Mama's Creations, Inc. (MAMA) Q3 2018 Earnings Report, Transcript and Summary

Good morning and welcome to the MamaMancini’s Third Quarter Fiscal Year 2018 Financial Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note, today’s event is being recorded. I would now like to turn the conference over to Joe Diaz with Lytham Partners. Please go ahead, sir.

Thanks, Rocco and thanks all of you for joining us today to review the financial results of MamaMancini’s Holdings Inc. for the third quarter of fiscal year 2018, which ended on October 31, 2017. With us on the call today today representing the company are Carl Wolf, Chairman and Chief Executive Officer; Matt Brown, President and Chief Operating Officer; and Lewis Ochs, 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 for the record the following statement. Statements made by the management team were MamaMancini’s Holdings 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 by words such as may, future, plan, will or should, expected, anticipate, 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 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 January 31, 2017 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?

Good morning. Thanks for joining us on today’s call. We appreciate your continued interest in MamaMancini’s and I can see we have a record number of people on the call today. So, we are pleased with the excellent financial results for the third quarter of fiscal year 2018. They continued the growth project trajectory of the past year. Revenue increased 61% versus last year’s third quarter, gross profit increased 40% and net income increased 152%. This was our fifth consecutive profitable quarter and an important milestone in the history of the company. There is no question that the strategic decision in 2015 to vacate the center of the store and to focus our efforts on large accounts and then permit the store we could earn a more reasonable margin is paying off. Our retail customers are happy by having nutritious new products to offer in their deli and prepared food sections. Consumers benefit by having the ability to choose ready to serve meals to accommodate their very busy work and family schedules and MamaMancini’s benefits by being at the leading edge of this cultural shift in family dynamics as it relates to meal preparation. Nationally, sales on the periphery of the grocery store continue to grow in an estimated 8% per annum, while the traditional packaged foods – packaged goods center of the store is estimated to be decreasing by 1% to 2% per year. Consumers are increasingly adopting prepared meals that offer a superior nutritional profile require minimal prep time enabling a growing segment of the population to maximize the use of their time and devote that time to activities they deem important for them and their families. Over the past five quarters, this has led to consistent expansion in our most important growth metrics and we have every expectation of continuing progress. It is estimated that upward of 70% of all consumers decide what is for dinner within 3 hours of the meal. Also due to extremely busy work and family activity schedules, people are increasingly eating separate easy to prepare meals from the rest of their family, so take our prepared meals makes sense. We believe we are in the right segment of the industry, fresh food and prepared ready-to-serve meals are taking market share from more traditional food product brands. The quality of food and the timeliness of preparation is now more important. We are also seeing that the cost of prepared foods in supermarkets was very competitive with the cost of takeout dining. MamaMancini is very well-positioned. The continuing strong double-digit revenue growth rate is a testament to our various sales and distribution channels. We are doing a great job in getting our products in grocery stores and increasing numbers throughout the United States. We continue to add more stores and we are increasing the number of SKUs in each store. During the last 6 months, we had placements of additional products to major grocery retailers, including Costco, HyVee, Publix, Whole Foods, The Fresh Market, Ahold whose major business is Stop & Shop and QVC. The company has sold into approximately 43,500 SKUs and 12,200 retail and grocery locations as of October 31, 2017 as compared to approximately 37,700 SKUs and 11,400 retail and grocery locations in October 31, 2016. Our sales per retail store, is up over 50% from prior year. Continued development of our target markets of prepared foods and delis on the periphery of grocery stores throughout the country will remain our primary focus. We believe we have expansion opportunities into about 70% of the retail grocery store market as we estimate we are only in 30% of all retail locations at present. So, we have got a long way to go and lots of headroom to grow this business in the retail grocery segment. Our manufacturing team is also doing a great job in meeting the growing demand for our products. Matt Brown, our Chief Operating Officer and his team continually meet the challenges of producing our products, the highest quality and the most efficient manner possible. Matt is overseeing the addition of new equipment, personnel and product recipes and has not missed a beat in getting product ready to meet our delivery schedules. With the acquisition on November 1 of Joseph Epstein Food Enterprises, JEFE henceforth, we believe we are positioned for efficient manufacturing for the foreseeable future. Integration of Joseph Epstein Foods operations is progressing seamlessly. We expect that a fully integrated manufacturing operation will increase margins in the future. We estimate that on a consolidated pro forma preliminary non-ordered basis, the gross margin, EBITDA, operating earnings and net earnings increased $278,000 in the quarter or approximately 4% of sales and we estimate that the integration will increase our gross profit margin and profits by $1.5 million or more in the next 12 months and we believe that the acquisition will assure a reliable source of supply for the company for years to come. We continue to value our association with QVC and its extensive audience. This is an important partner for MamaMancini’s that moves a lot of our product, but it also enhances our brand on a national scale. We expect to continue to expand on that experience for many years to come. We have given prior guidance that we expect to reach a sales run-rate of $40 million a year in the near future with cash EBITDA of about $6 million and we remain with these numbers. Our goal and I repeat call is to be at a $50 million plus sales run-rate and an EBITDA of $8 million plus by the mid part of next fiscal year. Again please note this is a goal and not a projection. At this point, let me turn the call over to Lew Ochs, our Chief Financial Officer for a review of the numbers. We will then hear from Matt Brown, our President and Chief Operating Officer on operations. Upon the conclusion of Matt’s remarks, I will provide some final thoughts and we then will open the call for your questions. Lew?

