Mama's Creations, Inc. 10-Q

Item 1. Financial Statements. MAMA’S CREATIONS, INC. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS October 31, 2023 Page(s) Condensed Consolidated Balance Sheets as of October 31, 2023 (unaudited) and January 31, 2023 F- 2 Condensed Consolidated Statements of Operations for the Three and Nine Months Ended October 31, 2023 and 2022 (unaudited) F- 3 Condensed Consolidated Statements of Changes in Stockholders’ Equity for the Three and Nine Months Ended October 31, 2023 and 2022 (unaudited) F- 4 Condensed Consolidated Statements of Cash Flows for the Nine Months Ended October 31, 2023 and 2022 (unaudited) F- 8 Notes to Condensed Consolidated Financial Statements (unaudited) F- 9 F-1 Table of Contents Mama’s Creations, Inc. Condensed Consolidated Balance Sheets (In thousands, except share and per share data) October 31, 2023 January 31, 2023 (Unaudited) Assets: Current Assets: Cash and cash equivalents $ 5,625 $ 4,378 Accounts receivable, net 11,141 6,832 Inventories, net 2,572 3,636 Prepaid expenses and other current assets 1,000 828 Total current assets 20,338 15,674 Property, plant, and equipment, net 4,624 3,423 Intangible assets, net 5,367 1,503 Goodwill 8,633 8,633 Operating lease right of use assets, net 3,016 3,237 Deferred tax asset 419 718 Equity method investment - 1,343 Deposits 95 54 Total Assets $ 42,492 $ 34,585 Liabilities and Stockholders’ Equity: Liabilities: Current Liabilities: Accounts payable and accrued expenses $ 10,084 $ 9,063 Term loan, net of unamortized debt disco unt of $ 43 and $ 60 , respectively 1,508 1,492 Operating lease liabilities 421 392 Finance leases payable 378 182 Promissory notes – related parties 1,950 750 Total current liabilities 14,341 11,879 Line of credit - 890 Operating lease liabilities – net of current 2,631 2,897 Finance leases payable – net of current 1,175 249 Promissory notes – related parties, net of current 3,000 1,500 Term loan – net of current 3,391 4,655 Total long-term liabilities 10,197 10,191 Total Liabilities 24,538 22,070 Commitments and contingencies (Notes 10 and 11) Stockholders’ Equity: Series A Preferred stock, $ 0.00001 par value; 120,000 shares authorized; 23,400 issued as of October 31, 2023 and January 31, 2023, respectively, 0 shares outstanding as of October 31, 2023 and January 31, 2023, respectively - - Series B Preferred stock, $ 0.00001 par value; 200,000 shares authorized; 0 and 54,600 issued and outstanding as of October 31, 2023 and January 31, 2023 respectively - - Preferred stock, $ 0.00001 par value; 19,680,000 shares authorized; no shares issued and outstanding - - Common stock, $ 0.00001 par value; 250,000,000 shares authorized; 37,368,387 and 36,317,857 shares issued as of October 31, 2023 and January 31, 2023, respectively, 37,138,387 and 36,087,857 shares outstanding as of October 31, 2023 and January 31, 2023, respectively - - Additional paid in capital 23,059 22,724 Accumulated deficit ( 4,955 ) ( 10,059 ) Less: Treasury stock, 230,000 shares at cost ( 150 ) ( 150 ) Total Stockholders’ Equity 17,954 12,515 Total Liabilities and Stockholders’ Equity $ 42,492 $ 34,585 See accompanying notes to the condensed consolidated financial statements. F-2 Table of Contents Mama’s Creations, Inc. Condensed Consolidated Statements of Operations (Unaudited) (in thousands, except per share data) For the Three Months Ended October 31, For the Nine Months Ended October 31, 2023 2022 2023 2022 Net sales $ 28,648 $ 25,694 $ 76,559 $ 70,371 Costs of sales 20,013 19,130 54,047 57,385 Gross profit 8,635 6,564 22,512 12,986 Operating expenses: Research and development 124 24 290 93 Selling, general and administrative expenses 5,804 5,041 15,297 11,964 Total operating expenses 5,928 5,065 15,587 12,057 Income from operations 2,707 1,499 6,925 929 Other income (expenses) Interest expense, net ( 124 ) ( 184 ) ( 483 ) ( 447 ) Amortization of debt discount ( 6 ) ( 3 ) ( 17 ) ( 10 ) Other income — — 27 3 Total other expenses ( 130 ) ( 187 ) ( 473 ) ( 454 ) Net income before income tax provision and income from equity method investment 2,577 1,312 6,452 475 Income from equity method investment — 72 223 90 Income tax (provision) ( 568 ) ( 286 ) ( 1,522 ) ( 106 ) Net income 2,009 1,098 5,153 459 Less: series B preferred dividends — ( 12 ) ( 49 ) ( 12 ) Net Income available to common stockholders 2,009 1,086 5,104 447 Net income per common share – basic $ 0.05 $ 0.03 $ 0.14 $ 0.01 – diluted $ 0.05 $ 0.03 $ 0.14 $ 0.01 Weighted average common shares outstanding – basic 37,121 36,318 36,642 36,020 – diluted 37,646 