Barfresh Food Group Inc (BRFH) 2019 Q4 法說會逐字稿

Good afternoon, everyone, and thank you for participating on today's Fourth Quarter and Full Year 2019 Corporate Update Call for Barfresh Food Group.

Joining us today is Barfresh Food Group's Founder and CEO, Riccardo Delle Coste; Joe Cugine, President; and Raffi Loussararian, Vice President of Finance for Barfresh Food Group. Following prepared remarks, we will open the call for your questions.

The discussion today will include forward-looking statements. Except for the historical information herein, matters discussed 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 and 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, potential, forecast and project among others. All statements, other than a statement of historical fact, that direct activities, events or developments that the company believes or anticipates, will, or may occur in the future are forward-looking statements. Such forward-looking statements are based on certain assumptions made based on experience, expected further developments and other factors that the company believes are appropriate under these circumstances. These statements are subject to a number of assumptions, risks and uncertainties, many of which are beyond the control of the company and may not materialize.

Investors are cautioned that any such statements are not guarantees of future performance. The content of this call should be considered in conjunction with the warnings, risk factors and cautionary statements contained in 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. The company does not intend and is not obligated to update publicly for any forward-looking statements, except as required by law.

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. Management believes that adjusted EBITDA provides useful information to the investor because it is directly reflective of the cash flow of the company. The primary factors in reconciling these items are noncash costs, including stock compensation, stock issued for services and gain or loss on the sale of derivatives.

Now I will turn the call over to the CEO of Barfresh Food Group, Mr. Riccardo Delle Coste. Please go ahead, sir.

Good afternoon, everyone, and thank you for joining us. On our call today, we will review our full year 2019 results and accomplishments, discuss our growing sales channels and provide added insight into our expanding sales pipeline and improvements in our operating efficiencies.

Before I discuss our 2019 results, I'd like to give an update on the current state of the business and the first quarter in light of COVID-19. To date, we have not experienced any material disruption in our manufacturing or supply chain logistics. However, towards the end of the first quarter, we began to see orders being canceled due to businesses such as restaurants, national parks and schools forced to temporarily close for the safety of their employees and customers.

As many of you are aware, March is historically our strongest month in the first quarter. However, despite these cancellations, and the prior year distributor loading comparison, we still recorded approximately $700,000 in gross revenue compared to approximately $880,000 in gross revenue for Q1 of the prior year.

One of the strength of our company is our diversified customer base, and that served us well as we saw the military side of our business continue to grow. Despite lower sales in the quarter, we had a meaningful improvement in our bottom line versus the prior year, and we expect continued improvement over the course of 2020.

Additionally, we made the conscious decision to expedite our new ready-to-drink bottle production in order to build assistance to our school channels in helping them continue to feed their students during these challenging times. Many students across the United States rely on the meals they receive at school. So with our bottled smoothie in the hands of administrators, they are able to continue serving students healthy food options despite school closures. To offset the effect of our business from COVID-19, we will be applying, and are eligible for, assistance under the Coronavirus Aid, Relief, and Economic Security (CARES) Act. We will provide more color on the quarter and our results as we release the first quarter results.

For full year 2019, our net sales increased 2% to over $4.3 million. Our full year sales would have been meaningfully higher. However, during the third and fourth quarters of 2019, we shifted our sales focus while we were waiting for the now finalized USDA language approving our bulk products widely and also our recently announced ready-to-drink bottle package. Our forward-thinking on this new package format in 2019 significantly reduced our investment on new customer bulk equipment, hence, bringing up cash flow to help finalize bottle testing and start-up manufacturing capabilities. We also faced challenging revenue comparisons versus last year and previous periods because in the prior year, we experienced a large selling of products to our recently signed school-focused distributors to get them up and running. And late into the fourth quarter of last year, we were still waiting on the USDA's formal authorization that our products sold into schools were fully reimbursable.

The exciting news is that we received that authorization, and the USDA approved our new package which will enhance our bulk platform.

Last week, we announced the launch of our new ready-to-drink product, Twist & Go. As I previously mentioned, this was done earlier than expected in order to assist with student feeding while schools are closed during COVID-19. We have been working on this offering for many months and believe it creates a tremendous long-term growth opportunity for us, which Joe will discuss in more detail shortly.

Full year 2019 gross margins expanded 3% to 54%. It is our expectation that gross profit margins in 2020 will be comparable to those in 2019 for our existing product lines. We also reduced general and administrative expenses by 12% to $6.9 million, and we reduced our operating loss by 16% to $5.2 million.

