MamaMancini’s Holdings, Inc. — Form 10-Q Summary
Reporting period: Three months ended April 30, 2014. The company changed its fiscal year-end to January 31; the income statement compares this quarter with the three months ended March 31, 2013, as labeled in the filing. The one-month period ended January 31, 2014 is also shown in the statements but is not a comparable quarter. The company manufactures and distributes prepared Italian meat and sauce products. (The filing names the issuer MamaMancini’s Holdings, Inc.)
Financial results and position
| Metric | Three months ended April 30, 2014 | Reported comparison |
|---|---|---|
| Net sales | $2.583 million | $1.772 million |
| Gross profit / margin | $803,000 / 31.1% | $490,000 / 27.7% |
| Operating expenses | $1.487 million | $1.099 million |
| Operating loss | $684,000 | $609,000 |
| Interest expense | $16,634 | $2,250 |
| Net loss | $701,000 | $611,000 |
| Basic and diluted loss per share | $0.03 | $0.03 |
| Operating cash flow | $(1.210) million | $(1.015) million |
Sales increased approximately 46%; management attributed the growth largely to expanded distribution, with products in about 26,000 retail and grocery locations versus about 16,000 in the reported comparison. Gross margin improved about 3 percentage points, which management attributed to product mix and lower slotting fees and discounts. The larger sales base did not offset higher operating costs, and the net loss widened by about $90,000.
Advertising and promotional expense was approximately $762,000, up from $417,000. Management cited increased advertising, marketing and social media, commissions, freight, royalties, and product development among the drivers of higher expenses.
| Balance-sheet item | April 30, 2014 | January 31, 2014 |
|---|---|---|
| Cash | $1.080 million | $1.542 million |
| Current assets | $4.303 million | $4.245 million |
| Current liabilities | $788,000 | $818,000 |
| Working capital | $3.515 million | $3.427 million |
| Line of credit | $204,000 | $223,000 |
| Total assets | $5.394 million | $5.269 million |
Investing cash use was $81,000, principally for machinery and equipment. Financing activities provided $829,000; cash declined by $462,000 to $1.080 million. The company reported no income tax paid and $16,634 of interest paid.
Liquidity, debt and funding
The company has a secured, demand credit facility with Faunus Group International, Inc. (FGI), with a stated $1.5 million facility limit backed by receivables and inventory and a lien on company assets. Advances bear interest at the greater of 6.75% or 2.5 percentage points above prime; the balance-sheet line-of-credit amount was $203,733. The facility also includes collateral-management fees and a minimum monthly net-funds-employed requirement.
Management estimated a 12-month working-capital requirement of $2.2 million and a monthly burn rate of $183,000, and said available cash, recent equity proceeds and the credit facility should meet requirements for at least 12 months. However, the filing also says continued operations depend on management raising further debt or equity capital, warns financing may not be available on acceptable terms, and identifies possible bankruptcy protection if revenue and financing prove inadequate.
Outlook, risks and unusual items
- Management planned to expand retail distribution and product placements, supported by radio advertising, promotions, social media, new products, additional production capacity and sales efforts in food service, Canada and the Caribbean.
- Management expected an operating loss in 2014 because of spending to develop the business, including initial distribution fees, marketing, promotions and sales support. It anticipated possible packaging and labor-cost efficiencies as volume and equipment utilization increased, but gave no quantified earnings guidance or assurance those savings would occur.
- Risks include competition, changing consumer demand, food-cost volatility, variable sales and earnings, and dependence on additional financing. Three customers accounted for about 53% of gross sales in the quarter; one related-party manufacturer supplied 100% of purchases.
- The manufacturer is owned by the company’s CEO and President. The balance sheet included $758,861 due from that manufacturer and a $762,743 inventory deposit with it. The company purchased substantially all inventory from this related party.
- The company reported that disclosure controls and procedures were not effective at quarter-end. It reported no material change in internal control over financial reporting during the quarter.
- Management reported no litigation believed to have a material adverse effect, no default on indebtedness, and no material change in previously disclosed risk factors. The company reported no off-balance-sheet arrangements or hedging activities.
- The filing disclosed a licensing royalty schedule and $78,630 of royalty expense for the quarter. Private placements during the period increased shares and generated warrants; as of April 30, 653,335 shares remained subscribed but unissued.
Most important facts for investors to verify
- Confirm the appropriate year-over-year comparison: the statements compare the April 2014 quarter with a period labeled three months ended March 31, 2013, following the fiscal-year-end change.
- Reconcile equity-financing disclosures: the cash-flow statement reports $980,001 of proceeds from common stock subscribed and $127,400 of cash stock-issuance costs; MD&A separately cites $852,601 of net proceeds from stock sales and $757,674 of net proceeds for 653,335 shares.
- Assess whether cash, collections and the demand credit facility can support the stated $183,000 monthly burn, particularly given operating cash use of $1.210 million in the quarter and management’s stated need for further financing.
- Evaluate exposure to the related-party manufacturer, including its exclusive supply role, balances due from it, inventory deposits and the concentration of all purchases with that supplier.
- Investigate the ineffective disclosure controls, customer concentration, planned spending and the extent to which sales growth can translate into sustainable operating profitability.