36,615 37,088 36,349 See accompanying notes to the condensed consolidated financial statements. F-3 Table of Contents Mama’s Creations, Inc. Condensed Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) (in thousands) For the Period from August 1, 2023 through October 31, 2023 Series A Preferred Stock Series B Preferred Stock Common Stock Treasury Stock Additional Paid In Accumulated Stockholders’ Shares Amount Shares Amount Shares Amount Shares Amount Capital Deficit Equity Balance, August 1, 2023 - $ - - $ - 37,343 $ - ( 230 ) $ ( 150 ) $ 22,912 $ ( 6,964 ) $ 15,798 Stock based compensation - - - - - - - - 110 - 110 Stock issued for the exercise of options and warrants - - - - 25 - - - 37 - 37 Net income - - - - - - - - - 2,009 2,009 Balance, October 31, 2023 - $ - - $ - 37,368 $ - ( 230 ) $ ( 150 ) $ 23,059 $ ( 4,955 ) $ 17,954 F-4 Table of Contents For the Period from August 1, 2022 through October 31, 2022 Series A Preferred Stock Series B Preferred Stock Common Stock Treasury Stock Additional Paid In Accumulated Stockholders’ Shares Amount Shares Amount Shares Amount Shares Amount Capital Deficit Equity Balance, August 1, 2022 - $ - - $ - 36,318 $ — ( 230 ) $ ( 150 ) $ 21,326 $ ( 12,968 ) $ 8,208 Stock options issued for services - - - - - - - - 16 - 16 Common stock issued for services - - - - - - - - 8 - 8 Issuance of Preferred B Shares, net of issuance costs - - 47 - - - - - 1,123 - 1,123 Series B Preferred dividend - - - - - - - - - ( 12 ) ( 12 ) Net income - - - - - - - - - 1,098 1,098 Balance, October 31, 2022 - $ - 47 $ - 36,318 $ — ( 230 ) $ ( 150 ) $ 22,473 $ ( 11,882 ) $ 10,441 F-5 Table of Contents For the Period from February 1, 2023 through October 31, 2023 Series A Preferred Stock Series B Preferred Stock Common Stock Treasury Stock Additional Paid In Accumulated Stockholders’ Shares Amount Shares Amount Shares Amount Shares Amount Capital Deficit Equity Balance, February 1, 2023 - $ - 55 $ - 36,318 $ — ( 230 ) $ ( 150 ) $ 22,724 $ ( 10,059 ) $ 12,515 Stock based compensation - - - - 19 - - - 270 - 270 Stock issued for the exercise of options and warrants - - - - 212 - - - 65 - 65 Conversion of series B preferred stock to common stock - - ( 55 ) - 819 - - - - - - Series B Preferred dividend - - - - - - - - - ( 49 ) ( 49 ) Net income - - - - - - - - - 5,153 5,153 Balance, October 31, 2023 - $ - - $ - 37,368 $ - ( 230 ) $ ( 150 ) $ 23,059 $ ( 4,955 ) $ 17,954 F-6 Table of Contents For the Period from February 1, 2022 through October 31, 2022 Series A Preferred Stock Series B Preferred Stock Common Stock Treasury Stock Additional Paid In Accumulated Stockholders’ Shares Amount Shares Amount Shares Amount Shares Amount Capital Deficit Equity Balance, February 1, 2022 - $ - - $ - 35,759 $ - ( 230 ) $ ( 150 ) $ 20,588 $ ( 12,329 ) $ 8,109 Stock options issued for services - - - - - - - - 28 - 28 Common stock issued for services - - - - - - - - 8 - 8 Stock issued for the exercise of options - - - - 57 - - - 26 - 26 Stock issued for the acquisition of equity investment in Chef Inspirational - - - - 502 - - - 700 - 700 Issuance of Preferred B Shares, net of issuance costs - - 47 - - - - - 1,123 - 1,123 Series B Preferred dividend - - - - - - - - - ( 12 ) ( 12 ) Net Income - - - - - - - - - 459 459 Balance, October 31, 2022 - $ - 47 $ - 36,318 $ — ( 230 ) $ ( 150 ) $ 22,473 $ ( 11,882 ) $ 10,441 See accompanying notes to the condensed consolidated financial statements. F-7 Table of Contents Mama’s Creations, Inc. Condensed Consolidated Statements of Cash Flows (Unaudited) (in thousands) For the Nine Months Ended October 31, 2023 2022 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 5,153 $ 459 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 767 679 Amortization of debt discount 17 10 Amortization of right of use assets 221 273 Amortization of intangibles 692 367 Stock-based compensation 220 36 Allowance for obsolete inventory 78 - Change in deferred tax asset 299 98 Income from equity method investment ( 223 ) ( 90 ) Changes in operating assets and liabilities: Allowance for doubtful accounts 140 - Accounts receivable ( 1,170 ) 735 Inventories 986 ( 673 ) Prepaid expenses and other current assets ( 179 ) ( 111 ) Security deposits ( 35 ) - Accounts payable and accrued expenses ( 1,851 ) 1,663 Operating lease liability ( 237 ) ( 261 ) Net Cash Provided by Operating Activities 4,878 3,185 CASH FLOWS FROM INVESTING ACTIVITIES: Cash paid for fixed assets ( 671 ) ( 508 ) Cash paid for investment in Chef Inspirational Foods, LLC, net ( 646 ) ( 500 ) Net Cash (Used in) Investing