A bitter boardroom spat has left baby formula company Bubs Australia (ASX: BUB) scrambling to undertake serious damage control following a disappointing year, financially, and fruitless attempts at chasing debts created by previous management. In an attempt to calm shareholder unrest, the Company has presented its strategic review to start over.
During the three-year period leading up to July 3, 2023, Bubs’s stock price experienced a significant decrease of 80.7%, dropping from $0.96 to $0.185 on July 3, 2023. Since its IPO in 2017, Bubs has incurred losses amounting to $240 million, despite riding the foreign wave of demand for Australian infant formula. The losses were propped up by seven capital raises in that time.
The Company recently ousted Dennis Lin (the former Executive Chairman) and Kristy Carr (the former Chief Executive Officer and Founder) who were collectively responsible for the Bubs China strategy and managed the relationship with the Alpha Group – the Company’s distributor in China.
Unsold inventory has resulted in one ongoing legal battle that Bubs is embroiled in. Alpha Group has been after Bubs for $20 million, citing unsold stock and previous arrangements. Willis and Alice, subsidiaries of Alpha Group, owe outstanding debts to Bubs. Willis owes $2.67 million, Alice owes $2.99 million, and they intend to return $5.65 million worth of unpaid stock. They also seek a refund of approximately $7.5 million for additional stock. Plus, they demand $12.9 million for Bubs’ “failure” to provide credit in new stock. The two claim that the previous management team promised them the ability to return unsold stock without any liability.
Bubs disputes these claims, stating that its agreements do not allow for stock returns or refunds.
The other legal battle has been initiated by Carr and Lin against Bubs Australia, alleging bullying, harassment and Fair Work breaches.
Both were let go following their failure to comply with reasonable Board directions and the recent deterioration in Bubs financial performance over the half year. In an announcement, Bubs said, “The time is right for a change in leadership and to change the governance framework of the company”.
In keeping with that, the Company has created a five-point plan as part of its strategic review. In the USA, it aims to expand its presence in major retailers, such as Grocery & Pharmacy, increase sales velocity and strengthen e-commerce operations. The Company also seeks permanent access to the US market by securing FDA approval.
In China, Bubs is implementing a reset strategy that involves new leadership, trade partners, and a focus on its competitive advantage in goat infant milk formula and goat adult milk powder. Bubs plans to optimise its product portfolio by focusing on premiumisation, repositioning bovine milk formula products, streamlining the product range, fostering innovation, and investing in core brands. Bubs intends to make better use of its manufacturing facility in Victoria, Australia, by exploring options such as China’s State Administration for Market Regulation (SAMR) registration, toll manufacturing, and private label opportunities.
The Company has reduced operating expenses and expects to decrease its monthly cash burn rate by more than half from Q2 FY24. It has enough funding and inventory to execute its growth plans.
Bubs Independent Non-Executive Director, Reg Weine, shared, “We must immediately arrest the decline in shareholder value and get Bubs back on track.”
“Capitalising on our first mover advantage in the US and resetting China are two significant components of our strategic plan. We have a clear competitive advantage in goat infant and adult nutrition, and we need to focus our efforts on this part of our portfolio.
“With a greater focus on working capital, and tighter control on costs, we will quickly reduce the monthly cash burn, extend the runway, and deliver sustainable shareholder value.”
For a baby formula company with a cutesy name, Bubs has plenty of adult stuff to contend with in the coming months. But if its strategic review goes to plan, hopefully it can get back on track before the end of FY24.
Alinda is a Business Reporter for The Sentiment
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