Barfresh Food Group Inc. Q3 FY2024 Earnings Call

Good afternoon, everyone, and thank you for participating on today's Third Quarter 2024 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 the projections of future financial performance. These forward-looking statements are identified by the use of the words such as grow, expand, anticipate, intend, estimate, believe, expect, plan, should, hypothetical, potential, forecast, 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 the 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 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 place undue reliance on these forward-looking statements, which speak only as 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 its Annual Report on Form 10-K, and the quarterly reports on Form 10-K, and current reports on Form 8-K, including any warnings, risk factors, and cautionary statements contained therein. Furthermore, the company expressly 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 gross profit, EBITDA, adjusted EBITDA, which are reconciled in tables in the business update released to the most comparable GAAP measures and certain calculations based on the results, including gross margin and adjusted gross margin. The reconciling items are non-operational or non-cash costs, including stock compensation and other non-recurring costs, such as those associated with product withdrawal, the related dispute, and certain manufacturing relocation costs. Management believes that adjusted gross profit and adjusted EBITDA provide useful information to the investor, because they are directly reflective of the performance of the company. Now, I will turn the call over to the CEO of Barfresh Food Group, Mr. Riccardo Delle Coste. Please go ahead, sir.

Good afternoon, everyone, and thank you for joining us for our third quarter 2024 earnings call. I'm thrilled to announce that we achieved record quarterly revenue of over $3.6 million for the third quarter, representing a 40% increase over the same period last year. What makes this achievement even more exciting is that it serves as a robust baseline for our future growth, especially considering our new Pop & Go offering wasn't a part of our third quarter offering or revenue. Our recent investments and strategic initiatives have positioned us exceptionally well for continued growth and profitability. Let me highlight some key developments. Our recent three new manufacturing partnerships, some of which have commenced and others still in the process of being commissioned, dramatically increase our production capacity, allowing us to meet growing demand and onboard new customers efficiently. We will now have the ability to produce over 120 million units annually across our product offerings, a 400% increase compared to last year. We have already begun ramping up operations with our new manufacturing partners and expect additional bottle capacity to come online in the fourth quarter. Our sales reach has experienced a transformative expansion with our broker network now covering an impressive 95% of the country. This extensive coverage is achieved through strategic partnerships with local brokerage firms across the United States, effectively putting hundreds of sales professionals on the ground actively promoting our products. The power of this approach lies in leveraging regional expertise and established local relationships, which has proven to be exceptionally impactful in the education channel. Complementing this external network is our dedicated internal sales force led by our experienced Vice President of Sales. This in-house team works in coordination with our national sales broker network, ensuring a cohesive and comprehensive sales strategy. It's important to point out that we are just beginning our expansion opportunity in the education channel with approximately only 4.5% penetration currently in the schools in the U.S. During the fourth quarter, we commenced selling our 100% Juice Freeze Pops Pop & Go to the education channel. This new product, as with our other products in the education channel, is compliant with USDA reimbursable meal programs and smart snack guidelines. The initial response from students and administrators has been extremely positive. Pop & Go complements our existing school offerings and strategically targets lunch menus in schools, which can be up to 5x the volume of our current breakfast menu offerings. Looking ahead, we see a clear path for Pop & Go to expand into other food service and retail channels, further broadening our market reach. The infrastructure we put in place is not just about this year's results, it's about building a company primed for sustained long-term growth. We're excited to capitalize on our momentum with the launch of Pop & Go and further accelerate our growth trajectory. The company is in the strongest position it's ever been having strategically aligned our on-trend product offerings, amplified production capacity, and comprehensive sales network under the stewardship of our experienced management team.