Activities ( 1,317 ) ( 1,008 ) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds in advance of preferred stock offering - 185 Proceeds from preferred stock offering - 1,180 Payment of stock offering costs - ( 57 ) Repayment of term loan ( 1,265 ) ( 905 ) (Repayment) borrowings of line of credit, net ( 890 ) 225 Repayment of finance lease obligations ( 175 ) ( 191 ) Payment of Series B Preferred dividends ( 49 ) ( 11 ) Proceeds from exercise of options 65 26 Net Cash (Used in) Provided by Financing Activities ( 2,314 ) 452 Net Increase in Cash 1,247 2,629 Cash and cash equivalents at beginning of period 4,378 851 Cash and cash equivalents at end of period $ 5,625 $ 3,480 SUPPLEMENTARY CASH FLOW INFORMATION: Cash Paid During the Period for: Income taxes $ 112 $ 9 Interest $ 477 $ 369 SUPPLEMENTARY DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Conversion of series b preferred stock to common stock $ — $ - Finance lease asset additions $ 1,297 $ 72 Related party debt incurred for purchase of Chef Inspirational Foods, LLC $ 2,700 $ - Non-cash consideration paid in common stock for equity investment in Chef Inspirational $ — $ 700 Preferred B accrued dividends $ — $ 1 Settlement of liability in common stock $ 50 $ - See accompanying notes to the condensed consolidated financial statements. F-8 Table of Contents Mama’s Creations, Inc. Notes to Condensed Consolidated Financial Statements October 31, 2023 Note 1 - Nature of Operations and Basis of Presentation Nature of Operations Mama’s Creations, Inc. (together with its subsidiaries, the “Company”), was organized on July 22, 2009 as a Nevada corporation. The Company has a year-end of January 31. Our subsidiary, MamaMancini’s Inc., a Delaware Corporation (“Mamas”) is a marketer, manufacturer and distributor of beef meatballs with sauce, turkey meatballs with sauce, beef meatloaf, sausage & peppers, chicken parmesan and other similar meats and sauces. In addition, the Company continues to diversify its product line by introducing new products such as ready to serve meals, single-size pasta bowls, bulk deli, and packaged refrigerated protein products. Mamas products were submitted to the United States Department of Agriculture (the “USDA”) and approved as all natural. The USDA defines all natural as a product that contains no artificial ingredients, coloring ingredients or chemical preservatives and is minimally processed. On December 29, 2021, the Company made two acquisitions which expanded the Company’s core product lines, occasions, and access to specific cohorts and markets. T&L Acquisition Corp, dba T&L Creative Salads, Inc. (“T&L”) and dba Olive Branch, LLC (“Olive Branch”), are related premier gourmet food manufacturers based in New York. T&L offers a full line of foods for retail food chains and club stores, delis, bagel stores, caterers and provision distributors. T&L uses high-quality meats, seafood and vegetables, prepared to meet the standards set forth by the USDA and the Food and Drug Administration (“FDA”). Olive Branch offers a full line of olives, olive mixes, and savory products to retail food chains and club stores, delis, bagel stores, caterers and provision distributors, primarily in pre-packaged containers. On June 28, 2022, the Company acquired a 24 % minority interest in Chef Inspirational Foods, LLC (“CIF”), a leading developer, innovator, marketer and sales company selling prepared foods, for an investment of $ 1.2 million. The investment consisted of $ 500 thousand in cash and $ 700 thousand in the Company’s common stock. The acquisition of the interest in CIF was accounted for under the equity method of accounting for investments up until the Company acquired the remaining interest of CIF (the “CIF Acquisition”). On June 28, 2023, the Company completed the acquisition of the remaining 76 % of CIF, in accordance with the terms of the Membership Interest Purchase Agreement dated June 28, 2023 by and among the Company, Siegel Suffolk Family, LLC, and R&I Loeb Family, LLC (the “Sellers”). Per the terms of the Membership Interest Purchase Agreement the purchase price was approximately $ 3.7 million, including approximately $ 1 million in cash at closing and $ 2.7 million in a promissory note. The promissory note requires a principal payment of $ 1.2 million in cash on the first anniversary of the closing date, and a payment of $ 1.5 million in common stock of the Company on the second anniversary of the closing date. The following presents the unaudited results of operations for the period February 1, 2023 through June 28, 2023 