MamaMancini’s Holdings, Inc. — Q3 2015 Form 10-Q
Reporting period: Three and nine months ended October 31, 2015; interim financial statements are unaudited. The filing identifies the registrant as MamaMancini’s Holdings, Inc.
Financial performance
| Metric | Three months ended Oct. 31, 2015 | Three months ended Oct. 31, 2014 | Nine months ended Oct. 31, 2015 | Nine months ended Oct. 31, 2014 |
|---|---|---|---|---|
| Net sales | $3.238 million | $3.760 million | $9.330 million | $8.593 million |
| Gross profit | $982,131 | $1.054 million | $2.575 million | $2.516 million |
| Gross margin | 30% | 28% | 28% | 29% |
| Operating expenses | $1.340 million | $1.803 million | $4.558 million | $4.715 million |
| Operating loss | $358,159 | $748,383 | $1.982 million | $2.199 million |
| Net loss | $975,522 | $773,809 | $3.070 million | $2.268 million |
| Net loss per common share | $0.04 | $0.03 | $0.12 | $0.09 |
- Third-quarter net sales fell about 14% year over year, while nine-month sales rose about 9%. Management attributed lower quarterly sales partly to exiting accounts with negative profit contributions; those exits represented about 23% of prior-year quarterly sales and about 10% of prior-year sales for the nine-month period.
- Quarterly gross margin improved to 30% from 28%; nine-month margin declined to 28% from 29%. Management cited monthly minimum-purchase shortfall charges from its manufacturer of $62,800 for the quarter and $233,800 for the nine months, and $58,000 of inventory liquidated during a packaging changeover.
- Operating expenses decreased 26% in the quarter and 3% over nine months. Lower advertising and share-based compensation were partly offset by higher payroll, depreciation, freight and other costs.
- Other expenses increased sharply, including interest expense, debt-discount and financing-cost amortization, and a $380,089 loss on extinguishment of debt tied to an amendment of the Manatuck debenture. The debenture’s stated principal was $2.540 million at period-end.
Cash flow, liquidity and debt
- Cash was $386,974 at October 31, down from $854,995 at January 31, 2015. Nine-month operating cash use was $889,314, investing cash use was $204,024, and financing provided $625,317.
- Working capital was $2.084 million, down from $2.964 million at January 31; current assets were $4.346 million and current liabilities $2.262 million. Total assets were $5.505 million, total liabilities $5.496 million, and stockholders’ equity just $9,205.
- Period-end debt included a $1.077 million revolving line of credit, $470,000 term loan, $358,832 third-party promissory note, $125,000 related-party notes, and the $2.540 million Manatuck convertible debenture. The filing reports $120,000 of the term loan and $139,559 of the promissory note as current, with remaining portions classified as long-term.
- Management estimated about $1 million of working-capital requirements over the following 12 months and said cash, financing proceeds and asset-based borrowing were expected to meet needs. It cautioned that sales growth or additional financing might not materialize or be available on acceptable terms.
Business outlook, risks and unusual items
- The company makes and distributes meatballs, sauces and related products. Management planned to expand distribution in retail, food service and other channels, including QVC, and emphasized fresh-food supermarket sections and direct-to-consumer sales.
- Management expected an operating loss in 2016 as it invested in distribution, promotion and business development. It anticipated lower cash needs through cost reductions, higher production utilization, new packaging and a higher-margin sales mix, but provided no quantified earnings guidance.
- As of December 11, 2015, the company reported raising $2.230 million in a best-efforts private placement of Series A convertible preferred stock. A November closing generated $1.020 million gross; the note reports $887,400 net after issuance costs, while MD&A cites estimated net proceeds of $862,000. Verify the net-proceeds figure and related financing costs.
- The Series A preferred stock carries an 8% dividend and conversion rights. Financing included warrants, and 5.332 million potential common-share equivalents were excluded from diluted loss per share as anti-dilutive.
- Related-party and concentration risks are notable: the CEO and President co-own the manufacturer, which supplied 93% of purchases in the nine-month period. The company reported $2.100 million due from that manufacturer and purchases of $6.208 million from it during the period. Three customers accounted for approximately 45% of nine-month gross sales.
- The company disclosed that its disclosure controls and procedures were not effective as of period-end. It reported no material litigation known to management and no defaults on indebtedness. It also stated there were no material changes to previously disclosed risk factors.
Investor verification priorities
- Confirm the private-placement net proceeds, remaining offering capacity, fees, preferred-stock conversion terms and potential dilution.
- Assess liquidity and debt service needs, including borrowing availability, asset-based lending terms and the maturity and amendment terms of the Manatuck debenture.
- Review collectability and settlement of the $2.100 million related-party manufacturer receivable, as well as the ongoing minimum-purchase arrangement and supplier concentration.
- Track whether sales growth, margin improvements and reduced cash use offset operating losses and the costs of planned expansion.
- Understand remediation plans for ineffective disclosure controls and monitor customer concentration and the impact of discontinued low-margin accounts.