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Edited Transcript of BRFH earnings conference call or presentation 14-Aug-18 8:30pm GMT

Q2 2018 Barfresh Food Group Inc Earnings Call

BEVERLY HILLS Mar 14, 2019 (Thomson StreetEvents) -- Edited Transcript of Barfresh Food Group Inc earnings conference call or presentation Tuesday, August 14, 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

* Eliot Penn

* Marc Nuccitelli

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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 second quarter 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 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 the 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 -- the 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'd 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, and good afternoon, everyone, and thanks for joining us. On our call today, we will review our second quarter 2018 accomplishments, discuss some of our recent wins, review our growing sales channels and provide some additional insight into our expanding sales pipeline. Our second quarter was a record for the company, with net sales of $1.1 million. Our gross margins improved to 52.2%, we reduced our personnel-related cost by 23%, while reducing our overall general and administrative expenses by 7% during the quarter. Our work to date has positioned us for a material ramp in sales during the second half of 2018 as our business rapidly expands.

We clearly see the momentum building in our business. Actually, our third quarter to date sales have set another record for the company by already eclipsing our Q2 sales of $1.1 million, just less than halfway through the third quarter, and we see this momentum continuing. Higher revenue, reduced fixed overhead and our strong margins are beginning to reduce our operating losses and bringing us closer to another very important inflection point for the company, which is achieving profitability. These are very exciting times at Barfresh, and we look forward to a strong back half of 2018 and carrying this momentum even further into 2019.

In addition to the ongoing test at national QSRs, the company has now made significant initial progress into 2 very attractive channels over the last 6 to 12 months, that are individually as big, if not bigger, than the national accounts we're so close to. We've recently issued press releases in both the school and military channels, and our customers in these channels have already started to meaningfully contribute to our top line and we haven't even scratched the surface yet on the size of the opportunity that each represent.

The Education and Military channels represent solid multiyear contract-based business with predictable sales per location in higher-margin product. The Education channel represents an accelerating source of growth for us that we've been diligently working to capitalize on ahead of the 2018-2019 school year. Currently, Barfresh products are being sold under contract in over 200 school locations across multiple states. Doubled our penetration in the first quarter of 2018. We continue to receive very positive responses from school administrators, and we believe our unique product offering, specialized programs, national distribution footprint and strategic partnerships ensure we are well positioned for rapid expansion. As mentioned, we are only just scratching the surface right now as the addressable market is 98,000 schools in the United States.

A great example of how our offering is being received and performing in the market is our recent experience with Pasco County School District in greater Tampa, Florida. Our first pilot testing customer valves for the past year. Earlier this month, Pasco extended their agreement to a term of 5 years and added 17 new locations for a total of 47 serving locations within their district as well as increasing the number of Barfresh product offerings to the students to include our 100% fruit products in addition to our dairy offerings. This is an exemplary case of the responses and progress we are having in this channel, increasing the number of locations, increasing the number of products we are selling and increasing the number of contract years.

Our initial success can be attributed to our great tasting, better-for-you product coupled with our simplified product preparation, which satisfies the needs of students and administrators alike. Similarly, the Military channel is a very large opportunity that also features long-term contracts. We expect this channel to become another primary driver of our growth. In March, Barfresh was approved to sell its products into all branches of the U.S. Armed Forces by the Defense Logistics Agency, or DLA. This was a huge milestone for our team as it allows us direct access to each military installation as an approved vendor. Over just the past 5 months, we have entered into contracts to sell products in 45 military installations and we are in discussions right now to add many more bases in the near future, both locally and overseas.

Both the Education and Military channels are very attractive for Barfresh in terms of our high sales value per location and multiple location management and decision-making. With the approval process for each channel now essentially complete, the sales process is shorter and less complex than a typical national account, allowing us to build momentum for new locations on a frequent basis. As we gain scale in each channel, we are building a multiyear contracted customer base that facilitates further growth in the channel and provides stability of predictable revenue streams. While the full impact of this revenue stream is not yet visible in the financials, this contracted base creates a more stable platform as we look forward to the coming school year in the case of schools and to the coming quarters in the case of military.