of CIF (in thousands). For the Period February 1, 2023 through June 28, 2023 Revenues $ 13,721 Net income $ 931 On July 31, 2023, MamaMancini’s Holdings, Inc. filed an amendment to the Articles of Incorporation with the Secretary of State of the State of Nevada to change the Company’s name from “MamaMancini’s Holdings, Inc.” to “Mama’s Creations, Inc.” (the “Name Change”). The Name Change, which was approved by the Company’s stockholders at its annual meeting on July 31, 2023, did not alter the voting powers or relative rights of the Company Common Stock, reflects the evolution of the Company from its origins as a home style, old world Italian food company to a broader provider of all-natural specialty prepared refrigerated foods for sale in retailers around the country. On July 31, 2023, the Company also amended and restated its Amended and Restated Bylaws, solely to reflect the name change (as amended, the “Second Amended and Restated Bylaws”). F-9 Table of Contents Note 2 - Summary of Significant Accounting Policies Basis of Presentation The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X of the SEC for interim financial information. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, the accompanying Condensed Consolidated Financial Statements of the Company and its subsidiaries, which are unaudited, include all normal and recurring adjustments considered necessary to present fairly the Company’s financial position as of October 31, 2023, and the results of its operations and its cash flows for the periods presented. The unaudited Condensed Consolidated Financial Statements herein should be read together with the historical Consolidated Financial Statements of the Company for the years ended January 31, 2023 and 2022 included in our 2023 Form 10-K. Operating results for the three and nine months ended October 31, 2023 are not necessarily indicative of the results that may be expected for the year ending January 31, 2024. Principles of Consolidation The Condensed Consolidated Financial Statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany balances have been eliminated in consolidation. Use of Estimates The preparation of Condensed Consolidated Financial Statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the Condensed Consolidated Financial Statements and accompanying notes. The Company bases its estimates on historical experience and other assumptions believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Such estimates and assumptions impact, among others, the following: allowance for doubtful accounts, the fair value of stock-based payments, valuation of the acquisition of the remaining interest of CIF (which was accounted for as an asset acquisition as substantially all of the fair value is concentrated in customer relationships), inventory reserves, and estimates for unrealized returns, discounts, and other allowances that are netted against revenue. 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 Condensed 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. Risks and Uncertainties The Company operates in an industry that is subject to intense competition and changes in consumer demand. The Company’s operations are subject to significant risk and uncertainties including financial and operational risks including the potential risk of business failure. The Company has experienced, and in the future expects to continue to experience variability in sales and earnings. The factors expected to contribute to this variability include, among others, (i) the cyclical nature of the grocery industry, (ii) general economic conditions in the various local markets in which the Company competes, including a potential general downturn in the economy, and (iii) the volatility of prices pertaining to food and beverages in connection with the Company’s distribution of the product. These factors, among others, make it difficult to project the Company’s operating results on a consistent basis. Cash and Cash Equivalents The Company considers all highly liquid instruments purchased with a maturity of three months or less to be cash equivalents. The Company minimizes its credit risk associated with cash by periodically evaluating the credit quality of its primary financial institution. The balance at times may exceed federally insured limits. Accounts Receivable and Allowance for Doubtful Accounts Accounts receivable are stated at the amount management expects to collect from outstanding balances. The Company generally does not require collateral to support customer receivables. The