Greetings and welcome to Else Nutrition's second quarter conference call. At this time, all participants are on a listen-only mode. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Alexandra Schilt. Thank you. You may begin.
Good morning, and thank you for joining Else Nutrition's 2025 second quarter financial results and business update conference call. On the call with us today is Hamutal Yitzhak, Chief Executive Officer of Else Nutrition. The company issued a press release today containing its 2025 second quarter financial results, which is also posted on the company's website. If you have any questions after the call or would like any additional information about the company, please contact Crescendo Communications at 212-671-1020. The company's management will now provide prepared remarks reviewing the financial and operational results for the second quarter ended June 30, 2025.
Before we get started, we would like to remind everyone that today's call will contain forward-looking statements that are based on current assumptions and subject to risks and uncertainties that could cause actual results to differ materially from those projected, and the company undertakes no obligation to update these statements except as required by law. Information about these risks and uncertainties are included in the company's filings, as well as periodic filings with regulators in Canada and the United States, which you can find on CDAR and Else Nutrition's website. With that, we will now turn the call over to Hamutal Yitzhak, Chief Executive Officer. Please go ahead, Hamutal.
Thank you, Alexandra, and good morning, everyone. The second quarter of 2025 marked steady progress in our transformation journey. Despite continued macroeconomic pressure and funding constraints, we advanced on several critical fronts, including streamlining our operations and our retail distribution, gaining regulatory momentum, and building our pipeline for future cost-efficient, sustainable growth. Before diving deeper, I want to acknowledge the reporting delay. Timely, accurate reporting is central to building investor trust, and while delays were driven by technical and external factors, it does not meet the high standards we set for ourselves. Despite operating with a very lean and understaffed financial team, we have managed to catch up with the timelines of the financial statements, and we expect to file on time for Q3. We are taking steps to ensure our reporting processes are truly aligned with regulatory timelines going forward.
We remain committed to compliance and transparency for our shareholders. We began 2025 with a clear mandate to operate more efficiently, conserve cash, and position the company for long-term sustainability. In Q2, we continued to implement purposeful initiatives to simplify our organization, reduce overhead, and increase operational agility. These changes are not only lowering costs but also helping us to focus on the areas of our business that deliver the most value. One of the most impactful initiatives underway is our planned transition to European-based powder production. By moving key manufacturing closer to our international supply chain, we expect to reduce production costs, expand margins, and mitigate tariffs and logistics risks. We believe this strategic shift is essential to scaling efficiently and effectively. On the commercial front, our Kids Ready-to-Drink Shakes continue to expand within Walmart, where we are now available in approximately 1,000 stores.
Importantly, our products are resonating with consumers seeking healthier, plant-based alternatives for their families. On the regulatory front, we continue to be actively involved and encouraged by the developing legislation around modernizing infant formula standards in the U.S. The momentum we saw earlier this year from Operation Stark Speed has carried forward with the FY2026 Agriculture Appropriations Bill, both reinforcing the need for innovation and resilience in the U.S. infant formula market. In addition, the recommendations from the National Academies of Sciences, Engineering, and Medicine, particularly around phasing out outdated PER testing in favor of more scientifically robust infant growth studies, are especially encouraging for Else. These developments give us increased confidence that a regulatory pathway is opening for our Plant-Based Infant Formula, and we are preparing accordingly to advance clinical trials as soon as practicable. Beyond the U.S., we are seeing encouraging momentum internationally.
Our toddler signature product manufactured in Europe continues to perform well online and is generating growing interest from distributors in key global markets. On the Adult Ready-to-Drink Product line, while cash flow constraints have required us to delay the full commercial rollout, retailer engagement has been strong. We are confident that when resources allow, this product will represent a meaningful growth lever, particularly in North America and select international markets. At the same time, we are actively engaging in partnership discussions with several large companies that have international operations. These conversations span both commercial distribution opportunities and strategic R&D collaborations. While no agreements are final, we view these discussions as highly encouraging as they validate Else's brand strength, its unique intellectual property, and the global demand for plant-based infant nutrition.
Before reviewing the financial results of Q2, I want to address the revenue decline compared with Q1 2025 and discuss some key factors that contributed to this. First, inventory constraints. We lost more than $300,000 in sales due to out-of-stock situations for a clean cereal, which typically contributes 15% to 20% of our online and retail revenue. Given cash priorities, we were unable to replenish in time, but production is now underway and expected to restore availability this month. Second, normal fluctuations of retail sales. U.S. retail sales were strong in Q1. Q2 reflects a normalization against that peak, a seasonal pattern we also observed last year. We anticipate retail sales to strengthen again in the coming months. Lastly, Canadian market. Out-of-stock conditions across our Canadian product portfolio, again tied to cash priorities, reduced revenue from Canada.
