Barfresh Food Group - Earnings Call - Q4 2024

Executive Summary

• Q4 2024 delivered revenue of $2.78M, up 45% year over year, but down sequentially from Q3’s record $3.64M; gross margin compressed to 26% due to onboarding costs and elevated logistics, driving adjusted EBITDA to a loss of $0.56M.
• Versus S&P Global consensus, BRFH materially missed: revenue $2.79M vs $4.17M*, and EPS -$0.06 vs -$0.01*; limited sell-side coverage (two estimates) magnified the surprise and likely reset expectations for near-term profitability recovery* [Values retrieved from S&P Global].
• Management guided FY 2025 revenue to $14.5–$16.6M (record), with Q1 revenue/margins “consistent with Q4” and margin expansion expected in H2 as co-manufacturing equipment installations complete by end of Q2.
• Strategic catalysts: Pop & Go juice freeze pops launched in Q4; broker coverage now ~95% of U.S.; manufacturing capacity ramp underway (targeted full bottle capacity by end of Q2), positioning for back-half acceleration.

What Went Well and What Went Wrong

What Went Well

• Record FY revenue of $10.7M; adjusted gross margin improved to 37% for FY 2024, reflecting favorable mix and pricing actions.
• Launch of Pop & Go 100% juice freeze pops in Q4, targeting the larger lunch daypart; initial revenue began in Q4 and management expects meaningful contribution in 2025.
• Expanded sales coverage (~95% of the U.S.) and onboarding of new co-manufacturers; CEO: “we expect… full manufacturing capacity by the end of Q2 2025… in time for our high season”.

What Went Wrong

• Missed Q4 adjusted EBITDA breakeven from prior guidance; Q4 adjusted EBITDA was a loss of ~$0.56M vs Q3 guidance for positive adjusted EBITDA.
• Gross margin contracted to 26% (vs 33% YoY and 35% in Q3) due to temporary production inefficiencies and increased logistics costs during co-manufacturer onboarding.
• Estimates miss: revenue came in ~$1.38M below consensus and EPS missed by ~$$0.05, implying sell-side expectations did not fully capture transitional cost headwinds* [Values retrieved from S&P Global].

Transcript

Operator (participant)

Good afternoon, everyone, and thank you for participating on today's fourth quarter and full year 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 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 here, 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 relations, 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.

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 development, and other factors that the company believes are appropriate under 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 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 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 intentions 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 has also presented certain non-GAAP measures, including adjusted gross profit, adjusted EBITDA, which are reconciled in tables in the business update release to the most comparable GAAP measures. Certain calculations based on its results include gross margin and adjusted gross margin.

The reconciling items are non-operational or non-cash costs, including stock compensation and other non-recurring costs that are those associated with the project withdrawal, the related dispute, and certain manufacturing relocation costs. Management believes that adjusted gross profit, EBITDA, and adjusted EBITDA provide useful information to the investor because they are directly reflected in the performance of the company. Now, I would like to turn the call over to the CEO of Barfresh Food Group, Mr. Riccardo Delle Coste. Please go ahead, sir.

Riccardo Delle Coste (Founder and CEO)

Good afternoon, everyone, and thank you for joining us for our fourth quarter and full year 2024 earnings call. 2024 was a transformative year for our company, one where we made significant strategic investments and operational enhancements that have positioned us for sustained growth. I'm pleased to report that these efforts delivered record full-year revenue, and we expect this momentum to continue with another year of record revenue expected in 2025, with growth guidance between 35% and 55%. Our revenue guidance accounts for continuing orders from existing customers and confirmed bids, while also considering estimated revenue from end-user opportunities at later stages in our sales pipeline, including two of the top 10 largest school districts in the United States. Let me highlight our key accomplishments. First, we successfully addressed our manufacturing capabilities. After losing our largest co-manufacturer in 2022, we secured and began onboarding two new strategic partners.

While this transition created some near-term cost pressures in Q4, we expect the onboarding to be complete by the end of Q2 2025, bringing us to full manufacturing capacity in time for our high-season sell-in in the education channel, which picks up with back-to-school demand in Q3. Second, we expanded our product portfolio with the significant launch of Pop & Go, 100% juice freeze pops in our education channel during Q4. While this new product contributed modest revenue in its first quarter, we're excited about its potential. Unlike our breakfast-focused offerings, this product targets the lunch day part, a market opportunity significantly larger than breakfast. With manufacturing ramping to full capacity by the end of Q2, we expect material revenue contribution from this product in 2025. Third, we secured our financial foundation through non-dilutive financing, including non-recourse litigation financing and a $1.5 million line of credit.

