MamaMancini’s Holdings, Inc. — FY2017 Form 10-K
Reporting period: Fiscal year ended January 31, 2017 (not a standalone 2016 fourth-quarter filing). The company sells all-natural prepared foods, principally meatballs, sauces and meatloaf, through supermarkets, distributors and QVC.
Financial results
| Metric | FY2017 | FY2016 |
|---|---|---|
| Net sales, after slotting fees and discounts | $18.05 million | $12.60 million |
| Gross profit / margin | $6.49 million / 36% | $3.60 million / 29% |
| Operating expenses | $6.09 million | $5.86 million |
| Income (loss) from operations | $407,009 | $(2.26) million |
| Net loss | $(289,140) | $(3.51) million |
| Net loss available to common stockholders / loss per share | $(494,061) / $(0.02) | $(3.58) million / $(0.14) |
| Cash from (used in) operations | $482,792 | $(1.26) million |
| Capital expenditures | $476,867 | $208,226 |
Sales rose 43%; management attributed higher gross margin to improved product mix and production efficiencies. Operating expenses increased 4%, substantially slower than sales. Advertising and promotional expense fell about $514,000, while stock-based compensation, freight and commissions increased. Other expense declined to $696,149 from $1.25 million, including interest expense of $667,623 in FY2017.
At January 31, 2017, cash was $666,580, total assets $6.32 million, and total liabilities $5.32 million. The balance sheet reports current assets of $5.14 million and current liabilities of $3.39 million, implying working capital of $1.75 million. Debt included a $1.36 million line of credit, $653,332 term loan, approximately $2.70 million Manatuck note, and $117,656 related-party notes. Total scheduled debt maturities were reported as $4.88 million. The EGC facility is secured by company assets, bears variable prime-based rates, and is personally guaranteed by the CEO.
Material changes and business developments
- The company expanded distribution to approximately 11,700 retail locations and 38,700 product placements, compared with approximately 10,000 locations and 32,000 placements a year earlier.
- FY2017 sales concentration increased: two customers represented approximately 28% and 13% of gross sales, versus four customers at 16%, 14%, 13% and 10% in FY2016.
- One related-party supplier, JEFE, accounted for approximately 100% of purchases, compared with 95% in FY2016. The company paid JEFE $12.46 million for manufacturing and reported $2.08 million due from the manufacturer at year-end.
- The amended JEFE supply arrangement extends into 2021 and requires monthly purchase orders of at least $963,000, with a stated 12% margin mechanism and a monthly $5,000 shared-expense payment. JEFE is owned by the CEO and President and their family members.
- The EGC credit facility was increased to a stated maximum of $3.2 million in September 2016. The Manatuck debt was amended, including removal of its convertible feature; subsequent amendments offered an extension option to May 2018 subject to payments and fees.
- During FY2017, the company issued 793,307 common shares for services and 509,894 shares for preferred dividends. Series A preferred shares carry an 8% annual dividend, convertible at $0.675 per share, and had 3,466,777 common shares issuable upon conversion at the report date.
Outlook, risks and unusual items
Management plans to expand retail placements, emphasize higher-margin fresh prepared foods, add products and pursue club-store and food-service channels. It reported purchasing additional production equipment in February 2017. The filing gives no quantified sales or earnings guidance. Management projected that available cash would meet requirements through the first quarter of fiscal 2019, but said additional financing might be needed and was not assured.
Although management concluded its plans and improving cash flow alleviated the conditions that had raised substantial doubt about continuing as a going concern, the company remained dependent on revenue growth, expense control and potentially obtaining financing. Key exposures include customer concentration, near-total dependence on a related-party manufacturer, food safety and regulatory requirements, competition, and possible volatility in food input costs. The company also disclosed material weaknesses in internal controls, including inadequate segregation of duties and limited controls due to its small staff; disclosure controls were deemed ineffective. No material litigation was reported.
Preferred dividends were paid in common shares rather than cash. The 2016 comparison includes a $380,089 debt-extinguishment loss; FY2017 included $28,526 of debt-discount amortization. The independent auditor gave an unqualified opinion on the financial statements but did not express an opinion on internal-control effectiveness.
Important facts for investors to verify
- Liquidity figures conflict: MD&A states current liabilities of $3,139,807 and working capital of $2,003,671, while the audited balance sheet reports current liabilities of $3,389,807, implying working capital of $1,753,671. Confirm the correct figures.
- Review the Manatuck note’s current balance, repayment schedule, extension option and subsequent amendments; the filing describes substantial scheduled payments and a maturity-extension fee.
- Assess the collectability and settlement terms of the $2.08 million receivable from JEFE, alongside the minimum-purchase commitment and related-party nature of the arrangement.
- Track customer concentration, sales growth, gross-margin durability and cash generation, particularly given the dependence on a small number of customers.
- Evaluate dilution from preferred conversion, warrants, options and stock-based compensation, as well as progress in remediating the disclosed control weaknesses.