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Edited Transcript of RBIZ earnings conference call or presentation 13-Apr-20 8:30pm GMT

Q4 2019 Verus International Inc Earnings Call

MINNEAPOLIS May 7, 2020 (Thomson StreetEvents) -- Edited Transcript of Verus International Inc earnings conference call or presentation Monday, April 13, 2020 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Anshu Bhatnagar

Verus International, Inc. - CEO, Chairman & President

* Christopher Cutchens

Verus International, Inc. - CFO

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Conference Call Participants

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* Mark Forney

MKR Group, Inc. - VP

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Presentation

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Mark Forney, MKR Group, Inc. - VP [1]

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Good afternoon, everyone, and welcome to Verus International's Fiscal 2019 Q4 and Year-End Earnings Conference Call. As a reminder, Verus' fiscal year ends on October 31, so all figures presented in relation to these periods will reflect that end date.

Earlier today, we issued our fiscal year 2019 financial results. A copy of the press release is available on the Investor Relations section of our website, and the financials are posted on EDGAR. We report our financials in U.S. dollars, so today's discussion will use that currency unless otherwise noted.

Before beginning our formal remarks, I'd like to remind listeners that today's discussion may contain forward-looking statements that reflect management's current views with respect to future events. Any such statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected in these forward-looking statements. Verus does not undertake to update any forward-looking statements except as required.

Today's call will be different than prior calls because we'll be using a slide format in conjunction with the audio portion of the call. Investors are encouraged to access today's call via a medium that provides the ability to do this additional information.

At this point, I am pleased to turn the call over to Verus CEO, Anshu Bhatnagar. Please go ahead.

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Anshu Bhatnagar, Verus International, Inc. - CEO, Chairman & President [2]

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Thank you, Mark. First off, I want to send out our best wishes for the health and happiness of all our shareholders. Like many of you, we have been working remotely, so know firsthand the kind of disruption that has changed the way we all do business, particularly for those of you with children. We work with suppliers and customers in many time zones and regions, so are better prepared than many companies for the transition to remote operations. Today, we're going to pull back the Verus curtain in a way that you've never seen before, reflecting a month of transformative events that is unparalleled in our operating history. By the end of this call, I want every investor to understand why we have so much confidence in our ability to maintain top tier growth even in the face of unprecedented challenges.

I'm going to let Chris dig more deeply into our financials, but want to highlight a couple of important items at the beginning of this call. Number one, we did not have any restatements from the prior quarters in conjunction with our annual audit, so the repercussions of our switch in auditors can now be left behind. And number two, we met our goal of triple-digit growth in Q4, marking our fifth consecutive 100% growth. We are doing quite a bit of product repositioning planning, so this quarter will be the slowest in our current trend and you can expect a return to even stronger acceleration in upcoming quarters.

Moving on to our operational update. Let me start with Nutribrands. On April 8, 2020, we executed a termination agreement to unwind all transaction-related agreements. The reason for this starts with a review of our goals for every new product line to add shareholder value rapidly, profitably but with minimal risk. That is one of the reasons we're so picky on the kind of deals we pursue, and the deals are highly structured. After signing the Nutribrands deal, we began the familiar task of melding together 2 companies. That process included designing a structure where we could take over significant amount of control while preserving a high degree of autonomy for the new subsidiary. As the plan began to develop, we began to realize that based on the way the transactions would need to be structured, we would lose the ability to credit insure our shipments.

Furthermore, the shipments would need to be in the multimillion-dollar range. That became a risk that we were not willing to take. Both parties worked really hard to come up with a viable solution acceptable to our treasury partner, but unfortunately, we just couldn't get there. So collectively, we felt it would be better to amicably unwind the transaction and move our separate ways. So although we are disappointed, we have so much business in hand that we expect the impact to be minor. As evidence of that, we managed to post a triple-digit growth quarter without incorporating any of the Nutribrands business into our revenue stream. And we do not expect that to change in the upcoming quarters.

