Mama's Creations, Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. THE FOLLOWING DISCUSSION OF OUR PLAN OF OPERATION AND RESULTS OF OPERATIONS SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL STATEMENTS AND RELATED NOTES TO THE FINANCIAL STATEMENTS INCLUDED ELSEWHERE IN THIS REPORT. THIS DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT RELATE TO FUTURE EVENTS OR OUR FUTURE FINANCIAL PERFORMANCE. THESE STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS THAT MAY CAUSE OUR ACTUAL RESULTS, LEVELS OF ACTIVITY, PERFORMANCE OR ACHIEVEMENTS TO BE MATERIALLY DIFFERENT FROM ANY FUTURE RESULTS, LEVELS OF ACTIVITY, PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY THESE FORWARD- LOOKING STATEMENTS. THESE RISKS AND OTHER FACTORS INCLUDE, AMONG OTHERS, THOSE LISTED UNDER “FORWARD-LOOKING STATEMENTS” AND “RISK FACTORS” DETAILED IN PRIOR COMPANY FILINGS AND THOSE INCLUDED ELSEWHERE IN THIS REPORT. Results of Operations for the Three Months ended July 31, 2021 and 2020 The following table sets forth the summary statements of operations for the three months ended July 31, 2021 and 2020: Three Months Ended July 31, 2021 July 31, 2020 (as revised) Sales - Net of Slotting Fees and Discounts $ 12,064,584 $ 10,247,564 Gross Profit $ 3,369,284 $ 3,077,161 Operating Expenses $ (2,784,371 ) $ (2,270,396 ) Other Expenses $ (7,549 ) $ (66,998 ) Income Tax Provision $ (145,439 ) $ - Net Income $ 431,925 $ 739,767 For the three months ended July 31, 2021 and 2020, the Company reported net income of $431,925 and $739,767, respectively. The change in net income between the three months ended July 31, 2021 and 2020 was mainly the result of a decrease in gross profit percentage (as discussed below) and the income tax provision of $145,439 recorded during the three months ended July 31, 2021 compared to $0 during the three months ended July 31, 2020. Sales: Sales, net of slotting fees and discounts increased by approximately 18% to $12,064,584 during the three months ended July 31, 2021, from $10,247,564 during the three months ended July 31, 2020. The increase was mainly to new product introductions and major customer volume increases. Gross Profit: The gross profit margin was 28% for the three months ended July 31, 2021 compared to 30% for the three months ended July 31, 2020. The change in gross profit margin is due to increases in raw material costs, packaging costs and in-bound freight costs. Operating Expenses: Operating expenses increased by 23% during the three months ended July 31, 2021, as compared to the three months ended July 31, 2020. Operating expenses as a percentage of sales was 23% in 2021 and 22% in 2020. The $513,975 increase in total operating expenses is primarily attributable to the following: ● Postage and Freight of $288,548 due to increased sales volume and transportation rate increases; ● Commission expense of $59,078 directly related to increased sales; ● Payroll and related expenses of $49,888 due to salary adjustments and bonuses paid to executives; ● Director fees of $42,500 due to the increase in the number of directors, an increase in compensation to each director and an additional shareholder meeting of $11,437; and ● NASDAQ up-listing costs of $80,000. 2 These expense increases were offset by minimal decreases in other expense categories. Other Expenses: Other expenses decreased by $59,449 to $7,549 for the three months ended July 31, 2021 as compared to $66,998 during the three months ended July 31, 2020. For the three months ended July 31, 2021, other expenses consisted of $7,549 in interest expense incurred on the Company’s financing arrangements. For three months ended July 31, 2020, other expenses consisted of $61,648 in interest expense incurred on the Company’s financing arrangements and the Company recorded $5,350 of amortization expense related to the debt discount. Results of Operations for the Six Months ended July 31, 2021 and 2020 The following table sets forth the summary statements of operations for the six months ended July 31, 2021 and 2020: Six Months Ended July 31, 2021 July 31, 2020 (as revised) Sales - Net of Slotting Fees and Discounts $ 22,377,984 $ 21,082,505 Gross Profit $ 6,713,637 $ 6,538,783 Operating Expenses $ (5,276,525 ) $ (4,756,064 ) Other Income (Expenses) $ 19,725 $ (136,750 ) Income Tax Provision $ (393,388 ) $ - Net Income $ 1,063,449 $ 1,645,969 For the six months ended July 31, 2021 and 2020, the Company reported net income of $1,063,449 and $1,645,969, respectively. The change in net income between the six months ended July 31, 2021 and 2020 was mainly the result of a decrease in gross profit percentage (as discussed below) and the income tax provision of $393,388 recorded during the six months ended July 31, 2021 compared to $0 during the six months ended July 31, 2020. Sales: Sales, net of slotting fees and discounts increased by approximately 6% to $22,377,984 during the six months ended July 31, 2021, from $21,082,505 during the six months ended July 31, 2020. The increase in sales can be attributed to new product introduction and major customer volume increases. Gross Profit: The gross profit margin was 30% for the six months ended July 31, 2021 compared to 31% for the six months ended July 31, 2020. The change in gross profit margin is due to increases in raw material costs, packaging costs and in-bound freight