Barfresh Food Group - Q2 2023

Transcript

Operator (participant)

Good afternoon, everyone, 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, Ricardo Delle Coste, and Barfresh Food Group's CFO, Lisa Roger. Following prepared remarks, we'll 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 place 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 its 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 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 EBITDA, which are reconciled in a 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 issued for services, and other non-recurring 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. Ricardo Delle Coste. Please go ahead, sir.

Riccardo Delle Coste (CEO)

Good afternoon, everyone, thank you for joining us for our second quarter 2023 earnings call. As expected, the second quarter was challenging as we worked to regain school customers lost as a result of the issues with our largest bottle manufacturer, and to get added back onto 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 our 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-$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 break even 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 30%-low 40%.

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. 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 will 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-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. I'll now turn the call over to our CFO, Lisa Roger. Lisa?

Lisa Roger (CFO)

Thank you, Ricardo. 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 Ricardo 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. Moving on to our balance sheet. As of June 30th, 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 31st, 2022. I will turn the call back to Ricardo for closing remarks.

Riccardo Delle Coste (CEO)

Thank you, Lisa. We believe we are turning a 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 25-30 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. With that, I would like to open up the line for questions. Operator?

Operator (participant)

Thank you, sir. We will now be conducting a question and answer session. If you would like to ask a question, please press Star and then 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press Star and then 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Ladies and gentlemen, again, if you wish to ask a question, please press Star and then 1. One moment while we poll for questions. Our first question is from Nick Sherwood of Maxim Group. Please go ahead.

Nick Sherwood (Equity Research Analyst)

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?

Riccardo Delle Coste (CEO)

Yeah, sure. actually, that's a, that's a great question because, part of the challenges that we've had since last year has been because of the product issues that we had, the schools that we lost, that we were taken off the menus for, it was very difficult to get back onto the menus mid-season. However, what did happen, what has been happening during that time with the new product is that we have been showing the customers, obviously, the, the product that we have, including the smoothie carton format, and we have been added to a very significant number of bids, and those bids are completed up until the end of, you know, the school year.

As we now enter the 2023-2024 school year, there are quite a large number of bids that we have been awarded, as well as previous customers that had the product that took us off their menus because of the bad product, and they've now added us back on to their menus. Now we have a full complement of customers that both previous customers that we had lost, as well as new customers that we've gained, that will now be starting the beginning of the new school year. We do have a lot of bids that have been awarded, everything from your large urban school districts to smaller districts, to purchasing co-ops, which range from hundreds of school districts that we've been awarded.

It's been a very exciting time for us, actually, getting back into the new school year with a larger range of products, at a very opportune time for us.

Nick Sherwood (Equity Research Analyst)

Awesome. Thank you for that detail. My final question is, do you have any updates on the bulk and single-serve segments of the business?

Riccardo Delle Coste (CEO)

Yeah. The bulk and single-serve parts of the business are starting to come back. We have actually seen a push on our, particularly on our bulk part of the business. For the first time, actually, since COVID, we feel as though the labor market has been improving for our customers. Before this new summer season, we still found it a little bit challenging for the equipment side of the business with customers that still needed to operate equipment. Last year, we felt that the labor market was still pretty challenging for our customers, and as a result, that affected our bulk sales. However, going into this season, we have definitely seen an increase in requests. The equipment's been turned back on, our bulk sales are up, so, you know, we're very encouraged with that.

We also did relaunch our five-to-one bulk program as well. That's also going to be contributing to our sales going forward, which hasn't been the case, and that was as a result of COVID, put back on hold, and we've just relaunched that now. It's a, you know, it's a very high-margin product.

Nick Sherwood (Equity Research Analyst)

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

Operator (participant)

Thank you. Ladies and gentlemen, just again, if you would like to ask a question, please press Star and then one on your telephone keypad. We will pause a moment while we poll for more questions. Our next question is from Ankur Sagar, who is a private investor. Please go ahead.

Ankur Sagar (Shareholder)

Hey, good afternoon, Ricardo. How are you?

Riccardo Delle Coste (CEO)

Good. How are you, Ankur?

Ankur Sagar (Shareholder)

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

Riccardo Delle Coste (CEO)

No, yeah, that, that's really separate, and we really don't, we're not really commenting on, on anything that we are or aren't doing as a result of that situation.

