Barfresh Food Group Inc (BRFH) 2020 Q2 法說會逐字稿

Good afternoon, everyone, and thank you for participating on today's second quarter 2020 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 words such as grow, expand, anticipate, intend, estimate, believe, expect, plan, should, potential, forecast and project, among all others.

All statements other than the statements of the 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.

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, risks 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.

Furthermore, the company does not intend and is not obligated to update publicly 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 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 second quarter 2020 results and year-to-date accomplishments, discuss our diverse sales channels and sales pipeline and detail the improvements made in our operating efficiencies.

I'll start by addressing how we have reacted to the headwinds our industry has experienced from COVID-19.

Stay-at-home orders have caused most of our customers to either temporarily close their doors or significantly reduce operations leading to cancellation of orders and significantly impacting our quarterly results.

When we began to see these cancellations take effect in March, our company acted quickly and with purpose to expedite the launch of our bottled smoothie Twist & Go, as we knew we could solve an immediate need in the education channel, and thankfully, we did, as the new Twist & Go smoothie sales accounted for over 80% of our Q2 sales.

Despite school closures in the first and second quarters, many students still relied upon schools to provide them with meals and our ready-to-drink bottled smoothies provide an easy and healthy option.

We knew this product would be a success and the initial response from students and administrators has exceeded our expectations.

Since launching, we have tested and been successful in a limited number of school districts. We then did some further testing in even more school districts, and again, these were also successful.

We expect these new school districts will be full-time customers once school reopens.

Due to the current coronavirus environment, selling into these schools has been challenging, simply due to some customers being reluctant to bringing new items during this time as well as other customers still needing to work through their pre-COVID inventory levels.

We believe the product will be widely received by many school districts once we get back to a normal operating mode, as it can support any kind of meal service platform.

We also have plans to market Twist & Go to additional sales channels, as we believe there are significant expansion opportunities within specific foodservice channels due to menu changes focusing on healthy, grab-and-go or prepackaged food and beverages.

From an expansion opportunity, our new Twist & Go offering enables us to expand our school channel with entire school districts, instead of school-by-school with our existing Easy Pour Bulk offering.

Twist & Go dramatically increases our growth opportunities in this channel. It is important to note that due to COVID-19 and some schools not reopened in this fall, many schools are still required to provide children with meals.

Our Twist & Go package enables school districts to provide a take-home package that fits into the meal kit and serves the fruit and protein requirements of the federal and state government.

As an example, we recently announced we will be rolling out Twist & Go to Brevard school district, the 49th largest school district in the U.S. and the ninth largest school district in Florida, serving over 73,000 students daily across 105 schools.

Twist & Go will be rolled out to approximately 100 schools as part of the reimbursable breakfast menu and will also be offered on an à la carte basis throughout the rest of the day.

There are over 14,000 school districts nationwide, that represent 98,000 schools. This is a very large opportunity for us.

Additionally, in the education channel, we recently launched our WHIRLZ 100% Juice Concentrates. These new 5:1 juice concentrates are stored and delivered ambient to our customers and come in 10 great flavors.

The product will initially target elementary and secondary schools. And as with all our products distributed into schools, these meet the USDA reimbursable guidelines and are Smart Snack compliant.

WHIRLZ is a perfect complement to our current 1:1 Bulk Easy Pour products used in beverage dispensing equipment at a more affordable price point that nicely rounds out our portfolio of offerings that we provide to the education channel.

We also announced last week that we had entered into a strategic relationship with Smart Beverage Inc. Smart Beverage will sell and distribute only Barfresh's full line of products to include Twist & Go, WHIRLZ 100% Juice Concentrates, and Bulk Easy Pour products to its existing and new customers in the education channel.

Smart Beverage works with over 800 schools throughout the Midwest, including Texas, Minnesota and Illinois and has approximately 600 additional schools slated to begin receiving product, once they reopen under normal operating conditions this upcoming school year.

Not only does this relationship expand our customer reach, but it also allows us to shift resources away from equipment management and service that we can focus on what we do best, product innovation.

Smart Beverage owns, operates and provides repair support for an extensive network of Bunn smoothie machines and has 1,000 existing machines in operation and 3,000 machines ready for deployment.

They will now manage, maintain, store and deliver the equipment needed for Barfresh products to their new and replacement accounts.

This relationship is expected to initially generate between $1 million and $2 million annually in the current COVID-19 environment and upwards of $2 million to $3 million annually in a normal operating environment, excluding COVID.

I'll now review our financial results for the second quarter. Revenue for the quarter was $506,000 compared to $1.4 million generated in the second quarter of 2019.