While progress has been immediate and tangible in the Military and Education channels, we haven't seen a lot of contribution just yet from the national account rollout to 1,000 foodservice locations that we announced earlier this year as it has been a lot slower than we had initially expected. This account is a major milestone for Barfresh. We believe the medium- to long-term opportunity will result in meaningful revenues from this account, and we expect to see an improvement from this account in the third and fourth quarters of this year. In addition, we continue to make progress with our national accounts and expect to achieve the second milestone of entering into an agreement with a national QSR account for the sale of our products into approximately 2,500 additional locations in the balance of 2018.

With that, let me turn the call over to our CFO, Joe Tesoriero, to walk through some of the financials for the second quarter of 2018. And then our President, Joe Cugine, will share some additional insight into channels and opportunities. Joe?

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

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Thank you, Riccardo. Today, I'll discuss our second quarter and year-to-date financial results and provide an update on some key operational aspects of our business. Net revenue was $1.1 million for the second quarter, an increase of 75% as compared to $629,000 for the comparable prior period. The improvement was driven by increased traction in our 2 newest sales channels, Education and the Military. Both our single-serve and bulk products are distributed through all 72 of Sysco's U.S. mainland distribution centers and in several Sysco OpCos in Canada as well as through new distributors beyond the Sysco distribution network.

Our gross profit margin for the second quarter was 52.2% compared to 51.2% margin in the year-ago period. Higher sales volumes have enabled us to begin leveraging our established infrastructure and realize savings in raw materials. We expect that our gross margins will be similar to the current quarter for the remainder of 2018. During the second quarter, we realized a net reduction of $174,000 in our general and administrative expenses, an improvement of 7%, driven primarily by a 23% reduction in personnel costs, which include payroll, stock compensation and travel, which reflects the beneficial P&L impact of our previous actions in the fourth quarters of 2016 and 2017 to realign our sales force. Additionally, after the close of this second quarter, we continue to work to rightsize our mix of in-house and brokerage sales support.

Due to higher sales, strong gross margins, reduction in G&A expense and general leverage in our business, we reduced our operating loss by 16% or $345,000. We ended the second quarter with $1.4 million of inventory, which essentially matches our inventory level at the beginning of the year and is down modestly on a sequential basis from the $1.6 million of inventory in the first quarter of 2018. This significant investment in working capital was primarily driven by our strategic initiative to prepare for the first national account rollout of 1,000 locations.

Higher levels of inventory have been a driver of relatively high spending for shipping and storage of product. We have established forward warehousing partners in order to approve -- improve service to our customers. We anticipate that shipping and 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 $854,000 in cash. And shortly after the close of the second quarter, we realized an additional cash inflow of $550,000 related to a cash warrant exercise. Also as I mentioned, we have a significant investment in working capital, much of which we expect to monetize during the third quarter. CapEx during the quarter was relatively high at $506,000, most of which was invested in our national account customer equipment, which will generate revenue during the coming quarters. In addition, the private placement of convertible notes that we initiated during February of this year, provides us with a second tranche of funding upon achieving a second milestone, which is defined as entering into a material agreement with a national account for the sale of our product into 2,500 new locations. We expect to meet this second milestone during the second half of 2018, and obtain the associated funding in the amount of approximately $1.7 million.

Now with that, let me turn the call over to 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 have us positioned for strong increases in revenue during the back half of 2018 and beyond. We entered Q2 focused on customers and channels that drive the best market share and growth opportunities. Our focus includes national and regional chains, education, military and large venues in both recreation and amusement. We are proud to have successfully launched a national customer across 1,000 foodservice locations in the U.S., with both our dairy and nondairy smoothie options being added to the menu.

While, as Riccardo mentioned, execution on this customer has proven to be more complicated than anticipated, that should only affect the timing and not the size of this account. We are working closely with their senior management on improving execution and sharing best practices across the country. This customer is one of the largest customers to date, and although we haven't seen the significant contribution to revenues that we expected, we do anticipate to see meaningful improvement from this account during the third and fourth quarter.

Our strategy of focusing on both national and regional chain 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 test and ultimately, take these opportunities to a national rollout. In addition, on our last call we announced that we had 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. Since last quarter, we increased the number of locations at this chain that are selling our single-serve from 10% to 20%. We are encouraged by our early success with this chain and our goal is to continue expansion while driving towards a national launch.

