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 Quarter ended April 30, 2022 and 2021 The following table sets forth the summary of the condensed consolidated statements of operations for the quarter ended April 30, 2022 and 2021: For the Three Months Ended April 30, 2022 April 30, 2021 Sales - Net of Slotting Fees and Discounts $ 21,830,580 $ 10,313,400 Gross Profit $ 3,860,263 $ 3,344,353 Operating Expenses $ (3,599,290 ) $ (2,492,154 ) Other Income (Expenses) $ (127,891 ) $ 27,274 Income Tax Provision $ (29,385 ) $ (247,949 ) Net Income $ 103,697 $ 631,524 For the quarters ended April 30, 2022 and 2021, the Company reported net income of $103,697 and $631,524, respectively. The change in net income between the quarter ended April 30, 2022 and 2021 reflects continued downward pressure on gross margin percentage from inflated materials and freight expenses, increased interest costs associated with acquisitions. Sales: Sales, net of slotting fees and discounts increased by approximately 112% to $21,830,580 during the quarter ended April 30, 2022, from $10,313,400 during the quarter ended April 30, 2021. Sales included the first full quarter from the acquisition of T&L Creative Salads, Inc. and Olive Branch LLC in December 2021. Sales for MamaMancini’s, Inc. also rose modestly during the three months ended April 30, 2022 versus the prior year comparative period. During the quarter, MamaMancini’s Inc. and T&L Salads were quickly able to gain product portfolio synergies by adding new products to existing customers, particularly in club stores. Gross Profit: The gross profit margin was 18% for the quarter ended April 30, 2022 compared to 32% for the quarter ended April 30, 2021. The T&L Creative Salads and Olive Branch LLC acquisition created a different financial model with lower gross margin percentage. In addition, continued inflation of raw materials, packaging and freight costs have out-paced price increases in the quarter. Management believes the balance between inflationary costs and price increases will begin to balance in the quarter ended July 31, 2022 and gross profits will begin to return to targeted levels. Operating Expenses: Operating expenses increased by 44% during the quarter ended April 30, 2022, as compared to the quarter ended April 30, 2021. Operating expenses decreased as a percentage of sales to 16% in 2022 compared to 24% in 2021. The $1,107,136 increase in total operating expenses is primarily attributable to the following: ● Freight charges rose $298,237 due to increased Finished Goods transportation rate increases and fuel surcharges; ● Advertising and Promotion expenses rose $60,840 based on key promotions primarily at club stores; ● Payroll and Related Expenses rose by $363,592 related to the acquisition of T&L Creative Salads management and office salaries, additional accounting staff at MamaMancini’s and severance pay expenses; ● Professional Fees rose $134,288 due to higher Auditing Fees related to the additional complexity of the acquisitions and added third-party accounting and technical expertise to augment staffing shortfalls; and ● Insurance Expenses rose $104,531 to account for the acquisition of T&L Creative Salads and Olive Branch LLC. Other Income (Expenses): Other expenses increased by $155,165 to $127,891 for the quarter ended April 30, 2022 as compared to income of $27,274 during the quarter ended April 30, 2021. For the quarter ended April 30, 2022, other income (expenses) consisted of $124,251 in interest expense on the Company’s financing arrangements and $3,640 in amortization of debt discount. For the three months ended April 30, 2021, other income (expenses) consisted of $(10,430) 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. 1 Liquidity and Capital Resources The following table summarizes total current assets, liabilities and working capital at April 30, 2022 compared to January 31, 2022: April 30, 2022 January 31, 2022 Change Current Assets $ 14,586,983 $ 11,638,317 $ 2,948,666 Current Liabilities $ 10,394,514 $ 8,985,127 $ 1,409,387 Working Capital $ 4,192,469 $ 2,653,190 $ 1,539,279 As of April 30, 2022, we had working capital of $4,192,469 as compared to working capital of $2,653,190 as of January 31, 2022, an increase of $1,539,279. The increase in working capital is primarily attributable to an increase in cash of $70,662, an increase in accounts receivable of $1,370,867 and increase of inventories of $1,277,898 based on robust sales increases, an increase in prepaid expenses of $229,239 and increases in the short term portion of lease payables of $52,312 offset by an increase in accounts payable and accrued liabilities of $1,069,320 and increases in the term loan of $261,635. Net cash used in operating activities for the quarter ended April 30, 2022 was $1,343,013 compared to net cash provided by operating activities for the quarter ended April 30.2021 of $1,434,768. The net income for the quarter ended April 30, 2022 and 2021 was $103,697 and $631,524, respectively. During the three months ended April 30, 2022, net income was affected by adjustments to net income of $445,950 and offset by changes in operating activities which used cash of $1,898,393. During the three months ended April 30, 2021, net income was affected by adjustments to net income of $475,832 and changes in operating activities which provided cash of $327,412. Net cash used in investing activities for the quarter ended April 30, 2022 was $174,007 as compared to $354,394 for the quarter ended April 30, 2021, respectively. For the quarters ended April 30, 2022 and 2021, the cash used in investing activities was to purchase new machinery and equipment. Net cash provided by all financing activities for the quarter ended April 30, 2022 was $1,587,682 as compared to $27,578 used by financing activities for the quarter ended April 30, 2021. During the three months ended April 30, 2022, the Company received net proceeds of $1,775,000 from borrowings pursuant to the line of credit which were offset by payments of the acquisition related term loan and finance lease payments of $129,310 and $58,008, respectively. During the three months ended April 30, 2021, the Company received proceeds of $19,080 from the exercise of options. These cash in-flows were offset by payments of $46,658 paid for finance lease payments. 