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Edited Transcript of BRFH earnings conference call or presentation 15-May-19 8:30pm GMT

Q1 2019 Barfresh Food Group Inc Earnings Call

BEVERLY HILLS Jun 21, 2019 (Thomson StreetEvents) -- Edited Transcript of Barfresh Food Group Inc earnings conference call or presentation Wednesday, May 15, 2019 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Joseph M. Cugine

Barfresh Food Group, Inc. - President & Director

* Joseph S. Tesoriero

Barfresh Food Group, Inc. - CFO

* Riccardo Delle Coste

Barfresh Food Group, Inc. - Founder, CEO & Chairman

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Conference Call Participants

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* Anthony V. Vendetti

Maxim Group LLC, Research Division - Executive MD of Research & Senior Healthcare Analyst

* Justin Bradley Borus

Ibex Investors LLC - Managing Member, CIO, and Chief Compliance Officer

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Presentation

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Operator [1]

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Good afternoon, everyone, and thank you for participating on today's First Quarter 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 Joseph Tesoriero, Chief Financial Officer 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 others. All statements, other than the statements of historical fact that address activities, events or developments of 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. Furthermore, the company does not intend and is not obligated to update publicly any forward-looking statements except as required by law.

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

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Riccardo Delle Coste, Barfresh Food Group, Inc. - Founder, CEO & Chairman [2]

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Good afternoon, everyone, and thank you for joining us. On our call today, we will review our first quarter 2019 results and accomplishments, review our growing sales channels and provide additional insights into our expanding sales pipeline. The first quarter is seasonally our softest quarter, however, we continued the momentum from 2018 and produced year-over-year top line improvement.

We generated net sales of over $834,000 in the first quarter, which is a 34% increase compared to the same period last year. As of today, we're halfway through the second quarter and have already exceeded $750,000 in revenue for the quarter compared to a total of $1.1 million for all of the second quarter last year. We also continued to reduce our general and administrative expenses in the quarter with a 4% reduction and expect continued improvement throughout 2019.

I'd like to point out that Q1 2019 G&A includes the $190,000 noncash expense related to the settlement of deferred executive compensation during the quarter. Excluding this onetime noncash item, G&A improved by $282,000 or 13.5% in the quarter. Joe will provide more details on this item in his commentary. We also continued to maintain healthy gross margins at 52% comparable to last year.

Over the course of the first quarter, we have continued to make good progress with all of our customers.

In the school and military channels, we have continued to sign new customers increasing our school-contracted locations to 400 and with military locations at over 100.

Keep in mind that both these channels are relatively new for us and we want to provide some additional color on what we are expecting per location. It is important to remember that we haven't had a military location in full operation for a full year just yet, and we've only had a few school locations for over a full year.

Our first school account was with Pasco County in Florida, over a year ago. Since that time, our customer in Pasco County has grown from 30 to 47 locations, and our overall school locations have grown to over 400. Our focus during the initial establishment of the school channel has been on growth of the number of customer locations. With the critical scale of 400 school locations and growing, we are now increasing our focus towards execution.

We are looking at the key drivers of success in those accounts where we have succeeded: personnel training, proper setup of distributors, timely responses to equipment issues, assistance with menu planning and expansion of flavor offerings and improved customer follow-up and service in general.

We view all these factors as critical to success as we continue to expand in the school channel.

In the initial school locations, we were seeing higher revenue per location, however, now that we have a larger, more diversified base, our revenue per school location is averaging around $7,000. We expect that average to grow as we get better at customer execution in this channel.

On prior calls, we had targeted revenue per school at a higher level, $10,000 to $12,500 due to how some of the largest school such as Pasco were performing. With our learnings and new focus on execution, we believe, we can get our overall school portfolio into that range. The same factors hold true for the military channel where we are an even newer entrant. We received our approval to sell into military bases a little more than a year ago, in March of 2018.

Our early focus on growing our military equipment placements has now transitioned into a sharp focus on execution. With many of the same factors, just mentioned for the school channel, being equally important in the military channel, where we have seen an actual average revenue per location of about $15,000 as compared with our earlier estimates of $35,000 per location.

Please keep in mind, this is an average across the number of locations and most without a full year of revenue and mostly through the colder months of the year. So we expect this number to increase. What we are seeing now is an increase in the number of locations, which is also increased in the range of account sizes. Whereas we started with some high-volume locations, as we've added more locations, not all of them have been as high, which has resulted in a lower average. As we improve our execution, we will be able to achieve a better return per location; therefore, increasing our average.