The decrease in year-over-year sales is from the decreased sales in the company's single-serve and Bulk Easy Pour products due to COVID-19 caused by the temporary closure of businesses that serve our products.

Approximately 80% of the revenue for this quarter is solely from the new Twist & Go smoothies and to only 1 customer.

Our gross profit margin for the quarter was 23%, down from 62% in the second quarter of 2019, primarily due to product mix and the start-up expenses for our new Twist & Go smoothies.

It is our expectation that gross profit margins for the remainder of the year will be at a similar level to those in the first half of 2019 at approximately 40%.

During the quarter, we experienced a 39% reduction in general and administrative expenses, thanks to quick decisions by management and our variable cost structure.

However, it was not enough to offset the decline in sales due to COVID-19, and we were relatively flat to the prior year in operating losses of $1.1 million for the second quarter.

For the second quarter, our adjusted EBITDA losses increased to a loss of $888,000 as compared with a loss of $705,000.

Turning to the balance sheet. We ended the quarter with approximately $3.4 million of cash and approximately $800,000 of inventory.

We feel comfortable with our cash position at this time. In addition, the company has taken steps to further reduce overhead during this time and believe we have adequate liquidity to navigate this pandemic and achieve profitability without the need for additional equity capital.

I'll now turn the call over to our President, Joe Cugine, to discuss the sales channel. Joe?

Thank you. As Riccardo stated, each of our accounts were affected by COVID-19, but we are working to lay the groundwork so that we exit this year with a stronger portfolio of products that meet a variety of customers' needs with the right strategic relationships and with a strong balance sheet.

We are staying engaged with all of our regional and national accounts, including our previously announced 3,000-plus location QSR so that we stay abreast of their changing needs and time lines.

We are optimistic that once these accounts begin experiencing normal operations and consistent traffic patterns, we expect them to start placing recurring orders for Barfresh products.

In the education channel, we believe our 2 new offerings, Twist & Go and WHIRLZ 100% Juice Concentrates, will drive expansion in our number of school relationships.

These offerings are convenient and healthy and also provide an improvement to budget-constrained school districts. Twist & Go product requires no customer equipment and WHIRLZ 100% Juice Concentrates is a more affordable option for some schools than the current 1:1 Bulk Easy Pour product.

Additionally, as we look to the future and the lagging effects from COVID-19, we believe Twist & Go will be extremely attractive as a low-touch item, not only in schools, but also other foodservice channels.

We believe that consumers will be much more focused on their health and wellness, which is a positive for our company as we pride ourselves on the healthy, great-tasting beverages we can offer consumers.

As an example, our Twist & Go smoothie contains 4 ounces of yogurt and a half a couple of fruit juice and that's a great source of protein, calcium and vitamin C, making it an appealing beverage for both kids and adults.

We have dedicated a lot of time and effort to the education channel over the past 6 months, and we believe it can be a massive revenue stream for our company, both in the short term, as our other channels recover from COVID, and in the long term, with over 14,000 school districts and 98,000 schools in the U.S.

We look forward to updating you as we roll out our new existing product lines to additional school districts this upcoming school year.

Turning to our military channel. Social distancing and changes in meal service options on the military basis has slowed the product order patterns in this channel.

We have recently begun to see these locations slowly beginning to reorder. It is our expectation to announce additional bases being added and getting back to a more normal operation in this channel during the back half of this year.

And with that, I turn it back to Riccardo.

Thank you, Joe. We realized that even while stay at home restrictions begin to lift in some areas, it may take some time before we are fully back to normal.

However, we have been working hard, as is evident by our recent announcements to expand our reach and offerings in the school channel so that we are ready to assist educators and children once schools do reopen.

We also believe these new offerings will be well received by our other business accounts once we begin re-engaging with them in a meaningful way.

Q2 was challenging, but we have seen business improve in Q3.

Additionally, the changes we are making will drive meaningful revenue and profitability. Our most recent announcement with Smart Beverage is a great example of 1 way we are generating incremental revenue to our second quarter results.

Our new Twist & Go smoothies accounted for over 80% of our Q2 sales.

This is 100% incremental to the business from this new product line that will be added to our existing product sales once we get back to normal.

Our new 100% Juice Concentrates will give our school customers a more affordably priced product that will result in higher volume per location.

Our new Smart Beverage relationship gives us over 800 new school customers and provides us with an entire sales team dedicated to selling Barfresh products.

That has already invested capital in equipment, that will do the sales, including storage and delivery as well as equipment delivery, service and management.

