Mama's Creations Inc

NASDAQ:MAMA

Earnings Call Transcript 2019-Q2

[Operator]

Good morning and welcome to the MamaMancini's Reports Second Quarter Fiscal Year 2019 Financial Results Conference Call. [Operator Instructions] Please note, this event is being recorded.

I would now like to turn the conference over to Joe Diaz with Lytham Partners. Please go ahead.

[Joe Diaz, Lytham Partners]

Thank you, Brandon. And thanks all of you for joining us today to review the financial results of MamaMancini's Holdings Incorporated for the second quarter of fiscal year 2019, which ended on July 31, 2018. With us on today's call representing MamaMancini's are Carl Wolf, Chairman and Chief Executive Officer; Matt Brown, President and Chief Operating Officer; and Larry Morgenstein, Chief Financial Officer. At the conclusion of today's prepared remarks, we will open the call for question-and-answer session.

Before we begin with those prepared remarks, we submit to the record the following statements. Statements made by the Management team with MamaMancini's Holdings Incorporated during the course of this conference call that are not historical facts are considered to be forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 as amended and Section 21E of the Securities Exchange Act of 1934.

Forward-looking statements describe future expectations, plans, results or strategies and are generally preceded with words such as may, future, plan or planned, will or should, expected, anticipates, draft, eventually or projected. You are cautioned that such statements are subject to a multitude of risks and uncertainties that could cause future circumstances, events or results to differ materially from those projected in the forward-looking statements, including the risks that actual results may differ materially from those projected in the forward-looking statements as a result of various factors and other risks identified in the Company's 10-K for the fiscal year ended July 31, 2018 and other filings made by the Company with the Securities and Exchange Commission.

Forward-looking statements reflect Management's analysis only as of today. The Company undertakes no obligation to publicly release the results of any revision to these forward-looking statements.

Let me now turn the call over to Carl Wolf, Chairman and Chief Executive Officer of MamaMancini's Holdings. Carl?

[Carl Wolf, Chairman and Chief Executive Officer]

Good morning. Thanks for joining us on today's call. We appreciate your continued interest in MamaMancini's.

As you saw in this morning's press release, our second quarter was very challenging. Sales for the quarter totaled $5.6 million versus $7 million in last year's second quarter. Sales were negatively impacted by changes in the purchasing offices in a number of our major retail customers not reflective of our product quality, trade relationships, or consumer acceptance. Purchasing managers at major grocery store chain just come and go, usually it’s no effect as it relates to MamaMancini's.

However, in this quarter, we were negatively impacted by a change in buyers. Also during last year's second quarter, we had an extraordinary high, one-time customer inventory build with new programs that went into effect. Clearly, we are not pleased with these developments. We operate in a dynamic business where conditions can change suddenly, and this sort of thing will happen from time-to-time.

We consider this a one-time event, and we do not expect any long-lasting impact. In that regard, we also had good start in the first six weeks of the new quarter. We expect to report record revenue and solid profitability when we report third quarter results. We also expect revenue in the fourth quarter to exceed that of the third quarter and consequently to complete the year on a strong, strong note.

Our expectation is to grow retail product placement spots by approximately 7,000 to 10,000 placements by the end of the fiscal year, which will increase our current 43,300 spots to between 50,000 to 53,000 in our retail partner locations. We believe that cash flow in the second half of the year will be more than sufficient to finance the growth of revenue going forward.

As announced in today's press release, we have retained Akin Bay Company in partnership with Kernick Advisory Group to investigate strategic options for the shareholders of MamaMancini's. Akin Bay and Kernick are experienced, independent investment bankers in the natural or organic foods category. Given the current strong U.S. economic environment, Management and the Board of Directors feel this is a propitious time to evaluate the Company and investigative if shareholder value can be substantially enhanced.

Potential options might include strategic acquisitions, a merger or acquisition by a larger competitor in the food manufacturing business, recapitalization of the Company, or other possibilities. There's no guarantee that any transaction will occur. However, given the extremely positive fundamentals of the economy, our shareholders deserve a comprehensive review. We intend to comment upon the completion of the process.