costs. Operating Expenses: Operating expenses increased by 11% during the six months ended July 31, 2021, as compared to the six months ended July 31, 2020. Operating expenses increased as a percentage of sales to 24% in 2021 compared to 23% in 2020. The $383,541 increase in total operating expenses is primarily attributable to the following: ● Postage and Freight of $271,074 due to increased sales volume and transportation rate increases; ● Payroll and related expenses of $117,025 due to salary adjustments and bonuses paid to executives; and ● Director fees of $66,472 due to the increase in the number of directors, an increase in compensation to each director and an additional shareholder meeting of $11,437; and ● NASDAQ up-listing costs of $80,000. These expense increases were offset by decreases in the following as well as minimal decreases in other expense categories: ● Professional fees decreased by $66,914 due to a decrease in contractual investment banking fees; and ● Stock compensation decreased by $49,189 due to a decrease in awards and vesting during the current period. Other Income (Expenses): Other income (expenses) increased by $156,475 to income of $19,725 for the six months ended July 31, 2021 as compared to expenses of $(136,750) during the six months ended July 31, 2020. For the six months ended July 31, 2021, other income (expenses) consisted of $(17,979) in interest expense incurred on the Company’s financing arrangements which was offset by the net insurance proceeds relating to the property damage claim of $37,704. For six months ended July 31, 2020, other expenses consisted of $(126,050) in interest expense incurred on the Company’s financing arrangements and the Company recorded $(10,700) of amortization expense related to the debt discount. 3 Liquidity and Capital Resources The following table summarizes total current assets, liabilities and working capital at July 31, 2021 compared to January 31, 2021: July 31, 2021 January 31, 2021 Change Current Assets $ 10,918,998 $ 8,879,451 $ 2,039,547 Current Liabilities $ 4,853,452 $ 4,045,349 $ 808,103 Working Capital $ 6,065,546 $ 4,834,102 $ 1,231,444 As of July 31, 2021, we had working capital of $6,065,546 as compared to a working capital of $4,834,102 as of January 31, 2021, an increase of $1,231,444. The increase in working capital is primarily attributable to an increase in cash of $1,062,321, an increase in accounts receivable of $728,920 and an increase in inventory of $212,403. These amounts were offset by an increase in accounts payable and accrued expenses of $749,822 and an increase in current portion of lease obligations of $58,281. Net cash provided by operating activities for the six months ended July 31, 2021 and 2020 was $1,618,610 and $1,465,898, respectively. The net income for the six months ended July 31, 2021 and 2020 was $1,063,449 and $1,645,969, respectively. Net cash used in all investing activities for the six months ended July 31, 2021 was $481,295 as compared to $189,287 for the six months ended July 31, 2020, respectively, to acquire new machinery and equipment and leasehold improvements. Our capital expenditures are attributed to a Plant Expansion Project in progress since mid-2017 to expand plant capacity and efficiency to meet growing demand. Net cash used in all financing activities for the six months ended July 31, 2021 was $74,994 as compared to $28,292 provided by for the six months ended July 31, 2020. During the six months ended July 31, 2021, the Company received proceeds of $19,080 from the exercise of options. These cash in-flows were offset by payments of $94,074 paid for finance lease payments. During the six months ended July 31, 2020, the Company received proceeds of $330,505 from the Paycheck Protection Program promissory note and proceeds of $1,484,303 from the exercise of options and warrants. These cash in-flows were offset by payments on its line of credit of $500,000, payments on its term loan of $250,002, payments of $641,844 on the related party loans and $64,165 paid for capital lease payments. The Company returned the $330,505 received from the Paycheck Protection Program in May 2020. Although the expected revenue growth and control of expenses lead management to believe that it is probable that the Company’s cash resources will be sufficient to meet its cash requirements through September 9, 2022 based on current and projected levels of operations, the Company may require additional funding to finance growth and achieve its strategic objectives. If such financing is required, there can be no assurance that financing will be available in amounts or terms acceptable to the Company, if at all. In the event funding is not available on reasonable terms, the Company might be required to change its growth strategy and/or seek funding on an alternative basis, but there is no guarantee it will be able to do so. Because of the rapidly changing environment in response to COVID-19, the current expectations of the Company may be altered as conditions change. 