Additionally, we raised $3 million through the sale of common stock, providing us with the resources to execute our growth strategy. On the sales front, we've built a robust sales network with 95% coverage across the U.S. While we've had strong success in new customer acquisition in the education channel, we're still only at a 5% market penetration, representing a significant runway for growth. Now, let me address our performance. While we achieved record revenue for fiscal year 2024, our results in the fourth quarter were impacted by two temporary factors: costs associated with installing production equipment while onboarding our new co-manufacturers, and higher supply chain expenses from sourcing products from multiple locations while we wait for more equipment to arrive that needs to be commissioned. Both pressures will be resolved when we reach full manufacturing capacity by the end of Q2 2025.

Looking ahead, we're entering 2025 with strong momentum. Our expanded manufacturing capacity, new product introductions, and robust sales network give us confidence in our growth projection. More importantly, we expect to see meaningful margin improvement as we realize the benefits of our operational investment. Before I turn it over to Lisa for a detailed financial review, I want to thank our employees, partners, and shareholders for their support during this pivotal year. While 2024 required significant investment and presented some challenges, it was essential groundwork that has positioned us for strong, profitable growth in 2025 and beyond. I'll now turn the call over to our CFO, Lisa Roger. Lisa.

Lisa Roger (CFO)

Thank you, Riccardo. Revenue for the fourth quarter of 2024 was $2.8 million compared to $1.9 million for the fourth quarter of 2023. Revenue for the full year of 2024 was a record $10.7 million compared to $8.1 million in the same period of 2023. The increase in quarterly and full-year revenue is primarily due to expanded bottle production capacity year-over-year, enabling higher sales volumes, complemented by improvements in smoothie carton and bulk sales. Gross margin for the fourth quarter of 2024 was 26% compared to 33% for the fourth quarter of 2023. Adjusted gross margin for the fourth quarter of 2024 was 30% compared to 33% in the prior year period. Gross margin for the full year of 2024 was 34% compared to 35% for the same period of 2023.

Adjusted gross margin for the full year of 2024 was 37% compared to 35% for the full year of 2023. The year-over-year improvement in full-year adjusted gross margin is a result of favorable product mix, pricing actions, and a slight improvement in the cost of supply chain components, partially offset by the temporary production inefficiencies and increased logistics costs experienced in the fourth quarter of 2024. Selling, marketing, and distribution expense for the fourth quarter of 2024 increased to $872,000, or 31% of revenue, compared to $624,000, or 32% of revenue in the fourth quarter of 2023. Selling, marketing, and distribution expense for the full year of 2024 increased to $3.1 million, or 29% of revenue, compared to $2.6 million, or 32% of revenue in the same period of 2023.

The year-over-year dollar increase in quarterly and full year is a result of increased sales and marketing personnel costs, broker commissions, and outbound freight as a result of increased shipments. G&A expenses for the fourth quarter of 2024 were $620,000 compared to $624,000 in the same period last year. G&A expenses for the full year of 2024 were $3 million, compared to $2.7 million in the same period of 2023. The year-over-year increase in full-year G&A was driven by an increase in management headcount, an increase in stock-based compensation resulting from the increased headcount and the extension of options previously issued to our board of directors, and the non-recurrence of recognizing Employee Retention Tax Credit benefits in 2023.

As a result of the above-noted changes in gross margin and operating expenses, our net loss for the fourth quarter of 2024 was $852,000, as compared to a net loss of $701,000 in the fourth quarter of 2023. Net loss for the full year of 2024 was comparable to the full year of 2023 at $2.8 million. For the fourth quarter of 2024, our adjusted EBITDA was a loss of approximately $561,000, compared to a loss of approximately $427,000 in the same period last year. For the full year of 2024, our adjusted EBITDA loss was $1.3 million, compared to a loss of $1.7 million in the prior year.

Our plans to achieve positive adjusted EBITDA in the fourth quarter were impacted, as Riccardo discussed, by the startup costs of onboarding our new co-manufacturers, as well as certain manufacturing equipment being in transit, which caused us to have to source product from multiple locations to meet customer demand. This resulted in higher logistics costs and less efficient production allocation than our target operating model. The equipment is expected to be installed and operational by the end of the second quarter, and we should return to our optimized production and distribution network. Now, moving on to our balance sheet. As of December 31st, 2024, we had approximately $1.1 million in cash and accounts receivable and approximately $1.5 million of inventory on our balance sheet.

