In the Heart of the Beast Puppet and Mask Theatre, best known for the giant puppets in its May Day Parade that attracts thousands to the Phillips and Powderhorn Park neighborhoods, is facing a severe financial crisis as it closes its fiscal year on Aug. 31.

The south Minneapolis company has laid off its 12-person staff, and programming for fiscal 2015 is jeopardized.

"If we don't have a break-even result, it makes it very difficult for us to do the ongoing larger projects," said Loren Niemi, HOBT's executive director.

The theater, whose annual budget is about $750,000, is plagued with insufficient cash flow. Niemi attributed the shortfall to "a tremendous drop in operating support from foundation grants" and nearly $40,000 in accounts receivable for contract projects.

Also contributing to the crisis is an unexpected need for $20,000 to ease a mortgage refinancing on the company's theater at 1500 E. Lake St. A drop in value of the old Avalon Theatre has put the mortgage underwater.

Work is continuing on contracted projects, Niemi said. For example, Sandy Spieler, the theater's founder and artistic director, is creating work for the Ivey Awards, a celebration of Twin Cities theater held in September. Saturday puppet matinees and touring shows, an educational project with the Phillips neighborhood, also will continue, and HOBT will co-host the Handmade Worlds Festival in collaboration with Open Eye Figure Theatre and Puppeteers of America in September. Niemi also said he and others are working, voluntarily, on an exhibit for the Minnesota State Fair.

However, the theater's signature holiday show, "La Natividad," could be threatened.

"To do that show, we need to spend $10,000 to $15,000 before we sell a ticket," Niemi said. "If we don't have that, we can't go ahead."

The board is committed to retaining the theater building and the annual May Day Parade, its best-known event, Niemi said. The parade in 2011 drew more than 30,000 people, but the organization lost $100,000 on it, tax records show.

In the Heart of the Beast was started 40 years ago as a street-theater project. Spieler, who recently received the McKnight Foundation's Distinguished Artist Award, has guided the company into both performance and community projects involving clean water, sustainable agriculture and social justice.

The board considers the Avalon Theatre "a cultural asset" for the E. Lake Street neighborhood. "We would be loath to walk away from the building," Niemi said.

The theater's board won praise for confronting the problem proactively. "They understand this is more than a few weeks' problem," said Kate Barr, executive director of the Nonprofits Assistance Fund. "They are going to have to take more substantive action because although it's sparked by cash flow, this is a question about the business model of the future."