Barfresh Food Group Inc. Q4 FY2023 Earnings Call

Good afternoon, everyone, and thank you for participating on today's Fourth Quarter and Full Year 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. Following prepared remarks, we will open the call for your questions. 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 the 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 the table in the business update release to the most comparable GAAP measures. The reconciling items are non-operational or non-cash costs, including stock compensation, stock issues for services, and other nonrecurring costs such as those associated with the product withdrawal, asset impairment, and the company's NASDAQ uplift. 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 CEO of Barfresh Food Group, Mr. Riccardo Delle Coste. Please go ahead, sir.

Good afternoon, everyone, and thank you for joining us for our fourth quarter and full year 2023 earnings call. The company generated its second-highest fiscal year revenue in 2023 with $8.1 million despite a full year without our largest Twist & Go bottle manufacturer who had previously accounted for over 50% of all our purchases. These sales results are a testament to the success of our smoothie carton product, which we rolled out in the fourth quarter of 2022, and our growing sales team's ability to sell it into new and existing customers. We used the new carton product to sign on new school accounts over the course of the year, including one of the top five largest school districts in the United States. As we've stated previously, the carton format is aligned with the growing trend in schools to move toward more ecologically friendly products and has provided us an entry point into more of the higher volume school accounts. Over the past year, we have laser-focused on expanding both our carton and bottle capacity. Since the launch of our new smoothie carton product offering at the end of 2022, we have been working with our carton co-manufacturer to have engineering changes made to the manufacturing line to increase capacity to approximately 25 million to 30 million units per year. All engineering changes were completed and over the course of this year, we incrementally used additional carton capacity that was made available. We did experience a slight setback with production beginning in December as an unforeseen national shortage of cartons plagued the beverage industry and continued into the early part of February. This shortage sent schools scrambling and got the attention of Congress, especially since schools are a large customer of the 4-ounce and 8-ounce cartons for milk, both of which were in short supply. We were, however, able to weather the storm better than others in the industry due to our contract manufacturing relationship with a major player in the dairy industry. The issue has been resolved and we are back to full carton production. As for the bottle capacity, we worked with our existing bottle co-manufacturer to see if there was a way to increase capacity, and we were successful toward the end of fiscal year 2023. This increased capacity will now continue. We also look to bring on a new co-manufacturer to replace the loss of our largest one, and we're in the final stages of signing with a new co-manufacturer this past quarter. However, they were ultimately unable to execute the contract. They are working to resolve the internal issues that prevented them from signing with us, and we are hopeful they will be resolved soon, allowing us to move forward again with them. However, we are also exploring other options to expedite the process of securing additional bottle capacity and expect this to be resolved before the beginning of the new school year in August of 2024. In addition to working to expand capacity this past year, we also expanded our product offerings with the relaunch of our world's 100% juice concentrates. This product is USDA reimbursable, smart snack compliant for schools in the United States, a good source of vitamin C, contains no added sugars, and comes in five great tasting flavors. Most importantly, it is stored and delivered ambient, which opens up many more opportunities for us. We had originally launched this world's 100% juice concentrate as a complement to our existing one-to-one bulk easy-pour product into the education channel in August of 2020. However, it ended up being more of a soft launch and was subsequently put on hold due to the extended closure of schools from the pandemic. As a result of the pandemic, schools experienced prolonged labor challenges, which impacted our world's 100% juice concentrates due to the need for personnel to operate the frozen dispensing equipment. We had been waiting for the prolonged labor challenges to resolve at schools as well as waiting for the selling cycle to recommence the new school menus before we relaunched the product, which we did this past quarter. We believe it was the right time to reintroduce the product and allows our sales force to go out with a wider range of options at various price points. We are growing our sales team by expanding our sales brokerage coverage to an additional 13 states where we previously had no representation in the education market. Barfresh expects to have sales coverage across 49 out of the 50 states before the end of the first quarter of 2024. For the first time, we plan to market the newly relaunched WHIRLZ 100 percent Juice Concentrates as well as the one-to-one bulk easy-pour concentrates through our sales brokers to the general food service market and into the education channel. As part of our expanded sales efforts, we also expect to sign a military broker contract for national coverage of all U.S. Military bases with Barfresh products in the United States. This is a national agreement that provides both senior relationships as well as local people nationwide to visit and sell our products to all the local bases. This is a first for the company and is expected to provide a robust lift in sales and further solidify our relationships with the military. In summary, we believe there is a lot of white space left for us across our sales channels, especially in the education channel. We have increased capacity for both our carton and bottle smoothie products, increased our sales network, and increased offerings with the reintroduction of WHIRLZ 100% Juice Concentrates. All of which we believe is setting us up for record first quarter revenue against any other first quarter as we have already achieved over 2 million in sales and have another month remaining in the quarter. We believe we will be on a path to sustain top-line growth once we have the necessary manufacturing capabilities for our bottle smoothie product fully online.

