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Edited Transcript of BRFH earnings conference call or presentation 15-May-18 8:30pm GMT

Q1 2018 Barfresh Food Group Inc Earnings Call

BEVERLY HILLS Apr 15, 2019 (Thomson StreetEvents) -- Edited Transcript of Barfresh Food Group Inc earnings conference call or presentation Tuesday, May 15, 2018 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

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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 corporate update call for Barfresh Food Group. Joining us in today's 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 questions. The discussion today will include forward-looking statements, except for the historical information herein, the matters discussed on this call are forward looking within the meaning of the safe harbor provision 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, hypothetical, potential, forecast and project, among others. All statements, other than statements of historical fact that address activities, events or developments that the company believes or anticipates will or may occur in the future are forward-looking statements. 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. These contents 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, 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 with that, I would like to 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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Thank you. Good afternoon, everyone, and thanks for joining us. On our call today, we will review our first quarter 2018 accomplishments and discuss some of our recent major customer wins, review our growing sales channels and provide additional insights into our sales pipeline.

We're off to a strong start in 2018. We generated gross revenue of approximately $700,000 in the first quarter, which is double last year's first quarter and the new clients we recently signed, combined with our existing client base, has us well positioned to generate over $1 million in revenue in the second quarter. We also achieved significant expansion of our new bulk product offering during the quarter, as we continue to gain traction with our K through 12 school channel. We are extremely excited about the balance of 2018, and our President, Joe Cugine, will address these opportunities in his remarks.

Regarding our first quarter results and our strong start to 2018, we accomplished the following: We secured our first 1,000 location national account and expect to add additional locations to that account during the balance of 2018. We began shipping product to this account in the second quarter and are very pleased with the customer response.

Last year, we created multiple school products, specifically designed to make the USDA national school lunch program requirements. After our initial pilot launch with 30 schools, we quickly added more schools to have over 100 school locations currently serving our products, and we continue to add at a rapid pace more schools under contract, as well as additional schools already under contract to come online this fall and many more in the pipeline as we're prepared for the beginning of the new school year. We believe the opportunity to expand distribution by hundreds of additional schools will be realized during the balance of this year. We are seeing great nationwide acceptance in the 98,000 schools in the U.S. With this, it is a great opportunity for us.

Also during the first quarter, we received approval from all branches of the U.S. Armed Forces to sell our product. We activated 7 initial military bases, with more being planned to be added, in addition to aggressively pursuing business with additional installations. With 940 bases throughout the world, this is another tremendous growth opportunity for us. We recently expanded our presence in the amusement national parks, with our largest and potentially most productive location to date, Niagara Parks in Canada. We expect that this will be one of our highest-volume single venues. At Niagara Parks, our products are being offered in 10 locations that host over 12 million annual visitors. We are very well positioned to build on this foundation for strong growth with expansion of our existing client base; expansion of our newer channels, including education and military; expansion of our previously announced national rollout; as well as additional national accounts as we work through that pipeline of opportunity.

In short, we expect to announce additional customer wins in the coming months. And we have already made the important upfront investments in our infrastructure and are very well positioned to improve our operating margins and cash flow going forward as we continue to drive our top line revenue.

With that, let me turn the call over to our CFO, Joe Tesoriero, to walk through some of the financials for the first quarter of 2018, and then our President, Joe Cugine, will share some additional insights into our various sales channels and recent wins and expansion inside our current customers. Joe?

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

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Thank you, Riccardo. Gross revenue was $670,000 for the first quarter and our net revenue for U.S. GAAP reporting for the quarter was $623,000, an increase of approximately 100% as compared to $312,000 for the comparable prior period, reflecting the increased traction in our new sales channels and more diversified customer base during what has traditional been a seasonally slow period. A significant factor in the increase in revenue is the rollout of our new bulk Easy Pour product, which has enabled us to enter channels such as schools, military and other locations that need to serve many customers in a very short service-time window multiple times per day.