Finally, although our school and military business is fairly balanced across seasons, the colder months have had a bigger impact than we first estimated. Our learnings will allow us to improve how we service these channels and we believe there are many ways to improve revenue per location going forward. Joe Cugine will discuss that more in a few moments. As we've said before, we are only just scratching the surface with these channels and these will provide many years of growth opportunities for us.

Regarding our national and regional accounts, we still expect to begin the rollout of our products into the previously announced national QSR with over 2,500 locations. In addition, we are being -- testing with national QSR chains and are also testing with one of the country's largest restaurant chains. While these accounts are still in the testing cycle, we are optimistic about our prospects and will announce any further developments as they become available.

We are also working with a new national third-party operator that works with amusement parks, museums, zoos and national parks. They have over 80 outlets across the U.S. and are in the process of rolling out our product to many of their locations.

Overall, I'm pleased with the progress we're making and how we are positioned for strong growth and better operating margins this year.

And with that, let me turn the call over to our CFO, Joe Tesoriero, to walk through the financial results for the first quarter in more detail before handing it off to our President Joe Cugine, who will provide more insights into our sales channels and opportunities.

Joe?

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Joseph S. Tesoriero, Barfresh Food Group, Inc. - CFO [3]

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Thank you, Riccardo. Revenue for the quarter was over $834,000, an increase of 34% compared to the $623,000 generated in the first quarter of 2018. The increase in year-over-year sales is primarily the result of channel expansion in the school and military markets driven by our bulk Easy-Pour product as well as headway made with our national and regional accounts.

As Riccardo said, we are halfway through the second quarter and have already realized over $750,000 in revenue. Our gross profit margin for the quarter was 52% in line with the 53% margin in the first quarter of 2018. We expect gross profit margins for the remainder of the year to be at a similar level.

During the first quarter, we realized a net reduction of $91,000 in our general and administrative expenses, an improvement of 4% over the prior year and on track to increase the leverage in our business throughout 2019.

It is noteworthy that the first quarter 2019 G&A expense includes $190,000 of noncash expense related to the settlement of deferred executive compensation expense that had accrued over the last 18 months. As explained in more detail in our Form 10-Q, during the first quarter, we settled deferred executive compensation amounts that had accrued since September of 2017. Approximately $487,000 of these deferred executive compensation was settled with warrants priced at $0.70. The $190,000 included in the first quarter 2019 is the noncash accounting charge to the portion of the warrants that relates to the prior period.

Excluding this amount, G&A expense decreased by $282,000 or 13.5%. We expect to see continued improvement of our operating expenses as we focused on cost-saving opportunities. Examples include the relocation of our headquarter office to lower cost space and negotiation of a new contract for personnel-related services. These 2 items alone reduced fixed overhead by $200,000 on an annual run-rate basis.

We are also very focused on our logistics chain and are undertaking and in-depth review of our shipping and storage costs. Shipping cost as the percentage of revenue improved on a quarter-over-quarter basis from 22% in 2018 to 12% in 2019. However, storage costs have increased from $23,000 in Q1 2018 to $51,000 in Q1 of 2019.

We see the logistics area as an opportunity for savings and, in particular, we expect storage cost to improve as we adjust to meet our customers' needs in the most economically efficient ways possible.

Turning to our balance sheet. We ended the quarter with $2.9 million of cash and $1.2 million of inventory, which matches our inventory level at the end of 2018.

As a reminder, in February, we announced, we raised approximately $4.3 million of capital through the combination of a private placement of equity and the cash exercise of existing warrants. The 2 components of the capital raise consisted of an issuance of 4 million shares of common stock at $0.60 per share with no warrant coverage, and the exercise of 3.1 million existing warrants at an exercise price of $0.60 per share.

At this time, we do not see the need to raise additional capital over the balance of 2019.

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

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Joseph M. Cugine, Barfresh Food Group, Inc. - President & Director [4]

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Thank you, Joe. As Riccardo stated at the beginning of today's call, we have a diverse stream of revenue from our many sales channels, which will be translating into significant revenue growth for us in 2019. I'll start by discussing the national and regional restaurant accounts. We continue to expect a rollout with the national QSR with over 2,500 locations.