In 2019, we implemented cost reduction measures, such as relocating our headquarters and entering into a new contract for our outsourcing of payroll and benefits, which will collectively yield an annual cost reduction of approximately $200,000 alone. Additionally, we made improvements in our supply chain logistics and believe all these improvements will begin to have a significant impact on our financial results in the first half of 2020. In an effort to help everyone better understand the improvements we are making in cash flow and expenses, we began in the second quarter of 2019 to report adjusted EBITDA. For the full year 2019, our adjusted EBITDA was a loss of $4 million as compared with a loss of $4.8 million in 2018, an improvement of $800,000. This is expected to be dramatically better in 2020 and will be evident starting in Q1 of 2020.

Now I'll provide a review of our accomplishments in 2019. Throughout the course of the year, we made great strides with each of our sales channels. We expanded our reach with our national and regional accounts with the rollout of 2 new restaurant chains, 1 in North America and 1 in Puerto Rico. And recently, we announced we had been approved to commence a regional rollout for multiple products with a 3,000-plus location, multinational restaurant chain, which Joe will discuss later in the call.

Moving on to the school channel. Despite many schools having closed temporarily, breakfast and lunches are still being served to students. As I said earlier, in order to assist school administrators during this difficult time, we have begun working with certain schools. Most recently, we announced Pasco County School District to begin offering our bottled fruit and yogurt smoothie, Twist & Go, to their students. We expect to roll out this offering to additional schools and school districts during this time to offer immediate assistance and then with full implementation on their menu once schools reopen.

Before handing the call to Joe, I'd like to talk about our recent successful round of funding. In March, we announced the company had raised approximately $5.8 million through the combination of an aggregate sale of common stock at $0.50 per share with 50% warrant coverage with an exercise price of $0.60 per share, of which $3.8 million will be for growth capital and approximately $2 million came from the conversion of existing debt as per the recently filed 8-K. This capital gives us a strong balance sheet and financial position as we enter 2020 and begin rolling out our new products and prepare for our recently announced new multinational customer win.

And with that, I'll now turn the call over to our President, Joe Cugine, to discuss our sales channels. Joe?

Thank you, Riccardo. I'll start by discussing the national and regional restaurant accounts. As Riccardo said, we have recently been approved to commence a regional rollout with a leading multinational QSR with over 3,000 U.S. locations. This announcement comes after years of development and testing of a customized product line, and we are really excited to begin rolling out this summer with multiple flavors. We will be able to share more information once the product is on their menu. This is a major milestone for our company and will dramatically increase our opportunity for profitable growth.

We have an established organization with ample manufacturing capacity, logistics and distributor network to successfully service this multinational restaurant client and many others. We look forward to updating you on the progress as we get closer to the launch.

We also continue to test with other national QSR chains in the U.S. In 2019, we launched 2 new restaurant chains, which began serving our products in the third quarter. The first was a sandwich chain in Puerto Rico and the second was a national chain in North America with 57 locations. Additionally, over the course of the year, we continued to expand our reach with existing customers, with the addition of new beverages to menus and expansion into additional locations and restaurant chains.

Moving to the education channel. We continued to add more school locations in 2019, albeit at a much slower pace as we were awaiting the USDA approval. However, now that we have approval and with the introduction of new products into this channel, we expect accelerated wins in 2020. Customer feedback and testing are important parts of this sales channel. And through these 2 means, we work with school administrators to come up with this new product offering called Twist & Go. This is a ready-to-drink fruit and yogurt smoothie that contains 4 ounces of yogurt and a half a cup of fruit and fruit juice and comes in 2 different flavors: strawberry banana and peach. These smoothies contain no added sugars, no preservatives, artificial flavors or colors. And importantly, they contain 2 components: fruit and yogurt protein, which therefore makes an alternative for all meals and snacks served under the federally funded meal programs, and they meet the USDA reimbursable standards.

We recently announced that we will be rolling out this product to the Pasco County School District in Florida, and our initial order with them was for 240,000 bottles in the first month. We've had a great, long-standing relationship with this school district and expect a high ongoing monthly order rate. This new offering significantly increases our penetration within this large school district alone, doubling the school locations serving our product to approximately 100 schools. Twist & Go will be available this week to all their students who continue to receive breakfast and lunch assistance during the temporary closure of their schools due to the COVID virus. We are pleased to be able to help these students in need during these trying times.

Once the schools reopen, it will be available on the breakfast menu and offered throughout the rest of the day on an a la carte basis. It is the perfect healthy snack or meal option for all occasions. And Twist & Go serves as a complement to our Easy Pour bulk product. And as you've seen with Pasco County, this will further our penetration in existing and new schools as it now shortens our sell-in process and importantly, does not require any customer equipment. Based on our initial success with Pasco County, we believe this district will be the first of many school districts to adopt the Twist & Go smoothie. And with over 98,000 schools in the United States, the opportunity for placement of our products is vast.

Now to touch on the military channel. We are currently selling our bulk Easy Pour products in dining facilities all over the United States and international dining facilities. In fact, we just started selling our product in our first dining facility in South Korea and have plans to pursue additional international military dining facilities this year. We are actively pursuing engagement with all U.S. military facilities, which total 800 bases serving 1.3 million active troops.