This is possible as the demand is outstripping supply and we have rapid growth potential from multiple business units, both in the U.S. and abroad. This is possible as demand is outstripping supply, and we have rapid growth potential from multiple business units, both in the U.S. and abroad. Added revenue from the new ZC Top subsidiary is not even in our projections yet, so that is a brand-new wildcard of its own. There really isn't much to say about this except that we are glad that the decision was made in a friendly way early in the implementation process at a time when the impact on both companies was minor.

That brings us to our discussion of our ZC Top acquisition. As our press release stated, this acquisition gave us controlling interest in a large, scalable textile operations in the Philippines. As a group, we collectively have many international business contacts in many product categories, so this is a case where the co-owners of ZC Top reached out to me for help. They had a dilemma, unprecedented request for quotations to sell large quantities of biohazard masks and suits well beyond anything they had ever seen. Interestingly enough, we had very early evidence of the upcoming severity of the global pandemic as we began our due diligence early in March and witnessed the early days of this global scramble to find masks and protective gear. ZC Top had the facility and equipment, the personnel and the product line to help during this time of global need, but they did not have the capital or global knowledge to accept large-scale orders. Partnering with a U.S.-based entity was a preferred choice but getting funding as the financial markets began to free-fall was not an easy task. It took a while to get funding, but we were able to proceed. This opportunity could be a game changer for both Verus and ZC Top because the global need is so large.

First, we'll start with the challenges. Although ZC Top is considered a strategic business, which allows it to operate while other industries are shut down, the Philippine government closed travel inbound and outbound for the month of April. In the interim, the company is making everyday simple masks to meet the government mandate that all citizens must wear masks in public. Verus is currently -- Verus is currently exploring charter plane options to get the N95 line running at full capacity, including moving some production to other countries to create 2 sources of supply. So we're preparing some logistical alternatives if the Philippine travel ban extends beyond April. The duration of production difficulties is relatively short compared to the ongoing demand metrics.

We are still assessing what kind of capacity we can generate from the plant, particularly based on the current travel conditions, but we can model out the revenue impact with a good degree of accuracy on a unit basis. We won't be disclosing our exact margins, but suffice to say, this will be our most profitable product category to date. We do not expect shipments to be meaningful until after the end of April. Beyond the mask production potential, we're still assessing the potential of the biohazard suit line, which could also be substantial based on some large initial requests for quotes. We feel the non-mask categories could represent a significant business totaling millions of dollars in revenue on a quarterly basis.

Masks are in the news almost daily, and many companies have joined the business to push supplies, but we have a unique offering that we think may have some staying power after the initial surge. As I mentioned, we have been working on this for quite a while now, learning the industry and doing some of our own modeling. Clearly, the current demand curve will remain solid for many months to come. As one country cools, another heats up with the trends continuing into the traditional flu season. On a global basis, we could see 2 high demand periods: one that will pay out in the U.S. and other Northern Hemisphere countries into summer 2020, then a second demand curve during the upcoming flu season in October 2020 through April 2021. The restocking cycle may not even start until the second half of 2021. But unlike some past cycles where stockpiles were left unfulfilled, the scrutiny on this issue will guarantee significant restocking following a return to normal flu seasons.

With this in mind, masks and equipment sales should remain robust into at least mid-2021. As a result, we are working to get the plant ramped up as quickly as possible to capture some part of the current hyper demand. The capital outlay for Verus is relatively small, less than 500,000, opening up a brand-new product line with a potential to become a significant contributor to future revenues. This is a very low-risk way to create substantial and profitable product line in a space where we can use our skill sets in international trade.

Up next, I'm going to briefly discuss our Middle East business, which was a primary source of growth in fiscal 2019. This part of our business has become a steady, dependable and profitable part of our business. Over the last 2 years, we have developed and experimented with brands in various categories, and we will continue to do so moving forward. As a result, I'm still not prepared to break out our sales by category. We will keep those brands in our presentation because they're Verus owned and are still part of our long-term plan but still not contributing significantly to our revenue.

