Barfresh Food Group Inc

NASDAQ:BRFH

Earnings Call Analysis

Earnings Call Transcript 2024-Q2

[Operator]

Good afternoon, everyone, and thank you for participating on today's second 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.

[Operator Instructions] 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 relationship 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 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 nonoperational or noncash costs, including stock compensation and other nonrecurring costs such as those associated with the product withdrawal, the related dispute and certain manufacturing relocation costs.

Management believes that adjusted EBITDA provides useful information to the investor because it directly is reflective of the period-to-period performance of the company's core business.

Now I'd like to turn the call over to the CEO of Barfresh Food Group, Mr. Riccardo Delle Coste. Please go ahead, sir.

[Riccardo Delle Coste, executive]

Good afternoon, everyone, and thank you for joining us for our second quarter and first 6 months of 2024 earnings call. During the first 6 months of this year, we have made tremendous improvements in all areas of our business.

Our recent infrastructure investments have us well positioned to achieve record quarterly revenue in Q3, record annual revenues in financial year 2024, positive adjusted EBITDA in Q3 and in the back half of this year and margin improvement.

I'm excited to announce we've reached a significant inflection point in our business. Our Q3 revenue and orders have already reached more than $2.2 million, representing a 40% increase year-over-year. And we still have 1.5 months to go in this quarter.

What's particularly noteworthy is that we haven't even launched our new Pop & Go product yet. This growth is a testament to the strength of our existing offerings and the effectiveness of our recent investments.

The recent investments include expanding our product line, which we will commence production on shortly, dramatically scaling our production capacity, expanding our sales reach by adding to our sales broker network, which now covers 95% of the country and all while bringing on top talent to our leadership team.

These investments are not just about this year's results. They are about building a company that is primed for sustained long-term growth. The infrastructure we've put in place thus far is the launch pad for our next phase of growth. As we look ahead, I'm energized by the opportunities before us and confident in our ability to deliver substantial value to our customers and shareholders alike.

During the first 6 months of this year, we have announced over 3,100 new customer school locations, representing over 2.2 million students that will be served the range of our current and recently announced products either on their breakfast menus or a la carte menus.

In addition, we have many opportunities to initiate and expand many placements under bids in the education channel that included our products, and we anticipate announcing more non-bid cycle opportunities in the coming months.

Thanks to our new manufacturing expansion, we will begin onboarding some of these schools in August, leading to our expected highest quarterly revenue in the company's history during the upcoming third quarter.

In addition to new locations, our customers are extremely excited about our recently announced new 100% Juice Freeze Pops Pop & Go. This innovative product aims to provide students with healthier options throughout the school day. Pop & Go was created with a commitment to nutrition and quality, containing a half cup of fruit juice, no added sugars, no preservatives, artificial flavors or colors and available in 5 delicious flavors.

In addition, the new Pop & Go freeze pops are compliant with USDA reimbursable meal programs and Smart Snack guidelines. Initially, this new product line will target lunch menus in schools across the country, which can result in up to 5x more volume of meals served in the breakfast menu where our Twist & Go and bulk products are typically offered.

Pop & Go extends the company's reach into different meal day parts, providing nutritious options to breakfast, lunch and after-school programs. We recently announced 3 new manufacturing partnerships and one of these facilities will primarily be dedicated to manufacturing our recently launched Pop & Go 100% Juice Freeze Pops as well as some of our other offerings.

In addition, we now have the ability to produce over 120 million units annually of our full range of product offerings in all channels. This is a 400% increase from our previous capacity. These 3 key partners are part of our strategic initiatives to strengthen and diversify our manufacturing footprint for all aspects of our offerings, including the much anticipated bottle expansion.

This approach not only positions us for rapid expansion, but also mitigates risks by reducing reliance on any single location where possible and significantly enhances our operational resilience and scalability.

To support our dramatically expanded manufacturing capacity, we recently announced the hiring of Marko Matla as Vice President of Supply Chain and Contract Manufacturing, spearheading our efforts to seamlessly onboard our new contract manufacturers with over 25 years of comprehensive end-to-end supply chain expertise, Marko brings a wealth of invaluable experience in establishing robust product manufacturing and supply chain operations.

His command over the domain coupled with deep rooted relationships with co-manufacturers, foodservice customers and distributors position him exceptionally well to ensure a steady product flow and uncompromised service delivery to all our valued customers. This strategic hire underscores our commitment to building a formidable supply chain infrastructure that can scale efficiently to support our long-term growth plan.

To bolster our sales capabilities and drive revenue growth, we recently announced the appointment of Tony Grossi as Vice President of Sales. Tony brings over 25 years of executive experience in food and beverage sales, including schools digitation and restaurant QSR service distributors.

With his proven track record of building high-performing teams and achieving ambitious goals, we're confident Tony will spearhead our sales efforts to help expand our client base, oversee our expanded sales broker network and accelerate revenue growth in fiscal year '24 and beyond.

As we enter the back half of 2024, we have enhanced our management team, increased our manufacturing capacity by 400%, added an exciting new product offering for Q4, significantly increased the number of school customers serve and increased our sales broker network to cover over 95% of the country.

All of these improvements add up to an expected record year in 2024 and continued strong profitable growth beyond.

