Barfresh Food Group Q3 2024 Earnings Call Transcript

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October 24, 2024

There are 5 speakers on the call.

Operator

Good afternoon, everyone, and thank you for participating on today's Q3 2024 Corporate Update Call for Barfresh Food Group. Joining us today is Barfresh Food Group's Founder and CEO, Riccardo Della Costa and Barfresh Food Group's CFO, Lisa Rodger. Following the 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.

Operator

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 1 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.

Operator

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 ks and the quarterly reports on Form 10 ks and current reports on Form 8 ks, including any warnings, risk factors and cautionary statements contained therein. Furthermore, the company expressingly 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.

Operator

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 Della Costa. Please go ahead, sir.

Speaker 1

Good afternoon, everyone, and thank you for joining us for our Q3 2024 earnings call. I'm thrilled to announce that we achieved record quarterly revenue of over $3,600,000 for the 3rd 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 and go offering wasn't a part of our Q3 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.

Speaker 1

Our recent 3 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 120,000,000 units annually across our product offering, 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 Q4. 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.

Speaker 1

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.

Speaker 1

During the Q4, we commenced selling our 100 percent juice freeze pops, Pop and 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. Up and Go complements our existing school offerings and strategically targets lunch menus in schools, which can be up to 5 times the volume of our current breakfast menu offerings. Looking ahead, we see a clear path for Pop and Go to expand into other foodservice and retail channels further broadening our market reach.

Speaker 1

The infrastructure we 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 and 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 Rodger.

Speaker 1

Lisa?

Speaker 2

Thank you, Ricardo. Revenue for the Q3 of 2024 increased 40% to $3,600,000 compared to $2,600,000

Speaker 1

in the Q3 of 2023. Revenue in 2024 benefited from improvements in Twist and Go bottled smoothie sales from inventory built ahead of our seasonally high Q3 and improvements in smoothie carton and bulk sales.

Speaker 2

Gross margin for the Q3 of 2024 was comparable to the prior year period at 35%. Excluding production relocation costs, adjusted gross margin for the Q3 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 Q3 of 2024 increased to $990,000 compared to $697,000 in the Q3 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.

Speaker 2

G and A expenses for the Q3 of 2024 were 705,000 compared to $577,000 in the same period last year. The increase in G and A was primarily driven by the non recurrence of recognizing employee retention tax credit benefits in 2023. Our net loss for the Q3 of 2024 was $513,000 compared to a net loss of $476,000 in the Q3 of 2023. The year over year increase is a result of increased headcount and the non recurrence of tax benefits recognized in 2023, partially offset by the contribution margin from increased sales. For the Q3 of 2024, our adjusted EBITDA was approximately a loss of 124,000 dollars compared to a loss of $89,000 in the prior year period.

Speaker 2

Now moving on to our balance sheet. As of September 30, 2024, we had approximately $2,100,000 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 Q3 of 2024. We expect expanded bottle smoothie capacity to come online in the Q4.

Speaker 2

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.

Speaker 1

Thank you, Lisa. In closing, I want to share both our near term and long term outlook. For fiscal year 2024, we continue to expect record annual revenue and year over year adjusted gross margin improvement. This growth is driven by 3 key factors. First, the expansion of our product portfolio, highlighted by our innovative pop and go offering, which will begin generating revenue in the Q4.

Speaker 1

2nd, 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 2024, but also provide robust momentum as we enter 2025. Beyond our 2024 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.

Speaker 1

While this represents a significant investment of internal resources and has resulted in incremental contract acquisition and trial costs that have impacted our Q3 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 system. 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 improvements to sales growth.

Speaker 1

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 strength and position in the market and the positive momentum we're seeing in 2024 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.

Speaker 1

Operator?

Operator

Thank you. We will now be conducting a question and answer session. Our first question comes from Anthony Vendetti with Maxim Group. Please proceed with your question.

Speaker 3

Thanks. Ricardo, Lisa, how are you? Good. How are you? Good.

Speaker 1

How are you?

Speaker 2

Good. Thanks.