As most of our long-term shareholders know, a shortage of working capital has been our biggest issue, forcing us to shift our available resources to whatever category can give us the greatest near-term return with the biggest margins. As a result, we are growing in this region via a limited product line and we'll expand some of these other categories as our financial strength improves. Each product line is like a switch ready to be turned on as we get more working capital. So the upside from this region is open-ended.

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Christopher Cutchens, Verus International, Inc. - CFO [3]

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Thanks, Anshu. As you look carefully at our 10-K, you will see that the issues pending at the time of our audit firm change were not as significant as some critics contended and most importantly, did not require a restatement of any prior periods, either full years or related quarters. Our thought process when we decided to change audit firms was that a top 8 national accounting firm would enhance our status during an uplist, which at the time seemed imminent and logical. We frankly underestimated the culture differences between a very large firm more accustomed to significantly larger clients and large accounting staffs and how that would translate to a small, lightly staffed company like Verus. As the audit crept forward and we saw the potential for large cost overruns and in open-ended delays, including certain unresolved discussions, we believe the resignation of MHM was in the best interest of both parties. Additionally, having the opportunity to reengage Assurance Dimensions as our audit firm to complete the 10-K audit ensured a timely completion as they were deeply knowledgeable of Verus and had already reviewed the first 3 quarters of fiscal 2019. The certain unresolved discussions cited by our prior audit firm was solvable with such resolutions resulting in no restatement of any prior periods as I previously mentioned. So with this 10-K filing, we are now current with our filings and this audit is a thing of the past.

Now that I have that out of the way, I can get to the important topics, the financials for fiscal 2019. As Anshu mentioned, we met our objective in posting another triple-digit revenue growth quarter even without the benefit of incorporating any contribution from Nutribrands. Fourth quarter 2019 marked our fifth consecutive quarter of triple-digit revenue growth with record revenue of $4.7 million. The revenue percentage increase during the fourth quarter took a temporary dip, down to only 116%, partly due to the fact that we reserved some of our foreign working capital for Nutribrands, and we took our foot off of the MLB accelerator while we redesigned the product line. I want to highlight, this will be the slowest quarter of our revenue ramp. Without stealing too much of our future thunder, I can share that we expect our upcoming first quarter of fiscal 2020 will mark a return to the kind of growth rates we've posted during the last few quarters.

For the full 2019 fiscal year, we generated $13.6 million in revenue, 135% increase over the $5.8 million generated during fiscal 2018. Geographically, approximately 69% of our sales were in the UAE. 14% were in Saudi Arabia. 9% were in Bahrain, and 8% were in Oman with just a modest level of sales in the U.S. Our gross operating profit margin for fiscal 2019 was 15.2% or approximately 230 basis points higher than fiscal 2018, which is moving higher but does not yet reflect where we expect to be as higher-margin products enter the mix. Salaries and benefits, excluding noncash charges, only increased 4.9% during fiscal 2019, so we more than doubled revenue without adding much to this important line item. The leverage in our model should be very apparent from that key figure alone but will really become apparent during fiscal 2020. We intend to remain a lean operation as we strive to become consistently profitable in the coming year.

We have been logging some heavy start-up costs in recent quarters for new gummy shapes and packaging redesign. Those costs were reflected in the fiscal 2019 numbers with general and administrative costs up 164% to $1.5 million. We also had selling and promotion expense of $126,000 for the year, which is a new category in fiscal 2019 connected to our MLB products launch. In addition to these costs, our largest expense in fiscal 2019 was a noncash expense of $3.4 million for stock-based compensation, which accounted for 55% of our total operating expenses. This charge is related to executive incentive compensation programs driven by certain company performance metrics.

Legal expenses for the year were also very large, reaching $618,000 or about 10% of total operating expenses. We expect that percentage to decrease during fiscal 2020. As a reminder, this 10-K covers the period dating back to the financial recapitalization period in early 2019 and the end of the RealBiz lawsuits in late 2018, periods with very heavy legal expenses.