Turning to our bulk Easy Pour platform. We are pleased with our growth in this area, which has allowed us to offer solutions to meet our customer needs. We have added many bulk customers this summer, including Niagara Parks in Ontario, Canada. We are pouring at multiple locations in Niagara Parks, which is one of Canada's largest visited national venues with over 12 million annual visitors, results to date are exceeding expectations.

In the Education channel, we also discussed on our last call, a platform of products we developed for K-12 schools throughout North America, and we have built a foundation for success with an outstanding tasting product that also meets the nutritional guidelines of the K-12 programs. We now have over 200 schools contracted to serve our products by Q3 of this year. We recently participated in the School Nutrition Association national show and the feedback has been tremendous. We continue to see a very high level of interest in our product and expect to add many more school contracts during the coming weeks. 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 a la carte purchases during breaks. One such example is Pasco County, which Riccardo mentioned during his opening remarks.

I'd like to reinforce that we were able to expand from 30 to 47 schools in Pasco after 1 year of operation. And our contract term was extended to 5 years, a solid endorsement of our product and our service level. Our pipeline has many more such opportunities that we expect to turn into new contracted locations in the fall term. We are starting to be recognized as a major player in the Education channel due to having a high-quality and affordable product, providing bulk equipment solutions and having a product displayed for the second year at the annual K-12 nutrition show, where we'll be meeting hundreds of decision makers. And recently, expanded with key distributors across some of the largest states in the U.S.

Next, in addition to the opportunity within the Education channel, one of the most exciting recent developments for Barfresh is our success 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. We have gone from 6 military locations where the company's Easy Pour bulk smoothies are available to troops, to over 45 military locations that are scheduled to pour Barfresh product by October. The bulk Easy Pour format offering is the perfect solution to feed large numbers of enlisted personnel in a short period of time for breakfast, lunch and dinner, 7 days a week, 52 weeks a year. As stated previously, we have been pleased with this 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 pace of revenue. Our expansion across multiple, diverse channels mitigates seasonality. And in the first half 2018, we have begun 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 the progress thus far in 2018 and the opportunities ahead for the balance of the year. As we look to the back half of the year, we are expecting one of our strongest finishes with the company being in the strongest position it's ever been to date. And I would like to recap with a few key takeaways. Our quarter-to-date sales are a record high, less than halfway through the quarter and those sales don't yet include a meaningful contribution from our 1,000 foodservice locations national account just yet. They are expected in the coming quarters. We now have a solid, diverse revenue platform with our Education and Military channel. This gives us high sales per location, long-term, multiyear contracted business, with high-margin products and a significant boost in sales that accounts as seasonal for our base business.

We expect to announce another major national account with over 2,500 locations triggering Milestone 2, and providing further funding for the company and a further significant increase in revenues. The company continues to increase sales, reduce and optimize its operating cost structure, increase and maintain strong margins, bringing us closer to profitability. Our business is the strongest it has ever been and we expect to announce additional significant wins throughout the balance of 2018. We look forward to updating you as the new opportunities come online.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question will be coming from the line of [Ray Reyes] with [Abby Ventures]. Excuse me, I'm sorry. We have 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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So I know you mentioned, Riccardo, on the call that the national account with 1,000 locations is rolling out a little slower than you thought, but can you talk about if you're actually in all 1,000 locations at this time with something? Or is it just a slow rollout in terms of the actual locations you have a product in?

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

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No. It's a little bit of a combination. We are rolled out. We've had some operational challenges around the country. Various issues between locations, some of which we're working with the senior management team to correct, some of them are distribution issues. These are foodservice locations, so it is a little bit different than a QSR national account for example. So whilst the locations that have got it and seem to be doing well and there are others that we had some operational challenges that we are working through with the senior management team. So we expect those to be resolved. It's just going to take us a little bit longer and we're going to -- it is going to be a bit of a delay in seeing the results. So that's basically it. So from the perspective of where we're at, it's really a delay in the results versus a change in the size.

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

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But Anthony, let me -- Joseph here, let me jump in a little bit. I -- everything Riccardo said is totally accurate. I would say that the customer feels terrific. They think it's going marvelous. They want to roll us out to more channels that we're in 1 channel today, their business and dining channel. They want to roll us out to their other channels. All the vendors and blenders have been delivered. We've trained in people in the establishment how to use the blenders. But as Riccardo said, they're running foodservice located -- they might have 10 or 12 locations they are running within a current location, with a current building. So some of it has been more complicated than others, to get up and running. They have ordered the product and then they haven't executed like we want, so it's a taken a little bit longer. The group that is doing well, we follow the program, the guide that was sent out are doing fabulous. So our belief is we'll get everyone to that level and we'll see the results even better than we thought with just some more time than we anticipated.

