Barfresh Food Group Inc (BRFH) 2020 Q1 法說會逐字稿

Good afternoon, everyone, and thank you for participating on today's first 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 of 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 others. All statements other than the statements of historical facts 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 contents of this call should be considered in conjunction with the warning, 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. 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 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'll 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 discuss the impact of COVID-19 on our business, review our first quarter 2020 results and year-to-date accomplishments, and discuss our diverse sales channels and sales pipeline and detail the improvements made in our operating efficiencies.

On our last earnings call in early April, we discussed how, toward the end of the first quarter, we had begun to see order cancellations from customers due to COVID-19. Our results in the first quarter were impacted by these closures with a 12% reduction in net sales compared to the prior year. Now 2 months later, some of these foodservice businesses, restaurants, recreation and amusement parks are slowly beginning to reopen at a limited capacity, and we are seeing slight improvements in sales at these locations.

Additionally, while many schools remain closed through the end of the school year, certain districts and individual schools, such as Pasco County, continue to feed their students breakfast and lunch, and we were able to assist with these feedings with our new bottled smoothie, highlighted by Pasco County ordering approximately 480,000 Twist & Go bottles in the second quarter over just a 2-month period.

When we saw COVID-19 forcing schools to temporarily close their doors but still needing to provide students with meals, we responded. Our team had already been working on a bottled ready-to-drink smoothie line, but its rollout wasn't planned until later in the year. However, knowing this product could support schools needing to feed students during this crisis, we expedited its launch.

The response to our Twist & Go product has exceeded our initial expectations. Since launching in April, we are already approved in over 200 schools, working with 2 large school districts in Florida and in discussions with many additional school districts throughout the U.S. I will let Joe go into more detail on the new product and the schools we are working with later on in the call. But I would just say that we believe Twist & Go opens up many more possibilities for us within this channel and others as it shortens the implementation window and requires no additional equipment CapEx for the customer or for us, now allowing us to work with complete school districts instead of just individual schools.

In addition to the K-12 space, we are highly optimistic the timing of our Twist & Go bottles will have significant expansion opportunities within specific foodservice channels due to menu changes focusing on healthy grab-and-go or prepackaged food and beverages. Customers are looking to promote food safety, hence the need for easy-to-execute recipes and brands versus traditional self-serve stations or catering and prepared meals. Barfresh will take advantage of this opportunity by entering the retail space within targeted foodservice channels, such as business and industry, higher education and health care.

As everyone is aware, the COVID-19 pandemic is a very fluid situation and has required businesses to temporarily delay certain menu expansion ideas which is exactly what has happened with our over 3,000 location QSR that we expected to begin regionally rolling our product this summer. We were recently notified that due to the temporary closure of their stores and their steep sales decline from the pandemic, they have decided to delay product launches. At this time, we do not have an update on timing for the launch, but we'll provide investors with updates as soon as they become available.

Quickly turning to our military channel. Although social distancing rules on military bases have reduced product refill order patterns, this channel is a steady channel for us, and we expect to announce additional bases being added during the back half of this year.

Moving to our financial results for the first quarter. Revenue for the first quarter was $733,000 compared to the $834,000 generated in the first quarter of 2019. The decrease in year-over-year sales is primarily the result of decreased sales in the company's single-serve product due to the closure of businesses that serve our product from COVID-19. Our gross profit margin for the quarter was 54%, up slightly from 52% in the first quarter of 2019. 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 quarter for the company's existing product lines.

During the quarter, we experienced a 39% reduction in general and administrative expenses, which cut our operating losses in half from the prior year period. For the first quarter, our operating loss was $900,000 as compared to $1.8 million for the first quarter of 2019. The cost improvements we implemented last year and beginning of this year are starting to show in our results. We expect these improvements to drive improved bottom line performance this year without the need for additional fixed overheads.

For the first quarter, our adjusted EBITDA loss improved to $676,000 as compared with a loss of $1.338 million, an improvement of $662,000. Adjusted EBITDA is expected to continue to improve throughout 2020 in comparison to the prior year period.

Turning to the balance sheet. We ended the quarter with approximately $2.34 million of cash and cash in escrow, plus another $1.5 million in offering proceeds receivable from the capital raise. We also had $700,000 of inventory, which is similar to our inventory level at the end of 2019.

In the first quarter, we announced the company had raised approximately $5.87 million, of which $2.325 million is included in our cash balance at the end of the first quarter 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, as per the 8-K published for the financing. Concurrent with the offering, the company also reduced its overall debt by approximately $2 million through holders converting their existing debt into the company's current offering of its common stock and warrants.

Additionally, the company received $568,000 under the Paycheck Protection Program during the second quarter that it expects to be fully forgiven and believes it has adequate liquidity to navigate this pandemic and achieve profitability without needing to raise additional equity capital.

