Barfresh Food Group Inc.

Good afternoon, everyone, and thank you for participating on today's fourth quarter and full year 2022 corporate update call for Barfresh Food Group. Joining us today is Barfresh Food Group's founder and CEO, Ricardo Delacaste, 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 the 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 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 and 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 sale of derivatives and other non-recurring costs, such as those associated with the product withdrawal. asset impairment, and the company NASDAQ uplifts. 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 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 fourth quarter and full year 2022 earnings call. We had a strong first half of the year, which allowed us to achieve our highest annual revenue in company history. Despite continued supply chain issues throughout the year and our decision to voluntarily withdraw defective product from the market from one of our two bottle manufacturers due to textural issues with their finished product. During the first half of 2022, we invested in our infrastructure, entered into a new manufacturing agreement for our new smoothie carton offering, expanded our customer base and implemented price increases across all product offerings, setting us up for what we expected to be a very strong back half of the year. Prior to the isolated incident with our largest Twist & Go bottle manufacturer, we were 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. Despite the temporary setback, we kept our heads down and stayed committed to servicing our customers. In the fourth quarter, we continued to supply Twist & Go bottle product, but at a significantly reduced rate via our other capacity-constrained bottle manufacturer. and as planned, executed the rollout of our new smoothie carton product. However, as the lost bottle manufacturer accounted for over 50% of all our purchases, the lost production had a significant impact on our revenue generation in the third and fourth quarters and will continue to have an impact until we replace the bottle manufacturer. We had generated over 3 million of sales in the third quarter before all the credits for the withdrawal of product. And we were expecting to generate 4.5 million in the fourth quarter versus the 1.4 million we actually booked. We are actively working to replace the lost bottle manufacturer and are working on multiple options. However, it takes time to source a new partner with the right experience, infrastructure, and available capacity. However, we were fortunate that early in 2022, we had set on a path to launch our new smoothie carton product offering the fourth quarter of 2022, and we achieved that goal. This new carton product offering was created to be complementary to our bottle revenue. This is an important point because our market wants and needs both carton and bottle product offerings. The response from our new customers since we rolled out the new smoothie carton product in the fourth quarter has been fantastic. It has helped us secure new customer wins and the environmentally friendly format has helped us enter into school districts we were previously excluded from due to their no plastic policy. The demand for the product has exceeded our expectations and we saw demand outstrip supply in the fourth quarter and into the first quarter of 2023. as we were still finalising product testing and are awaiting installation of new equipment to increase the available capacity. We have our co-packer working to make engineering changes to the manufacturing line, which will allow them to increase capacity to approximately 25 to 30 million units per year. However, this is not expected to become fully available until the second half of 2023. Results in the first half of 2023 will be impacted from these supply constraints, but revenue is expected to grow significantly in the back half as additional capacity for our smoothie carton product comes online. We expect margin improvement in the upcoming year driven by three main factors. Price increases that were implemented this year, the continuation of our operational margin improvement efforts, and a full year of sales of our higher margin smoothie carton product. We expect gross profit margins for the first half of 2023 to be consistent with the fourth quarter of 2022 in the mid-30s and then expand slightly in the back half of the year as sales increase with our increased capacity for our smoothie carton product. We will be focused in 2023 on securing the lost bottle manufacturing capacity and also securing additional carton capacity to support our long-term growth. We have proved to be a nimble organization that quickly adapts to change, and we will work this year to not only improve production levels, but also continue to improve our cost structure and margin profile, so that once we move past these near-term hurdles, we will be back on our path towards sustainable long-term growth and profitability. Lastly, As it relates to the legal matter with our former bottle manufacturer, we continue to pursue a resolution with the manufacturer. Given the size of the disruption to our business and the magnitude of the damage we've had to endure, an outcome in our favor should result in a significant financial recovery for the company. As the process is ongoing, there is nothing more to report at this time. I'll now turn the call over to our CFO, Lisa Roger. Lisa?