Operator

I was

Speaker 3

just wondering if you could talk a little bit about the new pop and 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.

Speaker 1

Yes, sure. So we actually we've just shipped our first orders for Pop! And Go. So they'll be registering some revenue commencing in Q4 like we mentioned. The interest has been exceptionally high.

Speaker 1

We've had a lot of people express interest in the new pop and 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

Speaker 4

of

Speaker 1

the new pop and go offering and we do 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 service if we get on the menu at lunch versus for breakfast is potentially up to 5 times the amount of volume of what we're doing for the say the Twist and 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 and 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.

Speaker 3

Okay. So that's great. So the co manufacturer that you signed up recently, are they doing both the Twist and Go and the Pop and Go or is it mostly the Pop and Go for the new co manufacturer? And then on the Pop and Go, are they similar margins to the Twist and Go better? Maybe just give us an idea about that.

Speaker 1

Sure. So that manufacturer does not make our Twist and 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 and probably a little bit better margin profile than Twist and Go.

Speaker 2

Okay. Okay.

Operator

And then I'll give you

Speaker 1

a sense

Speaker 2

for like our single serve product and some of our bulk products as well. So the expansion is every product line.

Speaker 1

Yes. So we've really done a lot of work on we've done a lot of work over the last 12 months on the manufacturing front 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 with that, we believe we're also going to 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 better pricing and just better efficiencies across the network.

Speaker 3

Okay. And then separately, at this time, how many school accounts are you active in right now?

Speaker 1

That's a great question. We've got new ones being added almost daily. We did announce about 3 months ago the addition of about 3,000 new locations. Some of them some or a lot have been on boarded and others are still to be on boarded as we get through the back half of the year. We feel as though we're at about a 4.5% penetration, which is about 6,000 schools ish, right, give or take.

Speaker 1

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.

Speaker 3

So 6,000 about 4.5% penetration. Are there schools that are just not good candidates for this? Or when you look at the spectrum of schools across the United States, are half the schools good candidates or 75% of them good candidates? How do you look at the entire school account program?

Speaker 1

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 and Go, right? I mean up until this week, we hadn't even shipped any Pop and Go. So Pop and Go is like just complete white canvas and 100% of the market is open to us still from penetration perspective. So as you look at the Twist and Go product, they're all great candidates for us, all the schools are.

Speaker 1

It really just you got to remember that we've also been capacity constrained up until now. So now that we're getting the capacity unlocked and the manufacturing brought up, we expect to increase the volume significantly and thus the penetration. And at the same time, we're looking to go and penetrate the same market and the same customers with Pop and Go, which is we're at 0% right now.

Speaker 3

Okay. Okay, great. That's helpful. Thanks very much. I appreciate it.

Speaker 3

I'll hop back in the queue.

Speaker 1

Thanks,

Operator

Our next question comes from Ankur Sagar. Please proceed with your question.

Speaker 4

Hey, good afternoon, Ricardo and Lisa. Thank you for taking my questions. Congratulations on the 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 persevered against all odds.

Speaker 1

Yes. We definitely have been. And Anke, we're really just scratching the surface still. Yes, 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 supply.

Speaker 1

So 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.

Speaker 4

Absolutely. Great job by you and your team. I think 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 not much of dilution. So that's great. I want to ask a couple of questions.

Speaker 4

It's the first one is a multipart question regarding the new product. It seems to me like now you're an innovation company I would put in 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 on the freeze pops? Or is it just that you wanted to basically go after the lunch side of the school as well?

Speaker 4

And in terms of the signing of the schools and getting on this product on the lunch menu, how do you go about doing that? Do you have to wait for the school bids or that you have customer, the 6,000 customers or so for Twistco, you can potentially reach out to the right personnel and just be able to get this on a lunch menu without the bidding process?

Speaker 1

Okay. So I'll take the questions from the top. We create 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.

Speaker 1

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, 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 talking and by talking to our customers and recognizing then the significance of the opportunity then on the lunch menu. So it's a multifaceted approach to introducing a new product and understanding the market.

