Barfresh Food Group - Q3 2023

Transcript

Operator (participant)

Good afternoon, everyone, and thank you for participating on today's third 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. 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 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-Q and current reports on Form 8-K, including any warning, risk factors, or 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 released 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's directly reflective of the period-to-period performance of the company's core business. Now, I'll turn the call over to the CEO of Barfresh Food Group, Mr. Riccardo Delle Coste. Please, sir, go ahead.

Riccardo Delle Coste (Founder and CEO)

Good afternoon, everyone, and thank you for joining us for our third quarter, 2023 earnings call. It's been a year now since our sales were materially impacted by the loss of our largest Twist & Go bottle manufacturer, the withdrawal of defective products, and as a result, the loss of some of our customers. Over the past year, we have worked tirelessly to roll out our smoothie cartons and use it to win back some of those lost customers, continued to expand our reach within the education channel with the signing of new school accounts, and continued to advance our operational margin improvement efforts. We have also worked to expand our carton production capacity and locate a new bottle manufacturer, both of which are crucial to supporting our long-term growth.

I'm very proud to say that based on these actions, our third quarter revenue was within our guidance, up both sequentially and year-over-year to $2.6 million, and we achieved the best Adjusted EBITDA in company history, close to breakeven at a loss of $87,000. We are set to realize positive Adjusted EBITDA for the fourth quarter and year-over-year margin improvement for fiscal year 2023. As it pertains to expanding our reach within the education channel, we recently issued a press release highlighting some of our new wins in this channel. We announced that just seven of the new school districts we are working with represent over 1,000 new school locations and a collective population of over 750,000 students. Also of note, one of the seven districts is in the top five largest school districts in the United States.

We have found over the past year that our smoothie carton fits nicely with the growing trend in schools to move toward more ecologically friendly products and has provided us an entry point into more of the high-volume school accounts. We believe there is still a lot of white space for us in this channel and believe our increased carton capacity and soon to come increased bottle capacity will position us to capitalize on that opportunity. We worked throughout the year to increase our capacity and are on track with our carton co-manufacturer to end the year with them having the capacity to produce between 25 million-30 million units annually. As for our bottle capacity, we are working to finalize an agreement with a new bottle co-manufacturer that could have us supplying more bottle product in the early part of next fiscal year.

We believe that both capacity initiatives will result in a dramatic increase in our top line growth across many different accounts and channels. In summary, while it has been a challenging year due to the events that occurred last year that were outside of our control, we believe we have taken actions so that exiting this year, we have an expanded customer base and manufacturing capabilities needed to put us back on a path towards sustainable long-term growth. I'll now turn the call over to our CFO, Lisa Roger. Lisa?

Lisa Roger (CFO)

Thank you, Riccardo. Revenue for the third quarter of 2023 was $2.6 million, compared to $2.4 million for the third quarter of 2022. Revenue in 2022 was negatively impacted by a $630,000 claim estimate, resulting from the voluntary product withdrawal of Twist & Go. Excluding the refund claims estimate, revenue for the third quarter of 2022 was $3 million. The year-over-year decline in adjusted revenue is a result of limited supply and lost customers caused by the loss of our largest bottle manufacturer of Twist & Go. As Riccardo said, we are on track with our carton capacity expansion plans and added a number of new school accounts in our heavy selling third quarter season.

Gross margin for the third quarter of 2023 was 35%, compared to a -30% for the third quarter of 2022. Gross margin for the third quarter of 2022, adjusted for the product withdrawal, was 28%. We expect modest margin improvement in the fourth quarter as a result of product mix as smoothie carton sales increase. Our net loss for the third quarter of 2023 was $476,000, as compared to a net loss of $2.7 million in the third quarter of 2022. Selling, marketing, and distribution expense for the third quarter of 2023 decreased 19% to $697,000, compared to $860,000 in the third quarter of 2022.

The decline was due to a decrease in storage and outbound freight expense and a decrease in broker commissions as a result of lower adjusted revenue. G&A expenses for the third quarter of 2023 decreased 43% to $578,000, compared to $1,000,000 in the same period last year. The decrease in GNA was driven by a decrease in personnel costs, resulting primarily from a reduction in headcount, as well as 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 third quarter of 2023, our Adjusted EBITDA was a loss of approximately $87,000, the best in company history, and down sequentially from a loss of $617,000 in the second quarter of 2023, and down year over year from a loss of $638,000 in the third quarter of 2022. We continue to expect to achieve positive Adjusted EBITDA in 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 September 30, 2023, we had approximately $1 million in cash and approximately $748,000 of inventory on our balance sheet, compared to $3 million in cash and $1 million of inventory as of December 31, 2022. Now, I will turn the call back to Riccardo for closing remarks.

Riccardo Delle Coste (Founder and CEO)

Thank you, Lisa. I'll wrap up by saying that we are encouraged by the conversations we had this past quarter with new school accounts and the reception our smoothie cartons product has had in this channel over the past year. We expect this positive selling momentum to continue through 2024, especially given we will be able to offer schools both our bottle and carton products with the increased bottle capacity that we expect to come online in early 2024. We are also hopeful that more of those lost customers will re-engage with us, as we'll be able to return to our historically strong service levels. I believe we are back on track to driving long-term profitable growth. With that, I would like to open up the line for questions. Operator?