Thank you, Carl. Revenue for the third fiscal quarter ended October 31, 2017 was $7.35 million, a 61% increase compared to revenues of $4.58 million for the third quarter of fiscal 2017. Revenue generated during the third quarter primarily increased as a result of selling more product into higher volume locations when compared to the third quarter 1 year ago. Third quarter gross profit decreased as a percent of sales from 36.8% last year to 32.1% this year mainly due to the inefficiencies breaking in higher, volume capacity and change in product mix away from the high low merchandising customers to EDLP Is which also reduced marketing overhead expenses proportionately and also due to a slight increase in the cost of commodities. Total operating expenses for the third quarter of fiscal 2018 increased by approximately $502,000 to $1.94 million versus the comparable quarter of fiscal 2017. While operating expenses rose by 34.8% in the quarter as a percentage of revenue, it dropped to 26.4% from 31.4% of the same period 1 year ago. Part of the lower operating expenses as a percentage of sales was due to the change in product mix as explained above. We continue to closely monitor our spending and implement tight fiscal expense controls. Operating income in the third quarter of fiscal 2018 improved by approximately $174,000 to $418,000 from the third quarter of fiscal 2017 and the net income for the third quarter of fiscal 2018 showed an improvement of $123,000 to $203,000 in the third quarter of fiscal 2017. Income per share for the third quarter of fiscal 2018 was $0.01 compared to no cents in the third quarter of fiscal 2017. The company’s cash position as of October 31, 2017 was $559,000. The company reported long-term debt of $752,000 as of October 31, 2017. Regarding our note with Manatuck Hill Partners, the company notified Manatuck that it had exercised its option to extend the loan to May 1, 2018. The company is paying down its senior loan each month with Manatuck Hill Partners. As of November 30, 2017, we had paid down $1.1 million since the end of the fiscal year ending January 31, 2017 and hope to have the loan paid off by May 1, 2018 when any remaining balance is due. Cash flow from operating activities for the 9 months period ending October 31, 2017 was $1.1 million compared to a negative $147,000 a year ago. Cash EBITDA was $611,000 in the quarter, an improvement of $140,000 from the prior year’s quarter’s cash EBITDA of $471,000. Cash EBITDA on a pro forma unaudited consolidated basis with the acquisition of Joseph Epstein Food Enterprises Inc. and the third quarter ending October 31, 2017 was $889,000, an improvement of $386,000 from the prior year’s third quarter. Cash EBITDA is a non-GAAP financial measure and is defined as EBITDA plus stock payments in lieu of cash expenses. That completes my comments. Let me turn the call over to Matt Brown, our President and Chief Operating Officer. Matt?

Thanks, Lew. As you have heard from Carl and Lew, revenue for MamaMancini’s increased 61% in fiscal Q3 2018 versus a year ago. Joseph Epstein Foods as the exclusive manufacturer of MamaMancini’s product, there is an obvious correlation between the growth in MamaMancini’s revenue and the output of the plant. Fiscal Q3 2018 saw record production at JEFE, where we once were happy a year ago to turnout demand for MamaMancini’s in a week. We now see this production in nearly half the time, so, what took days now takes hours and what took a week now take days to produce. I recently heard a quote that it’s very true to us here at the plant today. We don’t wait for the future we build it and build it we have. We have spent the past year improving production with the addition of equipment and infrastructural enhancements and continue to work on our production ramp-up phase. In fiscal Q3 2018, we brought on another vital piece of equipment into our packaging division, which has increased efficiency and flexibility by providing us the opportunity to handle multiple products at the same time. This has become essential as the breadth of our product line continues to expand. Stuffed pepper, chicken parmesan, 2-pound meatloaves are just a few of the new introductions that require as much attention as our core meatball business. As Carl did mentioned earlier, the manufacturing team has done a great job of meeting the increase in demand for existing and new products. It is only through this team effort that we have been able to increase capacity, while at the same time enforce strict quality control measures to ensure that we are adhering to our programs, our good manufacturing practices and the USDA’s requirements. I am proud of this team and the job that they have done, which is why I too am excited that the plant and MamaMancini’s have now officially joined together as one company. The plant will continue to improve on its production efficiencies and MamaMancini’s will continue to benefit from this vertical integration. As mentioned before, consolidated pro forma gross profit on a preliminary basis, including the plant is up. The plant is starting to utilize the MamaMancini’s name with our suppliers in an effort to lower raw material costs. I know we are halfway through our fiscal Q4 2018 business and we will be discussing those results at a later date. However, I can say that I like what I see already including a record-breaking production month of the plant. So, with that, I will now pass the meatballs and the call back to Carl. Carl?