You know, some of these accounts are existing customers. It's part of the ordinary course of business. You know, a lot of these things are starting to come into fruition as we speak now. You know, a lot of the school districts, some of them are restarting school. They have a, you know, varying degrees of... They have varying timetables for when they go back and when they complete their process. Some wish not to be disclosed publicly. In actual fact, some school districts don't actually want us to disclose it publicly at all. We're really just working on, you know, focusing on getting our sales up, getting our contracts in, getting our bids completed, getting products rolled out to the market as we go into the new school year.

As, as you can see, you know, we are expecting a very strong back half of the year. We had been indicating that all along. You know, finishing the school year, which, you know, finishes obviously around the June, June mark, was always going to be challenging because of the product issues that we had experienced beginning last year, and that those customers that we lost that replaced us on their menu, it's very difficult to get back on the menu once they take you off. Our ability to now get back onto their menus with the beginning of the new school year and by having good product and having the carton product available, has been very advantageous.

In addition to having the new carton format and the beginning of the new school year, we have also been getting new customers because the smoothie carton format has afforded us the opportunity to get even some of those larger school districts that we couldn't get previously, now with the new carton format. We're very excited about the back half of the year. As you can see, as we've announced, you know, both, from our production perspective on the carton capacity is being increased. We've got a new bottle manufacturer that is expected to be online in January. The sales are increasing. We're winning bids across the board.

Other than, you know, the cleanup of the historical issues that we've had with the previous bottle manufacturer, we feel that that's pretty much in the rearview mirror now, as we look to finish the year very, very strong. Again, we're expecting record quarters and a record year from here on out.

Ankur Sagar (Shareholder)

Got it. Got it. I mean, that's, kinda like what, you know, investors and yourself, you know, being the founder, CEO, and the company have been hoping for. Anything you could share in terms of the, the, the Q4? I mean, that, that's gonna be a significant, you know, pretty significant jump, Q3 versus Q2, almost double, you know, based on the.

Riccardo Delle Coste (CEO)

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

Yes.

You know, we were already, we were already at this point, right?

Mm-hmm.

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.

Ankur Sagar (Shareholder)

Got it. Got it. Anything you could share on the, the, you know, how do you see the Q4 shaping in terms of, not going into the guidance, but based on the school districts you have signed, do you expect, you know, sequentially, you know, that to grow over Q3?

Riccardo Delle Coste (CEO)

Oh, absolutely.

Being that.

Absolutely.

Okay.

Absolutely.

Okay.

I mean, just to be very clear, despite the numbers that we have, which are, as you can see, clearly getting very strong.

still a significant number of accounts that we can't service yet because we don't have the bottle capacity. If we had that-

Ankur Sagar (Shareholder)

Mm

Riccardo Delle Coste (CEO)

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 gonna open us up to a whole additional range of customers that have been waiting for the additional bottle capacity.

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 one. In terms of the cash, where we are, do you think that's enough? I, I understand there could be, you know, things that can happen that can provide the cash, but, you know, are, are we gonna be able to, you know, go through and, and service and, you know, show the revenue with this cash, or, or are you looking to... Will the company raise?

Lisa Roger (CFO)

Well, it, you know, we believe that our operating model currently, would be cash flow positive in Q3, or close to breakeven in Q3 and positive in Q4.

We have a fairly short operating cycle as far as cash. So, you know, It's not like we have to invest a lot into working capital as we grow.

There's not much concern there. In addition to that, you know, we previously had announced the NASDAQ issue and have secured some funds through a convertible debt offering that's fully, we haven't drawn, we don't have to draw it, but it's available for us. And it's primarily intended to shore up the equity balance that we have, if we need to get there, to, to meet the NASDAQ compliance. We don't, we don't, you know, we hope not to have to draw it.

Riccardo Delle Coste (CEO)

Yeah. It's really only as a backup.

Lisa Roger (CFO)

Yeah.

Ankur Sagar (Shareholder)

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

Riccardo Delle Coste (CEO)

Correct.

Ankur Sagar (Shareholder)

Okay, great. All right. Thank you for taking my questions, Ricardo. Thank you.

Riccardo Delle Coste (CEO)

Yeah, thank you.

Nick Sherwood (Equity Research Analyst)

Thank you.