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Anthony V. Vendetti, Maxim Group LLC, Research Division - Executive MD of Research & Senior Healthcare Analyst [5]

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Yes. But it's not a capacity issue, right? You have enough product to ship to them, it's more a -- it's operational stuff rolling out, getting them set up logistics wise.

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Riccardo Delle Coste, Barfresh Food Group, Inc. - Founder, CEO & Chairman [6]

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It's at the store level. It's at the store level, correct.

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Joseph M. Cugine, Barfresh Food Group, Inc. - President & Director [7]

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Location level. Actually some locations have us in 3 locations within a building, and we're in 2 and not the other 1, or we're there and it's just not set up properly, the POPs is not correct, so it's operationally more complex than national rollout where somebody just puts it everywhere immediately. So no problem with the product supply, none of that. That's all been sorted out.

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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 the last thing on the potential for this, this particular national account. Is -- when everything is up and running, you rolled out and everything is running smoothly in all these locations, is this still, do you believe, a $4 million-plus revenue opportunity?

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Joseph M. Cugine, Barfresh Food Group, Inc. - President & Director [9]

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I think it's far -- I want to say, I think it's far much more -- a lot bigger than that if everything is up and running. Again, we're only getting -- we only get 50% of 1 channel's worth of customers. They have multiple other channels with equal amounts of business. They wanted to start it here first and pilot it and then take it to the other channels, whether it be Education or schools or a hospital, health care. They have got plenty of sports entertainment, they have got plenty of other channels that we think we could go to. Right now, they are very excited, but we need to get these first 1,000 up and selling the way we want them to.

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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 -- and just in terms of the pipeline, there's a number of large accounts that are in the pipeline. As you're having the conversations with them, is there anything that during this time period when they've entered the pipeline that they've had issues with, concerns with or have decided to go in another direction or just not to pursue an agreement going forward? And if so, why?

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

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Yes. So we have got a pretty robust pipeline. A lot of the delays from outside have been not because of the product, it's been more because of -- change in management is actually a big one, believe it or not, because of the length of time that the process takes we've encountered that a number of times. However, given the strength of the category and the product, we have maintained -- we've maintained our position in terms of the change wanting to continue moving forward with the product. So look, we entered into the convertible note deal on the basis of hitting Milestone 2 for a reason with that national account. So we still maintain a robust pipeline. And we still fully expect the Milestone 2 to be achieved and additional national accounts to come forward and moving to rollout.

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Anthony V. Vendetti, Maxim Group LLC, Research Division - Executive MD of Research & Senior Healthcare Analyst [12]

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Okay. And then just on 2 other opportunities. You talk about schools, it sounds like it is a huge opportunity, you're just scratching surface with a little over 200, and there is 98,000. What's the -- is your best-case scenario, because it probably takes a while to get these schools up and running and unless it's a multi-school, it's going to take some time. But what's your best-case scenario? Where do you think the opportunity is within that 90 -- because not every one of those 98,000 schools is an opportunity. But out of the 98,000 schools, what percent of those do you think are a real opportunity for Barfresh? And if you had to look out 3 years from now, where do you think you could be in terms of penetration?

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

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Look, that's a great question. We've got some very large things in the pipeline. I mean, we've had a pretty -- I mean, we're going to -- we're in 200 schools that we weren't in last year, right? And I can tell you that by the time the year is out, it's likely that we'll be in a multiple of that. So we see the opportunity as being very large. Is it possible for us to be in several thousand locations in a few years? Absolutely. We could actually be there a lot sooner than that. We're working with school districts. And a part of the bid process that we haven't done before seems some of the -- the Pasco County example is very important because as we go into a school district, the district may have 200 locations. And we might start with 5 locations or 8 locations to start with, but that could, in a year's time, that can go from 8 to 100 or 8 to 200. And when you've got that happening around the country, it's very significant numbers. In addition to that, we're already participating in a number of bids for school districts. So as the year goes on and as we get into the back half of the year, this is when school is starting. School is just about to start, right? So a lot of the revenue jumps that we're seeing now in the schools, we're not even fully rolled out yet. And we're already seeing this jump in revenues. So as we get to the back half of the year, we only see it growing significantly more.