Thank you, Riccardo. Revenue for the fourth quarter of 2023 was $1.9 million, compared to $1.4 million for the fourth quarter of 2022. The increase in fourth quarter revenue is a result of improved supply due to increased capacity in our carton production this year over last year and the return of customers last year due to the loss of the company's largest bottle manufacturer at Twist & Go, partially offset by the industry-wide carton shortage Riccardo mentioned that impacted sales in the quarter. Revenue for the full year of 2023 was $8.1 million compared to $9.2 million in the same period of 2022. Revenue in 2022 was negatively impacted by a $493,000 claim estimate resulting from the voluntary product withdrawal of Twist & Go. Excluding the refund claim estimate, revenue for the full year of 2022 was $9.7 million. The year-over-year decline is a result of limited supply and lost customers caused by the loss of our largest bottle manufacturer of Twist & Go as well as the shortage of cartons during the fourth quarter of 2023. As Riccardo said, the issue has since resolved itself. However, it will have a bearing on our first quarter of 2024 results as it impacted the first six weeks of sales. We do, however, expect revenue to grow sequentially in Q1 as we have been able to recently increase capacity with our existing bottle manufacturer for Twist & Go. Gross margin for the fourth quarter of 2023 was 33% compared to 36% for the fourth quarter of 2022. Gross margin for the full year of 2023 was 36% compared to 16% for the same period of 2022. Gross margin for the full year of 2022 adjusted for the product withdrawal was 30%. The year-over-year increase is due to a full year of sales of our higher-margin cartons in 2023, pricing actions, and a slight improvement in the cost of supply chain components. Our net loss for the fourth quarter of 2023 was $701,000 as compared to a net loss of $1.9 million in the fourth quarter of 2022. Net loss for the full year of 2023 was $2.8 million, as compared to $6.1 million in the same period of 2022. Net loss for the full year of 2022 was impacted by $1.8 million in charges related to the product withdrawal and a $746,000 non-cash asset impairment charge related to idle equipment resulting from overcapacity for our single-serve products and equipment held at the manufacturer. Selling, marketing and distribution expense for the fourth quarter of 2023 was $624,000, compared to $625,000 in the fourth quarter of 2022. Following marketing and distribution expense for the full year of 2023 decreased approximately 9% to $2.6 million, compared to $2.9 million in the same period of 2022. The decrease is a result of decreased sales and marketing personnel costs and outbound freight as a result of decreased shipments. G&A expenses for the fourth quarter of 2023 decreased 31% to $629,000, compared to $912,000 in the same period last year. G&A expenses for the full year of 2023 decreased 24% to $2.7 million, compared to $3.5 million in the same period of 2022. The decrease in G&A was driven by a decrease in personnel costs resulting primarily from a reduction in headcount and the conversion of potential cash bonuses to equity awards under the company's 2023 Performance Stock Unit Program, a reduction in legal, professional and consulting fees, and a reduction in research and development expense that was elevated in 2022 as we incurred pre-production expense related to the launch of our carton packaging format. For the fourth quarter of 2023, our adjusted EBITDA was a loss of approximately $427,000, almost half of what it was in the same period of 2022. For the full year of 2023, our adjusted EBITDA loss was $1.7 million, compared to a loss of $2.4 million in the prior year. Our plans to achieve adjusted EBITDA breakeven in the fourth quarter were temporarily delayed by the carton shortage. However, we are expecting sequential adjusted EBITDA improvement in the first quarter driven by increased sales of Twist & Go due to the additional bottle capacity that came online and recovery of carton supply. Now moving on to our balance sheet. As of December 31, 2023, we had approximately $1.96 million in cash and approximately $1.2 million of inventory on our balance sheet compared to $3 million in cash and $1 million of inventory as of December 31, 2022.

Thank you, Lisa. We are encouraged to have recorded our second-highest fiscal year revenue in 2023 and are on track to have a record first quarter in 2024 versus any other Q1. We expect the positive momentum we're seeing in the first quarter, the increased carton and bottle capacity, as well as our expanded sales network will continue throughout the year setting us up to achieve a record fiscal year of revenue. We expect to replace our lost bottle manufacturer shortly and believe once we have the right manufacturing partners on board that provide us ample bottle capacity, we will be back on track to driving significant long-term profitable growth. And with that, I'd like to open up the line for questions.