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 June 16, 2024, 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. Recent Accounting Pronouncements In May 2021, the FASB issued accounting standards update ASU 2021-04, “ Earnings Per Share (Topic 260), Debt— Modifications and Extinguishments (Subtopic 470-50), Compensation—Stock Compensation (Topic 718), and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options ”, to clarify and reduce diversity in an issuer’s accounting for modifications or exchanges of freestanding equity-classified written call options (for example, warrants) that remain equity classified after modification or exchange. The amendments in this ASU are effective for public and nonpublic entities for fiscal years beginning after December 15, 2021, and interim periods with fiscal years beginning after December 15, 2021. Early adoption is permitted, including adoption in an interim period. The Company adopted the new standard on February 1, 2022 and the adoption of the new standard did not have a significant impact on the Company’s condensed consolidated financial statements. 2 In August 2020, the FASB issued ASU No. 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06”), which simplifies an issuer’s accounting for convertible instruments by reducing the number of accounting models that require separate accounting for embedded conversion features. ASU 2020-06 also simplifies the settlement assessment that entities are required to perform to determine whether a contract qualifies for equity classification and makes targeted improvements to the disclosures for convertible instruments and earnings-per-share (EPS) guidance. This update will be effective for the Company’s fiscal years beginning after December 15, 2023, and interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. Entities can elect to adopt the new guidance through either a modified retrospective method of transition or a fully retrospective method of transition. The Company is currently evaluating the impact of the pending adoption of the new standard on its financial statements and intends to adopt the standard as of January 1, 2024. 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 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 3 of our 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. 3 Intangible Assets Software The Company accounts for acquired internal-use software licenses and certain costs within the scope of ASC 350-40, Intangibles - Goodwill and Other - Internal-Use Software as intangible assets. The Company capitalized $87,639 of costs incurred in the quarter ended April 30, 2022 to implement cloud computing arrangements. Acquired internal-use software licenses are amortized over the term of the arrangement on a straight-line basis to the line item within the consolidated statements of operations that reflects the nature of the license. Additionally, the Company evaluates its accounting for fees paid in an agreement to determine whether it includes a license to internal-use software. If the agreement includes a software license, the Company accounts for the software license as an intangible asset. Acquired software licenses are recognized and measured at cost, which includes the present value of the license obligation if the license is to be paid for over time. If the agreement does not include a software license, the Company accounts for the arrangement as a service contract (hosting arrangement) and hosting costs are generally expensed as incurred. Goodwill The Company does not amortize goodwill or indefinite-lived intangible assets. The Company tests goodwill for impairment annually as of April 30 or if an event occurs or circumstances change that indicate that the fair value of the entity, or the reporting unit, may be below its carrying amount (a “triggering event”). Whenever events or circumstances change, entities have the option to first make a qualitative evaluation about the likelihood of goodwill impairment. If impairment is deemed more likely than not, management would perform the two-step goodwill impairment test. Otherwise, the two-step impairment test is not required. In assessing the qualitative factors, the Company assessed relevant events and circumstances that may impact the fair value and the carrying amount of the reporting unit. The identification of the relevant events and circumstances and how these may impact a reporting unit’s fair value or carrying amount involve significant judgements and assumptions. The judgement and assumptions include the identification of macroeconomic conditions, industry and market considerations, overall financial performance, Company specific events and share price trends, an assessment of whether each relevant factor will impact the impairment test positively or negatively, and the magnitude of an such impact. If a quantitative assessment is performed, a reporting unit’s fair value is compared to its carrying value. A reporting unit’s fair value is determined based upon consideration of various valuation methodologies, including the income approach, which utilizes projected future cash flows discounted at rates commensurate with the risks involved and multiples of current and future earnings. If the fair value of a reporting unit is less than its carrying amount, an impairment charge is recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized cannot exceed the total amount of goodwill allocated to that reporting unit. Management evaluates the remaining useful life of an intangible asset that is not being amortized each reporting period to determine whether events and circumstances continue to support an indefinite useful life. If an intangible asset that is not being amortized is subsequently determined to have a finite useful life, it is amortized prospectively over its estimated remaining useful life. Other Intangibles Amortizable intangible assets, including tradenames and trademarks, are amortized on a straight-line basis over 3 years. Customer relationships are amortized on a straight-line basis over 4 to 5 years. 4 Revenue Recognition The Company recognizes revenue in accordance with FASB Topic 606, Revenue from Contracts with Customers (Topic 606) . 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 fulfilment 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. 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. Item 3. Quantitative and Qualitative Disclosures About Market Risk. Smaller reporting companies are not required to provide the information required by this item. 5