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

[Lisa Roger, executive]

Thank you, Riccardo. Revenue for the second quarter of 2024 decreased 3% to $1.46 million compared to $1.51 million in the second quarter of 2023. Revenue in 2023 was positively impacted by adjustments to estimated credits related to the dispute with our manufacturer. Excluding such adjustments, revenue increased by 6% year-over-year, driven by increased capacity in carton production and improvements in bulk sales.

Gross margin for the second quarter of 2024 was 34.8% compared to 31.4% for the second quarter of 2023. The year-over-year increase is due to product mix, pricing actions and a slight improvement in the cost of supply chain components.

Selling, marketing and distribution expense for the second quarter of 2024 decreased 7% to $583,000 compared to $625,000 in the second quarter of 2023. The decrease was primarily due to freight efficiencies and lower storage and inventory management costs.

As a percent of sales, the two periods were comparable at 40% of revenue in the second quarter of 2024 and 41% of revenue in the second quarter of 2023. G&A expenses for the second quarter of 2024 were $871,000 compared to $493,000 in the same period last year. The increase in G&A was driven by a number of factors, including fees to broaden the capabilities of our management team, a noncash shift to stock-based compensation and the non-recurrence of recognizing employee retention tax credit benefits in 2023.

Our net loss for the second quarter of 2024 was $1 million compared to a net loss of $742,000 in the second quarter of 2023. The year-over-year increase is a result of the shift to stock-based compensation, recruiting expense related to the enhancement of our management team and the non-recurrence of recognizing the employee retention tax credit benefits in 2023.

For the second quarter of 2024, our adjusted EBITDA was a loss of approximately $682,000 compared to a loss of $617,000 for the prior year period. As Riccardo said, we believe we will achieve positive adjusted EBITDA in the third quarter and back half of this year.

Now moving on to our balance sheet. As of June 30, 2024, we had approximately $383,000 in cash and approximately $1.5 million 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.

This decision was made as we continue to work to secure additional production capacity to meet anticipated demand. Given that we have now secured this additional capacity and production is set to commence, we expect our cash burn to normalize in the second half of the year.

Furthermore, I'm pleased to report that earlier this month, we secured a $1.5 million receivables financing facility with a 1-year term that renews annually and is secured by accounts receivable inventory.

This provides us with extra coverage to fund inventory so we need to flex up production further. This proactive approach ensures we have the flexibility to respond quickly to market demands while maintaining a strong financial position.

In addition, we have also received nonrecourse litigation financing to allow vigorous pursuit of our legal complaint without further expense to the company.

Now I will turn the call back to Riccardo for closing remarks.

[Riccardo Delle Coste, executive]

Thank you, Lisa. We've absorbed a lot of the infrastructure and manufacturing capacity investments, key personnel hires and product development expenses in the second quarter and we'll be leveraging these costs in the third quarter and beyond.

Since last year, we have achieved the following: increased our co-manufacturing capacity by 400%; relaunched our 5:1 use concentrates; added a new and very exciting product offering that has received tremendous feedback and interest and has the potential to be as big as all of our other products combined; enhanced our management team; increased our sales broker network to cover 95% of the country; significantly increased the number of school customers; and secured nonrecourse litigation funding as well as secured a $1.5 million receivables financing facility.

This strategic groundwork has set us up for the third quarter to achieve positive adjusted EBITDA and the highest quarterly revenue in the company's history with over $2.2 million in orders already received halfway through the quarter, a 40% increase over last year.

And it's worth noting that this doesn't even include potential revenue from our new Pop & Go 100% Juice Freeze Pops. The company is in the best position it's ever been in with an increased on-trend product portfolio, increased capacity, increased sales team capacity and an enhanced experienced management team. We are extremely excited about our future opportunities and believe we are very well positioned to dramatically improve our growth and EBITDA.

And with that, I'd like to open up the line for questions. Operator?

[Operator]

[Operator Instructions] Our first question comes from Nicholas Sherwood with Maxim Group.

[Nicholas Sherwood, analyst]

My first question is, what have you been seeing in the noneducation channels in the second quarter? And then looking forward, specifically convenience, military and entertainment. And did you see any sort of boost in the summer in that entertainment channel in this -- at the beginning of this third quarter or at any time in this -- in the second quarter like in June?

[Riccardo Delle Coste, executive]

Not particularly. Overall, the summer sales for us were flat versus last year. A lot of our focus has been around the education channel. So we do expect that to increase next year. However, the various segments, they're relatively flat. And that's really a factor of since COVID. Most of the focus has really been around the education channel.

[Nicholas Sherwood, analyst]

Absolutely understood. And then my second question is what is the hiring outlook for the sales team? Do you think that you need to make a substantial number of more hires? Or is that team prefilled out? And will their focus be entirely on the education channel? Or will you sort of open up some of those lines of communication to -- into some of those other channels as you get into the school year? And you're looking less to secure new education customers?

[Riccardo Delle Coste, executive]

That's a great question. Now we feel that we fully staffed now with the recent hire of our VP of Sales, Tony Grossi. He really completed the sales team for us. And with the completion of our sales broker network around the country with over 95% now, almost at 98% of each state covered with local representation, that's boots on the ground with our broker network in 98% of the states around the country. So we feel that we're pretty solid on the hiring front, on the sales front.

And as it relates to that, we're now formulating our strategies to go after the various channels that we haven't really been as focused on in the past due to our focus being primarily on the education channel. So we are commencing our outreach with the other channels, including the QSRs, general foodservice, et cetera.

[Operator]

[Operator Instructions] This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.