Barfresh Food Group Inc.

everyone, and thank you for participating on today's third quarter 2022 corporate update call for Barfresh Food Group. Joining us today is Barfresh Food Group's founder and CEO, Ricardo Delacoste, and Barfresh Food Group's CFO, Lisa Roger. Following prepared remarks, we will open the call for your questions. The discussion today will include forward-looking statements. Except for historical information herein, Matters set forth on this call are forward-looking within the meaning 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 relationships, 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 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 of 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 a table in the business update release to the most comparable GAAP measures. The reconciling items are non-operational or non-cash costs, including stock compensation, stock issued for services, and gain or loss on the sales of derivatives and other non-recurring costs, such as these associated with the product withdrawal, and the company's 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 will turn the call over to the CEO of Barfresh Food Group, Mr. Ricardo de la Coste. Please go ahead, sir.

Good afternoon, everyone, and thank you for joining us for our third quarter 2022 earnings call. Before I provide an overview of our results, I need to first provide an update on the state of our business and some events that have impacted our third quarter results and will have an impact on the remainder of the year and into 2023. During the third quarter, we began to receive customer complaints related to the textural consistency of some of our Twist and Go product, which was isolated to one of our manufacturers. We pride ourselves on delivering quality products to our customers and voluntarily withdrew the impacted product from the market while we tried to work with the manufacturer to understand and resolve the issues. Unfortunately, our attempts to resolve these disputes by informal negotiation as contractually required were unsuccessful and we found ourselves at an impasse. Today, we filed a complaint in the Federal District Court of Los Angeles against the manufacturer. It is important to point out that this issue is specific to only one manufacturer and we are continuing to supply product to customers as we work with our other manufacturers to produce Twist and Go, as well as our single serve and bulk products. We are also actively working to replace the lost bottle manufacturing capacity. However, that process will take time. Considering the manufacturer in question accounted for 58% of all inventory purchases, the lost production will have a significant impact on our revenue until we have replaced the lost capacity. We expect to make up some of the lost revenue with the launch of Twist & Go in our new carton format. We have been working over the past year on a number of cost savings initiatives and one of those was a format extension for Twist & Go. This new product is a 7.6 ounce ready to drink carton that is both economically and ecologically friendlier than our bottle format. As previously announced, earlier this year we entered into a strategic agreement with a new manufacturer, which was established for the production of our new carton product. I'm excited to announce that after successfully completing all testing and trials in the third quarter, we began shipping our product to school customers in October. The feedback we received during the trials was very encouraging and we feel good about our ability to convert existing bottle customers to also be carton customers, as well as win new customers. The product also fits nicely with the emerging trends in schools to move towards more environmentally friendly products and showcases how the company is constantly working to meet our customers' changing needs. Additionally, The new product was designed to allow us to aggressively pursue high volume accounts. We are very excited about its potential, but as it ties back to the lost bottle production, we do want to emphasize that it was planned to serve as a format extension, not a replacement for Twist and Go bottles, and will therefore not completely offset the lost revenue from the bottles. It does provide us additional coverage of our quality Twist and Go product and keeps us actively engaged with the existing school customers. Moving on to our other products, while we are still working to get back to pre-pandemic sales levels, we are making a steady progress and have seen growth each quarter with our military, amusement park and restaurant clients. The growth across all our sales channels led to revenue in the first nine months of 2022 of $7.7 million, an 82% increase over the prior year period. Revenue for the third quarter increased 25% over the prior year and would have been significantly higher if not for the product issues with our manufacturer as previously described. Prior to this incident, we were on track to have the strongest back half in our history, and we're expecting revenue for the second half of this year to not only exceed the first half, but also to be greater than the full year of 2021. We were projecting strong growth for our company with plans in place to triple our capacity and believe we were on a path to consistent profitability. Our expectation was for the second half of this year to be an inflection point for Barfresh as we began to hit our stride as a company. And so while we are disappointed to now find ourselves in this current situation, one completely outside of our control, we must remind ourselves that we have made incredible progress as an organization and this is a temporary setback. We have a strong product portfolio and customer base and believe once we move past this hurdle, we will be able to continue on our path towards strong long-term growth. I'll now turn the call over to our CFO, Lisa Roger, to talk about the third quarter and first nine months results in more detail and the impact from the product withdrawal on those results. Lisa?