We are actively restructuring Canadian operations to build a more profitable and sustainable distribution model in parallel to avoid out-of-stock situations. Now, let me briefly walk you through our financial performance for the second quarter, which is reported in Canadian dollars. Total revenues for the quarter were $1.5 million compared to $2.6 million in the second quarter of 2024, reflecting softer sales in our core categories, mainly due to inventory constraints. On a half-year basis, revenues totaled $3.6 million, down from $4.8 million in the prior year period. Gross profit for the quarter was a loss of $55,000 compared to the positive $263,000 in Q2 2024. This translates into a negative gross margin of -3.7% versus a positive margin of 10% in the prior year. Importantly, a large portion of the revenue decline was caused by late 2024 U.S.
and Canada deductions totaling $270,000 Canadian dollars recorded in Q2, which reduced revenue and gross profit that we believe are not reflective of Q2's performance. Importantly, we made significant progress on cost discipline. Operating expenses were reduced by almost 60% year over year, falling to $1.3 million from $3.4 million in Q2 2024. Notably, wages came down from $1.1 million in Q1 2024 to $871,000 in Q1 2025 and to $573,000 in Q2 2025, a 50% reduction. In consulting fees, we cut costs by 90% and office and miscellaneous expenses by close to 60%. These efforts contributed to a narrowing of the operating loss, which improved by 55% to $1.4 million from $3.1 million in Q2 2024. At the bottom line, non-operating items, including the reevaluation of warrants, convertible loan impacts, and foreign exchange losses, weighed on the results.
Net loss for the quarter was $1.4 million compared to $2.5 million in Q2 2024, an improvement of roughly 43% year over year. We will continue to operate with a lean team structure through 2026 and remain committed to achieving cash flow positivity by late 2026 or early 2027. Looking ahead, we remain focused on balancing near-term financial discipline with long-term strategic growth. Our priorities for the next several quarters include growing our online business, where we continue to see strong engagement from health-conscious families, accelerating international expansion with particular focus on Europe and select high-potential markets, progressing regulatory discussions to bring our Plant-Based Infant Formula to market and create a new category in plant-based infant nutrition, improving margins through continued supply chain optimization and sourcing efficiencies, and broadening our product portfolio with innovations tailored to both children and adults.
At this point, I'd like to address questions that come in from investors. Alexandra, please lead the Q&A session.
Thank you, Hamutal. Our first question is, can you elaborate on your regulatory strategy and timeline?
Certainly. We see meaningful progress at both the legislative and scientific levels. Operation Stark Speed and the FY2026 Agriculture Appropriations Bill are key milestones that support broader access to alternative formulas. Meanwhile, the National Academies of Sciences, Engineering, and Medicine's recommendation to replace outdated testing methods gives us confidence in the FDA's willingness to modernize. We believe these developments will enable us to advance clinical trials in the near future, a critical step in bringing our Plant-Based Infant Formula to market.
Thank you. Are you exploring M&A or partnerships to accelerate growth?
Yes. We continue to evaluate opportunities for strategic collaborations that could expand distribution, enhance our R&D capabilities, and accelerate regulatory approval. While we remain selective, we are open to partnerships that align with our mission and deliver value to shareholders.
Thank you. Our next question, gross margins turned negative in Q2. What drove this, and how will you improve them?
The negative gross margin of -3.7% in Q2 was driven by a combination of lower sales volumes, higher per unit production costs that were based on 2024 production costs as the inventory sold was produced in 2024, and on delayed QA and Canadian deductions that drove revenue down by an additional $270,000. Additionally, some extraordinary cost items in supply chain and distribution weighed on results. Going forward, we are negotiating better supplier terms, improving logistics efficiency, and managing inventory more tightly. We expect margins to recover to positive territory in the quarters ahead.
Thank you. When do you expect to achieve positive cash flow?
Based on our current trajectory and operational plans, we expect to achieve cash flow break even between late 2026 and early 2027. This timeline reflects both the ramp-up in revenue as new distribution channels scale and ongoing cost optimization. Importantly, every quarter between now and then should show progress toward narrowing losses and improving gross margins.
Thank you. With the cease trade order still in effect, how are you addressing regulatory challenges?
Upon filing the Q2 2025 financials, the British Columbia Securities Commission has lifted the cease trade order on the closing date of September 12, 2025, and we are currently awaiting the Toronto Stock Exchange approval.
Thank you, Hamutal. That does conclude our Q&A session. At this point, I'll turn it back over to you for closing remarks.
Thank you, Alexandra. In closing, the second quarter reflects the continued progress we are making in transforming Else Nutrition Holdings Inc. into a leaner, stronger, and more focused business. We have stabilized revenues, improved gross margins, and significantly reduced our operating losses, all while positioning ourselves for future growth. We remain deeply grateful to our investors, partners, and customers for their continued confidence and support. We are excited about the road ahead and look forward to sharing further progress in the coming quarters. Thank you for joining today's call.
This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.