Thank you, Riccardo. Revenue for the third quarter of 2024 increased 40% to $3.6 million, compared to $2.6 million in the third quarter of 2023. Revenue in 2024 benefited from improvements in Twist & Go bottled smoothie sales from inventory built ahead of our seasonally high third quarter and improvements in smoothie carton and bulk sales. Gross margin for the third quarter of 2024 was comparable to the prior year period at 35%. Excluding production relocation costs, adjusted gross margin for the third quarter of 2024 was 38%. The year-over-year increase in adjusted gross margin is due to favorable product mix, pricing actions, and a slight improvement in the cost of supply chain components. Selling, marketing, and distribution expenses for the third quarter of 2024 increased to $990,000, compared to $697,000 in the third quarter of 2023. The increase is a result of investments in higher personnel costs, travel, and broker commissions due to the expansion of the company's broker network, as well as freight costs due to the increase in revenue. G&A expenses for the third quarter of 2024 were $705,000, compared to $577,000 in the same period last year. The increase in G&A was primarily driven by the non-recurrence of recognizing employee retention tax credit benefits in 2023. Our net loss for the third quarter of 2024 was $513,000, compared to a net loss of $476,000 in the third quarter of 2023. The year-over-year increase is a result of increased headcount and the non-recurrence of tax benefits recognized in 2023, partially offset by the contribution margin from increased sales. For the third quarter of 2024, our adjusted EBITDA was approximately a loss of $124,000, compared to a loss of $89,000 in the prior year period. Now moving on to our balance sheet. As of September 30, 2024, we had approximately $2.1 million in cash and accounts receivable and approximately $770,000 of inventory on our balance sheet. In the first half of the year, we deployed a significant amount of cash to build up inventory in preparation for our seasonally high Q3. The inventory build allowed us to generate a 40% year-over-year increase in revenue for the third quarter of 2024. We expect expanded bottle smoothie capacity to come online in the fourth quarter. Additionally, we have taken other measures to reduce our liquidity requirements, including compensating our directors and employees with equity to reduce cash compensation requirements and obtaining non-recourse litigation finance and secured receivables financing.

Thank you, Lisa. In closing, I want to share both our near-term and long-term outlook. For fiscal year 2024, we continue to expect record annual revenue and year-over-year adjusted gross margin improvement. This growth is driven by three key factors. First, the expansion of our product portfolio, highlighted by our innovative Pop & Go offering, which will begin generating revenue in the fourth quarter. Second, our significantly enhanced production capacity. And third, our broadened sales network, which is accelerating new customer acquisitions. These strategic initiatives not only set the stage for a strong finish to 2024 but also provide robust momentum as we enter 2025. Beyond our 2024 outlook, we have laid the groundwork for sustained future growth. A key part of this effort has been the establishment of our new co-manufacturing locations. While this represents a significant investment of internal resources and has resulted in incremental contract acquisition and trial costs that have impacted our third quarter results, it is crucial for our long-term growth. Beyond manufacturing, we've been diligently working on enhancing all aspects of our business. Our operations have also been bolstered by the newly integrated ERP and transport management system. This integrated infrastructure positions us to scale our business efficiently and effectively. With these building blocks now in place, we're set to aggressively shift our focus and resources from increasing manufacturing capacity and operational improvements to sales growth. Our track record shows we can significantly increase sales, and our expanded capacity gives us even more room to grow. We've been diligently rebuilding all aspects of our business and are in a great position to capitalize on these investments. The future is bright, and we're more prepared than ever to drive our sales to new heights and seize the opportunities ahead. These initiatives, coupled with our strengthened position in the market, and the positive momentum we're seeing in 2024, give us confidence in our ability to deliver substantial growth and value for our shareholders in both the near-term and the long-term. And with that, I would like to open the line for questions. Operator?

Thank you. We will now begin the question-and-answer session. Our first question comes from Anthony Vendetti with Maxim Group. Please go ahead with your question.

Thanks, Riccardo, and Lisa. How are you?

Good. How are you?

Good. How are you?

Good. Thanks. I was just wondering if you could talk a little bit about the new Pop & Go Freeze Pops. Just the initial traction, what the pipeline looks like? And then any other commentary you want to provide around that, that would be helpful. Thanks.

Yes, sure. So we actually, we've just shipped our first orders for Pop & Go, so they'll be registering some revenue commencing in Q4 like we mentioned. The interest has been exceptionally high. We've had a lot of people express interest in the new Pop & Go just from the samples that have been sent out. We've already got opening orders. We've got new distributors that are getting codes set up all over the country. Probably the most exciting part of the new Pop & Go offering, and we do talk about it a little bit, but understanding the detail of the difference between the breakfast menu, volume of servings and the lunch opportunity in the same education channel is very significant. So you just have a much bigger audience. And the volume of lunch served, if we get on the menu at lunch versus for breakfast is potentially up to 5x the amount of volume of what we're doing for the, say the Twist & Go on the breakfast menu. So that is a very, very significant opportunity for us as we look to go into the same customers that we're already serving with the Twist & Go. And in addition to having products on their breakfast menu, we now also have products on their lunch menu, as well as brand new customers and having an alternative option for them for the lunch menu. So we're very excited about it, very, very excited about it.

