Barfresh Food Group - Q3 2024
October 24, 2024
Transcript
Operator (participant)
Good afternoon, everyone, and thank you for participating in 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 words such as grow, expand, anticipate, intend, estimate, believe, expect, plan, should, 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, 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 gross profit, EBITDA, adjusted EBITDA, which are reconciled in tables in the business update release 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 the product withdrawal, the related dispute, and certain manufacturing relocation costs. Management believes that the 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.
Riccardo Delle Coste (CEO)
Good afternoon, everyone, and thank you for joining us for our third quarter twenty twenty-four 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 increased our production capacity, allowing us to meet growing demand and onboard new customers efficiently.
We will now have the ability to produce over one hundred and twenty 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 five times 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've 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. I'll now turn the call over to our CFO, Lisa Roger. Lisa?
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 expense 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 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 nonrecurrence 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 nonrecurrence 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 bottled 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. Now, I will turn the call back to Ricardo for closing remarks.
Thank you, Lisa. In closing, I want to share both our near-term and long-term outlook. For fiscal year twenty twenty-four, 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 twenty twenty-four, but also provide robust momentum as we enter twenty twenty-five. Beyond our twenty twenty-four 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 systems. 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 improvement 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 twenty twenty-four, gives 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?
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 that 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. One moment please while we poll for questions. Our first question comes from Anthony Vendetti with Maxim Group. Please proceed with your question.
Anthony Vendetti (Executive Managing Director of Research and a Senior Healthcare Analyst)
Thanks, Ricardo. Lisa, how are you?
Riccardo Delle Coste (CEO)
Good. How are you?
Lisa Roger (CFO)
How are you?
Anthony Vendetti (Executive Managing Director of Research and a Senior Healthcare Analyst)
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.
Riccardo Delle Coste (CEO)
Yeah, 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 did 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 servings, if we get on the menu at lunch versus for breakfast, is potentially up to five times 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.
Anthony Vendetti (Executive Managing Director of Research and a Senior Healthcare Analyst)
Okay, so that's great. 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.
Riccardo Delle Coste (CEO)
Sure. So, that manufacturer does not make our Twist & Go product, but they do 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.
Anthony Vendetti (Executive Managing Director of Research and a Senior Healthcare Analyst)
Okay, and-
Lisa Roger (CFO)
For, like, our single-serve product and some of our bulk products as well. So the expansion is, you know, every product line.
Riccardo Delle Coste (CEO)
Yeah. So we've really done a lot of work on, you know, we've done a lot of work over the last twelve months on, on the manufacturing front, you know, to really give us the coverage that we need from a manufacturing footprint nationally, and building in some extra redundancy within our system, to cover multiple products. So, you know, with that, we believe we're also gonna get some additional product cost savings as we kind of, roll out and commission new manufacturing locations, and we get, just get more volume and, and better pricing and, you know, just better efficiencies across the network.
Anthony Vendetti (Executive Managing Director of Research and a Senior Healthcare Analyst)
Okay. And then, separately, at this time, how many school accounts are you active in right now?
Riccardo Delle Coste (CEO)
That's a great question. You know, we've got new ones being added almost daily. You know, 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. You know, 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.
Anthony Vendetti (Executive Managing Director of Research and a Senior Healthcare Analyst)
So, six thousand, about 4.5% penetration. Are there schools that are just not good candidates for this? Or... You know, when you look at the spectrum of schools across the United States, you know, are half the schools good candidates or 75% of them good candidates? How do you look at the entire school account profile?
Riccardo Delle Coste (CEO)
Yes. So that's a good question, and it's probably worth some further explanation because that 4.5%, and that penetration that we've been talking about is only for the Twist & Go, right? I mean, up until this week, we hadn't even shipped any Pop & Go. So Pop & Go is like, just complete white canvas, and 100% of the market is open to us, you know, still from a penetration perspective. So, you know, as you look at the Twist & Go product, they're all great candidates for us. All the schools are. It really just, you got to remember that we've also been capacity constrained up until now.
So, you know, now that we're getting the capacity unlocked and the manufacturing brought up, we expect to increase, you know, the volume significantly and thus the penetration. And at the same time, you know, we're looking to go and penetrate the same market and the same customers with Pop & Go, which is, you know, we're at 0% right now.
Anthony Vendetti (Executive Managing Director of Research and a Senior Healthcare Analyst)
Okay. Okay, great. That's helpful. Thanks very much. I appreciate it. I'll hop back in the queue.
Riccardo Delle Coste (CEO)
Thanks. Thank you.