Both our single-serve and bulk products are distributed through all 72 of Cisco's U.S. mainland distribution centers and in several Cisco OPCOs in Canada, as well as through new customers beyond the Cisco distribution network.

Our gross profit margin for the first quarter was 55.3% compared to 41.8% margin in the year ago period. Increased sales has enabled us to begin leveraging our established infrastructure and realized savings in raw material. We expect that our gross margins will be approximately 50% for the remainder of 2018.

During the first quarter, we realized a net reduction of $339,000 in our general and administrative expenses, an improvement of 14%, driven primarily by our initiatives to effectively realign our sales force. Due to higher sales, strong gross margins and leverage in our business, we reduced our operating loss by 20% or $500,000.

We ended the first quarter with $1.6 million of inventory, slightly higher than the level of inventory we had at the end of 2017. This significant investment in working capital was driven by our strategic initiative to prepare for the first national account rollout of 1,000 locations, which was mentioned by Riccardo.

In addition, we have added multiple SKUs to our product offerings with the introduction of our Easy Pour bulk format, which also drives the inventory level increase. Higher levels of inventory have resulted in higher spending for shipping and storage of product. We have established forward warehousing partners in order to improve service to our customers throughout our -- through our third-party distributors.

Our shipping and shortage expense includes the cost of moving product from our 2 factories to the forward warehouses, the cost of storing product at those forward warehouses, any costs we incur to deliver the product from the forward warehouse to our customer. We anticipate this being a storage expense as a percentage of sales will reduce as our business continues to grow and we are able to take advantage of economies of scale.

We ended the quarter with $2.4 million in cash. In February of 2018, we entered into a definitive agreement with several of the company's large shareholders and management led by Unibel, Barfresh's strategic investor, for a private placement of convertible notes for gross proceeds of $4.1 million. $2.5 million or 60% of this amount became available upon our March announcement of a rollout to 1,000 locations, whereby 60% of the funds were released. The second milestone releases the balance of the funds upon entering into an agreement with a national account for the sale of our products into approximately 2,500 additional locations. We believe we will achieve this second milestone during the balance of 2018.

Now let me 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. Riccardo opened the call today by highlighting recent customer wins and how these wins are translating into strong revenue growth for us in 2018 and have us well positioned for the future. We entered 2018 focused on customers and channels that drive the best market share and growth opportunities. Our focus includes, but is not limited to, national and regional chains, education, military and large venues in both recreation and amusement.

Let me start with some additional thoughts on our national and regional restaurant accounts. We are proud to have successfully launched a national customer across 1,000 locations in the U.S., with both our dairy and nondairy smoothie options being added to the menu. This customer is our largest customer to date and we expect to add more locations during the balance of the year as we move into other lines of their business.

Our strategy of focusing on both national and regional chains has evolved and so have the opportunities in that pipeline. We continue working with several of the largest QSRs to develop custom SKUs, expand market tests and ultimately take one or more of these opportunities to a national rollout.

In addition, we have recently started selling our single-serve product into over 10% of one of the largest casual dine chains in the U.S., with the goal of expanding this penetration.

Keeping the discussion within national and regional accounts, we continue to have success with our bulk platform, allowing us to offer solutions to meet our customers' needs. We have many additional bulk customers starting to pour product this summer. We will be pouring in 10 locations within Canada's largest visited national venue. And during the first quarter, we continued adding bulk units in the U.S. for large prestige national museum parks, hotels and casinos. Each of these bulk venues provides tremendous revenue opportunities, along with having Barfresh brands engaging with millions of consumers.

Moving the discussion from national and regional chains to our channel focus in education, we discussed on our last call the platform of products we developed for K through 12 schools throughout North America. I am proud to say that we have built the foundation for success with an outstanding-tasting product that also meets the nutritional guidelines of the K to 12 programs, and this has led to early success. We now have over 100 school locations pouring Barfresh under contract since we launched. Many of these schools offer 2 meals a day and Barfresh is now on the school cafeteria menus and available throughout the day for any à la carte purchases during breaks. Our pipeline build is on schedule, and we project a significant ride in new locations beginning with the fall term.