In the quarter, we began testing with the some of the biggest QSRs and one of the largest restaurant companies in the U.S. A spring test is now complete, and we are optimistic about the potential for all of these pipeline accounts.

We continue to work with our current national and regional customers to expand the number of locations pouring our products as well as the number of flavors at these locations, which will drive increased sales. This expansion is throughout QSR, casual dine restaurants, third-party operators, zoos, theaters and ski resorts.

In the first quarter, we began working with a new national third-party operator, who has over 80 attraction centers across the U.S., ranging from zoos, aquariums and museums. We are already pouring in several of their locations and expect to expand the rollout in the next few months.

Moving on to the education channel. We are now in over 400 school locations with other school announcements expected soon for the 2019 school year. As with all of our sales channels, we continue to provide product innovation and recently introduced 3 new flavors, no sugar added blue raspberry, green watermelon and strawberry kiwi. It is especially important with the school channel that we continue to provide variety, and we intend to consistently add additional flavors.

We also continue to improve how we are servicing these accounts and the management of the overall expanding opportunities.

As Riccardo mentioned in his opening comments, we have become acutely focused on improving customer execution in the school channel. Some of the keys to improve sales in the school channel include additional days pouring per week, new flavor additions and menu placements of at least 3 times per week. Also, critical to the product pull-through is placement of the right type of equipment in each school, balancing both traffic counts and structure of the service line.

Lastly, I'll touch on the military channel. We are currently in over 100 U.S. Armed Forces dining facilities with additional locations in the sales pipeline that we expect to announce shortly. In addition, we have already begun pursuing international facilities and expanding into a nonappropriated side of the business.

A great news is that military locations have higher revenue annually since they have high-traffic, large assets placed and they pour 12 months per year. As mentioned earlier, each asset placed at a military location has generated approximately $15,000 on average. This has come with lots of learnings along the way and areas for improvement that will increase this average.

We continue to improve our execution and our revenue opportunity by placing the right asset per location and providing better support and training to maximize sales once the asset is placed.

In addition, we have improved the turnaround time for when the contract is signed and when the product is delivered from the distributor and the asset is placed. We have a great foundation for growth and we are working across all sales channels to increase revenues and deliver a superior product that meets the growing needs of our customer.

We began this year with a successful capital raise that has us positioned to take the momentum from last year and propel this company forward to start generating a significant and growing revenue stream.

And with that, I turn it back to Riccardo.

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Riccardo Delle Coste, Barfresh Food Group, Inc. - Founder, CEO & Chairman [5]

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Thank you, Joe. We made a great start into the new education and military channels. We've demonstrated our ability to start new accounts, most of which are multiyear contracted customers of 3 to 5 years. We are now increasing our focus on the execution of these accounts to help them increase their throughput.

Some of the key factors to remember for both our school and military channels: we had longer delays than initially expected in converting a signed account into a pouring customer for various reasons, for example, distributor setup, the equipment delivery, the training coordination, all affecting the timing for getting the accounts set up.

Secondly, the effect of seasonality has been much greater than initially expected for both the schools and the military. We have a wider range of account sizes in both channels ranging from $50,000 to $70,000 per annum down to $3,000 to $5,000 per annum.

As a result, our average has reduced, however, we feel confident that we can increase the average as we now focus on the execution.

We are also increasing the product and flavor range based on direct customer feedback so that the kids don't get tired of the same flavors. Where schools have introduced new flavors, some schools have seen sales increase 2 to 3x. We've improved our equipment deployment process and issue response times. All these factors have played on the timing and longer-than-expected delays in converting a contracted customer to a pouring customer.

Given that we've just started in these channels and now that we have some experience with these customers, we feel very confident about the future success and growth of these channels as it becomes an important cornerstone to our business.

Lastly, we continue to work with our national accounts. We would like to remind our investors that we do have products that have been approved for a system-wide rollout, and although we cannot confirm the timing just yet, we are equally excited that this channel will be another important cornerstone of our business. We are pleased with the progress made in the first quarter of 2019 and excited about the opportunities ahead for the company.

While this quarter is seasonally light, we continued to drive top line growth, reduced our overhead costs and maintained strong margin, all driving us closer to our goals of profitability and of becoming cash flow positive. We made important inroads with current and prospective customers and began incorporating lessons learned. We are well funded as a result of the Q1 capital raise; and considered together with our growing sales revenue, strong gross profit margin and reduced operating costs, we don't see a need to raise additional capital in 2019.