Thank you, Matt. Before we open the call for your questions, I would like to reiterate that the financial results of the third quarter of fiscal year 2018 were excellent. We now have five consecutive quarters of profitability under our belt. We have every expectation of continuing to grow the Street in the coming quarters and years. I would also like to note that we now have 4 main product lines up from 1 a few years ago, meatballs and sauce, meatloaf, stuffed pepper kit and chicken parmesan kit and we expect first orders for ravioli lasagna in February and should be introducing pasta meals this summer. In addition, we will be going into limited distribution this winter with vegetarian meatballs and also as a separate line sauces and jars. We also plan to introduce for the organic trade non-GMO grass-fed beef meatballs and sauce. We have yet to enter the food service and convenience store segment. Collectively, we believe these segments are a largest supermarket segment and they best represent 100% growth opportunity. Moreover, our products are still in only 30% of total supermarkets and club stores nationwide. We believe we have the opportunity in the coming years to be the company that can generate several $100 million in annual sales and an EBITDA in the 20% range. That’s our long-term goal. We would earn close to $1 dollar per diluted share if this occurs. As you are aware, this is not a projection or forecast that should not be taken as such. The addition of JEF operations has been accretive this year and we expect to continue in the future. Last but not least, we do not see the need for additional equity to finance our growth and we tend to uplift with the NASDAQ this coming year if we meet our estimated growth and profitability. The current plan expansion spec to be financed through traditional leases, lease sources and we continue to pay down our senior debt with Manatuck Hill as well. As we head into the fourth quarter, we expect to conclude this year on a strong note. With that, let’s open up the call for your questions. Operator, please begin the process.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And today’s first question comes from Howard Halpern of Taglich Brothers. Please go ahead.

Congratulations. Solid quarter, guys.

Thank you.

In terms of the integration of JEF and I guess if it had occurred in the third quarter, you talked about $278,000 potential benefit. Was that mostly from gross margin or is that also going to help in the operating expense line too?

Well, it shows up in gross margin. So, the gross margin actually will be 36%, not 32% which is about the same as last year. What it really is showing plant capacity. So, we have a relatively fixed overhead. So, as we do higher volume, the gross margin is coming down to the bottom line. We hope as we continue to do even higher volume that will have additional gross margin coming from plant in last year was slightly positive and earlier years the plant was underutilized, so there was a negative effect on gross margin.

Okay. And in terms of now the number of employees that you have after the acquisition, could you give a little bit of a number on that now?

We use a lot of contract labor. So, my guess is the number of employees will be about 30. We have contract labor of about 60 to 70 employees.

And with all the new machine and work in the plant what is the capacity – revenue capacity?

We see it at the present level of about $60 million possibly a little more than at that point we were already looking at opportunities to expand our facility, which we think will – expansion is never easy, but we think that we have an opportunity to not have to rip up everything to do that to get additional space, near us.

And now I have a couple of questions regarding I guess I am not sure if I am going to phrase this correctly, but the cyclical nature of like in this current quarter you had approximately 43,500 SKUs sold into location. Now, when it bumps up for sequentially, does it tend to drop just a little bit, but does it tend to drop revenue per SKU and then if that’s the case how long does it take to build that up and accelerate the revenue per SKU?

It’s actually the opposite. One of the issues we have when we get new distribution with let’s say 200 locations is very often the supermarket chain. It doesn’t get as full distribution. So, a lot of our growth comes in subsequent quarters where we work on merchandising plants with the retailer to make sure we have a continued distribution fact we are working on that now with a couple of major retailers to assure we are not getting ACV in 100%. So what we try to do is, so it actually bumps up higher usually unless you have a product line that is not successful that you will know for a year or two quite honestly from a few years ago we were very heavily promoting the inner part of the store, the packaged foods, which involved a lot of price orientation. There is one other thing I do want to mention that the business at the end of the year when we do our end of the year report will show consolidated numbers. So, you said pro forma estimated, that’s just to make sure that our final number as our audit comes out, but anyway the consolidated pro forma numbers are pretty much what we will show for the year subject to some slight adjustments if any.