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

Thank you, Riccardo. I'll start by discussing the national and regional restaurant accounts. As Riccardo explained, due to COVID-19, our over 3,000-plus QSR launch has been put on hold. This is obviously disappointing, but not totally unexpected. We have a very good working relationship with this company, and we will stay engaged with them as circumstances in their business change. As always, we are in various stages of testing with other national QSR chains throughout the U.S., and we have ample manufacturing capacity, logistics and a distributor network to successfully service the multinational restaurant clients already announced and any additional clients in the pipeline as they move to rollout.

Prior to COVID-19, we anticipated accelerated growth in schools with our single-serve and bulk products due to the fact that our products now have USDA approval and have been extremely well received by students, administrators and dietitians. However, the pace of these new placements for these product offerings has temporarily slowed due to the closure of the schools for the remainder of the school year.

With that said, our new product, Twist & Go, is enabling us to sell into complete school districts instead of just a few schools at a time, and we feel very good about the upcoming school year. We're really proud of this new product and believe these no-fuss food and yogurt smoothies are the perfect item for schools looking to deliver healthy, low-touch items for their school feeding programs. These ready-to-drink bottled smoothies come in 2 flavors, strawberry banana and peach, and we plan to introduce additional flavors over the course of the next year.

Now like our single-serve product, Twist & Go is also compliant with the USDA reimbursable meals program and its Smart Snack compliant with the yogurt portion as a meat alternative for all meals and snacks. This includes snacks and meals served under all federally funded meal programs. The product has a number of benefits. Each contain 4 ounces of yogurt and a half a cup of fruit juice, providing 2 of the 3 reimbursable elements in school feeding, the fruit and protein. They contain live and active probiotic cultures. They're a good source of protein, calcium and vitamin C, and they contain no preservatives, artificial flavors or colors.

Now we rolled this product out in early April in the middle of the pandemic and already have signed 2 large school districts in Florida, one that has started purchasing and another that is set to begin in the new school year. Pasco County School District served this product to students who are continuing to receive breakfast and lunch assistance during the temporary closure of their schools. We sold under just 0.5 million bottles to Pasco over the span of 2 months before their school year ended. We expect an ongoing high monthly usage rate in the next school year. Now this kind of volume for a single account is incredibly exciting. Now prior to the rollout of Twist & Go, we had already been servicing Pasco County. However, with the introduction of this new product, we doubled the number of school locations in Pasco District from 50 schools to approximately 100 schools.

The second school district we announced was Brevard Public Schools. Brevard is the 49th largest school district in the U.S. and the 9th largest in the state of Florida, serving 73,000 students daily across 105 schools. With the addition of this one school district, we expanded our school customers by over 30%. Brevard will roll out Twist & Go to approximately 100 schools beginning in the fall of 2020 to be served as part of the reimbursable breakfast menu and also offered on an à la carte basis throughout the rest of the day.

We're going to continue to offer easy pour bulk products into this channel and believe there is room for both. We no longer preclude it from working with school districts or individual schools with smaller student populations, as Twist & Go does not require any customer equipment. These 2 products serve as a complement to one another in this channel, and we have dedicated a lot of time and resources to this one sales channel as we see it as a massive opportunity for revenue stream for the company with 14,000 districts nationwide, representing over 98,000 schools in the U.S.

And with that, I turn it back to Riccardo.

Thank you, Joe. We've accomplished a lot during the last 9 to 12 months. We have dramatically improved our operating cost structure. This is clearly evident in our first quarter results with a 50% improvement in our adjusted EBITDA despite a 12% reduction in sales from COVID-19 and a traditionally slower quarter, bringing us closer to profitability. We moved forward with our national accounts. However, COVID-19 has further temporarily delayed our expansion opportunities in this channel. We also expanded our product portfolio to allow for significant revenue growth with the new Twist & Go offering. And we have a number of new exciting initiatives that we hope to announce shortly that would deliver further revenue growth and create additional value for shareholders.

We expect continued improvement in our adjusted EBITDA during the back half of this year, and we are confident we have ample cash to achieve profitability. Our company is managing through these challenging times and doing everything in our power to remain trim and reducing fixed costs, while also continuing to service our customers and be ready to reengage with them once they have fully reopened.

We are also very excited about the opportunities ahead in the education channel as we believe our Twist & Go product is extremely attractive, especially in a post-COVID world as it provides an easy, no touch, grab-and-go solution to schools.

And before I open up the line to questions, I would like to end by thanking all of our employees for their continued hard work and perseverance. These are challenging times, and the dedication they have shown is truly appreciated.