Okay. So that's great. So the co-manufacturer that you signed up recently, are they doing both the Twist & Go and the Pop & Go? Or is it mostly the Pop & Go for the new co-manufacturer? And then on the Pop & Go, are they similar margins to the Twist & Go better? Maybe just give us an idea about that.

Sure. So that manufacturer does not make our Twist & Go product, but they do some other products for us. So it's different. However, from a margin profile perspective, it's probably at the same, probably a little bit better margin profile than the Twist & Go.

Like our single serve product and some of our bulk products as well. So the expansion is every product line.

Yes. We have made significant progress in manufacturing over the past year to enhance our national manufacturing footprint and introduce additional redundancy in our system to support multiple products. As a result, we expect to achieve further cost savings on products as we launch and complete new manufacturing locations, which will lead to increased volume, improved pricing, and greater efficiencies across the network.

Okay. And then separately at this time, how many school accounts are you active in right now?

That's a great question. We've got new ones being added almost daily. We did announce about three months ago the addition of about 3,000 new locations. Some or a lot have been onboarded and others are still to be onboarded as we get through the back half of the year. We feel as though we're at about a 4.5% penetration, which is about 6,000 schools-ish, right, give or take. Once we get into the beginning of the New Year, we'll have a better handle on that number and we'll be able to share it in more detail.

So 6,000, about 4.5% penetration, are there schools that are just not good candidates for this or when you look at the spectrum of schools across the United States are half the schools good candidates, or 75% of them good candidates? How do you look at the entire school account for Barfresh?

That's a great question and deserves some clarification. The 4.5% penetration we've mentioned is specifically for the Twist & Go product. Until this week, we hadn't shipped any Pop & Go products, so that market is completely untapped for us. All schools are potential candidates for us with the Twist & Go product, but it's important to note that we've faced capacity constraints until now. As we unlock more capacity and ramp up manufacturing, we anticipate a significant increase in volume and penetration. Additionally, we plan to penetrate the same market and target customers with Pop & Go, where we currently have no penetration.

Okay. Okay, great. That's helpful. Thanks very much. I appreciate it. I'll hop back in the queue.

Okay. Thanks, Anthony.

Our next question comes from Ankur Sagar. Please proceed with your question.

Hey, good afternoon, Riccardo, and Lisa. Thank you for taking my questions.

Hi, Ankur.

Congratulations on the higher top line number. I think I want to commend you for the job you have done. I mean, I think it's fair to say you have persevered against all odds.

Yes, we definitely have been. And Ankur, we're really just scratching the surface still. Yes, it's probably been our first significant jump in a while. But that's really only because we've had both arms tied behind our back, right? And we're really being short on supply. So with the inventory build that we did at the beginning of this year and now with the extra capacity that's coming online, we really expect a lot more of these types of jumps to occur.

Absolutely. Great job by you and your team. As a shareholder, it has been amazing to see what you have accomplished in the last couple of years with minimal dilution, which is fantastic. I have a couple of questions. The first is a multi-part question about the new product. It appears that you are now an innovation company, introducing new products into the lunch area for schools. How did you come up with this product? Was it based on customer feedback from the Freeze Pops, or did you decide to expand into the lunch segment for schools? Regarding signing up schools and getting this product on the lunch menu, what is the process? Do you have to wait for school bids, or can you leverage your existing 6,000 customers for Twist & Go to connect with the right personnel and potentially add this product to the lunch menu without going through the bidding process?