At this point, I'm going to turn the call over to our CFO, Larry Morgenstein for a review of the numbers. After Larry's comments, Matt Brown our President and COO will provide his report on operations. We will then open the call for your questions. Larry?

[Larry Morgenstein, Chief Financial Officer]

Thank you, Carl.

Revenue for the fiscal second quarter ending July 31, 2018, was $5.641 million compared to revenue of $7.005 million for fiscal second quarter 2018. Gross profit percentage was 36.6% in 2Q 2019 versus 33.6% in 2Q 2018.

Additionally, operating income was approximately $130,000 in 2Q 2019 versus approximately $365,000 in 2Q 2018. In the second quarter 2019, net loss was $210,000 as compared to a gain of $168,000 for the comparable period in 2018. Net loss per share was $0.01 loss in the second quarter 2019 as compared to breakeven for the quarter in 2018.

Cash flow from operating activity for the fiscal first half of 2019 was an increase of $1.440 million as compared to an increase of $328,000 for the year ago quarter. Additionally, EBITDA for the six-month period was 1,021,000 versus 712,000 in the prior year for the six months. This represents a 43.4% increase year over year.

I thank you, and I now turn the call back to our COO, Matt Brown.

[Matt Brown, President and Chief Operating Officer]

Thank you, Larry.

Despite the external sales challenges we faced in fiscal Q2 2019, I am happy to report that the plant continued to operate efficiently during this period. With the efficiency, the plant was able to contribute positively at the gross profit level of the consolidated company.

In addition to steady production in the plant, most of Q2 2019 was spent completing the plant renovations, which didn't officially finish until the last day of Q2 2019. These renovations have enabled us to gain greater efficiency and capacity in two major areas.

First, with the construction, we addressed our need for greater freezing capabilities to handle the increase in cooked production through the process. Product is now freezing quicker, which enables us to turn it around and the necessary components back to the cook process which gives us greater flow, and this flow enables more production and hence more capacity.

Second, we needed to address our increase in the assembly business with more of the kick project's, chicken parm, sausage peppers, manicotti and others in Q2 2019, and projected out. The plant needed to provide a chilled environment to handle all the raw materials during this assembly process.

Therefore, we built a 2100 square foot temperature-controlled room and it has already contributed mightily given the extremely hot weather that we experienced here in New Jersey over the summer. Use of this space ensures not only better production control during the assembly process, but better-quality control as well.

Speaking of quality control, two subsequent events just occurred in early August 2018 with our annual SQF or Safe Quality Food third-party audit, and also an independent audit from Albertsons Corporation for some new business.

The plant worked hard in Q2 2019 to incorporate the new renovations into our standard operating procedures. I'm proud to say that we surpassed last year's SQF score with a 95% rating. This rating doesn't show that we will continue to have the approval to sell all existing accounts and now opens the door for even the harshest of customer critics who require 95% or above on SQF ratings to become an approved vendor.

With the Albertson's approval, we are now anticipating our first orders to ship out within the next week or two. We're working hard against already booked business in Q3 2019, and anticipate running extended shifts as we receive new business every week.

I will now turn the call back over to Carl.

[Carl Wolf, Chairman and Chief Executive Officer]

Thank you, Larry and Matt.

Before we take your questions, I'd like to provide a bit of forward-look. The Company expects revenues to be near the $40 million annualized run range by the end of the fiscal year with an increase in retail locations by 7,000 to 10,000 spots.

Indications are for a substantial increase in revenue next fiscal year to be near the $50 million annual annualized run rate by spring. That forecast is buttressed by a major national retailers' strongly indicating the start date for featuring our products next spring in a large number of stores. This would further support our view that the next 12 to 18 months will show increase in sales and profitability.

As always the above are subject to change and the Company will periodically update its guidance on future prospects. Our expectations is that cash flow in the second half of the year will be more than sufficient to finance the growth of revenues going forward. The Company completes its construction as paid or finance or obligations from this in early September.