Company provides an allowance for doubtful F-10 Table of Contents accounts based upon a review of the outstanding accounts receivable, historical collection information and existing economic conditions. The Company determines if receivables are past due based on days outstanding, and amounts are written off when determined to be uncollectible by management. As of October 31, 2023 and January 31, 2023, the reserve for uncollectible accounts was approximately $ 93 thousand a nd $ 233 thousand, respectively. During the three and nine months ended October 31, 2023 the Company wrote off approximately $ 0 and $ 140 thousand of uncollectible accounts respectively. Inventories The Company values its inventory at the lower of cost or net realizable value (“NRV”) and include direct material, direct labor, warehousing, and overhead costs. NRV is defined as the estimated selling prices less the costs of completion, disposal, and transportation. The cost of inventory is determined on the first-in, first-out basis. Inventories have been reduced by an allowance for excess, obsolete and unsaleable inventories. The allowance is an estimate based on management’s review of inventories on hand compared to estimated future usage and sales. The reserve for obsolescence as of October 31, 2023 and January 31, 2023 was approximately $ 110 thousand and $ 32 thousand respectively. Inventories by major category are as follows (in thousands): October 31, 2023 January 31, 2023 Raw materials and packaging $ 1,454 $ 1,883 Work in process 98 99 Finished goods 1,020 1,654 Total $ 2,572 $ 3,636 Property, Plant and Equipment Property, plant, and equipment are recorded at cost net of depreciation. Depreciation expense is computed using straight-line methods over the estimated useful lives. Asset lives for financial statement reporting of depreciation are: Machinery and equipment 2 - 7 years Furniture and fixtures 3 - 5 years Leasehold improvements * (*) Amortized on a straight-line basis over the remaining lease term at the time the asset was placed in service or their estimated useful lives, whichever period is shorter. Upon sale or retirement of property and equipment, the related cost and accumulated depreciation are removed from the accounts and any gain or loss is reflected in the consolidated statements of operations. Goodwill and Other Intangible Assets Goodwill Goodwill represents the excess of the purchase price over the fair values of the underlying net assets of an acquired business. The Company tests goodwill for impairment on an annual basis during the fourth quarter of its fiscal year, or immediately if conditions indicate that such impairment could exist. The Company evaluates qualitative factors to determine if it is more likely than not that the fair value is less than its carrying value and whether it is necessary to perform goodwill impairment process. As of October 31, 2023 and January 31, 2023, there were no impairment losses recognized for goodwill. F-11 Table of Contents Other Intangible Assets Other intangible assets consist of trademarks, trade names and customer relationships. Intangible asset lives for financial statement reporting of amortization are: Tradenames and trademarks 3 years Customer relationships 4 – 5 years Fair Value of Financial Instruments The fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation. The carrying amount of the Company’s short-term financial instruments approximates fair value due to the relatively short period to maturity for these instruments. Research and Development Research and development is expensed as incurred. Research and development expenses for the three months ended October 31, 2023 and 2022 were approximately $ 124 thousand and $ 24 thousand, respectively. Research and development expenses for the nine months ended October 31, 2023 and 2022 were approximately $ 290 thousand and $ 93 thousand, respectively. Revenue Recognition The Company recognizes revenue in accordance with FASB Topic 606, Revenue from Contracts with Customers (Topic 606) . The Company’s sales are generated from the sale of finished products to customers, which contains 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 received and accepted by 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. The Company elected to treat shipping and handling activities as fulfillment activities, and the related costs are recorded as selling expenses in selling, general and administrative expenses on the Condensed Consolidated Statements of Operations. The Company promotes its products with consumer