Operator (participant)

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press Star two 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. Our first question comes from Anthony Vendetti with Maxim Group. Please go ahead.

Anthony Vendetti (Executive Managing Director of Research)

Oh, hey, Riccardo. Hey, Lisa. How are you doing?

Riccardo Delle Coste (Founder and CEO)

Good. How are you, Anthony?

Lisa Roger (CFO)

Great.

Anthony Vendetti (Executive Managing Director of Research)

Good, thanks. Just in terms of the customers that you lost when you had that issue with the bottle manufacturer, do you have a percentage of the ones you've resigned? Is it about half of them, 75%? Just trying to understand where that's at and then what the opportunity is going forward with those customers as well as the new customers with the cartons.

Riccardo Delle Coste (Founder and CEO)

Yeah, look, I mean, we've lost, we did lose, you know, a fair amount of customers that we haven't been able to get back yet, mainly because, they still want the bottles. And then some that even though they've taken the cartons, they're not doing the same amount of volume because they're not offering it to all the same students. So we believe, you know, from a percentage perspective, you know, I would say it's probably at least probably 30%, 30%-40%. You know, we do have a lot of new customers that have been added. Some, some previously existing customers have been added that were previously lost.

We believe there's a very, very significant opportunity going into next year once the new bottle capacity comes back up, particularly with some of the larger accounts that were previously using the bottles, and are waiting for them still to come back.

Anthony Vendetti (Executive Managing Director of Research)

In terms of that new bottle manufacturer, when will that be up 100% running, so that it can completely replace what you lost?

Riccardo Delle Coste (Founder and CEO)

So, we're expecting to have the agreement finalized here soon, and as mentioned, you know, be up and running early in the new fiscal year.

Anthony Vendetti (Executive Managing Director of Research)

Early-

Riccardo Delle Coste (Founder and CEO)

Early in 2024.

Anthony Vendetti (Executive Managing Director of Research)

Yeah.

Riccardo Delle Coste (Founder and CEO)

I would say Q1 2020 by Q1 2024, maybe sooner, but we'll see.

Anthony Vendetti (Executive Managing Director of Research)

Oh, okay. Okay. Just to be clear on the 30%-40%, is that the amount of customers you've lost and haven't been able to get back? Or is that the amount— or is 30%-40% the percentage of customers you've been able to get back?

Riccardo Delle Coste (Founder and CEO)

No, that's probably the percentage that we still have available to go, to go and get back.

Anthony Vendetti (Executive Managing Director of Research)

Okay, so that means you believe, Riccardo, 60%-70% of the customers that you lost found other companies to do business with?

Riccardo Delle Coste (Founder and CEO)

No, not other companies. They're just waiting for us. They've just-

Anthony Vendetti (Executive Managing Director of Research)

They're waiting.

Riccardo Delle Coste (Founder and CEO)

Yeah, they're just waiting.

Anthony Vendetti (Executive Managing Director of Research)

Okay, got it. Okay, thanks.

Riccardo Delle Coste (Founder and CEO)

We've got quite a few customers that have said to us, "As soon as the bottles come back, let us know.

Anthony Vendetti (Executive Managing Director of Research)

Okay, that's-

Riccardo Delle Coste (Founder and CEO)

Yeah. So we're literally just waiting until we get the capacity, the new plant sorted out, and then we can start supplying. And then we'll go... Obviously, there'll be a process to go back around and, you know, get product out to everyone, and there'll still be a, you know, probably a truncated selling process, but there will still be a process involved in getting product out to them and then getting it back on their menus. You know, we do need to time it with getting onto the menus, and it needs to fit in with their schedules as well.

Anthony Vendetti (Executive Managing Director of Research)

Okay, and then lastly, for some of the agreements that you signed this quarter, when will you be able to start shipping products to those customers that were signed this quarter?

Riccardo Delle Coste (Founder and CEO)

Some of those have already started.

Anthony Vendetti (Executive Managing Director of Research)

They started already?

Riccardo Delle Coste (Founder and CEO)

Yes.

Anthony Vendetti (Executive Managing Director of Research)

And the others by before the end of the year? By the end of the year.

Riccardo Delle Coste (Founder and CEO)

Yeah, by the end of the year. Some or most have already started. Some have, some have partially started and will ramp up to full scale within their schools by the end of the year, beginning of the new year. There's a bit of a mix, but by January, everyone should be at, you know, at 100%.

Anthony Vendetti (Executive Managing Director of Research)

Okay, great. All right, I'll hop back on the queue. Thanks.

Riccardo Delle Coste (Founder and CEO)

Thanks.

Operator (participant)

Ladies and gentlemen, as a reminder, if you would like to ask a question, please press star one. Please hold while we poll for questions. As a reminder, if you would like to ask a question, please press star one. Please hold while we poll for questions. Ladies and gentlemen, if you would like to ask a question, please press star one. We have no further questions at this time, so this concludes today's teleconference. Thank you for your participation. You may now disconnect your lines. Have a good evening.