Barfresh Food Group Inc.

Good afternoon, everyone, and thank you for participating on today's second quarter 2022 corporate update call for Bar Fresh Food Group. Joining us today is Bar Fresh Food Group's founder and CEO, Ricardo Del Costa, and Bar Fresh Food Group's CFO, Lisa Roger. Following prepared remarks, we will open the call for your question. The discussion today will include forward-looking statements. Except for historical information herein, matters set forth on this call are forward-looking within the meeting, of 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 relationship, 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 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 warnings, risk factors, and 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, changes 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 the table in the business update release to the most comparable gap measures. The reconciling items are non-operational or non-cash costs, including stock compensation, stock issued for services, and gain or loss on the sale of derivatives and other non-recurring costs, such as those associated with the company's recent 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'd like to turn the call over to the CEO of Barfresh Food Group, Mr. Ricardo Del Costa.

Please go ahead, sir.

Good afternoon, everyone, and thank you for joining us for our second quarter 2022 earnings call. I'm very pleased with the first half of this fiscal year. Revenue in the second quarter increased 115% year over year to 2.8 million despite continued supply chain issues as well as significant cost pressures impacting our ability to fulfill all immediate orders. Our revenue growth was driven by continued success in the education channel with our Twist and Go products and also by an uptick in our single serve and bulk products as we entered into the summer selling season. We have continued to expand our footprint with new school locations as we tackle the massive opportunity in the United States with over 98,000 schools and 14,000 school districts. The growth in single serve and bulk was from our military, amusement park and restaurant clients and offset the seasonal slowdown in the education channel. The reintroduction of single serve and bulk is a high margin business enabling us to offset some of the inflationary pressures we and our industry continue to face. We also raised prices in order to offset a portion of the inflationary pressures and began implementing price increases across all product offerings at the end of the first quarter. These are now fully implemented as we enter the third quarter. Additionally, we have been expanding our customer base in all channels, including the education channel, driven by strong product adoption and increased size of our sales team and administrative support. We are now well positioned to drive efficiencies in the back half of 2022, and believe the expected increase in revenue will enable us to significantly improve gross and operating margins. In addition, we recently entered into a strategic manufacturing agreement that will enable us to expand our production capabilities in a phased approach positioning us to properly partner with larger school districts and improve cost efficiencies beginning in the back half of this year. Once fully implemented Our production capacity will more than triple our current outsource capacity. We believe the back half of this year is going to generate meaningful sequential top line growth and improvements in our gross and operating margins as we better leverage our recently added infrastructure and all other efficiency improvements. I'll now turn the call over to our CFO, Lisa Roger, to talk about the second quarter results in more detail. Lisa?

Thank you, Ricardo. Revenue for the second quarter of 2022 increased 115% to $2.8 million compared to $1.3 million for the same period last year. The year-over-year increase in revenue is a result of increased orders for our Twist and Go product in the school channel, even during the seasonally soft summer period, as well as an increase in sales of our single serve and bulk products. We believe the third quarter top line will exceed the second quarter as we will be entering the back to school period for the education channel. Overall, we believe the back half of the year will generate record revenue greater than the first half of this year. Gross margins for the second quarter of 2022 were 32% compared to 43% for the same period last year and 30% for the first quarter of 2022. The expected year-over-year decline in gross margins was due to higher raw material and packaging costs, as well as product mix. We expect gross margins to improve once the company's margin improvement efforts are fully implemented. Selling and marketing expense for the second quarter of 2022 increased to $0.7 million compared to $0.4 million in the second quarter of 2021. The increase is a result of the increased sales and marketing personnel and outbound freight elevated as a result of our growth in revenue as well as inflationary pressures. We are working to offset the elevated product and freight costs by implementing a number of initiatives to include improving packaging and ingredient and freight optimization. Also, our new manufacturing agreement will improve our efficiencies beginning in the third quarter. G&A expenses for the second quarter of 2022 increased to $0.8 million compared to $0.6 million in the second quarter of 2021. The increase in G&A was driven by an increase in personnel costs compared to a pullback in the COVID-19-affected quarter last year, including non-cash stock-based compensation. The company is now fully resourced for accelerated growth plans. Net loss for the second quarter of 2022 was 0.7 million as compared to a loss of 0.3 million in the second quarter of 2021. Adjusted EBITDA was a loss of approximately $430,000 for the second quarter of 2022 compared to a loss of approximately $386,000 for the second quarter of 2021. Adjusted EBITDA in the second quarter of 2022 was negatively impacted by significantly higher raw material costs, increased personnel costs, and record high shipping and storage costs. We expect sequential improvement in adjusted EBITDA for the third quarter and believe we will be close to adjusted EBITDA breakeven in the fourth quarter. As of June 30, 2022, the company had approximately $3.7 million of cash and approximately $1.6 million of inventory on its balance sheet. This has us very well positioned to meet the expected increase in demand for the third and fourth quarter. Now, I will turn the call back to Ricardo for closing remarks.