Okay. And in terms of average shares outstanding, is that 33.2 that you did in the third quarter, 32.3, 32.3, is that going to be a fair number going forward?

As our shares go higher, it will probably go to about 36 million.

Okay.

Because we had 7 million warrants outstanding and about 31 million with the conversion preferred, so around 36, 37 million assuming our shares get to I think your target price versus 260 a share in the next year in your report, Howard. So, 260 a share will probably be 36 million to 37 million.

Okay. And your goal obviously is to get to – you talked about at least $50 million run-rate, but does that include – is that just on your base business and growing that or does that include breaking into the foodservices area?

No, no food service. Food service, we do not show in our projections for this year.

Yes.

Food service would start it up in the latter part of the year and that would have to be a major effort. You can’t just hire one person. You have to have all marketing and merchandising program. And that will take – my opinion, that will start breaking even within about 4, 5 months and then major results will take 6 months and on to show returns for that.

Okay.

Our sales network etcetera.

Okay. And one last question, how satisfied are you with your broker network at this point compared to this time last year?

What happens with brokers is you have around 30% to 40% chance with every new broker you hire, but they will be successful. And then what you do as you selectively change them. So, we have made about four, five changes, six broker changes mainly on the West Coast and I think of the six, three will be successful and then we probably we will have to look at another three or four again. So overall we are pretty happy.

Okay. Well keep up the great work, guys.

Thank you.

[Operator Instructions] And it looks like we have a couple of questions from Joe Diaz with Lytham Partners. Please go ahead, sir.

Thank you, Rocco. You had mentioned Carl about getting listed on to NASDAQ, what are some of the requirements that the company needs to meet in order to obtain a listing?

You need a $5 million net worth, you need a share price I think above $4 a share and we meet the criteria of earnings and the number of shareholders. If at that time, if let’s say the stock – hopefully is at Howard’s projection 260, we would announce that we are pending top list to NASDAQ and we would do a reverse split quite before we plan top list. We have talked to NASDAQ several times, so we know the rules. Quite honestly, there also is the opportunity to do the New York Stock Exchange market. We believe NASDAQ is a much more vital opportunity for us.

Okay. Looking at the Manatuck Hill note, assuming all minimum payments are made there are still going to be approximately $0.5 million or thereabout owed to them at the due date. Should investors assume that any remaining debt will be repaid using cash on hand or how would you handle that?

Well, we have talked to Manatuck Hill and the indication is verbally that we would be able to roll that not over for several more months and pay it off. We estimate actually that will be about $1 million on May 1 and we have a good chance of paying it all off, but if we don’t we think we have the flexibility of extending it.

Okay. And one final question, could you talk about the brand value that MamaMancini is currently carries and some of the things that you are going to be doing to expand that brand equity?

Okay. Well, we did several years ago very intensive program Sirius Radio, Sirius hits around 60 million people nationally. We did that pretty much 10 months out of the year in a very expensive campaign of about 600 commercials a week. We have booked Sirius at certain key points that we know we can buy at the remnant rates. So, we will be doing that in slides, 2 week slides this December and January. We will be doing it again in February and March and throughout the year at a very minimal cost, but we will be very valuable. We are in QVC which we estimate it’s about $30 million. In fact we are on QVC last night. We are on for about 7 plus minutes and the numbers show that we were significantly above all the other participants in that show. So, we tend to do very, very well with QVC, but those 8 minutes in essence is a new commercial for our product as well as selling product profitably for the line. We also have a very active Facebook campaign. We have individual post that hit over a million and we like Facebook is that we geotarget individual stores or locations or products. And with that, we have been very, very successful. And part of that is to get some market buyers or club store buyers to work with us in tandem. In addition to that, we do consumer public relations. And I think we estimated we hit close to 200 million impressions this past year. So, we are very, very active. We do a lot of point of purchase and we do a lot believe it or not coupons that we give to daily clerks, because often they talk to consumers and those coupon – the daily clerks buy the products, our product as if you go to our website and pull up our book. You will see that we have about 92% intent to buy again. If you are in the food business, if you have in the high 60s that’s considered successful line, so we are way above that. So, our product is very well received.

And thank you sir. This concludes the question-and-answer session. Let me turn it back over to Carl Wolf for any closing remarks.

Okay, very good. I want to thank everybody for being on this call. Again, it looks like we had about 20 people together on this which is up from like 6 or 7 a year and a half when we started and have a great day and I hope we will be speaking soon on our year end results.

Thank you. Today’s conference has now concluded. I want to thank you all for attending today’s presentation and we now disconnect your lines. Wonderful day.