Our first question is from Anthony Vendetti with Maxim Group. Please go ahead with your question.

On the carton shortage, is that going to impact gross margins in any way? And then as we move to the '24 school year beginning in August, September, I know you said you expect to have a new packager on board. Can you maybe just talk through what conversations you're having? How many replacement companies are you looking at this point? And then in the meantime, is there anything that you think can fill the gap, whether it's the military channel or some other channel, while you're waiting for this replacement company?

So, with regards to the national carton shortage, I'm sure a lot of people would have seen that in the media. Schools were without milk cartons due to the national shortage. We did weather that storm a lot better due to our significant manufacturing partner relationships who are some of the largest in the dairy industry. So, we were impacted in December in the fourth quarter and then also in the first six weeks of January, and in the first quarter as well, a little bit into February. As a result of that, we were also fortunate that we were able to get some increased capacity from our bottle manufacturer, which helped close that gap; because it probably would have been worse off, but because of the increased bottle capacity from our existing manufacturer, we're able to close that gap a little bit. As a result of the higher SKU between the bottles and cartons, there was a little bit more of a compression on the margin. We'll see a little bit more of that in the first quarter. However, the carton supply issue has been fully rectified now and we're back to full production and serviceability on those lines. Regarding the bottle manufacturing capacity and getting the extra bottle manufacturer on board, we’ve done a lot of work on that last year, and as you probably remember I gave some updates on that. We were literally supposed to have it signed in Q4, and the contract was fully negotiated and out for signatures. Unfortunately, the partner was going through some management changes, and they were just unable to sign the contract due to some internal things that they were working on. We were to revisit in a few months, and that revisit is occurring right now. We've reconnected and it's back on the table. We are expecting to still have something closed here shortly. However, in the meantime, we haven't just been sitting on our hands. We have been out there looking at other opportunities and we do have several options on the table for us right now as well. As we think about what our bottle capacity looks like, we are extremely confident that we will still get it resolved and get it resolved very quickly. In fact, we now have more options on the table than what we did previously. This should also help our negotiating power. There are some other opportunities that may come out of it as we get deeper into confirming what our manufacturing relationships look like. I think there's going to be more to come on that that are going to be very beneficial to the company going forward.

Okay. So even if the one that you're revisiting doesn't come through, it sounds like you have other options. That's why you're confident that within the next couple of months, you'll have something so that you're all set up for the beginning of the '24 school year?

Correct, yes.

Okay. And then maybe just an update, a little more of if you can elaborate more on the military channel and then any other updates on other opportunities outside of the school channel?

Yes, sure. We did mention it briefly in the script that we spoke about before in the update. Post-COVID, it has been quite challenging getting back into the market with different products in certain channels, particularly with the bulk products and the one-to-one and the easy-pour, as well as the new five-to-one that we had launched in 2020. They both require the beverage dispensing equipment. Now that's what we have in the military and that's what we have in the schools as well as in recreation and amusement locations. Due to COVID, there were a lot of changes that happened and then post-COVID, there were prolonged labor challenges within these establishments, particularly in the education channel. Fast forward now, a good year out of that, there's been a lot of reshuffling and a lot of rehiring in many of these places, and we just haven't been able to get those products front and center and get the attention of the operators to include them back on the menu, as well as to have the people in place to service them. We've now started to see that, and we've relaunched the five-to-one 100% juice concentrates, which has done really well with the initial customers that we've seeded them in. As a result of that, we have taken a different approach with our sales growth strategy. Previously, it was only our limited sales team that was selling the bulk products, namely the five-to-one and the one-to-one product. Now, we are in the process of expanding that by including a broker network to sell both of those products not only to the education channel but also through a dedicated military channel team that's both senior relationships and boots on the ground nationally that can go out to each of the locations. This is going to be very significant for us as well, as we plan to have multiple salespeople within each state and sometimes up to 10 people going out there and selling the product both in the education channel as well as general food service. When you consider locations like the Statue of Liberty, which we've been in for many years, and Long Beach Aquarium, there are many high-volume accounts. We’re excited about the potential for gaining access to such accounts with the local team on the ground that we just haven't been able to achieve before because we didn't have the depth in our sales team to get the coverage. By signing these agreements and getting the teams set up, it should generate a serious lift in sales for the company across all channels.

And then just maybe comment looking at the mix that you have right now, what do you think is a reasonable normalized or go-forward gross margin for the business?

We're projecting high-30s, low-40s for 2024. It will build over time. Q1 is going to be a little bit lower just because of the carton issue. Beyond that, expect to see low-40s.

There are no further questions at this time. This concludes today's conference. You may disconnect your lines now. Thank you for your participation.