And with that, I turn it back to Riccardo.

Thank you, Joe. We used 2019 as a year to reposition our company for continued success with significant reductions and restructuring of our G&A and operating expenses, introduction of cost management initiatives and continued margin expansion. We continued to solidify our status in the school channel with the accreditation from the USDA that our product meets full reimbursement standards. We also created and recently launched a new ready-to-drink smoothie product that will make our ability to serve a far greater number of children throughout the country far more achievable. Look only at our first sales for one school district of 240,000 smoothies in the first month alone to understand the sheer potential of this new ready-to-drink smoothie product in schools. We are off to a great start in 2020 with the recent announcement of a new national account and increased funding, and I look forward to updating you on more of our accomplishments in the year ahead.

Now with that, let me open up the call for questions. Operator?

(Operator Instructions) Your first question comes from the line of Len Goldberg with Goldberg Capital Management.

Riccardo and Joe, congratulations with the announced QSRs and progress with the schools. So tell me, or tell us, what took so long?

Yes. Well, we should be -- it's a simple answer. It's -- we're glad it's here nonetheless.

Okay. Well, maybe you can extrapolate regarding the Pasco County, Florida success to the rest of the country. Any possible timing on this?

Yes. Look, our original plan. We thought originally we were going to get this done at the beginning of the year. And then we were really targeting the beginning of the new school year. So we brought things forward, obviously, due to COVID-19 and schools being closed down together with schools still serving students their meals. Some of them are doing it via bus routes, pick-ups. There's a myriad of different solutions that are being put in place. But in essence, this is a very big turning point for us.

As we mentioned on the call, the new product has been approved through the USDA. We actually worked directly with the USDA to meet all the requirements and specifically create this product. There's nothing else like it in the marketplace, and it meets all the requirements, not only for the components for reimbursement, but also for all federally funded meal programs. So that includes breakfast, lunch, afternoon school feeding and even the summer feeding programs, which is also going to be very beneficial to us through the summer period with schools. So traditionally, when we've set up schools with equipment, it's a large capital cost to put the piece of equipment in the schools. It, therefore, requires a high return in terms of throughput.

So typically, it limits you to high schools and middle schools and those with a larger student population. And when we go into a school district, they would -- given the commitment that was needed, we would typically start in a few schools within the district and take it from there. This is almost the complete opposite. There's no equipment. You may do an initial sampling or testing with the students, but you're able to go to 100% of the student population immediately. And Pasco County is really the perfect example of that because where we've been supplying them for a number of years now, we were only in half of their locations. And the other half of the locations, we weren't in for all the reasons that I've just explained.

So with the new bottle product, and we actually worked very closely with the leaders at Pasco County whilst we were developing the product, it allows the school administrators to serve it to all grades and also the different formats. So there's a lot of schools that do what's called breakfast in the classroom. So when you have the machines in the cafeteria areas, it's very difficult to do breakfast in the classroom with a smoothie that's been made and served on the go. Whereas the bottles, it's very easy. They can put them on the carts, they roll them out to the classrooms and the kids can eat them and drink them in the classrooms. So it is vastly different. And we're obviously extremely excited about this. It solves a lot of challenges and not only for the customers, i.e., the administrators, but the kids love the product as well. So did that give you a little bit of color?

It does. So the $240,000 for 1 month, services how many students, roughly?

I believe that school has about -- they have 100 -- about 100 schools, and I believe it's about 70,000 kids.

Okay. And could you maybe shed a little light on delivering bottles to school districts and into the students' hands during the shutdown?

Yes. So kind of from what we're being told, the schools are doing an unbelievable job at feeding the kids. And they've got all sorts of different programs in place. But some of the schools, such as Pasco from what we've been told, they deliver the meals once a week, and they do it via the bus routes. They have certain community feeding centers that have been established. And those centers prepare the meals, they package them up, whether it's an ambient product, a dry product, a refrigerated product or a frozen product. And people register for the meals, and then they put those packs together, and then they go on the bus route, and they deliver them to the kids. So and this involves...

It's on a bus route, so kids don't have to arrive at a school, or parents to pick up?

Correct. I believe they're being delivered via a bus route. So our products are frozen, and they are thawed. So from a logistical perspective, it works very well because they're able to use them also as freezer packs to keep other food products chilled and cold.

So we're actually -- the other really important thing is the 1 product is substituting 2 products. So in the 1 smoothie bottle, you actually have both the fruit component and the yogurt or yogurt-protein, meat alternate component. So we're also consolidating what would otherwise be 2 separate products that the schools would need to provide to the kids through 1 product.

Your next question comes from the line of [David Morgan] with MSR Investment.