Speaker 1

And we believe that personally, I believe that the new Pop and Go product, I believe it's going to surpass our Twist and 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 time will tell, but just from the initial feedback and the volumes that are being proposed to us from our customers, I'll give you an example. We did have a customer that was forecasting about 40,000 units a month for the Twist and Go product and they intend to add the Pop and Goes in the spring and they're going to do about $200,000 a month of the Pop and Goes started in spring per month. So we are already seeing the significance of the contrast in volume opportunity between the Twist and Go product and the Pop and Go product, which is why we're so bullish and excited about it.

Speaker 1

So that I believe that's going to 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 mix. The answer is yes, absolutely, we're going to 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 and a la carte where they buy it.

Speaker 1

And then maybe when their bid season opens up, they'll rebid it and then it will 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 different types of schools.

Speaker 4

Got it. Got it. And that's great. And in terms of the is it fair to say from the Twist and Go side that you're somewhat still supply constrained?

Speaker 1

I think you mentioned

Speaker 4

in the prepared remarks about another contract manufacturer coming up in Q4. And that should allow you to basically go after and supply the Twist and Go product even to larger school districts?

Speaker 1

Yes. That's not mince words. We're not somewhat constrained. We've been completely restrained. And that's really been a very significant factor to what's had a cap on our ability to generate the revenue.

Speaker 1

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 and Go product nationwide.

Speaker 4

That's great. I mean, I see it actually even on social media, customers, school administrators, students love your product and some are just waiting for like when it's going to show up again on the menu. So I can attest to that.

Speaker 1

We probably get an e mail 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 want to 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.

Speaker 4

Got it. Got it. And the I think you had one item regarding the manufacturing relocation. Is it just something you're doing with the contract manufacturing right now, a move? Or is this still the remainder of that the legal dispute you had a couple of years ago?

Speaker 1

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. So we had to relocate the equipment as a result of that. So that's really our single serve product. So 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.

Speaker 1

We'll be targeting that single serve business going into next year again.

Speaker 2

Yes. That was the business where we had significant opportunities with QSRs, before COVID. So that's really a very significant new opportunity to relaunch that.

Speaker 1

Yes. And for those that have been following for a while, we had multiple national QSRs where we've got multiple products approved by them and we're 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.

Speaker 4

That's great. That's great. And just one other one more. If I think now I see some of the business is also cash constrained. I think your goal is to probably get the sales growth and even be able to get the cash flow breakeven, generate cash.

Speaker 4

And is there a revenue number that you can share where the company gets the cash flow breakeven? And any sort of comments you can provide on the timeline on when you get there?

Speaker 2

Yes. Well, we were very close to EBITDA adjusted EBITDA breakeven this quarter

Speaker 1

and a

Speaker 2

very small loss. So kind of think about our contribution margin on sales, we probably only need another, I don't know, dollars 500,000 to be adjusted EBITDA breakeven. So we're very close. We expect to be there for Q4. And you talked about being cash constrained, that's somewhat true, but I mean we also have the receivable facility.

Speaker 2

And if you look at our balance sheet, Q3, we had,

Speaker 3

I want to say,

Speaker 2

dollars 1,700,000 in AR. We'd only borrowed $100,000 on it. So we could have borrowed like another $1,200,000 if we really needed it. We just don't want to borrow unnecessarily. Yes.

Speaker 1

So we have access to and we have cash available to meet our plan. So we feel like we're in a really good spot right now.

Speaker 4

Great. No, no, that's for sure. I think you guys have done an amazing work here on managing that. Just one last one, this regarding the litigation, I don't know if you can comment on this. I mean, it has taken a while.

Speaker 4

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 right amount here. And can you share at least the initial amount that you're going after in this litigation dispute?

Speaker 1

Yes. We're really taking a position that we're really not talking about it, Ankur. The filing is we filed a claim for a minimum of $20,000,000 for the breach contract. And that's public and that's really where we're leaving it at this stage.

Speaker 4

Got it. Got it. Okay, that's great. Thank you for taking my questions. I appreciate it.

Speaker 4

Great work.

Speaker 1

All right. Thank you.

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Barfresh Food Group Q3 2024
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