Operator (participant)
As a reminder, if you would like to ask a question, please press Star One on your telephone keypad. Our next question comes from Ankur Sagar. Please proceed with your question.
Ankur Sagar (Equity Research Analyst)
Hey, good afternoon, Ricardo and Lisa. Thank you for taking my questions.
Riccardo Delle Coste (CEO)
Hi.
Ankur Sagar (Equity Research Analyst)
Congratulations on the, you know, 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, you know, persevered against all odds.
Riccardo Delle Coste (CEO)
Yeah, we definitely have been. And, Ankur, we're really just scratching the surface still. Yes, it, it's probably been our first kind of significant jump in a while, but that's really only because we've had both arms tied behind our back, right? And we've really been short on, on supply. So, you know, 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.
Ankur Sagar (Equity Research Analyst)
Absolutely. No, great job by you and your team. I think, it's, as a shareholder, it's just been amazing to see that, what you have accomplished in the last couple of years, and that too, without, you know, not much of dilution. So that's great. I want to ask a couple of questions. It's the first one is a multipart question in regarding the new product. It seems to me like now you're an innovation company, with, you know, putting new products into the lunch area as well for the schools. How did the company came about this product? I mean, was it based on the customer feedback, you know, on the freeze pops?
Or, is it just that you wanted to basically go after the lunch side of the school year as well? And you know, in terms of the signing up the schools and getting this product on the lunch menu, how do you go about doing that? Do you have to wait for the school bids, or you know that you have customers, the 6,000 customers or so for Twist & Go, you can potentially reach out to, you know, the right personnel and just you know, be able to get this on a lunch menu without the bidding process.
Riccardo Delle Coste (CEO)
Okay. So, I'll take the questions from the top. We created the products by a combination of understanding where the bigger part of the opportunities are. Yes, you're right, the lunch menu is definitely a much higher volume opportunity, and we recognize that, but we also listened to what our customers were asking for. So it was in conjunction with talking to our customers, but then it was also in conjunction with understanding what we already have access to, our supply chain. What our supply chain, you know, what kind of great products can we deliver to these customers, utilizing the ingredients that we're already using as well, right? Because we're using a lot of the same ingredients. We're using the same supply chain. And by talking to our customers and recognizing the significance of the opportunity on the lunch menu.
So it's a multifaceted approach to introducing a new product and understanding the market, and we believe that, firstly, I believe that the new Pop & Go product, I believe it's gonna surpass our Twist & Go product, just by sheer volume opportunity out there in the marketplace for this product category, and based on the initial reception and acceptance that we've had from the initial customers that we've been talking to. So, you know, time will tell, but just from the initial feedback and the volumes that are being proposed to us from our customers, you know, I'll give you an example.
We did have a customer that, you know, was forecasting about 40,000 units a month for the Twist & Go product, and, you know, they intend to add the Pop & Go's in the spring, and, you know, they're gonna do about 200,000 a month of the Pop & Go's, you know, starting in spring per month. You know, we are already seeing the significance of the contrast in volume opportunity between the Twist & Go product and the Pop & Go product, which is why we're so bullish and excited about it. So that I believe that's gonna play out over time as we get out to the customers. In terms of approaching customers now and our existing customers, it's a total mixed bag.
The answer is yes, absolutely. We're gonna be going to our direct customers that we're already servicing, that we're already on menus to. In some instances, they will have flexibility to add them to their menus. They may choose just to add it to their cafeteria menus at the moment, an à la carte-
Ankur Sagar (Equity Research Analyst)
Mm-hmm.
Riccardo Delle Coste (CEO)
-where they can buy it, and then maybe when their bid season opens up, they'll, you know, they'll rebid it, and then it'll get added to the bids. Some won't be able to add it until the bid season rolls around. Sometimes that happens twice a year. Sometimes they do special bids. It really is a mixed bag around the country for all different types of schools.
Ankur Sagar (Equity Research Analyst)
Got it. Got it. And that's great. And in terms of the... Is it fair to say from the Twist & Go side that you're somewhat still supply constrained? I think you mentioned the prepared remarks about...
Riccardo Delle Coste (CEO)
Somewhat
Ankur Sagar (Equity Research Analyst)
Another contract manufacturer coming up in Q4, and that should, you know, allow you to basically go after and supply the Twist & Go product even to, you know, larger school districts?
Riccardo Delle Coste (CEO)
Yeah. Yeah, let's not mince words. It's. We're not somewhat constrained. We have been, you know, we've been completely restrained. And that's really been-
Ankur Sagar (Equity Research Analyst)
Got it
Riccardo Delle Coste (CEO)
... a very significant factor to what's 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 being more broadly and aggressively going out there and selling the Twist & Go product nationwide.