Thank you, Ricardo. Revenue for the fourth quarter of 2022 was $1.4 million compared to $2.5 million in the prior year. Revenue for the full year of 2022 increased 37% to a record $9.2 million compared to $6.7 million for the full year of 2021. The full year increase in revenue is the result of increased orders of our Twist & Go bottle product in the first half of the year and sales from our new smoothie carton product rolled out in the fourth quarter of 2022. This is offset by reduced sales of our Twist & Go bottle product in the back half of the year due to the loss of our largest bottle manufacturer. Net sales for the full year of 2022 include a $500,000 unfavorable impact related to expected customer credits. Additionally, we estimate that we lost over $3 million in revenue resulting from the disposal of Twist & Go bottle inventory with textural issues and the loss of bottle capacity in the third and fourth quarters of 2022. Gross margins for the fourth quarter of 2022 were essentially flat to the prior year period at 36%. Gross margins for the full year of 2022 were 16% compared to 37% for the full year of 2021. The year-over-year decline in gross margins was primarily due to the customer credits and costs related to the product withdrawal in the third quarter of 2022. partially offset by the launch of our new higher margin smoothie carton product in the fourth quarter of 2022. In addition, the higher raw material and packaging costs from the unprecedented market costs and labor shortages weighed on margins in 2022. As Ricardo said, we expect margin improvement in 2023 as we benefit from increased sales of our new higher margin smoothie carton product, pricing actions implemented in 2023, and our operational margin improvement efforts. Our net loss for the fourth quarter of 2022 was 1.9 million as compared to net income of 130,000 in the fourth quarter of 2021. Net income for the fourth quarter of 2021 benefited from forgiveness of a $568,000 PPP loan. Net loss for the fiscal year 2022 was 6.2 million as compared to a net loss of 1.3 million in fiscal year 2021. The main drivers behind the year-over-year loss increase were the lack of product supply from our lost bottle manufacturer, overall higher operating costs since the start of the pandemic, increased costs for ingredients and packaging, and significantly higher freight costs. Net loss for fiscal year 2022 was also impacted by 1.8 million in charges related to the product withdrawal and a $746,000 non-cash asset impairment charge related to idle equipment resulting from overcapacity for our single serve products and equipment held at our manufacturer. G&A expenses for the fourth quarter of 2022 were $927,000 compared to $572,000 in the same period last year. Selling, marketing, and distribution expense for the fourth quarter of 2022 increased to $610,000 compared to $574,000 in the fourth quarter of 2021. G&A expenses for fiscal year 2022 were $3.5 million compared to $2.2 million in the prior year. The increase in G&A was driven by an increase in personnel costs as we hired permanent staff rather than rely on consultants and temporary staff as the critical stages of the COVID-19 pandemic waned. Personnel costs include non-cash stock-based compensation. Additionally, G&A expenses were impacted by an increase in research and development expense in the third quarter of 2022 related to the launch of the new smoothie carton product and legal fees related to the dispute with our bottle manufacturer. For fiscal year 2022, selling, marketing, and distribution expense increased to $2.9 million compared to $1.8 million in the prior 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 the new smoothie carton format, as well as ingredient and freight optimization. For the fourth quarter of 2022 and full year 2022, our adjusted EBITDA was a loss of approximately $833,000 and $2.4 million respectively, as compared to a loss of $67,000 and $1.2 million for the same periods last year. The increase in adjusted EBITDA loss was due to the aforementioned margin pressure and the increase in operating expenses as we emerged from the pandemic and built our business to support the growth that was anticipated before we encountered the product issues and dispute with one of our bottom manufacturers. Now moving on to our balance sheet. As of December 31st, 2022, we had approximately $3 million in cash and approximately $1 million of inventory on our balance sheet. We are confident that we will not need to raise additional capital for the foreseeable future. Now I will turn the call back to Ricardo for closing remarks.