MamaMancini’s Holdings, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended October 31, 2016. The company manufactures and distributes prepared meatballs, meat loaves, sauces, and related products. The filing identifies the registrant as MamaMancini’s Holdings, Inc.
Financial performance
- Third quarter: Net sales were $4.58 million, up about 41% from $3.24 million a year earlier. Gross profit was $1.68 million and gross margin was 36.8%, compared with $982,131 and 30.3%. Operating income was $243,563, versus an operating loss of $358,159. Net income was $80,603, compared with a net loss of $975,522; net income available to common shareholders was $33,803 after preferred dividends.
- Nine months: Net sales were $12.64 million, up about 35.5% from $9.33 million. Gross profit was $4.52 million and gross margin was 35.8%, compared with $2.58 million and 27.6%. Operating income was $79,176, versus an operating loss of $1.98 million. Net loss was $422,314, improved from $3.07 million; net loss available to common shareholders was $580,435.
- Expenses and interest: Nine-month operating expenses declined 2.5% to $4.45 million. Lower advertising and professional fees were partly offset by higher stock-based compensation, freight, commissions, research and development, depreciation, and royalties. Nine-month other expense was $501,490, including $472,870 of interest expense. Prior-year other expense included a $380,089 debt-extinguishment loss.
- Cash flow: Nine-month operating cash use was $146,619, versus $889,314 in the prior-year period. Investing cash use was $225,792, mainly for fixed assets; financing provided $440,019. Cash increased by $67,608 to $655,030.
Liquidity, debt, and balance sheet
- At October 31, 2016, current assets were $5.32 million and current liabilities were $3.47 million, producing working capital of $1.86 million, versus a $34,365 deficiency at January 31, 2016. Total liabilities were $5.58 million and stockholders’ equity was $763,541.
- Debt included a $2.85 million net note payable to Manatuck, a $1.45 million long-term line of credit, and a term loan with a $688,333 balance. The filing lists aggregate future debt maturities of $5.20 million, including $3.08 million in the twelve months ending October 31, 2017.
- The September 2016 amendment increased the EGC lending facility to $3.2 million and extended the line-of-credit maturity to September 30, 2018. The secured term loan was increased to $700,000 and extended to September 30, 2021. The CEO personally guarantees amounts borrowed under the facility.
- “Due from manufacturer — related party” was $2.14 million, a substantial portion of current assets. The manufacturer is co-owned by the CEO and President.
Changes, outlook, and risks
- Management attributed improved results to higher sales, placement in higher-volume locations, and the removal of unprofitable retailers. The company reported approximately 37,700 retail and grocery locations, versus 31,900 a year earlier, and broker coverage of about 90% of the United States.
- Management plans to expand sales through existing and new retail, club, mass-market, food-service, and international channels; promote new products; and focus on more profitable accounts. It also expects possible packaging-cost benefits from longer production runs, but cautions that savings are not assured. No quantitative earnings or revenue guidance is provided.
- The company and its auditor disclosed substantial doubt about the company’s ability to continue as a going concern. Management plans to use operating cash flow and refinancing and may seek additional debt or equity financing; it warns that financing may not be available on acceptable terms and that bankruptcy protection may be sought if adequate revenue or funding cannot be obtained.
- Manufacturing is highly concentrated: the related-party manufacturer accounted for 100% of purchases in the nine-month period. The company also disclosed customer concentration, with three customers representing approximately 47% of gross sales combined. The supply agreement with the related party was extended to August 2, 2021, and requires minimum monthly purchases of $963,000, with a charge equal to 12% of any shortfall.
- Preferred stock carries an 8% annual dividend; accrued dividends were paid in common shares. Potential common-stock equivalents totaled about 9.23 million at October 31, 2016, presenting dilution risk. Common shares outstanding were 27,562,906 at quarter-end.
- Management concluded disclosure controls and procedures were not effective. No material changes in internal control over financial reporting were reported during the quarter. The company reported no material pending litigation and no material defaults on indebtedness.
Important facts for investors to verify
- Whether operating cash flow can improve enough to fund operations and meet the substantial debt maturities, particularly the $3.08 million scheduled for the year ending October 31, 2017.
- The collectability and timing of the $2.14 million due from the related-party manufacturer, and the terms and performance of the amended supply agreement.
- Whether sales growth and gross-margin improvement are sustainable given concentrated customers, a single-source related-party manufacturer, and food-cost and consumer-demand risks.
- The availability, cost, and dilution impact of any refinancing or additional financing, including preferred dividends and outstanding warrants and options.
- How and when management will remediate ineffective disclosure controls and procedures.