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Anthony V. Vendetti, Maxim Group LLC, Research Division - Executive MD of Research & Senior Healthcare Analyst [14]

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Okay. No. Great. And then Military. I know you're approved in all channels, but if you looked across the different channels, where do you see the greatest near-term opportunity to generate significant sales?

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

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Yes. Look, this is another great opportunity for us that we actually -- we're starting to monetize. So we started with 6 -- we only got approved in the beginning of the year officially. Since then we've gone from 6 installations to 45, and that's 45 contracted that we -- really the majority of those still haven't even been rollout. So in terms of the contribution level from those 45 bases, we really haven't seen the bulk of those contribute just yet. We're expecting those in the coming months. So again, they're the ones that are already contracted. We already know that they're going to be more that will be added to that number between now and the end of the year. So as we look to understand the metrics for the Education and the Military channel, it's significant. It's a high dollar value per location. Military is around the $50,000 mark. And with schools around the $10,000 to $15,000 mark per location, per year. So when you add up all the schools and all the military bases that we already have and the fact that we've got more that we already know are going to be added between now and the end of the year, it's changing the base of our business. And it's a high-profit product and it's a multi-contract year customer. As we go into next year, you've got a brand-new base of business that we've never had before.

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Operator [16]

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Our next question comes from the line of [Ray Reyes] with [Abby Ventures].

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Unidentified Analyst, [17]

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I just wanted to follow on to the question about the school opportunity. If -- give a little bit more detail in terms of -- for example, as you just mentioned, $10,000 to $15,000 per school on an annual basis. Could you go on a little more detail about what do you expect on, not just revenue, but also the margin opportunity? And also how many schools we could conservatively expect to be in by the end of this year, by the end of next year?

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Riccardo Delle Coste, Barfresh Food Group, Inc. - Founder, CEO & Chairman [18]

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Yes, sure. So just a little bit more detail on that. So it's probably important to note that when we sign up a school location, each school location signs anywhere from a 3- to 5-year contract term. So that 3- to 5-year contract term also comes along with a minimum annual commitment in volume. So depending on the school and district, it's anywhere from, again, $10,000 to $20,000 per school annually, but we're saying $10,000 to $15,000, right. So will every school do that? Probably not. There'll be some that over index and there'll be some that under index. But the way we're structuring the business is that each account is on a contracted term over that period of time. So we've already announced that we're in over 200 locations. We're going to -- we are going to provide an update shortly on that new number. I can tell you it's greater. And by the end of the year, it's not unreasonable to see a multiple of that number by the end of the year going into next year. So again, we're just starting the school year. This is counter-seasonal business for us. So we're expecting some good sequential growth as we go into the back half of the year. It's a very exciting channel for us. And we're starting to see the -- this quarter alone, the fact we've passed Q2 in the -- less than the first half of the Q3 without a material contribution from our first national account, that's a sign. It's a very good sign.

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Operator [19]

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Our next question comes from the line of Marc Nuccitelli with Dillon Hill Capital.

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Marc Nuccitelli, [20]

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Just -- I just -- on that last thing you just said, you said you've exceeded $1.1 million already for the third quarter, just to be specific?

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

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Correct.

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Marc Nuccitelli, [22]

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Okay. And the first, what is that, 6 weeks or so you're saying?

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Riccardo Delle Coste, Barfresh Food Group, Inc. - Founder, CEO & Chairman [23]

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Yes, in first 5 weeks.

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Marc Nuccitelli, [24]

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And you think you can continue that trend for the remainder of the third quarter?

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Riccardo Delle Coste, Barfresh Food Group, Inc. - Founder, CEO & Chairman [25]

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Correct.

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Marc Nuccitelli, [26]

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Okay. Without kind of being redundant, I just want to get a little more granular on the Military business. You're up to 45, 46 locations, is that -- that's 45 dining halls, correct?

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Riccardo Delle Coste, Barfresh Food Group, Inc. - Founder, CEO & Chairman [27]

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That's correct. And it's probably worth mentioning, majority of those dining halls haven't been installed yet. So we've got a rollout plan for those. And I think as we've communicated, the majority of those are expected to be installed and pouring product by October. So as we look again from a revenue contribution, the bulk of those locations are expected to come over the coming months.