Next, in addition to the opportunity within the education channel, one of the most exciting recent developments is with the United States Military. Following a year-long approval process with the United States Defense Logistics Agency, our smoothie products are now approved for sale into all branches of the U.S. Armed Forces.

You've heard us speak about this opportunity within the military channel previously. We now have activated 7 initial military bases, where the company's Easy Pour bulk smoothies are available to troops and several additional bases are purchasing our products through food service operators. The bulk Easy Pour format offering is the perfect solution to feed large numbers of the listed personnel in a short period of time for breakfast, lunch and dinner, 7 days a week, 52 weeks a year.

Our successful implementation into the DLA system allows us access to the various branches and bases with an endorsed product, enabling our sales team to target incremental opportunities in a much more efficient manner. The DLA is actively seeking healthier food and beverage alternatives to keep the men and women serving the U.S. Military at their best. The response from the initial bases provides us with great confidence in the potential of this new channel and we are actively pursuing engagement with many more U.S. Military installations and expect to gain significantly greater penetration across the United States and internationally, pursuing 940 bases serving approximately 1.3 million active troops.

As stated previously, we have been pleased with the terrific national sales potential and firmly believe the opportunity for the military channel is as large as a national account, if not greater.

In summary, we've been building the foundation for a stable and consistent base of revenue. Our expansion across multiple channels will mitigate the effects of seasonality and fluctuation caused by any single channel. In these first few months of 2018, I believe we have finally been able to demonstrate how this strategy will come to life and begin driving revenues in a material way going forward.

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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Thanks, Joe. We are very excited about our opportunities in 2018. We will be ramping revenue within our existing client base as well as additional customers that we expect to announce in the coming months. The year is off to a very strong start and we are confident that we will continue to leverage our infrastructure with improved operating results. As you've heard on our call today, we've gained significant traction in the K through 12 segment. We've successfully initiated sales activity in the military channel and we've launched our first national account, with each of these areas representing significant opportunities for growth in 2018 and beyond. We believe that one of the key reasons for this progress is that we have one of the leading smoothie offerings in the market, together with the significant established infrastructure, distribution channels, customer pipeline and a healthy great-tasting range of products that are operationally friendly. Our diversified revenue channels are strengthened by long-term contracts, representing repeatable consistent revenue flow. Our pipeline is the strongest it has ever been, and we expect to announce additional significant wins in the coming months throughout 2018. We look forward to updating you throughout 2018 as these new opportunities come online.

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 Anthony Vendetti with 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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Yes, I just want to talk about the rollout into the 1,000 locations for that national account. Have all the products been -- have the products been shipped to all 1,000 locations yet? Or is that still in the process of rolling out, and then how many SKUs for each location?

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

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Yes, sure. So that has already gone out. There are a few that are still in the process of being completed. We're slightly delayed on that. But for the most part, they've all been done now and it's 4 SKUs.

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

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Four SKUs. And then on the 2,500-location national account, I know -- I think you said by the end of the year, is that a continuous rollout from now until the end of the year? Or does that not begin until the third quarter? Can you just give us a little more color on that?

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

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Yes. Look, so there's a lot of developments that have taken place with that particular account and we actually have multiple that would fit that criteria at the moment. So in terms of the timing for when we expect it, we're not really giving the guidance on when the accounts are going to hit, obviously. It could be relatively soon.

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

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Okay. So things could ramp up maybe before the third quarter, start to ramp to that national account?

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

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Yes. Look, we've got -- we don't just have one, again, for that number. We've actually got multiple. So each of them at varying stages of finalization. So there's a possibility that it could happen sooner rather than later, and which obviously would.

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Anthony V. Vendetti, Maxim Group LLC, Research Division - Executive MD of Research & Senior Healthcare Analyst [8]

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And then for the...

