MamaMancini’s Holdings, Inc. (now identified in request as Mama’s Creations, Inc.) — Form 10-Q
Reporting period: Third quarter and nine months ended October 31, 2018. The company manufactures and distributes prepared meat products and sauces. The 2017 comparison reflects consolidation of Joseph Epstein Food Enterprises, Inc. (JEFE) following its November 1, 2017 merger; the filing says prior periods were adjusted to reflect the transaction.
Financial performance
| Metric | Three months ended October 31, 2018 | Three months ended October 31, 2017 | Nine months ended October 31, 2018 | Nine months ended October 31, 2017 |
|---|---|---|---|---|
| Net sales | $8.24 million | $7.35 million | $21.63 million | $19.71 million |
| Gross profit | $2.69 million | $2.37 million | $7.58 million | $6.67 million |
| Gross margin | 33% | 32% | 35% | 34% |
| Operating expenses | $2.15 million | $2.11 million | $6.36 million | $5.85 million |
| Operating income | $536,109 | $258,454 | $1.22 million | $821,553 |
| Net income | $356,348 | $29,345 | $470,154 | $193,512 |
| Net income per common share, basic and diluted | $0.01 | $0.00 | $0.01 | $0.00 |
For the nine months, operating cash flow was $1.65 million, versus $1.18 million in 2017; investing cash outflow was $1.03 million, versus $1.41 million; and financing cash outflow was $743,272, versus $137,443 of inflow. Cash decreased $121,233 to $460,089. Capital spending primarily supported the ongoing plant expansion.
At October 31, 2018, current assets were $4.89 million and current liabilities were $7.98 million, producing a $3.09 million working-capital deficit, compared with a $2.90 million deficit at January 31, 2018. Total liabilities were $9.25 million. Debt included a $2.24 million line-of-credit balance, $884,460 in term loans, a $1.28 million Manatuck note balance net of discount, $250,000 in bank debt, related-party notes, and $226,907 in capital lease obligations. The filing lists aggregate future maturities of debt and capital leases of $5.49 million, including $4.22 million due in the twelve months ending October 31, 2019.
Changes and management commentary
- Quarterly sales rose approximately 12%; nine-month sales rose approximately 10%. Management attributed growth to higher sales with the largest customer, new and existing customers, higher-volume locations, and a customer merchandising event. Distribution expanded to approximately 45,200 SKUs in 12,600 retail and grocery locations, from 43,500 SKUs in 12,200 locations.
- Gross margin improved by one percentage point for both the quarter and nine-month period. Management cited manufacturing efficiencies and cost control, while noting plant-related depreciation increased by approximately $151,000 during the nine months.
- Nine-month operating expenses increased 9%, while other expenses increased 24%, including approximately $112,500 of non-recurring charges associated with the Manatuck note extension and debt modification. The note’s maturity was extended to May 1, 2019; $392,702 of accrued interest was added to principal.
- Management expects gross margin to improve with more efficient operations. Planned products include additional pasta-based entrees and limited test launches of Italian sauces and vegetarian meatballs in fiscal 2019; no numerical earnings or revenue guidance is provided.
Liquidity, risks, and other matters
- Management said cash resources were expected to be sufficient through the fourth quarter of fiscal 2019, ending January 31, 2019, but warned additional funding may be needed for growth and strategic objectives and may not be available on acceptable terms. The company collected a net $3.4 million on outstanding receivables after October 31, 2018.
- Customer concentration is significant: one customer generated approximately 52% of gross sales for the nine months and represented approximately 50% of gross receivables at period-end.
- Related-party matters include CEO and CEO-affiliated advances totaling $532,000 at 8% interest, in addition to other CEO notes; a director is associated with customer Meatball Obsession, LLC. The company reported $81,111 of nine-month sales to that customer and $36,000 of commission expense from sales generated by WWS, Inc., whose president is a director.
- Risks cited include intense competition, changing consumer demand, grocery-industry cyclicality, economic conditions, food-price volatility, and variability in sales and earnings. Management reported no material litigation, no debt defaults, and no off-balance-sheet arrangements. Disclosure controls were deemed effective, with no material changes in internal control reported.
- The company expects adoption of the new lease standard to materially increase balance-sheet assets and liabilities; it did not expect a material effect on income or cash flows.
Important facts for investors to verify
- Whether the $3.4 million subsequent receivables collection was received and materially improved liquidity, and whether the company can meet near-term debt maturities.
- Customer concentration, continued sales growth, and receivable collectability, especially given the dominant customer’s share of sales and receivables.
- Progress and funding needs for the plant expansion, and whether anticipated efficiency gains offset higher depreciation and operating costs.
- Terms and repayment capacity for the Manatuck note, line of credit, term loans, related-party borrowing, and capital leases.
- Potential dilution from outstanding options and 6.19 million warrants, as well as the effect of the lease-standard adoption on reported liabilities.