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Marc Nuccitelli, [28]

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Okay. So -- and that's 45 dining halls over how many military bases?

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Riccardo Delle Coste, Barfresh Food Group, Inc. - Founder, CEO & Chairman [29]

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It's about 36, thereabouts, military bases, so we've obviously got a lot of runway in front of us. We've been having some great feedback and great response on the product. And again, it's probably worth mentioning that each one of these machines that we placed with our product, it's a significant contribution that we expect from each one of these bases, it's anywhere from $50,000 to $80,000 per machine. So when you start to add up digging -- that's per installation.

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Marc Nuccitelli, [30]

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Per installation, per annum. Right. Okay.

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Riccardo Delle Coste, Barfresh Food Group, Inc. - Founder, CEO & Chairman [31]

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Per annum. Correct. So -- and this is all year round. This is all year round. So what's important here is, we're not relying on -- as this is not a customer outlet where the customer is going out to purchase the product, it's included as part of the meal plan for the troops. So it's a popular product. And it's been doing very well in the locations that it's in.

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Marc Nuccitelli, [32]

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So it's exceeding your expectation that would give you the $50,000 to $80,000 type of annual run rate?

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Riccardo Delle Coste, Barfresh Food Group, Inc. - Founder, CEO & Chairman [33]

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Yes, the $50,000 is kind of the broad stroke number, correct.

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Marc Nuccitelli, [34]

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Okay. So out of the 45 dining hall locations, how much have actually contributed revenue thus far? Even I know you said a lot are still in progress of being installed, so how much revenue have you gotten out of those locations?

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Riccardo Delle Coste, Barfresh Food Group, Inc. - Founder, CEO & Chairman [35]

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Probably 11.

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Marc Nuccitelli, [36]

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Probably 11 of the 46, 45?

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Riccardo Delle Coste, Barfresh Food Group, Inc. - Founder, CEO & Chairman [37]

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Yes. And even so, even out of the 11, the last 2, 3 or 4 of those have only just started, very recent. But in the last less than 30 days.

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Marc Nuccitelli, [38]

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Okay. So out of all these large announcements, whether it's the 200 schools, the 45 military, the $1,000, $1,500 national accounts. The reality is a lot of this revenue is in -- still in the early stages?

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Riccardo Delle Coste, Barfresh Food Group, Inc. - Founder, CEO & Chairman [39]

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Absolutely. Yes. Very much so. Whether it's the military or the schools, and we're only talking about dining facilities right now within the military, right? There's other locations outside of the actual dining halls that will be -- that we see also becoming available to us, so both locally and overseas. I mean, we've already -- we already put it out there that we've already had international -- requests from international locations for the product as well that we're working with the military on. So there's an enormous runway here for us both in the dining facilities and outside of the dining facilities as well.

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Marc Nuccitelli, [40]

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Okay. And so -- and how many military dining hall installations do you expect to have by the end of December?

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Riccardo Delle Coste, Barfresh Food Group, Inc. - Founder, CEO & Chairman [41]

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Look, it's a great question. Somewhere between 75 or a 100 wouldn't be -- would be a great achievement for us.

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Marc Nuccitelli, [42]

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So when you look into the fourth quarter, based on your kind of -- on your comments about the third quarter, you could have a $2 million or $3 million quarter in the third quarter. Are you prepared kind of looking at what's on the table, not to give a range of revenue guidance for the fourth quarter?

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Riccardo Delle Coste, Barfresh Food Group, Inc. - Founder, CEO & Chairman [43]

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Look, we're not giving that just yet. But it doesn't take much now to look at how the business is set up. We've got -- we've announced 200 schools that we never had before, going to the back half of the year when they're just starting. That number is going to be larger and we're probably going to -- we're going to give an update on that shortly. So we know that we're going to the back half of the year with over 200 schools that we never had before. We're going to have 45 military bases that we never had before. We're also going to have the national account that we didn't have last year. So as we look to the back half of the year and given the trajectory and the sales that we've had quarter-to-date with this new customer base, we feel as though we're going to have a very strong finish to the year.

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Marc Nuccitelli, [44]

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And you expect the big Milestone announcement also to be activated by the fourth quarter?