Our business has come a long way over the past few years, and we expect to drive significant increases in the second quarter and beyond and look forward to updating you on our progress throughout the coming year.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Anthony Vendetti from Maxim Group.

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Anthony V. Vendetti, Maxim Group LLC, Research Division - Executive MD of Research & Senior Healthcare Analyst [2]

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Just a little more on the -- a little more color, Riccardo, just on the national and regional accounts. I know that you said I guess on the call, the testing is complete for the national QSR with over 2,500 locations. Can you -- do you have an idea of a cadence of that rollout? Is that somewhat dependent on the QSR? Or is it -- is there a ramp that you need to do from your end?

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Riccardo Delle Coste, Barfresh Food Group, Inc. - Founder, CEO & Chairman [3]

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Anthony, let me just clarify what you -- the question you just asked. There's actually multiple that we're talking about here, right? The testing that we referred to was not the 2,500-plus location account that we had originally spoken of. The 2,500 one has already been approved. That testing has been completed. The products are approved to be rolled out. We're just waiting for the calendar time. So as soon as we get the calendar time, we'll be able to update everybody on that, separately to that. So that's won and done, right? We're just waiting for the timing on that one. So we want to be kind of clear from that perspective.

Secondly is we've mentioned that we have other national accounts. Yes, we did recently just complete another test, and we're waiting on the results for that to come forward. And we're very optimistic about it, as Joe mentioned. They are separate and we do have other ones in addition to those that the company has been working on that we're expecting some things to happen for this year. So...

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Anthony V. Vendetti, Maxim Group LLC, Research Division - Executive MD of Research & Senior Healthcare Analyst [4]

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Okay. That's a good clarification. But Riccardo, on the ones where you're just waiting for the timing for the 2,500 locations. Is it -- the QSR wants to roll it out in stages and that's the timing you're talking about?

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Riccardo Delle Coste, Barfresh Food Group, Inc. - Founder, CEO & Chairman [5]

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No. One -- whole system-wide at once.

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Anthony V. Vendetti, Maxim Group LLC, Research Division - Executive MD of Research & Senior Healthcare Analyst [6]

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Oh, it's going to be system-wise at once, once they say, okay, we're ready to go.

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Riccardo Delle Coste, Barfresh Food Group, Inc. - Founder, CEO & Chairman [7]

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Correct.

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Operator [8]

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Our next question comes from the line of Justin Borus from Ibex.

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Justin Bradley Borus, Ibex Investors LLC - Managing Member, CIO, and Chief Compliance Officer [9]

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A couple of quick questions. One, there seems to be a lot of noise on your expenses in Q1. Could you just clarify it for investors, what does your current burn rate look like as of today? And maybe what do we have to get to on a revenue, quarterly revenue basis, to get the break-even or profitability? Because it's hard to tell just looking at the Q1 results, there's a lot of moving parts.

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Joseph S. Tesoriero, Barfresh Food Group, Inc. - CFO [10]

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Justin, it's Joe. A couple of things to point out in the first quarter 2019. First of all and we do explain this in the Q and I mentioned it in the comments. We cleaned -- cleared up deferred compensation that had been accruing over about 18-month period. So part of the cost -- the biggest part of that cost, we took care of with warrants. So it's a noncash expense to the company, but $190,000 of that warrant expense is in the first quarter 2019 results.

So that's why we wanted to -- why we emphasized on the prepared comments, you take that out -- once you take that out, we have a 13.5% reduction on a quarter-over-quarter basis in the G&A expense.

Importantly, though, we've talked about -- we spoke about on the call and then the release, we have a number of cost-saving initiatives that the company is putting into place right now that are not yet reflected in the first quarter results. Though we mentioned in the release a couple of things, but -- one is, we've relocated our headquarters to a lower cost and smaller space, and we've also entered into a new contract with our PEO, our personnel benefits-related company. Those 2 items alone $200,000 of savings a year. You don't see that yet in the first quarter.

And I would say, maybe, the last item is, it's important, when you look at the statement of cash flow, we have shown a fairly large use in the first quarter, $1.8 million.