incentives and trade promotions. These programs include discounts, slotting fees, coupons, rebates, in-store display incentives and volume-based incentives. Customer trade promotion and consumer incentive activities are recorded as a reduction to the transaction price based on amounts estimated as being due to customers and consumers at the end of a period. The Company derives these estimates principally on historical utilization and redemption rates. The Company does not receive a distinct service in relation to the consumer incentives and trade promotions and as a result, these incentives and promotions are accounted for as a reduction of the transaction price. Payment terms in the Company’s invoices are based on the billing schedule established in contracts and purchase orders with customers. The Company recognizes the related trade receivable when the goods are received by the customer. Expenses such as slotting fees, sales discounts, and allowances are accounted for as a direct reduction of revenues as follows (in thousands): For the Three Months Ended October 31, 2023 October 31, 2022 Gross Sales $ 29,294 $ 26,045 Less: Slotting, Discounts, Allowances 646 351 Net Sales $ 28,648 $ 25,694 F-12 Table of Contents For the Nine Months Ended October 31, 2023 October 31, 2022 Gross Sales $ 78,309 $ 72,025 Less: Slotting, Discounts, Allowances 1,750 1,654 Net Sales $ 76,559 $ 70,371 Disaggregation of Revenue from Contracts with Customers. The following table disaggregates gross revenue by significant geographic area for the three months ended October 31, 2023 and 2022 (in thousands): For the Three Months Ended October 31, 2023 October 31, 2022 Northeast $ 9,317 $ 10,327 Southeast 8,225 7,397 Midwest 6,116 3,449 West 5,636 4,872 Total gross sales $ 29,294 $ 26,045 The following table disaggregates gross revenue by significant geographic area for the nine months ended October 31, 2023 and 2022 (in thousands): For the Nine Months Ended October 31, 2023 October 31, 2022 Northeast $ 27,267 $ 29,452 Southeast 22,113 19,550 Midwest 14,371 9,671 West 14,558 13,352 Total gross sales $ 78,309 $ 72,025 Cost of Sales Cost of sales represents costs directly related to the production and manufacturing of the Company’s products. Costs include production costs, freight-in, packaging, and print production costs. Advertising Costs incurred for advertising for the Company are charged to selling, general and administrative expenses as incurred. Advertising expenses for the three months ended October 31, 2023 and 2022 were approximately $ 375 thousand and $ 100 thousand respectively. Advertising expenses for the nine months ended October 31, 2023 and 2022 were approximately $ 678 thousand and $ 401 thousand respectively. 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 recognizes all forms of stock-based payments, including stock option grants, warrants and restricted stock grants, at their fair value on the grant date. Stock-based payments, excluding restricted stock, are valued using a Black-Scholes option pricing model. Grants of stock-based payment awards issued to non-employees for services rendered have been recorded at the fair value of the stock-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 F-13 Table of Contents compensation expenses are included in cost of goods sold, selling general and administrative expenses, or research and development, depending on the nature of the services provided, in the Condensed Consolidated Statements of Operations. Stock-based payments issued to placement agents are classified as a direct cost of a stock offering and are recorded as a reduction of additional paid in capital. Forfeiture of stock-based payment awards are recorded in the period in which they occur. For the Nine months ended October 31, 2023, the Company issued 19,960 shares valued at approximately $ 50 thousand to certain employees as compensation. For the nine months ended October 31, 2023 and 2022, when computing fair value of stock-based payments, the Company has considered the following variables: October 31, 2023 October 31, 2022 Risk-free interest rate N/A 2.77 % Expected life of grants N/A 6.5 years Expected volatility of underlying stock N/A 85.74 % Dividends N/A 0 % Earnings Per Share Basic net income per share attributable to common stockholders excludes dilution and is computed by dividing net income attributable to common stockholders during the period by the weighted average number of common shares outstanding during the period. Diluted net income per share reflects potential dilution and is computed