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Riccardo Delle Coste, Barfresh Food Group, Inc. - Founder, CEO & Chairman [45]

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Correct. That's correct. And look, I wouldn't be surprised if it happens sooner.

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Marc Nuccitelli, [46]

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Okay. And you feel like your cash position is okay with -- in the front of that potential large ramp?

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Riccardo Delle Coste, Barfresh Food Group, Inc. - Founder, CEO & Chairman [47]

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For now, that's correct. Yes. Yes, because what's also happening is our margin is going up, right? We've reduced our operating cost structure. We've got a significant amount of inventory on hand, right. So we got $1.4 million, $1.5 million inventory on hand. And that's about $3 million in revenues that's already paid for. So yes, so we're sitting -- right now we're sitting pretty happy.

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Marc Nuccitelli, [48]

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So -- and assuming that you convert another $1 million to $1.5 million in the back half of the third quarter, that's going to come directly out of inventory and convert to cash?

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Riccardo Delle Coste, Barfresh Food Group, Inc. - Founder, CEO & Chairman [49]

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Sorry, say that again.

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Marc Nuccitelli, [50]

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The -- assuming you sell another, let's say, $1 million to $1.5 million in the back half of the third quarter, that's going to come directly out of your inventory, so that inventory will convert directly to cash?

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Joseph S. Tesoriero, Barfresh Food Group, Inc. - CFO [51]

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Right, but we -- Marc, it's Joe. But we'll be replacing that naturally because we need to keep the forward-looking funnel full as well.

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Riccardo Delle Coste, Barfresh Food Group, Inc. - Founder, CEO & Chairman [52]

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Yes.

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Joseph S. Tesoriero, Barfresh Food Group, Inc. - CFO [53]

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So inventory has not been a use to working capital, and it's pretty stable. Quarter-to-quarter so far this year, we built up inventory for the 1,000 account -- foodservice account that we've spoken about. So we're good there. And we'll need to keep building. But as Riccardo said, we've used a significant amount of cash to build that inventory. So obviously, we need to replenish that as we look to the fourth quarter sales.

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Marc Nuccitelli, [54]

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Right. So assuming you continue the same trajectory, this is an assumption, I'm not asking for a projection. You can hit $2.5 million for the third quarter at roughly 50-ish percent margins, you should be on a P&L basis, close to breakeven, but you should actually build cash by, if you're converting some of that inventory, correct?

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Joseph S. Tesoriero, Barfresh Food Group, Inc. - CFO [55]

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In the fourth quarter, build cash...

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Marc Nuccitelli, [56]

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No in the third quarter, in the third quarter.

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Joseph S. Tesoriero, Barfresh Food Group, Inc. - CFO [57]

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No. I don't think that will be the case. But there are a lot of other variables as well, but I think working capital should be fairly neutral to a use depending upon a lot of things that are going to be happening. So if the account, the Milestone 2 account that Riccardo mentioned, gets happening sooner rather than later, we'll have to build for that account. So it's really -- it's hard to say -- it's hard to answer your question definitively.

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Marc Nuccitelli, [58]

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Okay. Okay. But you feel comfortable with your -- looking at these scenarios moving into the back half of the year?

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Joseph S. Tesoriero, Barfresh Food Group, Inc. - CFO [59]

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Yes. We're very optimistic. The balance sheet is in good position. We're looking for the funding of the Milestone 2 activity to occur. Haven't talked about it much, but we did get funding after the quarter closed. That helps as well. So we're in strong position.

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Marc Nuccitelli, [60]

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Okay. And then just my last question. Unibel, you really haven't talked about their involvement or how is that relationship going? Are they helping you with some of these delivery issues? Are they helping you internationally? Where do they stand at this point?

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Riccardo Delle Coste, Barfresh Food Group, Inc. - Founder, CEO & Chairman [61]

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Yes. Look, we're not really having any delivery issues. They've been good. They've been a good source of -- a good resource for us. And they've been a great partner, obviously, a contributor. So on the balance, it's been good. So, yes.

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Operator [62]

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Our next question is from the line of Eliot Penn with Ibex Investors.