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Riccardo Delle Coste, Barfresh Food Group, Inc. - Founder, CEO & Chairman [9]

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That's why we actually build -- that's why we built the second small [factory].

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Anthony V. Vendetti, Maxim Group LLC, Research Division - Executive MD of Research & Senior Healthcare Analyst [10]

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Okay. And then just the last question on the schools in the military. How is that rollout going? I know you mentioned some of the 7 new military bases on the call and some of the new schools. Where is that in terms of shipping product? And then is there any of the Easy Pour -- is that all Easy Pour or is that different?

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

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Yes. Look, Anthony, we can't express how excited we are about both the school and the military channel. These -- both these channels, we mentioned the 7 bases, but what we didn't mention is that those 7 bases actually represent, I believe, over 12 installations. So that is on each -- on multiple basis, we have more than 1 installation or 1 dining facility that we're actually feeding people at. And when you take -- back to our previous notes at the time, we indicated that each installation is worth anywhere from 50,000 to 80,000 installation in revenue to us. In addition to that, we had some that are giving 50% to 100% more than those numbers as well. So -- but the military channel, as we continue to expand and we actually have a pretty aggressive plan in place beyond the ones that already are in, but this is going to be an incredibly exciting channel for us. It's got good distribution. It's got good margin and efficient distribution model for us. And that parlays into the education channel as well, same kind of format. So we're extremely bullish on both of those. We're going to see a material ramp in revenue. They're going to be significant contributors to that. And particularly now as we keep signing customers, it feels like it's almost every day that we're getting new agreements in from new schools and districts. So particularly as the school year is winding down, a lot of the bids are out there being finalized. Between now and the beginning of the school year, we're going to see another material ramp in the quantity of schools that will be coming on board.

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Joseph M. Cugine, Barfresh Food Group, Inc. - President & Director [12]

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If I could just elaborate a little bit on that last point. Yes, the bidding process really begins in earnest right now, over the last 30 days, and goes for another probably 30 to 45 days, until mid-June, mid-late-June. That's when all the schools are making their decisions on what products to launch when school starts in August, kind of mid-August in the South and in September in the Northeast and in the West. So we really do support Pepsico, as well as our own team, are now embedded in many, many of these bids. I think we're growing bids in gigantic school districts, small school districts, big school districts across the country. So we've -- given the success we've had to date, we feel terrific that we have a product that has no real peer in the industry. And as customers begin to talk about that, and they all talk to each other, these directors, we think we're going to pick up significant wins starting in the August time period. There's also a national school show that we went to last year, which was successful. That really kicked off Barfresh to the nutritionists and administrators in the school districts, and there's another one coming up that we're going to be front and center at with PepsiCo.

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

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Yes. I think the other thing just to elaborate further on, Anthony, is the reason why we're also so bullish is in the lead up to the bid -- part of the bidding process, there's a lot of prework that's obviously done with the schools and the districts and a lot of that includes doing the taste-testing and others. We've made comments about it in the past, but part of the process includes being in that great school district whether it's 30 schools or 400 schools or 10 schools in a district, part of the process to get in on the bid and having the product available for the kids is actually the product needs to be taste tested with the kids at the school. And that would -- that generally involves us being on the site with the equipment, with the product and anywhere from 300 to 400 kids come past and try the product. And they vote. They each get a piece of paper and they put it in either the Yes bucket or the No bucket, and typically 100% say yes. So we're seeing that on a daily basis around the country with our team and our partners out there doing these taste tests, and these tests are happening every day. So that is the imperative lead-up work that needs to be done ahead of the bid. So we have a very good chance of schools that we're in, the schools that we're testing with bids that are being set up and the timing and how many schools are in those districts. So it's a very, very exciting time for us.

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Operator [14]

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I would like to turn the floor over to Riccardo for closing remarks.

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

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Great. I would like to thank everyone for joining today, and we look forward to updating you as the events unfolds. Thanks very much.

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Operator [16]

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