Barfresh Food Group, Inc. (BRFH) Earnings Call Transcript & Summary

Good afternoon, everyone, and thank you for participating on today's Third Quarter 2023 Corporate Update Call for Barfresh Food Group. Joining us today is Barfresh Food Group's Founder and CEO, Riccardo Delle Coste; and Barfresh Food Group's CFO, Lisa Roger. [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 on the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, including statements about the company's commercial progress, success of its strategic relationships and projections of future financial performance. These forward-looking statements are identified by the use of words such as grow, expand, anticipate, intend, estimate, believe, expect, plan, should, hypothetical, potential, forecast and project, continue, could, may, predict and will, and variations of such words and similar expressions are intended to identify such forward-looking statements. All statements other than the statements of historical fact that address activities, events or developments that the company believes or anticipates will or may occur in the future are forward-looking statements. These statements are based on certain assumptions made based on experience, expected future developments and other factors that the company believes are appropriate under the circumstances. Such statements are subject to a number of assumptions, risks and uncertainties, many of which are beyond the control of the company. Should one or more of these risks or uncertainties materialize or should underlying assumptions prove incorrect, actual results may vary materially from those indicated or anticipated by such forward-looking statements. Accordingly, investors are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date they are made. The contents of this call should be considered in conjunction with the company's recent filings with the Securities and Exchange Commission, including its annual report on Form 10-K and the quarterly reports on Form 10-Q and current reports on Form 8-K, including any warning, risk factors or cautionary statements contained therein. Furthermore, the company expressly disclaims any current intention to update publicly any forward-looking statements after this call, whether as a result of new information, future events, change 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, stock issued for services and other nonrecurring costs, such as those associated with the product withdrawal and the company's NASDAQ uplist. Management believes that adjusted EBITDA provides useful information to the investor because it is directly reflective of the period-to-period performance of the company's core business. Now I'll turn the call over to the CEO of Barfresh Food Group, Mr. Riccardo Delle Coste. Please sir, go ahead.

Good afternoon, everyone, and thank you for joining us for our third quarter 2023 earnings call. It's been a year now since our sales were materially impacted by the loss of our largest Twist & Go bottle manufacturer, the withdrawal of defective products and, as a result, the loss of some of our customers. Over the past year, we have worked tirelessly to roll out our smoothie cartons and used it to win back some of those lost customers, continued to expand our reach within the education channel with the signing of new school accounts and continued to advance our operational margin improvement efforts. We have also worked to expand our carton production capacity and located a new bottle manufacturer, both of which are crucial to supporting our long-term growth. I'm very proud to say that based on these actions, our third quarter revenue was within our guidance, up both sequentially and year-over-year to $2.6 million, and we achieved the best adjusted EBITDA in company history, close to breakeven at a loss of $87,000. We are set to realize positive adjusted EBITDA for the fourth quarter and year-over-year margin improvement for fiscal year 2023. As it pertains to expanding our reach within the education channel, we recently issued a press release highlighting some of our new wins in this channel. We announced that just 7 of the new school districts we are working with represent over 1,000 new school locations and a collective population of over 750,000 students. Also of note, one of the 7 districts in the top 5 largest school districts in the United States. We have found over the past year that our smoothie carton fits nicely with the growing trend in schools to move toward more ecologically friendly products and has provided us an entry point into more of the high-volume school accounts. We believe there is still a lot of white space for us in this channel and believe our increased carton capacity and soon-to-come increase bottle capacity will position us to capitalize on that opportunity. We worked throughout the year to increase our capacity and are on track with our carton co-manufacturer to end the year with then having the capacity to produce between 20 million to 30 million units annually. And as for our bottle capacity, we are working to finalize an agreement with a new bottle co-manufacturer that could have us supplying more bottled product in the early part of next fiscal year. We believe that both capacity initiatives will result in a dramatic increase in our top line growth across many different accounts and channels. In summary, while it has been a challenging year due to the events that occurred last year that were outside of our control, we believe we have taken actions so that exiting this year, we have an expanded customer base and manufacturing capabilities needed to put us back on a path towards sustainable long-term growth. I'll now turn the call over to our CFO, Lisa Roger. Lisa?

Thank you, Ricardo. Revenue for the third quarter of 2023 was $2.6 million compared to $2.4 million for the third quarter of 2022. Revenue in 2022 was negatively impacted by a $630,000 claim estimate resulting from the voluntary product withdrawal of Twist & Go. Excluding the refund claims estimate, revenue for the third quarter of 2022 was $3 million. The year-over-year decline in adjusted revenue is a result of limited supply and lost customers caused by the loss of our largest bottle manufacturer, Twist & Go. As Ricardo said, we are on track with our carton capacity expansion plans and added a number of new school accounts in our heavy selling third quarter season. Gross margin for the third quarter of 2023 was 35% compared to a negative 30% for the third quarter of 2022. Gross margin for the third quarter of 2022, adjusted for the product withdrawal, was 28%. We expect modest margin improvement in the fourth quarter as a result of product mix and smoothie carton sales increase. Our net loss for the third quarter of 2023 was $476,000 as compared to a net loss of $2.7 million in the third quarter of 2022. Selling, marketing and distribution expense for the third quarter of 2023 decreased 19% to $697,000 compared to $860,000 in the third quarter of 2022. The decline was due to a decrease in storage and outbound freight expense and a decrease in broker commissions as a result of lower adjusted revenue. G&A expenses for the third quarter of 2023 decreased 43% to $578,000 compared to $1 million in the same period last year. The decrease in G&A was driven by a decrease in personnel costs resulting primarily from a reduction in headcount as well as a reduction in research and development expense that was elevated in 2022 as we incurred preproduction expense related to the launch of our carton packaging format. For the third quarter of 2023, our adjusted EBITDA was a loss of approximately $87,000, the best in company history, and down sequentially from a loss of $617,000 in the second quarter of 2023 and down year-over-year from a loss of $638,000 in the third quarter of 2022. We continue to expect to achieve positive adjusted EBITDA in the fourth quarter of 2023 as a result of increased sales volume, gross margin improvements, headcount reductions taken late in the second quarter of 2023 and relatively fixed operating costs, with the exception of outbound freight. Now moving on to our balance sheet. As of September 30, 2023, we had approximately $1 million in cash and approximately $748,000 of inventory on our balance sheet compared to $3 million in cash and $1 million of inventory as of December 31, 2022. Now I will turn the call back to Riccardo for closing remarks.

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

[Operator Instructions] Our first question comes from Anthony Vendetti with Maxim Group.

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

Yes. Look, I mean we've lost -- we did lose a fair amount of customers that we haven't been able to get back yet, mainly because they still want the bottles. And then some that even though they've taken the cartons, they're not doing the same amount of volume because they're not offering it to all the same students. So we believe from a percentage perspective, I would say it's probably -- at least probably 30% -- 30% to 40%. We do have a lot of new customers that have been added. Some previously existing customers have been added that were previously lost. So we believe there's a very, very significant opportunity going into next year once the new bottle capacity comes back up, particularly with some of the larger accounts that were previously using the bottles and are waiting for them still to come back.

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

So, we're expecting to have the agreement finalized here soon. And as mentioned, it will be up and running early in the new fiscal year, early in 2024. I would say by Q1 2024, maybe soon, we'll see.