Bubs Australia settles with former chair and founder over legal disputes

Bubs Australia settles with former chair and founder over legal disputes

Former Bubs Australia chair Dennis Lin and founder/former CEO Kristy Carr.

A legal dispute at Bubs Australia (ASX: BUB) that ensued following the sacking of founder Kristy Carr as CEO and former chair Dennis Lin has come to a close after the parties reached a settlement, alongside the dissolution of a Chinese joint venture initiated during their leadership.

In mid-2023 the infant formula company, which at the time was the target of a board spill that eventually failed, had argued in court filings that the pair allegedly misused company funds, while Carr had alleged that Bubs breached Fair Work rules in its treatment of her.

Today the group confirmed it had settled the proceedings in the Federal Court of Australia with Carr and Lin. 

"The claim commenced by Ms Carr and Mr Lin against Bubs, Katrina Rathie, Steve Lin, Paul Jensen and Reg Weine and the cross claim commenced by Bubs against Ms Carr and Mr Dennis Lin have been (mutually) discontinued on confidential terms with no orders as to costs," Bubs stated in an update today.

"Bubs is also pleased to advise that it has agreed binding terms to resolve all outstanding matters with respect to its Chinese joint venture with Zhitong (Hangzhou) Health Technology Co Ltd."

The joint venture, with Bubs holding 75 per cent, had been established to distribute the company's Chinese label goat infant formula products, subject to approval from China's State Administration for Market Regulation (SAMR).

However, in June following a review of its China strategy, Bubs communicated to its JV partners that it no longer wished to proceed with transactions previously planned by the former executive team, and had made a request to withdraw the SAMR application.

In July Bubs Australia released the results of a strategic review conducted by then non-executive director Reg Weine, who has since become CEO, claiming that "clearly our China's strategy has failed" and required a reset.

"Jackie’s (China manager Jackie Lin) initial observations on our Chinese business were stark. Sell through was weak, only 10 per cent of the distribution points promised by our exclusive reseller have been activated, pricing architecture was wrong, and our daigou business was overly reliant on rebates and discounts," Weine said at the time.

In today's announcement, CEO and managing director Reg Weine emphasised the China reset was "well underway" with expectations sales in the current half would exceed the December-half results, delivering mid-single digit revenue growth over FY23 for the full year.

"While the inventory overhang in China under Bubs’ previous exclusive distributor continues to be heavily discounted in all channels, this inventory will be cleared by the end of FY24," he said.

Net revenue in China was down 30 per cent to $7.1 million, compared to substantial increases in sales in the USA and Australia of 84.6 per cent and 36.8 per cent respectively. 

A very large portion of the USA net revenue of $18.2 million occurred in the last quarter of the half, which saw a 498 per cent surge year-on-year to $13.7 million.

Bubs Australia managed to substantially reduce its statutory loss in the period from $44.4 million in the December half of 2023 to $7.7 million in the red in the most recent period. This was aided by 25 per cent growth in overall revenue to $39.4 million, and a three percentage point lift in gross margin to 38 per cent on the back of stronger inventory management, together with geographic and channel optimisation.

Significantly, operating expenses as a portion of revenue were cut from 78 per cent to 53 per cent.

"Momentum in our business continues to build and H1 was a very strong six months with gross revenue up 29.8 per cent on the prior corresponding period driven by our rapid growth in the US. Bubs remains firmly on track to achieve our guidance for FY24," Weine said.

"USA market expansion remains our number one priority and our capital raising in November 2023 has enabled us to commence our second production shift at our Deloraine manufacturing facility and doubled our daily production volumes. This will enable us to service the increased demand in the USA where we are ranged at over 5,800 physical stores.

"Bubs is on track to deliver its strategic plan and guidance for the full year and remains focused on responsibly managing capital to grow and maximise shareholder value."

He also confirmed that interim CFO Robin Johnston is now a permanent member of the Bubs leadership team.

Bubs expects to be EBITDA positive and cash flow positive in FY25.

BUB shares are down 6.15 per cent to $0.122 at the time of publication, representing approximately a 47 per cent deterioration in the share price since last year's extraordinary general meeting (EGM) where shareholders voted to retain the current board and leadership team.

Kristy Carr declined to comment on today's announcement, and Dennis Lin is yet to respond to requests for comment at the time of publication.

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