Thank you, Lisa. During the first half of 2022, we invested in our infrastructure, entered into a new manufacturing agreement, and expanded our customer base. These improvements enable us to properly service many of the larger customers that we have been wanting to work with, but we were not able to service due to supply chain issues and inability to manufacture enough product to meet their demand. Our new manufacturing agreement completely changes this dynamic. We have the perfect offering for the school channel and are very excited to continue expanding our customer base in all channels. As we enter the back half of this year, we are confident we will increase our top line, improve gross and operating margins, and be close to adjusted EBITDA breakeven or even positive in the fourth quarter. So in the back half, we expect to continue to increase sales with record highs expected to continue. We have implemented strategies to mitigate the increases in raw materials, shipping and storage costs. We have signed a new long-term manufacturing agreement that will significantly increase our production capacity and allow us to service some of the largest customers. Continue to work on new innovative products to add to our portfolio. And we are fully staffed and will not need to add any additional personnel to meet our goals for the foreseeable future. We expect all these improvements to result in the strongest back half in our history and will lead to consistent profitability. We are beginning to hit our stride and our entire company is very excited about the future. Now with that, let's take your questions. Operator?

Thank you. At this time, we'll be conducting a question and answer session. If you'd like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.

One moment please while we poll for questions. Our first question comes from Anthony Vendetti with Maxim Group. Please proceed with your question.

Ricardo, I was wondering if you could talk about The magnitude of the price increases, if there's been any pushback, and if so, from which customers?

Yeah, sure. That's a good question. The magnitude of the increases have been anywhere from 7% to 10% across the various products. Unfortunately, that still didn't account for the total amount of price increases that we received. but it was an amount that we felt was suitable for the customers that we were providing the increases to. There was a little bit of pushback on certain customers, some of the larger customers and more urban type customer sets where they're more price challenged, but overall it was very well received. We have put in a lot of work in solving for the supply chain and cost increase challenges that we have had. And that's evident in the margin that came through in Q2. We are very confident about the next six months margin improvement due to all the initiatives that we've actually already solved for now and put in place. They just need to be rolled out. So, you know, we'll start to see that playing out over the next, you know, three to six months.

Okay, so 7% to 10%, and what you're basically saying is your supply chain slash raw material costs increased more than 10%, so that's why a little bit of it hits your gross margin.

Exactly, yeah. Yeah, but we're expecting that to go the other way now from Q3 onwards. Okay. There was just a little bit of a lag as well in terms of just a little bit of a lag in terms of raw material inventory build as well and still pulling through all the all the priced items and needing to make sure that we have the raw materials available to actually make the product given all the supply chain issues you know a lot of those items we needed to make sure that we secure and so that was secured at a higher price so we needed to still work through some of those items as well.

Okay, just two more quick questions. Any potential additional distribution partners? How are those conversations going? Any expectation for additional partners before the end of the year?

Maybe before the end of the year. We are talking to a few like potential partners. You know, we'll see how they play out before the end of the year. you know, we are getting a lot of traction on the products. So we're definitely recovering from COVID and we're starting to see that even in the other product segments. So I think that, you know, it's going to be a really good back half of the year and it should also help any of the potential partner discussions that we're having.

Okay, and last question. You know, it is the summer, so sometimes the... single serve with the bulk channels, how is that doing? Does that pick back up this summer?

Yeah, that's a good question. Mixed bag, actually. We had, for the summer, the single serve was definitely picking up. The bulk product has started to pick up. However, as I'm sure everyone's aware, there's been a pretty significant labor increase labor shortage for a lot of locations, particularly some of these outlets where they just don't have enough labor to man the machines. So we did see a lot of, you know, it didn't pick up as much as we thought it was going to in the first part, but we are definitely seeing those machines starting to be turned on now and the bulk product, especially for the equipment, is definitely starting to pick up as well with more customers actually signing new agreements. So that's going to be another exciting product channel for us to see increase from here on out post-COVID.

Okay, great. I'll hop back into the queue. Thanks very much.

It's a good sign. It actually is a really good sign. I mean, the COVID issues that we've had are definitely starting to correct. And I think the labour shortage is probably one of the last ones excluding obviously the pricing.

Okay, great. Thank you. Thanks.

Ladies and gentlemen, we've reached the end of the question and answer session. I'd now like to turn the call back over to Ricardo Del Costa for closing comments.

Thanks, everyone, for joining.

We look forward to sharing new updates and successes for the back half of the year as they come available. Thanks very much.

This concludes today's conference. You may disconnect your lines at this time. And we thank you for your participation.