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

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

So the Twist & Go product seems like the right product at the right time for the school districts, except COVID-19. So is it stopping completely new sales right now? Or as things are beginning to open back up, you see that you can get in and get this product out there? And then for the schools that have started it, what has been their response so far?

Yes. Sure. So we agree 100% with the comment about right product at the right time. We've obviously been working on it for some time now, but COVID-19 happened, and it really has just accentuated the need and the opportunity for the product. It has been definitely challenging. Obviously, we're in the same boat as most other companies, especially in the foodservice arena, where most of our business lies. But the bottles had given us an enormous opportunity even with most schools were closed, so it has affected our sales, right? But we were able to get the Twist & Go bottles into Pasco County and a couple of other smaller locations. And as you can see, it's been extremely well received. I mean one school district alone doing just under 0.5 million units across 2 months is an extraordinary number, and that's, again, one school district. So it has been challenging to get in contact with other schools. However, probably over the last couple of weeks, really, last 2, maybe even 3 weeks, it started to open up. And as every kind of day goes by now, it opens up more and more.

So just to give you an idea, we've probably sent out about 150 unique samples to unique school districts. So that is everything from 2 or 3 school districts to 200 or 300 schools in a district. So getting feedback from them varies based on people's availability and some -- a lot of people are still on vacation. It's in summer school now. We do have a lot of schools that are already indicating that they will bring the product on for the summer -- sorry, for the beginning of the new school year, and we have a lot more that are in the pipeline that we'll follow up with. The product tastes amazing, and it serves a need. It really deals with a lot of the challenges that are happening in the foodservice environment at the moment, particularly with single-serve, prepackaged items, which everyone seems to be looking for now, and the added fact and added bonus that we meet the criteria is just that much more value add. So it's been -- it's gone over very, very well.

So Riccardo, just to follow up on the value add and you meet the criteria that the school districts are looking for. There's other Twist & Go products out there. But yours, which is tailored towards the schools, meet -- checks all the boxes. Do any of those competitors check all the boxes? Or do the other competitors fail to check all the boxes?

Yes. That's exactly -- that is our point of difference. There are no other Twist & Go products out there that ticked the boxes, and that's why our product is so unique. We actually -- we worked directly with the USDA on the criteria of the packaging format and the ingredients and the smoothie itself. And we created it based on that dialogue with them, which they then updated the regulations. So there's no other product out there that meets these requirements. So we're really leading the way in that respect.

Okay. Great. Can you talk a little bit about the military? That channel obviously is still open, but maybe the person that you would need to speak to or the people that you would need to speak to on some of the individual bases or in the individual departments may not be as available as they may have been pre-COVID-19. Has that started to change also in the last couple of weeks? And what changed across the board?

Yes. It changed across the board. I mean just even our ability to engage with our customers and things are opening up, where even our orders are starting to come in now, so things are definitely starting to turn the corner. And we're seeing that on all fronts. Yes, the military still kept chugging along during this time, albeit at a much slower pace, but it was still going in comparison to some of our other channels that were just unfortunately completely stopped.

(Operator Instructions) And it seems we have reached the end of the question-and-answer session. I will now turn the call back over to management for any closing remarks.

Actually, operator, I believe Anthony may have some more questions. He said he was going to go back in the queue, and if there's anyone else out there with any other questions [go through].

And our next question is from Anthony Vendetti from Maxim Group.

Sure. So this quarter, even though revenues were below $1 million, and they were slightly above what we were looking for, the gross margin was actually better than we were looking for, even though, like I said, it was on lighter revenues because last quarter, it was around 34%. The last time it was over 50% was in the third quarter, but that was at $1.6 million in revenue. So what do -- is there anything that you would attribute to, more efficiencies, the particular product mix to the higher gross margin this quarter?

Yes. I think it's more -- it's got more to do with product mix than anything else. And I think that for the existing product range, it will stay around there. That may change with some of the Twist & Go once we kind of get full scale, but we still want to maintain a very healthy margin.

Okay. Good. And then just lastly on expenses. I know, Riccardo, you've been focused over the last year or so on really consolidating expenses and being more efficient, lowered your footprint in terms of your headquarters and brought down the expenses there as well. Can you talk about where you are with the expense side? Are you largely done taking out costs? Or is there still more to be done?

No. I think there's probably a little bit more refinement to do. But I think we've done a lot of work on that, and that's definitely showing up in the -- and starting to show up now in the numbers, as you can see. But I think for the most part, we're kind of done with that. We may see a little bit more improvement on it, but not in terms of the same proportion as we have over the last 9 months.

And it seems that was the end of the Q&A session. And I will now hand it over to management for any closing remarks.

Great. Thank you, operator. I'd just like to thank everybody for joining us on our call today, and we look forward to updating everyone shortly on some new exciting developments that we expect to happen here in the near term. Have a great day.

This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.