I'll start by addressing the questions. We developed our products by identifying where significant opportunities lie. You're correct that the lunch menu presents a much higher volume potential, and we are aware of that. We also took into account customer feedback while considering what we can provide through our existing supply chain. This means utilizing the same ingredients and resources we already have. We've engaged with customers and acknowledged the important opportunity in the lunch segment. Our approach to launching a new product is comprehensive and market-driven. Personally, I believe our new Pop & Go product will outperform our Twist & Go product due to the substantial market opportunity it represents and the positive response we've received from initial customers. For instance, one customer predicted a demand for 40,000 units per month for the Twist & Go, but they plan to incorporate Pop & Go starting in spring, forecasting around 200,000 units a month. This clearly illustrates the disparity in potential volume between the two products, which reinforces our optimistic outlook. Regarding our strategy to reach customers, we will definitely approach our existing clients we already serve. Some may have the flexibility to add the product to their menus immediately, while others might only be able to introduce it during their bidding periods, which can happen twice a year or through special bids. The situation varies significantly across different schools.

Got it. That's great. Is it correct to say that on the Twist & Go side, you're still somewhat supply constrained? I recall you mentioned in your prepared remarks about another contract manufacturer starting in Q4, and that should enable you to supply the Twist & Go product to larger school districts.

Yes, that doesn't mince words. We're not somewhat constrained. We have been completely restrained. And that's really been a very significant factor that had a cap on our ability to generate the revenue. So we have the facilities being commissioned now as we speak, literally. And we expect that volume to start to turn on in Q4, and further improve at the beginning of next year as well. So as we see that volume capacity opening up, we will definitely be approaching those larger accounts and be more broadly and aggressively going out there and selling the Twist & Go product nationwide.

That's great. I mean, I see it actually even on social media, customers, school administrators, students love your product and some are just waiting for like, when it's going to show up again on the menu. So I can attest to that.

We probably get an e-mail every other day from a parent, a teacher, a grandparent, letting us know that their child or their grandchild has had the product and they loved it and they want to know where else they can get it from, so they can get it at home. So we definitely get great feedback on the product, and we look forward to getting it out to more students.

Got it. I think you had a question about the manufacturing relocation. Is this related to the current contract manufacturing activities, or is it still connected to the legal dispute from a couple of years ago?

No. That was more of a repositioning. We actually, one of our co-packers was sold off, and the new owners didn't do any contract manufacturing, so we had to relocate the equipment as a result of that. So that's really our single-serve product. So we will be, again, focusing more on once that new line is up and running, which is actually being done as we speak as well. We'll be targeting that single-serve business going into next year again.

Yes. So that was the business where we had significant opportunities with QSRs before COVID. So that's really a very significant new opportunity to relaunch that.

Yes. Yes. And for those that have been following for a while, we had multiple national QSRs where we've got multiple products approved by them, and we're ready to roll out actually. So we'll be picking up those conversations going into next year, and we've already started planning those seeds.

That's excellent. Additionally, I believe some aspects of the business are facing cash constraints. Your objective seems to be achieving sales growth and reaching cash flow breakeven to generate cash. Can you provide a revenue figure that indicates when the company can reach cash flow breakeven? Also, any insights on the timeline for achieving that would be appreciated.

Yes. We came very close to achieving adjusted EBITDA breakeven this quarter after experiencing a series of losses. Our contribution margin on sales suggests that we need approximately $0.5 million more to reach adjusted EBITDA breakeven, and we expect to achieve this by Q4. Regarding cash constraints, while that is somewhat accurate, we do have a receivables facility available. In Q3, we reported around $1.7 million in accounts receivable but only borrowed $100,000 from it. This means we could have borrowed an additional $1.2 million if necessary, but we prefer to avoid unnecessary borrowing.

Yes. So we have access to and we have cash available to meet our plan. So we feel like we're in a really good spot right now.

Great. That's for sure. I think you have done an amazing job managing that. Just one last question regarding the litigation. I don't know if you can comment on this. It has taken some time, but I believe you have made the right decisions to secure the recourse financing, and you are ensuring you get the appropriate amount here. Can you at least share the initial amount you are pursuing in this litigation dispute?

Yes, we are not discussing it at this time, Ankur. We have filed a claim for at least $20 million for the bridge contract, which is public information, and that is where we are at this moment.

Got it. Got it. Okay. That's great. Thank you for taking my questions. I appreciate it. Great work.

Right. Thank you.

Thank you.

We have reached the end of our question-and-answer session. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.