MamaMancini’s Holdings, Inc. (now identified in the request as Mama’s Creations, Inc.) — FY2013 Form 10-K
Reporting period: Year ended December 31, 2013, compared with FY2012. This is an annual report, not a standalone fourth-quarter filing. The filing reports the company as MamaMancini’s Holdings, Inc.; following a January 2013 reverse merger, the financial statements present the operating business of MamaMancini’s for both years.
Business context
The company sells premium prepared, frozen and refrigerated Italian-style foods, primarily through supermarkets and mass-market retailers. At year-end 2013, products were in 7,040 retail locations, with approximately 22,600 product placements. The company relies on outsourced manufacturing, principally from related-party manufacturer Joseph Epstein Food Enterprises (JEFE).
Financial results and liquidity
| Metric | FY2013 | FY2012 |
|---|---|---|
| Net sales | $8.74 million | $4.58 million |
| Gross profit | $2.55 million | $1.35 million |
| Gross margin | 29.2% | 29.5% |
| Operating expenses | $5.49 million | $3.34 million |
| Operating loss | $2.94 million | $1.99 million |
| Net loss | $2.95 million | $2.00 million |
| Net loss per share | $0.13 | $0.12 |
| Cash used in operating activities | $3.82 million | $2.09 million |
| Cash at year-end | $1.74 million | $2.01 million |
| Working capital | $3.37 million | $2.44 million |
Sales increased approximately 91%, while the net loss widened approximately 47%. The net loss equaled about 33.7% of sales, versus 43.6% in FY2012. Operating expenses rose 64%, including higher advertising and promotion, payroll, commissions, professional fees and freight. Management attributed the sales increase to expansion in retail distribution; gross margin declined about 0.3 percentage points, primarily due to slotting fees and discounts.
Investing cash outflow was $1.17 million, mainly for $877,522 of machinery and equipment and a $295,000 shell-company acquisition. Financing provided $4.73 million, primarily from stock sales and subscriptions. The $200,000 bank line outstanding at year-end 2012 was repaid and cancelled in September 2013; no line-of-credit balance remained at December 31, 2013. Stockholders’ equity was $4.30 million, and accumulated losses were $6.30 million.
Material changes, outlook and risks
- Growth plans: Management planned additional retail distribution, advertising, sales staffing and new products in 2014. It estimated growth-plan costs of approximately $2.6 million and anticipated approximately $400,000 in sales-staff compensation. New offerings were expected during 2014, including gluten-free products and Bolognese sauce; timing and commercial success were not assured.
- Outlook: Management expected an operating loss in 2014 because of product launches and expansion spending. It estimated next-12-month working-capital needs of $2.2 million, or about $183,000 per month, and said existing cash, anticipated securities proceeds and financing were expected to fund operations for at least 12 months. The filing also states that profitability and positive operating cash flow are uncertain and that further financing may be needed.
- Subsequent financing: In January 2014, the company entered a secured, demand receivables-and-inventory facility with a stated $1.5 million limit. Advances bear interest at the greater of 6.75% or 2.50% above the lender’s selected prime/base rate, with additional fees and collateral. From January 1 through March 14, 2014, the company also sold $805,000 of stock, before approximately $104,650 in issuance costs, and issued placement-agent warrants.
- Concentration and related parties: The ten largest customers generated approximately 86% of FY2013 sales, and four generated approximately 63%; there were no long-term customer contracts. JEFE, owned by company officers and their family members, accounted for 100% of FY2013 cost-of-sales purchases. The company reported $781,521 due from the manufacturer, including a $450,000 unsecured, non-interest-bearing loan, and a $359,506 inventory deposit.
- Operational and governance risks: The company depends on outsourced manufacturing and faces customer, food-safety, commodity-cost, competition and financing risks. Management concluded disclosure controls and internal control over financial reporting were ineffective, citing material weaknesses including inadequate segregation of duties and limited written accounting procedures. Management planned remediation as funding allowed.
- Other notable items: The company reported no material pending litigation. Its independent auditor issued an unqualified opinion on the financial statements, but did not audit or opine on internal-control effectiveness. The company changed its fiscal year-end to January 31, 2014, beginning with the next fiscal year.
Important facts for investors to verify
- Whether the January 2014 facility and subsequent equity proceeds were sufficient to meet working-capital needs, and the actual amount, cost and availability of facility advances.
- Whether sales growth translated into improved margins and cash generation, given the larger loss and higher operating cash burn.
- Customer retention and concentration, including any changes to major-customer purchasing or distribution placements.
- JEFE contract renewal, manufacturing capacity, related-party balances and the company’s ability to qualify alternative manufacturers.
- Progress in remediating the disclosed control weaknesses and any changes in related-party transactions or financial reporting oversight.
- Potential dilution from outstanding options and warrants and later stock issuances; the filing reports 25,257,374 common shares outstanding as of March 20, 2014.
- Whether the proposed products and expansion plans launched as expected and generated sales; the filing provides expectations, not confirmed subsequent results.