The Company restructured its senior note with Manatuck Hill Partners with the maturity date of May 1, 2019, and the Company expects to pay down the note by that date. This past quarter the Company also extended its working capital financing with EGC for two years to October 2020 and took out a two year $300,000 notes payable in monthly installments with EGC to partially finance the plant construction expenses.

As Matt indicated we completed our planned expansion in July, expanding manufacturing capacity to $50 million to $60 million in sales given the anticipated product mix going forward. We also received, as he mentioned, the prestigious SQF Level 2 Safe Quality Food designation by USDA this August, with a rating of 95%. We have developed a high quality manufacturing operation that ranks right up there with some of the biggest players in the industry. We are proud of our accomplishment in that regard.

For the second consecutive year we are pleased to have won the QVC Customer Choice Award for the most convenient entrée. This is a clear indication that our products address the needs of the modern consumers provide a high quality and nutritional meal that requires minimal preparation so that they can manage their increasingly busy work with family schedules.

We're also gratified to have won QVC's best meatball category, being named among the best with great competitors like Fabio's, Emeril's, [Nipo] and Anne Burrell's as a real honor. Taking the top spot is a great accomplishment. It is a testament to the entire team for their tireless dedication to produce a product with a great taste and nutritional profile that is convenient and can be offered at a reasonable price point.

With that let's open up the call for your questions.

[Operator]

[Operator Instructions] Our first question comes from Howard Halpern with Taglich Brothers. Please go ahead.

[Howard Halpern, Taglich Brothers]

In 7,000 to 10,000 placements you expect to gain, how much of that's going to be from new customers and/or expansion within existing customers?

[Matt Brown, President and Chief Operating Officer]

I'd say about 60% to 70% will be with new customers.

[Howard Halpern, Taglich Brothers]

And so that means during that - has that already started or…?

[Carl Wolf, Chairman and Chief Executive Officer]

Some have started, and as Matt mentioned, we received approval from Albertson's for the national chain of 2,500 stores. However, you have to go to each division to make that placement, so it will take a number of months to roll that out.

[Howard Halpern, Taglich Brothers]

And with - then assuming some inventory build on some of those new customers, what could we expect with the gross margin going forward, should we anticipate it getting towards that 40% area?

[Matt Brown, President and Chief Operating Officer]

The 40% in my opinion will occur next spring, we'll move toward it as we do higher volume and when margins increase because of efficiencies in plant, so the margin will move up steadily as volume increases.

[Howard Halpern, Taglich Brothers]

And is it more - in terms of interest expense, what should we expect on a quarterly basis with all the restructuring that went on this quarter?

[Matt Brown, President and Chief Operating Officer]

Interest is running around 50 -- about 165,000 a quarter, am I correct, Larry?

[Larry Morgenstein, Chief Financial Officer]

Yes.

[Matt Brown, President and Chief Operating Officer]

And that should go down as we pay down some of these notes.

[Howard Halpern, Taglich Brothers]

And in this quarter, you had the one-time expense for the restructuring, correct?

[Matt Brown, President and Chief Operating Officer]

Right. Correct.

[Howard Halpern, Taglich Brothers]

And looking at, I guess, your food broker network, how satisfied are you with them? Has there been some turnover that's gone on and what do you expect from them to drive, I guess, towards that $50 million annual revenue?

[Matt Brown, President and Chief Operating Officer]

Well, we hired a new vice president of sales for the West Coast starting in July, and we’ve appointed a new broker network on the West Coast. We've just received a new major authorization for delivery in the next few weeks. As a result, it takes a number of months, but we should receive some substantial additional business on the West Coast. So, that's the biggest change in our broker network.

We also have made some changes in our club store network mainly on the West Coast. So, we made about eight broker changes in the last three months.

[Howard Halpern, Taglich Brothers]

And earlier you talked about the general environment, the good economy, and the drive towards natural and organic-type food. In general, what do you see as a general landscape of the industry going forward?

