MamaMancini’s Holdings, Inc. — 10-Q Summary
Reporting period: Fiscal second quarter and six months ended July 31, 2016. The company manufactures and distributes meatballs, sauces, and related prepared foods. Financial statements are unaudited.
Financial performance
| Metric | Three months ended July 31, 2016 | Six months ended July 31, 2016 | Prior-year comparable period |
|---|---|---|---|
| Net sales | $4.14 million | $8.06 million | $2.74 million and $6.09 million |
| Gross profit | $1.37 million | $2.84 million | $648,168 and $1.59 million |
| Gross margin | 33% | 35% | 24% and 26% |
| Operating expenses | $1.47 million | $3.00 million | $1.41 million and $3.22 million |
| Operating loss | $109,167 | $164,387 | $762,936 and $1.62 million |
| Net loss | $276,810 | $502,917 | $1.00 million and $2.09 million |
| Net loss available to common shareholders | $323,610 | $614,238 | $1.01 million and $2.11 million |
Basic and diluted loss per share was $0.01 for the quarter and $0.02 for the six months, versus $0.04 and $0.08, respectively, a year earlier. Preferred dividends were $46,800 for the quarter and $111,321 for the six months.
- Cash flow: Six-month operating cash use was $23,403, compared with $763,417 used in the prior-year period. Investing cash use was $204,083, primarily for fixed assets; financing cash use was $95,490. Cash declined $322,976 to $264,446.
- Liquidity: Current assets were $4.44 million and current liabilities $942,225 at July 31, producing reported working capital of $3.50 million, versus a $34,365 deficit at January 31. The filing says September debt amendments led to line-of-credit and convertible-note reclassification as long-term; reported working capital therefore reflects those classifications.
- Debt: At July 31, the balance sheet reported a $1.10 million line of credit, $380,000 term loan, $156,275 in current promissory notes, $125,000 related-party notes, and $2.81 million outstanding on the convertible note including interest. Total liabilities were $4.96 million. The debt-maturity schedule totals $4.57 million.
- Other balance-sheet items: Total assets were $5.53 million and stockholders’ equity $567,661. A $2.18 million amount due from the related-party manufacturer was a significant asset.
Changes versus prior period
- Quarterly sales rose approximately 51% and six-month sales rose 32%. Management attributed growth to higher-volume locations; the number of retail and grocery locations fell to about 36,000 from 37,600 after the company exited some unprofitable accounts.
- Gross margin increased 9 percentage points in both the quarter and six-month comparison. Management linked the improvement to customer and account selection.
- Six-month operating expenses fell 7%, mainly from lower advertising and professional fees, partly offset by higher share-based compensation, freight, commissions, research and development, depreciation, and royalties.
- Six-month other expense declined to $338,530 from $470,706, primarily because prior-year debt-discount amortization was higher; interest expense itself increased to $319,711 from $248,062.
Outlook, risks, and notable items
- Management plans to pursue new and existing retail outlets, expand geographic coverage through brokers, promote products, and develop new product placements. It described product expansion as promising but provided no quantitative revenue or earnings guidance.
- Going concern: The filing states that substantial doubt exists about the company’s ability to continue as a going concern, citing recurring losses, limited cash, and dependence on additional financing. Management plans to raise debt or equity to refinance maturing obligations and fund working capital; it warns that financing may not be available and bankruptcy protection could be considered if funding and revenue prove inadequate.
- Subsequent financing amendments: In August 2016, the Manatuck convertible note maturity was extended to September 30, 2017; principal was to increase to $2,898,523, including accrued interest through October 31, 2016, and a $50,000 cash origination fee was due October 31. In September, the EGC facility was amended to a maximum $3.2 million and its line maturity extended to September 30, 2018; the term loan was increased to $700,000 with maturity extended to September 30, 2021.
- Related-party dependence: The CEO and president co-own the manufacturer, which supplied 100% of purchases in the six-month period. The company had $2.18 million due from this manufacturer and agreed to a monthly minimum purchase of $963,000, with a charge tied to shortfalls. The supply agreement was extended through August 2021.
- Customer concentration: Four customers accounted for approximately 20%, 13%, 12%, and 11% of six-month gross sales. The company also noted competition, changing consumer demand, grocery-industry cyclicality, and food-price volatility.
- Controls: Management concluded disclosure controls and procedures were not effective at period-end. No material change in internal control over financial reporting was reported during the quarter.
- The company reported no material pending litigation and no debt defaults. It stated it had no off-balance-sheet arrangements or hedging activities.
Important facts for investors to verify
- Whether the company secured sufficient financing and met obligations under the amended Manatuck and EGC debt terms.
- Whether operating cash generation and sales growth can continue without further financing, given the going-concern warning and low cash balance.
- Collectability and timing of the $2.18 million due from the related-party manufacturer, and the terms and economics of the manufacturing relationship.
- Whether margin improvement and account rationalization persist as the company pursues expansion, including the effects of freight, promotions, and customer concentration.
- Potential dilution from preferred stock, warrants, options, and share-based compensation; the filing lists 9.23 million potential common-stock equivalents at July 31, 2016.
- Remediation of ineffective disclosure controls and procedures.