Well, congratulations on getting the national and all the progress and the raise. Now I have a question on the raise. Is that going to be sufficient cash at this point to execute your plan? Or will you need to do another raise in the near future?

No. That's a good question. No, what we have we believe is sufficient, David. We've made great -- we've gone to great lengths to clean up the overhead cost structure and reduce our G&A expenses, some of which have come through, but they haven't -- you haven't been able to see all of that come out yet. You will definitely start to see that come out in Q1 and throughout the rest of the year.

Just to give you an idea on the kind of changes that we've made, if we were to use last year's revenue as a marker, just with the changes that we've already put in place, we would basically have reduced our operating loss by over 50%, just with the same level of sales. So that, together with what we've already just announced, both the national account, regional rollout commencement, as well as the new ready-to-drink bottle, obviously, we've got a very exciting year ahead and we think that what we have is sufficient.

The national account, will it have the bottles? Or will it have the machines? Or what will they have?

No. Neither. Actually, these are the national accounts that we've been working on for a number -- quite a number of years, and it will be our single-serve pouches.

Okay. And then that first region that's rolling out, when will be the soonest one of those stores within the region will actually have your product?

Well, it will actually be this summer. So we haven't been able to say that before. So that's very exciting. So we're going to -- we're very excited to be able to have that come to fruition, and we'll be able to communicate more on that as the -- as it hits the menus.

Your next question comes from the line of Anthony Vendetti with Maxim Group.

So I guess, on the Twist & Go, it seems like that's a great product. Riccardo, can you talk about the competition in that space, because there seems to be other companies that have Twist & Go yogurt products or fruit products. Is there any competition that you see in the school district or outside the school district for the Twist & Go product?

Yes. Look, that's a great question. There's a reason why it hasn't been done before because it's actually quite -- it's quite difficult to actually create the product. And there's a lot of regulations around what the product can and can't include. The distribution channel is also incredibly important. You need to have a frozen distribution channel for this product to succeed. You cannot have the dry or refrigerated, purely from shelf life and use of the product. There's a lot of factors that go into it. Right now, although you might see some other yogurt manufacturers, a lot of the yogurt world is really built around refrigerated shelf life or an ambient, but it's a very different product profile. And without going into too many of the technical elements, there's a lot of IP actually in how we've created the baseline product to meet the regulations.

So you believe that based on your knowledge right now, you believe you have something that's unique for the school district no one else has. What about outside the school district in terms of moving this product beyond that?

The answer is, absolutely, at the right point in time. But we have got a lot of runway ahead of us just in the school channel. And again, without actual -- without putting numbers out there, I mean, you're looking at just 100 schools, Pasco County doing 240,000 bottles in the first month. Discount that going forward, it's still only 100 schools out of 98,000. So we believe that there is an enormous amount of runway with this product. But we will, at the right time, look for the additional avenues for revenue from that product.

Okay. And then in terms of -- you said you didn't have any supply chain disruptions. Obviously, restaurants, national parks aren't going to be ordering any product.

True.

But is -- are your military installations so far business as usual? Or any slowdown there?

No. For the most part, it's been business as usual with the military locations. And actual fact, we just -- even though it was slightly delayed, not due to the coronavirus, but we got our -- some of our international bases up and running as well. So -- but for the most part, the military is business as usual.

Okay. And then lastly, on the restaurant chains. So it's a sandwich chain for Puerto Rico. You said you're in 57 locations for the restaurant chain in the U.S. Is that part of a 3,000-location restaurant company? Or is that in addition to...

It's completely separate. Two separate ones. Yes, completely separate. Yes.

And on the 3,000-restaurant chain, where are you in terms of that rollout?

Well, we're going to have our largest single orders come through for this summer. So it's a very exciting time, and we expect to be in location this summer.

Okay. And so as you know, no delays based on COVID-19 at this point?

No. At this point, no delays. I mean who knows what happens. Obviously, we don't have a crystal ball. But as it stands right now, that's going as expected.

Your next question comes from the line of Mike Donnelly with Ibex Investors.

Congratulations guys on finally getting the national account across the finish line. Patience is finally paying off. I was hoping you could give us a little bit more color on the national accounts. And in the press release, it says over 3,000 locations. If you can give us a little bit more specific color on actual number of locations, that would be great.

You can always ask, Mike. We -- it is definitely more than 3,000. We can't give the specific details just yet because it will give it away relatively easily. We are going to be on menus in summer. Once it's on the menus, we'll be able to communicate who the chain is. But at the moment, we're really not going into who it is just yet. However, what's probably worth mentioning is we are still -- we want to remind everybody that we are still approved with the other national account as well. So we are hoping to update people as it unfolds with regards to the going to market with the other national account also.

Ladies and gentlemen, we have reached the end of the question-and-answer session, and this does conclude today's conference. You may disconnect your lines at this time. Thank you for your participation.