Capacity Increases On Schedule. Barfresh noted its carton capacity expansion is moving ahead of schedule, meaning it will increase from 5 million cartons to 25 to 30 million cartons annually later this year.  Additionally, it has agreed to terms with a manufacturer who will bring new Twist & Go bottle capacity online at the beginning of 2024.  These capacity increases should help propel Revenue higher than current levels and meet current and expected demand.

Positive Developments In The Education Channel.  Since the end of theschool year there has been talk of banning flavored milk at schools due to the inclusion of added sugars.  Any change in competing drink availability could drive more demand to healthier Barfresh products.  Additionally, more states are implementing free meals for all students, which could speed the adoption of Barfresh products into school districts, and significantly increase sales once products are on the menu.  Eight states now offer free meal programs at schools, including California (the Los Angeles Unified School District is a Barfresh client), Colorado, Minnesota, Maine, Michigan, New Mexico and Vermont, with Nevada doing so on a temporary basis for the upcoming school year.

Q2 Continues To Feel Impact Of Schreiber Supply Issue.  Barfresh reported second quarter results with Revenue of $1.51 million, missing our estimate as the Company struggled to convert bottle customers to carton customers before the end of the 22-23 school year.  SG&A declined substantially on personnel cuts, a stock-based compensation reversal, and lower shipping expenses.  Net Loss for the quarter was $0.74 million, while Adjusted EBITDA was negative $617,000. 

Schreiber Foods Dispute Update.  The Company noted that absent significant movement in settlement talks, it intends to refile its lawsuit against Schreiber Foods later this month.  We note the original filing was a  $20 million breach of contract suit.

Delisting Notice & Convertible Debt Subscription.  In June, the Company received a notice from Nasdaq that it failed to meet continued listing requirements, which requires having $2.5 million in Stockholders Equity, $500,000 of Net Income or a $35 million market cap.  With its Equity around $1.5 million, investors recently agreed to subscribe to a convertible debt offering of $1.13 million.  The debt can be drawn down by Barfresh as needed, has a maturity of one year, an interest rate of 10%, and is mandatorily convertible at the greater of $1.20 or 85% of the 10-day VWAP.  The stock is relatively close to the $35 million market cap figure, which would make a drawdown unnecessary.  This will be an item to watch as we approach October 30.

Model Update.  After a slower uptake of bottle to carton conversions and the end of the school year in Q2, we reigned in our growth expectations for the next few quarters based on deliveries at the end of the last school year.  With more schools online at the start of the 23-24 school year, we still expect sales to rise as more carton and bottle capacity comes online in the next six months.  From there, it should be a matter of winning contracts and delivering product.  The decline in our Revenue estimates was offset by SG&A reductions put in place recently and lower shipping costs, which yields higher EPS estimates.  Management noted on the conference call that it expected to be around Adjusted EBITDA breakeven in Q3 and positive in Q4.

Maintaining Rating & Target Price.  While the Revenue ramp will be slightly slower than previously expected, it is coming soon, along with potential drivers in the Education channel that could accelerate uptake.  With a continued positive outlook for the Company, we are reiterating our Buy rating and $5.50 target price on Barfresh Food Group.  Our target price is based on an EV/Revenue multiple of 3 times our 2024 Revenue estimate of $25.3 million.  We believe the multiple is justified given industry multiples and the rapid growth expected heading into 2024.  We again note that any meaningful cash settlement from Schreiber is not included in our model and would give greater flexibility to the Company to speed its development of other channels, like Grocery.