Based on what we accomplished during 2019 and where we're exiting, we have an exciting start to fiscal 2020. If you exclude the onetime noncash stock-based compensation expense and normalized other expenses such as legal expenses, our fiscal 2019 operating loss of $4.1 million approaches breakeven.

We are not quite complete with our first quarter fiscal 2020 financial review, but I expect investors are going to be surprised to see the leverage in our model and what that means for future profitability. We ended fiscal 2019 with $372,000 in cash on hand compared to just $29,000 at the end of the prior fiscal year. So the improvement in that regard is fairly obvious. Accounts receivable increased 166% to $3.3 million, and inventory was a record $599,000 at year-end. So every line item you would expect to increase but the growing business is reflecting that growth in an appropriate way.

We're getting a lot of questions concerning financing. Those efforts have been in limbo during our delayed 10-K filing, so getting our 10-K filed is a major event because we now regain our current filing status. With the end of the Nutribrands agreement, we can put some of the capital to work that we have reserved for that effort, but more importantly, we can reengage with some higher-quality sources of commercial funds.

In particular, we are actively working to add a domestic revolver and to expand our foreign revolver. This kind of commercial financing is outstanding because it is based on a premium over the LIBOR rate. At the end of our 2019 fiscal year, our rate was just 4.8%, which is far superior as compared to all of our other sources of working capital. We are in active discussions with several sources to gain access to additional LIBOR plus funding, and we'll be able to advance those efforts now that we have filed our 10-K.

Today's call looks pretty far back in time. So to provide a glimpse of the upcoming first fiscal quarter of 2020, we expect: one, another record revenue quarter; two, another triple-digit revenue growth quarter but reaccelerating; and three, closer to operating profit, excluding noncash stock-based compensation charges. We are still assessing additional financial guidance but are now forecasting a number of unknowns into our model. For example, we do not know how long state governments will keep stores closed, whether the MLB will have a season, production potential in the Philippines and quite a few other factors. Individually, these are short-term issues or opportunities, but collectively, they could change the trajectory of a ramp during the second half of 2020 either negatively or positively. We expect to be in a better position to model these new variables over the next few weeks, so we will update our forecast accordingly during our next quarterly review.

No matter what the scenario or time frame, we expect to generate solid revenue growth during 2020. So in our case, it is just a matter of trying to define how fast we can grow.

At this time, I will turn the call back to Anshu for additional comments.

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Anshu Bhatnagar, Verus International, Inc. - CEO, Chairman & President [4]

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Thanks, Chris. During this part of the call, I'd like to discuss our growth plans as we navigate our way to what we hope will be a steady reopening of the U.S. economy. At Big League Foods, we are far ahead of the plan during the early part of 2020 with progress that includes: opening sales channel in 4 or 5 desired categories: grocery, convenience, general, retail and online with just the drug store and supermarket left to penetrate; signing chains in 2 of our 3 major target categories with our first regional and national customer and only big box left to penetrate; and introducing a full redesign of our MLB product line.

We were making great progress in our key sales channel prior to the COVID-19 pandemic, and we have a high level of confidence that this type and number of customers will continue to expand as the retail business returns to normal. In terms of online, we sold more than 150 cases of product on the first day of going live, and we think that will become a steady source of business. We see growth in every channel for MLB products under every scenario. We have 2 kinds of growth planned: customer growth and also product line growth. So I'm very excited to provide some of the following update on the professional sports discussion.

We have been in talks with all of the major professional sports leagues in North America, and those talks have all been moving very well. With all the sports leagues, we are either in final stage talks or have some sort of assigned LOI or verbal approval with documents and legal at this point. Those talks include MLB Players Association, the NBA, the NFL Players Association, NASCAR, NBA Players Association, and we expect the NFL to follow shortly thereafter. We expect in the near future to be able to feature many stars on our packaging, which will help us in the retail level by keeping our offering exciting and fresh.