Ankur Sagar (Equity Research Analyst)
That's great. I mean, I see it actually even on social media, you know, customers, you know, school administrators, you know, students love your product, and some are just waiting for, like, when it's gonna show up again on the menu. So I can attest to that.
Riccardo Delle Coste (CEO)
Yeah.
Ankur Sagar (Equity Research Analyst)
And then-
Riccardo Delle Coste (CEO)
We probably get an-
Ankur Sagar (Equity Research Analyst)
Mm-hmm. Go ahead.
Riccardo Delle Coste (CEO)
... email. We probably get an email 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 love it, and they wanna 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.
Ankur Sagar (Equity Research Analyst)
Got it. Got it. And I think you had one item regarding the manufacturing relocation. Is it just you know something you're doing with the contract manufacturing right now, a move, or is this still the remainder of that you know the legal dispute you had a couple of years ago?
Riccardo Delle Coste (CEO)
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.
Ankur Sagar (Equity Research Analyst)
Mm-hmm.
Riccardo Delle Coste (CEO)
We had to relocate the equipment as a result of that, so that's really our single-serve product. 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.
Lisa Roger (CFO)
Yeah. That was the business where we had significant opportunities with QSRs, before COVID, so that's really a very significant new opportunity-
Riccardo Delle Coste (CEO)
Yeah
Lisa Roger (CFO)
you know, to relaunch that.
Riccardo Delle Coste (CEO)
Yeah.
Ankur Sagar (Equity Research Analyst)
Mm-hmm. Mm-hmm.
Riccardo Delle Coste (CEO)
For those that have followed, have been following for a while, we had, you know, multiple, you know, national QSRs where we've got multiple products approved by them and were ready to roll out, actually. So, we'll be picking up those conversations going into next year, and we've already started planting those seeds.
Ankur Sagar (Equity Research Analyst)
But that's great. That's great. And just one other, one more, you know, I think you know, now I see somewhat the business is also cash constrained. I think your goal is to probably get the sales growth and even, you know, be able to get to cash flow breakeven, generate cash. And is there a revenue number that you can share where the company gets to cash flow breakeven, and any sort of, you know, comments you can provide on the timeline on when you get there?
Lisa Roger (CFO)
Yeah, well, you know, we were very close to EBITDA, Adjusted EBITDA breakeven this quarter, you know.
Ankur Sagar (Equity Research Analyst)
Yep
Lisa Roger (CFO)
-at a very slow loss. So, you know, kind of think about our contribution margin on sales, we'd probably only need another, I don't know, $500,000 to be at Adjusted EBITDA breakeven.
Ankur Sagar (Equity Research Analyst)
Mm-hmm.
Lisa Roger (CFO)
So, you know, we're very close. We expect to be there for Q4. You know, and you talk about being cash constrained, that's somewhat true, but I mean, we also have the receivables facility.
Ankur Sagar (Equity Research Analyst)
Sure.
Lisa Roger (CFO)
If you look at our balance sheet, Q3, we had, oh, I want to say $1.7 million in AR. We'd only borrowed $100,000 on it, so we could have borrowed, like, another $1.2 million if we really needed it. We just, you know, don't wanna borrow unnecessarily.
Riccardo Delle Coste (CEO)
Yeah, so we feel like-
Ankur Sagar (Equity Research Analyst)
Got it
Riccardo Delle Coste (CEO)
... we have access to and we have cash available to meet our plan. So, you know, we feel like we're in a really good spot right now.
Ankur Sagar (Equity Research Analyst)
Great. No, no, that's, that's for sure. I think you guys have done an amazing, amazing, work here on managing that. Just one last one. You know, this, regarding the litigation, I don't know if you can comment on this. I mean, it has taken a while. I think you have done the right, taken the right sort of decisions to get the recourse financing in place, and I think you're just trying to make sure that you get the, you know, right amount here. And can you share at least, you know, the initial amount that you're going after in this litigation dispute?
Riccardo Delle Coste (CEO)
Yeah, we're really taking the position that we're really not talking about it, Ankur. You know, the filings, we filed a claim for a minimum of $20 million for the breach contract, and that's public, and that's really where we're leaving it at this stage.
Ankur Sagar (Equity Research Analyst)
Got it. Got it. Okay, that's great. Thank you for taking my questions. I appreciate it. Great work.
Riccardo Delle Coste (CEO)
All right. Thank you.
Lisa Roger (CFO)
Great.