But there are a couple of nonrecurring items in there. The key items are the cash related to the settlement of the deferred comp. Also, we had some vendor payments that got settled in the first quarter of 2019 that were unusually large. And then finally, we had an amount related to the capital raise that was not yet received by March 31. So that appears as a receivable in the working capital.

So all of those items, when you adjust for those, get us down to a much lower, let's say, $1.2 million cash use in the first quarter.

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Riccardo Delle Coste, Barfresh Food Group, Inc. - Founder, CEO & Chairman [11]

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Yes. And I think just to add to that, in addition to the one-offs that Joe mentioned, on a go-forward basis, a lot of the measures that we've put in place obviously aren't even included in net number. So Joe mentioned a couple of them being changed [in the least]. We've also restructured some of the executive compensation packages and reduced those numbers and restructured them, total significant benefits to the company. In addition to that, we've changed our sales compensation. In addition to that, we've changed out our PEO setup.

In addition to that, we've changed out our logistics and freight approach. I mean you saw a 22% to 12% change in this quarter. And I can tell you we're, very obviously, expecting some further savings, particularly as we're getting more scale.

So they're all changes and benefits that's uneven -- excluding the one-off that Joe just mentioned, those aren't even factored into Q1. So when you pair that together with -- when you pair the changes together with the increased sales, we're feeling really good about the go-forward cash position.

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Justin Bradley Borus, Ibex Investors LLC - Managing Member, CIO, and Chief Compliance Officer [12]

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So just to put you on the spot a little bit, if we got our quarterly revenues to maybe a little bit north of $2 million, do you think we're at breakeven with all the -- it sounds like, you've made like 100 small cost reductions that add up to put something pretty significant?

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Riccardo Delle Coste, Barfresh Food Group, Inc. - Founder, CEO & Chairman [13]

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Yes. Look, it obviously depends on the mix, but it's going to be pretty close.

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Justin Bradley Borus, Ibex Investors LLC - Managing Member, CIO, and Chief Compliance Officer [14]

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Good. Good. And just -- I'll beat the dead horse on the national accounts just because it could potentially be so significant. On the 2,500 unit national account, do you have any idea what that initial order might be in size of units or what that could look like?

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Riccardo Delle Coste, Barfresh Food Group, Inc. - Founder, CEO & Chairman [15]

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I mean, look, purely speculating, but it could be a $5 million opening order.

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Justin Bradley Borus, Ibex Investors LLC - Managing Member, CIO, and Chief Compliance Officer [16]

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And is it -- have you guys -- it sounds like you still think one or more of these national accounts could occur this year, even though, we might be losing part or all the summer? Or is it more likely that we should kind of model this to be a next year or 2021 type of thing?

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Riccardo Delle Coste, Barfresh Food Group, Inc. - Founder, CEO & Chairman [17]

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No. Look, I think we're doing everything we can to try and get as much in for this year as possible. But you know, the size of the accounts and the amount of work that we've put into this and the amount that we've invested in it, it's not just one account, it's multiple accounts. We're here to build a long-term sustainable business. So it's more about making sure we're doing everything right on our side and then when the customers place the calendar timing, we're there and we're able to deliver.

And we'll take them when they come, to be quite frank, because at the end of the day, these are massive accounts and single-handedly will change the company in addition to everything else that we're doing anyway.

And I think one of the pictures that's really being painted from outside anyway is, we've now got a number of options that are very attractive for us to have a great future whether it's schools and military, whether it's the individual accounts, whether it's a general food service business. We're really starting to get a lot of revenue channels that are going to be quite profitable for us.

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Justin Bradley Borus, Ibex Investors LLC - Managing Member, CIO, and Chief Compliance Officer [18]

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Good. Good. And just one last question on the 2,500 unit national account. I know you've gotten approval several months ago. Have they given you any indication at all that they've changed their mind or they're deciding not to roll you out? Or are you still at this point in time just think it's a matter of time?

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Riccardo Delle Coste, Barfresh Food Group, Inc. - Founder, CEO & Chairman [19]

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No. Quite the contrary. We have had conversations with them and they will let us know as soon as calendar dates being confirmed.

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Operator [20]

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We have reached the end of the question-and-answer session, and I will now turn the call back to management for closing remarks.

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Riccardo Delle Coste, Barfresh Food Group, Inc. - Founder, CEO & Chairman [21]

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All right. Thanks, everybody. We look forward to updating everybody as some new events unfold, and we hope that's going to be very shortly.

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Operator [22]

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