The reaction to our new packaging has been phenomenal even outside our loyal shareholder feedback, so we have increased confidence that Big League Food brand can eventually gain a foothold not just in retail but in stadiums and arenas throughout the U.S. We think this will translate to sports overseas as well, so it is very easy to describe this as a multiyear opportunity that will begin in North America but replicate in Europe, South America and other parts of the world. Europe, in particular, will be very easy as our production is already taking place in Western Europe and can be expanded as needed.

To sum up our progress, we are far ahead of schedule in gaining a foothold in professional sports. As an added bonus, as we sign different leagues, we can create an overlap of seasons that remove the seasonality from this segment. Our GCC business is rock solid, and we will continue to be the kind of steady business that many companies wish they had at this time of slow or no growth in many industries. The GCC business is on track to grow this year, but our other 2 revenue streams are the ones that will define fiscal 2020. We have a few other wildcards we have been saving for down the road, so we continue to have many levers to pull to keep our growth heading in the right direction.

At this point, I would like to thank everyone for their patience while we work through some difficult and unusual challenges. Now is the time to tackle more than 6 pages of questions sent by shareholders, so I'll turn the call over to Mark to lead us through the Q&A.

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Questions and Answers

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Mark Forney, MKR Group, Inc. - VP [1]

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Thanks, Anshu. We have quite a few questions about the new subsidiary, so we will start with those first. Question one, the masks made by ZC Top is not NIOSH certified. Will this affect sales? And are you looking to gain that certification in the U.S.?

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Anshu Bhatnagar, Verus International, Inc. - CEO, Chairman & President [2]

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Yes, we are looking to get both FDA and NIOSH certified. We've reached out to both the FDA and NIOSH for testing, and there's a bit of a process that's required. Fortunately, everything is being fast tracked. On a sort of unrelated note that those certifications are required for hospitals and government agencies here in the U.S., but they're not required for retail sales and sales in -- for individuals. So that is another area that we are looking at and we'll probably look to continue to penetrate, and we have a lot of interest from companies that have reached out to order our product and do not require that certification.

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Mark Forney, MKR Group, Inc. - VP [3]

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Question 2, how do you plan to ramp up biohazard gear production with the transportation challenges in the Philippines?

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Anshu Bhatnagar, Verus International, Inc. - CEO, Chairman & President [4]

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We are looking at expanding production outside of the Philippines as well, so we've looked at quite a few other countries where we can start production using our existing tech packs. So we have all the description, specifications to be able to manufacture the product outside the Philippines, including the U.S. Furthermore, we are also looking to charter flights outside of the Philippines. So I know there's a restriction right now on airports being closed, but we're looking to see if we can actually charter a flight outside of the Philippines either through Hong Kong or some other place. And we're working in every sort of category possible to make sure that we can keep production up and keep manufacturing. And sort of just another added note on that is that we have a lot of demand in the Philippines itself, so regardless of anything, the Philippine market is a big market for us, and we're going to continue that, but we're very confident that we'll be selling outside of the Philippines in the very near future.

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Mark Forney, MKR Group, Inc. - VP [5]

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Third question, what is the new game plan for an uplist to a major exchange?

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Anshu Bhatnagar, Verus International, Inc. - CEO, Chairman & President [6]

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Our intent is still to uplist to a major exchange this year. We're going to continue to work very hard on that and unless advised by bankers to hold off, our idea is still to move forward this year if possible. And we're doing everything that we need to, to make that happen.

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Mark Forney, MKR Group, Inc. - VP [7]

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And fourth we have what is going on with the Texas plant.

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Anshu Bhatnagar, Verus International, Inc. - CEO, Chairman & President [8]

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As far as the Texas plant, a lot of the work has been done. Most of the equipment has already been selected. There is a bit of a delay as the sort of last part of getting our equipment in was to visit China and actually give approval on all the machinery and equipment. So that, of course, has been put on hold. We do have certain products in inventory in the Texas location. However, there has been a delay. We were looking at local sources as well to get equipment and machinery procured here through -- in the U.S., but the price difference is actually significant enough to see if this is something that we should hold off on. China has opened up, and we are trying to figure out logistically what

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