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Eliot Penn, [63]

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I was hoping to -- I heard the commentary at the beginning of the call and throughout the call about expecting a dramatic ramp in the second quarter. And you made a mention of a betterment continuing to 2019. And maybe I can get you to just clarify some of the comments you gave in response to the prior question. In particular, what are the key assumptions that we're making as you think about the guidance you've given for a strong back half of the year? And beyond, is there any contribution there from same-store sales? Are we dependent upon winning a national account if you don't have now? How much are we expecting from the 1,000 and the 2,500 location customers that are just -- or that are in works? What are you expecting about the pace of the Education channel? If you can help us just clarify what assumptions that you're making in terms of getting to the strong second half in 2019, I'd appreciate that.

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Riccardo Delle Coste, Barfresh Food Group, Inc. - Founder, CEO & Chairman [64]

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Yes, sure. Eliot, so look, I think it's a combination of everything, right. So we really haven't factored in the national account of 2,500 locations into the back half just yet. It's really -- that is a significant swing card for us because that's more than 2,500 locations. We've had 2,500 as a benchmark, but I can tell you it's significantly more that we're expecting. But when you look at the balance of the business that we've got, it's going to be significantly higher than 200 schools that we're going to finish the year with. It's going to be higher than 45 military bases. It's going to be the 1,000 national accounts in the foodservice locations. Plus it's going to be these other regional national accounts and other regional and special fee accounts, whether it's amusement, plus our base business. So the business base that we have is growing. So -- and a lot of it's becoming contracted business. So it's going to be repeat, ongoing repeat customers that we're going to be able to continue growing on. So that's really the basis of what we're looking at. And then when you layer in the next national account, it's going to -- the next national account is going to be very different from our first one because it's in the QSR space. So what that means for us is, it's a much different application to our product. It's nationally marketed. It's a more controlled operational effort. It's a significantly different execution. And that also results in significantly different sales results. So as we look to the back half of the year and especially into 2019, we're going to have an incredibly solid base of existing business as well as another major national account, at least one. So that's how we're looking at it.

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Eliot Penn, [65]

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And can I ask you just to expand on the national accounts progress? You've been talking it for some time, and I bet that there are a lot of things that are happening behind the scenes that are not yet reported in the financials, so what are the things that you're seeing or working on or doing that give you confidence that there's actually been progress made? Any anecdotes you can share would be helpful and be welcomed as well.

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Riccardo Delle Coste, Barfresh Food Group, Inc. - Founder, CEO & Chairman [66]

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Yes. How long do we have for the call? The list goes on, but at the end of the day, we have made -- we've done a significant amount of work with multiple national accounts. And all indications are pointing towards the rollout of which we're being kind of talking to. Whether it's consumer taste panels, whether it's focus groups, whether it's planned audits. And look, some of these we've already been through. And as I mentioned before, we've had a few false starts with some of them. But I think that given the renewed progress that we've had and the significant amount of work and rework that we've done and the amount of contact that we have with the customers, we feel extremely optimistic about achieving the Milestone 2, which is why we included it as part of our milestone. Had we have not been optimistic in achieving it, we wouldn't have included it as part of our milestone.

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Eliot Penn, [67]

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Got you. And then within the -- onto the topic of national accounts, are you able to comment just generally on where -- what kind of accounts are in testing? And where they are? I heard you mention that 1 large QSR, 20% locations. But where else do we have not just consumer -- not just factory audits and some taste panels, but where else are we actually in stores in some kind of test fashion?

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Riccardo Delle Coste, Barfresh Food Group, Inc. - Founder, CEO & Chairman [68]

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Yes. Look, we're in a range of different -- we're in some casual dine chains. We're in some -- a number of QSR chains. And that's pretty much the detail I can give you without being too descriptive giving them away. So we're in multiple categories within the space. So, yes.

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Eliot Penn, [69]

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And is there a sense of, if all those test locations are rolled out to the entire chain of -- like how many locations are we talking about collectively were already in today?

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Riccardo Delle Coste, Barfresh Food Group, Inc. - Founder, CEO & Chairman [70]

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It'd be tens of thousands.

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Operator [71]

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At this time, I would like to turn the floor back to management for closing remarks.

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Riccardo Delle Coste, Barfresh Food Group, Inc. - Founder, CEO & Chairman [72]

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Great. Thanks for the time. Thank you, everyone, for joining. And we look forward to sharing some exciting results in the back half of 2018. Thank you.

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Operator [73]

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