The rest of our business, including our national accounts are still there, just delayed, idle and waiting, like the rest of the country.

We are also working to drive down our costs and continue the cost-saving initiatives implemented at the end of 2019 and beginning of 2020.

Year-to-date, we have reduced our G&A by 39% or $1.5 million over the prior year and expect continued expense leverage throughout the back half of 2020.

In closing, I'm very proud of the company's ability to come together and operate during this difficult time, and we are committed to serving our customers with a variety of great-tasting better-for-you beverage choices.

The company will continue working on strategic opportunities to drive growth and shareholder value and expect to update the market as these developments come to fruition.

Now with that, let us take your questions. Operator?

(Operator Instructions) Our first question is from Anthony Vendetti with Maxim Group.

Smart Beverage looks like a good agreement for you guys because one of the things that I think you have mentioned that's been an impediment in terms of your business is having to deal with servicing -- installing, servicing and repairing the machines -- the blenders and the machines to make the smoothies.

So now it seems like Smart Beverage is going to take care of all of that for you. Can you elaborate on the agreement and how it works financially?

Yes, sure. It is actually a very exciting agreement for us. And you hit the nail on the head on a couple of those items. One is it frees up our capital. We no longer need to invest capital in the equipment, which we've done historically.

In addition to that, there's all the service and repairs attached to the equipment. Now all we do is focus on making the product and shipping it out in bulk with no sales-related costs, no equipment-related costs and no service-related costs.

So the added benefit is that they already have existing customers, over 800 schools and over 1,000 machines already in the market that our product is going to be going directly into.

And then in addition to that, they have another 600-odd accounts that earmark to have equipment installed as well once things reopen normally. That's what we already have and can speak to as of today, doesn't give you anything incremental, and it's also only limited in the existing markets that they're in.

So as we talk about launching the new 5:1 concentrate product, those numbers are specifically only limited right now, the servicing with Smart Beverages and only in their territories. It does not include anything outside of their territories that our own team will do on our own.

I think the other benefit is that whilst they'll be doing the purchase and delivery of the products for the 5:1 concentrates, they will also be selling the rest of our portfolio.

So in all these customer accounts that they have relationships already, now we'll be able to get more sales by their part in different SKUs with customers that we didn't even have relationships before.

So it is a really strong relationship that we're going to have. They are solely dedicated to our products. It's added -- it's basically doubled our sales team with an existing set of customers that they already have. So we're really excited about the partnership -- about the relationship.

Yes, it sounds great. Okay. COVID-19 clearly had a big impact on the single-serve and bulk business, which used to be your primary business and now the move to Twist & Go and now you have WHIRLZ, seems like these products are the future. But as certain states start to reopen, and I know some of them have had a pull back. But as the reopening continues, can you talk to what you're seeing so far in the third quarter that we're in, in terms of your single-serve and bulk? Is that coming back slowly? Any sort of...

That's a great question, Anthony, because sales are picking up. So I kind of made a reference on the quarter. And I think it's incredibly important to kind of point this out. Q2 was a rough quarter. But we still managed to do $500,000 with basically all of our customers being closed with over 80% of those sales going to 1 customer, which was a very first customer with Twist & Go because that was all that we could get made in time.

So as we've schools closed or schools ended for the summer, so most of Q3, all of Q3, really, schools have been closed. So -- but yet, our sales have increased. So all the sales that we're getting now are really from the foodservice customers.

So we're now starting to see the foodservice customers come back, albeit very slowly, but they are coming back.

And just to give you a little bit more color, even our military bases were -- had changed their feeding patterns, more grab-and-go items, hence, our bulk suffered, but they're also now coming back online.

And just generally, we are seeing pockets starting to come back online. With the new Twist & Go, the stop and start of the relaunch of schools is a little bit unpredictable right now. But we have made some very significant progress from what we've recently -- from what we've previously announced.

We have made significant progress in terms of number of additional school districts that we're kind of just waiting to see what the beginning of the school year looks like, and when some of these school districts actually reopen, because as everyone I'm sure is aware, a lot of districts have delayed their reopenings.

In any instance, things are picking up and the new Twist & Gos are definitely going to be a heavy contributor going forward. And it's going to be incremental to the rest of the business as that picks up again and as well as being incremental to the Smart Beverages partnership and the 5:1 Juice Concentrates when they go back online, again, just depending on the rate at which we get back as a result of COVID-19.

(Operator Instructions) And it seems we have -- it seems we have reached the end of the question-and-answer session. And with that, we will also end the call. Thank you for your participation. Have a good day.