[Matt Brown, President and Chief Operating Officer]

Well, we think - first of all, the question we thought will come up just right now, we believe we have a momentum and have been involved in looking at strategic alternatives with Alpine Lace. When you have a momentum, it’s very, very important to consider that in looking at strategic alternatives.

And we think we have the presence as we gain more industry exposure in our area, and we see that just indicated by Pirate's Booty once this was sold to [indiscernible] to Hershey, 5x sales - there's been a number of companies selling, as well there has been companies selling at as well as one time sales, but recent sales in our national organic territory has been at 3x to 5x sales. So, it seems like a very attractive period.

[Howard Halpern, Taglich Brothers]

And one last one, gaining that 95%, does that open you up for just about everybody, all the supermarkets, club stores in the country?

[Matt Brown, President and Chief Operating Officer]

What do you mean by 95%?

[Howard Halpern, Taglich Brothers]

The ratings that -

[Matt Brown, President and Chief Operating Officer]

Yes, I would say it basically allows us to sell to every major company in both supermarket business and food service.

[Howard Halpern, Taglich Brothers]

Well, thanks and while it was a choppy quarter, it was a good operational quarter. So, thanks, keep up the great work.

[Operator]

[Operator Instructions] Our next question comes from [Fred Ore], a Private Investor. Please go ahead.

[Unidentified Analyst]

Good morning, fellow North Jerseyans, I just came to Pennsylvania, but I lived that near you guys for 30 years. I have two questions. The first one is for Howard. I saw in the 10-Q that you stated that you have collected $2.4 million in receivables in the quarter to-date after the July quarter-end even though you started the quarter with only $1.7 million in receivables, could you give us some idea of what that cash is going to be used for?

[Carl Wolf, Chairman and Chief Executive Officer]

That's for Larry, the question, not Howard.

[Unidentified Analyst]

I'm sorry. Pardon me. He's a new guy, I forgot his name. Please excuse me.

[Larry Morgenstein, Chief Financial Officer]

No problem. We use that to pay down some of our debt. We use that to continue supporting our manufacturing operations and expansion of sales.

[Matt Brown, President and Chief Operating Officer]

We pay down a lot of the capital improvements in the business as well.

[Unidentified Analyst]

And a related question to that, what's the capital budget look like for the second half of the year? Will it trend down, flatten out?

[Larry Morgenstein, Chief Financial Officer]

Very minor. We expect less than $50,000 from the last [indiscernible].

[Unidentified Analyst]

Oh, goodie. That's wonderful news. My second question relates to sales at - you put a note in the 10-Q note 9 about customer concentration, and through the first half customer A or largest customer represented 52% of sales; in my calculations something north of $7 million, assuming that same customer has been your largest customer over the last few years, the growth in sales to that customers has done spectacular by my calculations more than tripling over the last two years. Do you have - can you give us an impression as to what kind of growth you'll see from that customer going forward over the next 6 to 12 months?

[Matt Brown, President and Chief Operating Officer]

With that specific customer we should see some modest growth. However, most of the new business or business we anticipate is either with existing customers and new customers.

[Unidentified Analyst]

So, growth rate there at that customer we've - we're getting close to that particular customers capacity in other words?

[Matt Brown, President and Chief Operating Officer]

Not necessarily. It's just - there are other opportunities with that customer. It's just a question of when they come up and very substantial additional growth possible.

[Unidentified Analyst]

Okay. But not in hand at the present time so you don't want to comment?

[Matt Brown, President and Chief Operating Officer]

Right.

[Unidentified Analyst]

Okay. Thanks very much, that's all I had. I wish you guys well going forward.

[Operator]

[Operator Instructions] At this time there are no further questions. And this concludes our question-and-answer session. I would like to turn the conference back over to Joe Diaz for any closing remarks.

[Joe Diaz, Lytham Partners]

Thank you, Brandon. And again I'd like to thank all of you for joining us today and participating on today's call. We will look forward to chatting with you again to review the results of the third quarter here in shortly. Have a great day and we'll talk to you again soon. Thank you.

[Operator]

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.