

Yes, that’s a great question. Since last year, we faced challenges due to product issues that caused us to lose some schools and get removed from their menus, making it tough to return mid-season. However, during that time, we have been showcasing our new product, including the smoothie carton format, which has led to a substantial number of bids. These bids are set to be completed by the end of the school year. As we approach the 2023-2024 school year, we have secured a significant number of awarded bids and have regained previous customers who had initially removed our products due to quality issues. We now have a comprehensive mix of both returning and new customers ready for the start of the school year. We have received awards from a variety of bidders, including large urban districts, smaller districts, and purchasing cooperatives covering numerous school districts. It’s an exciting time for us as we prepare for the new school year with an expanded range of products at a very advantageous moment.

Awesome. And then my final question is, do you have any updates on the bulk and single-serve segments of the business?

Yes. The bulk and single-serve segments of our business are beginning to recover. We have actually observed a notable increase in our bulk operations. For the first time since COVID, we believe the labor market has improved for our customers. Before this new summer season, the situation remained somewhat challenging. Last year, customers who needed to use equipment faced a difficult labor market, which impacted our bulk sales. However, as we enter this season, we've seen a rise in requests, and the equipment is back in operation, leading to an increase in our bulk sales. We are very optimistic about this trend. Additionally, we have reintroduced our new 5:1 bulk program, which will also contribute to our sales moving forward. This program was put on hold due to COVID but has been relaunched now, and it is a high-margin product.

Thank you. Thank you for all that detail and I'll return to the queue.

Our next question is from an unidentified analyst, he's a private investor. Please go ahead.

Hi. Good afternoon Riccardo, how're you?

Good. How're you?

So it's a pretty significant jump from Q2 to Q3 that you're projecting. It seems like you have signed a lot of school districts, but we haven't heard any press release or announcements. Is it because of that ongoing legal pending case that you're not able to announce such deals?

No, that situation is separate, and we are not commenting on what we are or aren't doing as a result of it. Some of these accounts are existing customers, which is part of our usual business operations. Many of these developments are happening right now. Several school districts are resuming school with different schedules for their return and completion processes. Some prefer their information to remain confidential, and in fact, some districts don't want us to make it public at all. Our focus is on increasing sales, securing contracts, completing bids, and launching products as we enter the new school year. We are anticipating a very strong second half of the year, which we have indicated previously. The conclusion of the school year around June was challenging due to product issues we faced last year, and once customers removed us from their menus, it has been hard to regain that presence. However, as the new school year begins, we are in a favorable position to return to those menus with quality products, including our new carton format. This new format has also allowed us to attract new customers, including larger school districts that were previously inaccessible. We are excited about what lies ahead in the latter part of the year. As we have shared, our production capacity for cartons has increased, and a new bottle manufacturer will start operations in January. Sales are climbing, and we are winning bids consistently. Aside from resolving the historical challenges with the old bottle manufacturer, we believe those issues are mostly behind us as we aim for a strong finish to the year. We expect record quarters and a record year from this point forward.

Got it. I mean, that's kind of like what investors and yourself being the Founder, CEO and the company, you've been hoping for. Anything you could share in terms of the Q4? I mean, that's going to be a pretty significant jump in Q3 versus Q2, almost double.

Sorry, again, it's really not, right? We should have been here and more last year.

Yes.

We were already at this point, right? So had it not have been for the issues that we had with the previous manufacturer, we would have been probably a multiple of that already by the end of this year very easily.

Got it. Do you have any insights on how you anticipate Q4 will develop in relation to the school districts you've signed? Do you expect to see sequential growth compared to Q3?

Absolutely. I mean, just to be very clear, despite the numbers that we have, which are, as you can see, clearly getting very strong, we have still a significant number of accounts that we can't service yet because we don't have the bottle capacity. If we had that bottle capacity now, we would be significantly higher still. Not only are we going to expect to increase our sales between Q3 and Q4, but we already know that come Q1 when we have the new bottle manufacturer online, that's going to open us up to a whole additional range of customers that have been waiting for the additional bottle capacity. So we don't just expect that growth to come between Q3 and Q4. We expect it to come Q3, Q4 and then into Q1 and on into next year as well.

Got it. That's great. One last question. Regarding our current cash position, do you believe it's sufficient? I recognize there could be opportunities that might generate cash. However, will we be able to manage our operations and report that revenue with our current cash levels? Or are you considering raising funds?

We believe that our operating model will be cash flow positive in Q3 or very close to breakeven, with positive cash flow expected in Q4. Our operating cycle is relatively short regarding cash, which means we don’t need to invest heavily in working capital as we grow, so there are no significant concerns in that area. Additionally, we previously addressed the NASDAQ issue and have secured some funds through a convertible debt offering that we haven’t utilized yet. This funding is available to strengthen our equity balance if necessary to meet NASDAQ compliance, but we hope not to need it.

And it's really only as a backup.

Yes. Got it. So that takes care of that NASDAQ concern as well?

Correct.

Thanks.

Our next question is from no questions in the queue. And that then concludes today's conference. You may disconnect your lines at this time, and thank you for your participation.