Thank you, Ricardo. Revenue for the third quarter of 2022 increased 25% to $2.4 million compared to $1.9 million in the prior year. Revenue for the first nine months of 2022 increased 82% to $7.7 million compared to $4.2 million for the same period last year. The year-over-year increase in revenue is the result of increased orders for our Twist & Go product in the school channel, as well as increased sales of our single-serve and bulk products. Net sales for the third quarter of 2022 include a $1.2 million unfavorable impact related to expected customer credits and lost revenues resulting from the product withdrawal Ricardo mentioned at the start of the call. Gross margins for the third quarter of 2022 were negative 30% compared to 37% for the same period last year. Our third quarter gross margins tracked with our year-to-date Q2 performance, exclusive of the unfavorable impact related to the product withdrawal, including customer returns, fees, unsaleable inventory, and other product withdrawal-related costs. Gross margin for the first nine months of 2022 were 12% compared to 38% for the same period last year. The year-over-year decline in gross margins was primarily due to the costs related to the product withdrawal in the third quarter of 2022. in addition to higher raw material and packaging costs from the unprecedented market costs and labor shortages, as well as product mix. We expect gross margin improvement with the launch of the Twist & Go carton product. Selling, marketing, and distribution expense for the third quarter of 2022 increased to 0.8 million compared to 0.5 million in the third quarter of 2021. For the first nine months of 2022, selling, marketing, and distribution expense increased to $2.1 million compared to $1.2 million in the same period last year. The increase is a result of the increased sales and marketing personnel and outbound freight elevated as a result of increased shipments, including those that were ultimately not recognized as revenue due to the product withdrawal. Inflationary pressures have also contributed to the year-over-year increase in outbound freight expense. We have been working to offset the elevated product and freight costs by implementing a number of initiatives to include our new carton format for Twist and Go, as well as ingredient and freight optimization. DNA expenses for the third quarter of 2022 increased to $1.1 million compared to $0.6 million in the third quarter of 2021. For the first nine months of 2022, they increased to $2.7 million compared to $1.6 million in the same period last year. 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, as well as an increase in research and development expense related to the launch of the Twist & Go carton product. Net loss for the third quarter of 2022 was $2.7 million, as compared to a loss of $0.5 million in the third quarter of 2021. Net loss for the first nine months of 2022 was $4.3 million compared to a loss of $1.4 million in the same period last year. Adjusted EBITDA was a loss of approximately $637,000 for the third quarter of 2022 compared to a loss of approximately $597,000 for the third quarter of 2021. Adjusted EBITDA for the first nine months of 2022 was a loss of approximately $1.6 million compared to a loss of $1.1 million in the same period last year. As of September 30, 2022, the company had approximately $3 million of cash and approximately $600,000 of inventory on its balance sheet. Although we expect that the product withdrawal, reduction in capacity, and the cost of litigation will negatively impact our ability to achieve positive cash flow in the near term, we do not expect that we will need to raise cash to navigate the setback. Now I will turn the call back to Ricardo for closing remarks.

Thank you, Lisa. We spent the greater part of this year making significant improvements in our business. And if not for the unexpected issue with our manufacturer, would have been on a path towards delivering an incredible second half of the year and sustained profitability. Over the course of this year, we've expanded our manufacturing footprint by entering into a new manufacturing agreement, expanded our customer base across all channels, continued to see steady improvement in sales from our single serve and bulk customers, increased our sales network by adding sales brokers nationally, rolled out a new product extension with the introduction of our twist and go carton format, implemented a new operating system to help us manage growth and provide better visibility into our business. We believe the issue with our manufacturer is an isolated, temporary setback that we are able to weather with existing financial resources. Our performance in the first half of this year and the course we were on provides confidence that once we have replaced the twist and go capacity, we will be set up for strong long-term growth. As a reminder, we will not be able to comment on the ongoing litigation beyond what is in the complaint filed today. Now, with that said, Let's take your questions. Operator?

Thank you. We will now begin the question and answer session. To join the question queue, you may press star, then one on your telephone keypad. You will hear a tone acknowledging your request. If you are using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star, then two. We will pause for a moment as callers join the queue.

The first question comes from Nick Sherwood with Maxim Group.

Please go ahead.

Hi, this is Nick Sherwood from Maxim Group speaking for Anthony Mendetti. What sort of capacity do you have right now for the card in Twist & Go, and sort of how do you see that developing throughout the year as you add new accounts to that product?

Yeah, hi, Nick. Yeah, we've just launched that. We've just launched that new carton capacity, the new carton product right now. We will be able to move into about 20 million units a year with that capacity. We've just started, so we're making some improvements to the process as we get started here, but we expect to be able to have about a 20 million annual run rate.

Okay, thank you. And as a follow-up, do you see that The gross margins for that product being higher than your historical gross margins you've been experiencing in the past two quarters?

Correct. That's actually, you know, as I described in the call, that was one of the initiatives that we had been working on from the beginning of the year in terms of some of the cost improvements. So we believe it's going to have a very significant positive impact on our bottom line.

Okay, thank you. I'll rejoin the queue.

Once again, if you have a question, please press star then one. Once again, if you have a question, please press star, then one, now. Once again, if you have a question, please press star then one now.

As there are no more questions at this time, This concludes the question and answer session and today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.