MamaMancini’s Holdings, Inc. — FY 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012, with comparative results for 2011. This is an annual report, not a standalone fourth-quarter report. The audited financial statements principally reflect MamaMancini’s food business; the parent company acquired it in a merger on January 24, 2013. The company changed its name from Mascot Properties, Inc. and began trading as MamaMancini’s Holdings, Inc. in March 2013.
Business context
The company sells branded, specialty prepared foods, including meatballs, sausage and sauces, primarily through supermarkets and mass-market retailers. At year-end 2012, products were in approximately 4,000 retail locations, with about 16,000 product placements. Manufacturing was outsourced, almost entirely to Hors d’oeuvres Unlimited, Inc. (HDU), a related party owned by company executives and their family members.
Financial performance and liquidity
| Metric | FY 2012 | FY 2011 |
|---|---|---|
| Net sales, after slotting fees and discounts | $4,582,845 | $3,734,062 |
| Gross profit | $1,352,256 | $1,237,524 |
| Gross margin | 29.5% | 33.1% |
| Operating expenses | $3,339,532 | $1,885,084 |
| Operating loss | $(1,987,276) | $(647,560) |
| Net loss | $(1,999,623) | $(681,728) |
| Net loss per share | $(0.12) | $(0.05) |
| Net cash used in operating activities | $(2,093,214) | $(945,313) |
- Sales increased approximately 23%, attributed mainly to expanded distribution. Gross margin fell by approximately 3 percentage points, which management attributed primarily to slotting fees and discounts.
- Operating expenses increased 77% (about $1.45 million). Notable increases included advertising and promotion ($717,000), payroll ($392,000), legal ($97,000), research and development ($68,000), market research ($72,000), and trade-show and travel costs ($64,000).
- At December 31, 2012, cash was $2,008,161; current assets were $2,964,630; current liabilities were $529,233; and working capital was $2,435,397. Stockholders’ equity was $2,452,848.
- Outstanding debt was a $200,000 bank line of credit, compared with $500,000 at year-end 2011. The line’s maturity was extended to May 1, 2013; it was secured by company assets and shareholder guarantees.
- Financing activities provided $4,103,158 of net cash in 2012, including share-sale proceeds and repayment of $300,000 on the credit line. The company reported $1,460,000 in advertising costs for 2012.
Material changes, outlook and risks
- Management expected an operating loss in 2013 as it invested in distribution, product development, sales and marketing. It estimated a 2013 growth-plan cost of approximately $1.15 million, including roughly $550,000 for sales staff and $600,000 for advertising, marketing and public relations.
- Management planned to raise debt or equity financing in the second quarter of 2013 and said it believed available financing was adequate for the growth plan through year-end, while warning that faster-than-expected growth could require additional capital. The filing estimated next-12-month working-capital needs of $2.2 million and a monthly burn rate of $183,000.
- The auditor highlighted substantial doubt about the company’s ability to continue as a going concern, citing recurring losses and operating cash outflows. Management’s plans depended on raising additional financing; the filing warns that failure to obtain funds could require a change in plans or bankruptcy protection.
- Customer concentration was significant: the ten largest customers represented about 91% of 2012 sales. Publix accounted for 35%, Wakefern/ShopRite 15%, Burris Logistics/The Fresh Market 14%, and C&S Wholesale Grocers 11%. The company reported no long-term contracts with its principal customers.
- HDU accounted for 99% of purchases in 2012 and is a related party. The company’s manufacturing agreement with HDU was due to expire in February 2015, subject to renewal provisions. The filing also describes a related-party balance due from the manufacturer of $159,200 and an inventory deposit of $192,956 at year-end.
- Management concluded that disclosure controls and internal control over financial reporting were ineffective, citing limited segregation of duties and insufficient written accounting and reporting procedures. The company said remediation would depend partly on available funding.
- Other disclosed risks include food-safety and product-recall exposure, regulatory changes, raw-material and transport cost volatility, reliance on key personnel, competition, and limited access to capital. The filing reports no material pending litigation and no off-balance-sheet arrangements.
Important facts for investors to verify
- Confirm the cash runway, monthly cash burn, and status and terms of any financing raised after year-end; the filing’s funding expectations were not guaranteed.
- Reconcile the reported working-capital comparison: the filing states 2012 working capital of $2,435,397 versus $29,298 in 2011, but gives an increase of $1,760,489, which does not match those two figures.
- Review the 2012 equity financing figures: the statements show $5,054,000 in gross share proceeds, $650,842 in cash stock-issuance costs, and $4,103,158 net financing cash after the credit-line repayment. The equity statement separately reports $1,088,964 of issuance costs, including warrants issued for services.
- Assess customer concentration and the consequences if major retailers reduce or stop orders, particularly given Publix’s 35% share of sales and the absence of long-term customer contracts.
- Examine the related-party manufacturing, administrative and payment arrangements with HDU, including the 99% supplier concentration, renewal terms and balances due.
- Check progress in remediating material control weaknesses and note that the common stock had no active trading market as of the filing’s stated date; the filing reported 20,854,000 shares outstanding as of April 2013.