4 Recent Accounting Pronouncements In December 2019, the FASB issued authoritative guidance intended to simplify the accounting for income taxes (ASU 2019-12, “ Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes ”). This guidance eliminates certain exceptions to the general approach to the income tax accounting model and adds new guidance to reduce the complexity in accounting for income taxes. This guidance is effective for annual periods after December 15, 2020, including interim periods within those annual periods. The adoption of the new standard did not have a significant impact on the Company’s condensed consolidated financial statements. Management does not believe that any recently issued, but not yet effective accounting pronouncements, when adopted, will have a material effect on the accompanying consolidated financial statements. Critical Accounting Policies Our condensed consolidated financial statements and related public financial information are based on the application of accounting principles generally accepted in the United States (“GAAP”). GAAP requires the use of estimates; assumptions, judgments and subjective interpretations of accounting principles that have an impact on the assets, liabilities, revenues and expense amounts reported. These estimates can also affect supplemental information contained in our external disclosures including information regarding contingencies, risk and financial condition. We believe our use of estimates and underlying accounting assumptions adhere to GAAP and are consistently and conservatively applied. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ materially from these estimates under different assumptions or conditions. We continue to monitor significant estimates made during the preparation of our financial statements. Our significant accounting policies are summarized in Note 2 of our condensed consolidated financial statements. While all these significant accounting policies impact our financial condition and results of operations, we view certain of these policies as critical. Policies determined to be critical are those policies that have the most significant impact on our financial statements and require management to use a greater degree of judgment and estimates. Actual results may differ from those estimates. Our management believes that given current facts and circumstances, it is unlikely that applying any other reasonable judgments or estimate methodologies would cause effect on our consolidated results of operations, financial position or liquidity for the periods presented in this report. We believe the following critical accounting policies and procedures, among others, affect our more significant judgments and estimates used in the preparation of our consolidated financial statements: Use of Estimates The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Such estimates and assumptions impact, among others, the following: allowance for doubtful accounts, inventory obsolescence and the fair value of share-based payments. Making estimates requires management to exercise significant judgment. It is at least reasonably possible that the estimate of the effect of a condition, situation or set of circumstances that existed at the date of the consolidated financial statements, which management considered in formulating its estimate could change in the near term due to one or more future confirming events. Accordingly, the actual results could differ significantly from our estimates. Leases In February 2016, the FASB issued ASU 2016-02 “ Leases” (Topic 842) which amended guidance for lease arrangements to increase transparency and comparability by providing additional information to users of financial statements regarding an entity’s leasing activities. Subsequent to the issuance of Topic 842, the FASB clarified the guidance through several ASUs; hereinafter the collection of lease guidance is referred to as ASC 842. The revised guidance seeks to achieve this objective by requiring reporting entities to recognize lease assets and lease liabilities on the balance sheet for substantially all lease arrangements. 5 On February 1, 2019, the Company adopted ASC 842 using the modified retrospective approach and recognized a right of use (“ROU”) asset and liability in the consolidated balance sheet in the amount of $1,599,830 related to the operating lease for office and warehouse space. Results for the year ended January 31, 2020 are presented under ASC 842, while prior period amounts were not adjusted and continue to be reported in accordance with the legacy accounting guidance under ASC Topic 840, Leases . As part of the adoption the Company elected the practical expedients permitted under the transition guidance within the new standard, which among other things, allowed the Company to: 1. Not separate non-lease components from lease components and instead to account for each separate lease component and the non-lease components associated with that lease component as a single lease component. 2. Not to apply the recognition requirements in ASC 842 to short-term leases. 3. Not record a right of use asset or right of use liability for leases with an asset or liability balance that would be considered immaterial. Revenue Recognition In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606) . ASU 2014-09 supersedes the revenue recognition requirements under Topic 605, Revenue Recognition , and most industry-specific guidance throughout the Industry Topics of the ASC. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which an entity expects to be entitled in exchange for those goods or services. Under the new guidance, an entity is required to perform the following five steps: (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue when (or as) the entity satisfies a performance obligation. The new guidance will significantly enhance comparability of revenue recognition practices across entities, industries, jurisdictions and capital markets. Additionally, the guidance requires improved disclosures as to the nature, amount, timing and uncertainty of revenue that is recognized. In May 2016, the FASB issued ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606)—Narrow-Scope Improvements and Practical Expedients . This update clarifies the objectives of collectability, sales and other taxes, noncash consideration, contract modifications at transition, completed contracts at transition and technical correction. The amendments in this update affect the guidance in ASU 2014-09. In September 2017, the FASB issued additional amendments providing clarification and implementation guidance. The Company adopted this guidance and related amendments as of the first quarter of fiscal 2019, applying the full retrospective transition method. As the underlying principles of the new standard, relating to the measurement of revenue and the timing of recognition, are closely aligned with the Company’s current business model and practices, the adoption of ASU 2014-09 did not have a material impact on the consolidated financial statements. In addition, the adoption of ASC 606 did not impact the previously reported financial statements in any prior period nor did it result in a cumulative effect adjustment to retained earnings. The Company’s sales predominantly are generated from the sale of finished products to customers, contain a single performance obligation and revenue is recognized at a single point in time when ownership, risks and rewards transfer. Typically, this occurs when the goods are shipped to the customer. Revenues are recognized in an amount that reflects the net consideration the Company expects to receive in exchange for the goods. The Company reports all amounts billed to a customer in a sale transaction as revenue. Under the new revenue guidance, the Company elected to treat shipping and handling activities as fulfillment activities, and the related costs are recorded as selling expenses in general and administrative expenses on the consolidated statement of operations. Stock-Based Compensation The Company accounts for stock-based compensation in accordance with ASC Topic 718, “ Compensation – Stock Compensation” (“ASC 718”) which establishes financial accounting and reporting standards for stock-based employee compensation. It defines a fair value-based method of accounting for an employee stock option or similar equity instrument. The Company accounts for compensation cost for stock option plans in accordance with ASC 718. 6 The Company recognizes all forms of share-based payments, including stock option grants, warrants and restricted stock grants, at their fair value on the grant date, which are based on the estimated number of awards that are ultimately expected to vest. Share-based payments, excluding restricted stock, are valued using a Black-Scholes option pricing model. Grants of share-based payment awards issued to non-employees for services rendered have been recorded at the fair value of the share-based payment, which is the more readily determinable value. The grants are amortized on a straight-line basis over the requisite service periods, which is generally the vesting period. If an award is granted, but vesting does not occur, any previously recognized compensation cost is reversed in the period related to the termination of service. Stock-based compensation expenses are included in cost of goods sold or selling, general and administrative expenses, depending on the nature of the services provided, in the consolidated statement of operations. Share-based payments issued to placement agents are classified as a direct cost of a stock offering and are recorded as a reduction in additional paid in capital. When computing fair value of share-based payments, the Company has considered the following variables: ● The risk-free interest rate assumption is based on the U.S. Treasury yield for a period consistent with the expected term of the option in effect at the time of the grant. ● The Company has not paid any dividends on common stock since its inception and does not anticipate paying dividends on its common stock in the foreseeable future. ● The expected option term is computed using the “simplified” method as permitted under the provisions of Staff Accounting Bulletin (“SAB”) 110. ● The term is the life of the grant. ● The expected volatility was estimated using the historical volatilities of the Company’s common stock. ● The forfeiture rate is based on the historical forfeiture rate for the Company’s unvested stock options, which was 0%. Advertising Costs incurred for producing and communicating advertising for the Company are charged to operations as incurred. Off Balance Sheet Arrangements: We do not have any off-balance sheet arrangements, financings, or other relationships with unconsolidated entities or other persons, also known as “special purpose entities” (SPEs). Item 3. Quantitative and Qualitative Disclosures About Market Risk We do not hold any derivative instruments and do not engage in any hedging activities.