In the first half of the year, the company deployed a significant amount of cash to build up inventory in preparation for its seasonally high third quarter. The inventory build allowed the company to achieve its highest fiscal year revenue in company history for fiscal year 2024. The company brought on expanded capacity in the fourth quarter of 2024. Additionally, the company has taken other measures to reduce its liquidity requirements, including compensating its directors and employees with equity to reduce cash compensation requirements, obtaining non-recourse litigation financing, and securing receivables financing. In February 2025, the company secured $3 million in gross financing. This capital raise enhances our financial position and supports scaling of production capacity to meet growing customer demand, particularly in the education channel. Now, I will turn the call back to Riccardo for closing remarks.

Riccardo Delle Coste (Founder and CEO)

Thank you, Lisa. Before we open up the lines for questions, let me emphasize that while 2024 was a year of strategic investment and transformation, we enter 2025 with an expanded product portfolio, robust sales coverage, and operational improvements underway. As we continue our co-manufacturer ramp through Q2, we expect revenues and margins for Q1 to be consistent with Q4 levels. For the full year of 2025, we expect significant revenue growth of between 35% and 55%, with margin expansion beginning in the second half as our manufacturing capabilities come online. The temporary costs we absorbed in Q4 were necessary investments to build a stronger foundation. We've been waiting for some time for additional bottle capacity to come online, and it's finally started, and it will be here in a meaningful way very shortly.

With a great pipeline of business, we're confident these actions will drive both top-line growth and margin expansion, as we've outlined, making 2025 another record year. We look forward to updating you on our progress in the quarters ahead. I would like to open up the lines 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. One moment, please, while we pull for questions. Thank you. Our first question comes from the line of Nicholas Sherwood with Maxim Group. Please proceed.

Nicholas Sherwood (Equity Research Associate)

Good evening. My first question is related to the new Pop & Go freeze pops. You talked about how you expect them to contribute meaningfully in the second half of the year. Can you sort of give us your expectations on how that specific product line is going to help you achieve the revenue guidance you gave for 2025?

Riccardo Delle Coste (Founder and CEO)

Yeah. It is still pretty early days. We launched the product late in Q4. We launched it in Q4. We have started to get it out to customers and trials and testing. We have had very good feedback in terms of acceptability for the product. We do have bids that are in process now. We are right in the middle of bid season. We do have some customers that have already started to add it on the bids. We are waiting to see the total effect of all the testing that we have done. That is really part of the range and potential further upside depending on how well the pops get into the market in this bid cycle.

Nicholas Sherwood (Equity Research Associate)

Understood. Can you just talk about just how you're working with or how have your relationships with your customers been during some of these sort of production issues that you've had in the fourth quarter?

Riccardo Delle Coste (Founder and CEO)

Yeah. That's a good question. It's definitely tested some relationships in the sense of having availability of product for some of those customers because we were tested with supply. That was a challenge still because even though we turned on some of the bottles, it still outstripped the capacity that we had at the time. Even though we've incrementally added bottle supply, we just haven't had enough because we've been waiting for additional upgrades and change parts to arrive for equipment. Like we discussed on the call, those change parts are expected to be here and installed and commissioned before the end of Q2, paving the way for a very, very solid back half of the year with additional supply, more than what we need to do our plans.

Whilst relationships have been an uncomfortable discussion for some customers in terms of supply, they really stand there waiting for the product, and they love the product so much. Hopefully, once we've got everything back on track, it'll be back in the kids' hands in those schools.

Nicholas Sherwood (Equity Research Associate)

Understood. My final question is, have you heard anything from your customers sort of related to funding? The Department of Education is kind of being looked at for cuts. Have you heard anything from them about any worries for budgetary constraints related to your product?

Riccardo Delle Coste (Founder and CEO)

Yeah. We haven't really got any direct negative feedback. Obviously, we see what's in the press, and we see some of the programs that are being cut. Some of those programs that are being cut may actually help us in the long run because they're actually subsidizing other programs that could be offering substitute products than our products that maybe the kids don't like as much, but they have more of a financial incentive to offer them. There could be, out of all the changes so far to date, a net positive effect on our products in the schools. Again, there's a lot of moving pieces that are going on. Nothing negative.

Nicholas Sherwood (Equity Research Associate)

Understood. Yeah, thank you for taking the time to answer my questions, and I'll return to the queue.

Riccardo Delle Coste (Founder and CEO)

Thank you.

Operator (participant)

Thank you. If you would like to ask a question at this time, please press star one. As a reminder, if you would like to ask a question, please press star one at this time. There are no further questions. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.