by dividing net income attributable to common stockholders by the weighted average number of common shares outstanding during the period, which is increased by the number of additional common shares that would have been outstanding if the potential common shares had been issued. However, if the effect of any additional securities are anti-dilutive (i.e., resulting in a higher net income per share or lower net loss per share), they are excluded from the dilutive net income computation. The dilutive effect of stock options, warrants, and restricted stock is calculated using the treasury-stock method and the dilutive effect of the Series B Preferred Stock is calculated using the if-converted method. F-14 Table of Contents The following table provides a reconciliation of the numerator and denominator used in computing basic and diluted net income attributable to common stockholders per common share (in thousands, besides per share data). For the Three Months Ended October 31, 2023 October 31, 2022 Numerator: Net income attributable to common stockholders $ 2,009 1,086 Effect of dilutive securities: — — Diluted net income $ 2,009 $ 1,086 Denominator: Weighted average common shares outstanding – basic 37,121 36,318 Dilutive securities (a): Restricted stock 447 0 Options 78 297 Weighted average common shares outstanding and assumed conversion – diluted 37,646 36,615 Basic net income per common share $ 0.05 $ 0.03 Diluted net income per common share $ 0.05 $ 0.03 (a) – Anti-dilutive securities excluded: Series B Preferred shares - 708 Options - 30 Warrants - 12 F-15 Table of Contents For the Nine Months Ended October 31, 2023 October 31, 2022 Numerator: Net income attributable to common stockholders $ 5,104 447 Effect of dilutive securities: 49 — Diluted net income $ 5,153 $ 447 Denominator: Weighted average common shares outstanding – basic 36,642 36,020 Dilutive securities (a): Restricted stock 384 - Options 62 329 Weighted average common shares outstanding and assumed conversion – diluted 37,088 36,349 Basic net income per common share $ 0.14 $ 0.01 Diluted net income per common share $ 0.14 $ 0.01 (a) – Anti-dilutive securities excluded: - - Series B Preferred shares - 708 Options - 30 Warrants - 12 Income Taxes Income taxes are provided in accordance with ASC 740, “ Accounting for Income Taxes ”. A deferred tax asset or liability is recorded for all temporary differences between financial and tax reporting and net operating loss carryforwards. Deferred tax expense results from the net change during the period of deferred tax assets and liabilities. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets are adjusted for the effects of changes in tax laws and rates on the date of enactment. As of October 31, 2023 and January 31, 2023, the Company recognized a deferred tax asset of $ 419 thousand and $ 718 thousand, respectively, which is included in other long-term assets on the condensed consolidated balance sheets. The Company regularly evaluates the need for a valuation allowance related to the deferred tax asset. Recent Accounting Pronouncements 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 adoption of the new standard is not expected to have a significant impact on the Company’s consolidated financial statements. F-16 Table of Contents Management does not believe that any recently issued, but not yet effective accounting pronouncements, when adopted, will have a material effect on the accompanying condensed consolidated financial statements. Note 3 – Property Plant and Equipment: Property plant and equipment on October 31, 2023 and January 31, 2023 are as follows (in thousands): October 31, 2023 January 31, 2023 Machinery and Equipment $ 4,383 $ 5,387 Furniture and Fixtures 252 285 Leasehold Improvements 2,924 3,480 7,559 9,152 Less: Accumulated Depreciation 2,935 5,729 Total $ 4,624 $ 3,423 Depreciation expense for the three months ended October 31, 2023 and 2022 amounted to approximately $ 255 thousand and $ 278 thousand, respectively. Depreciation expense for the nine months ended October 31, 2023 and 2022 amounted to approximately $ 767 thousand and $ 679 thousand, respectively. Note 4 – Acquisition of CIF As described in Note 1, on June 28, 2023, the Company completed the CIF Acquisition. The acquisition of the remaining interest in CIF was accounted for as an asset acquisition as substantially all of the fair value was concentrated in customer relationships. CIF’s assets (except for cash and working capital) were measured and recognized as an allocation of the transaction price based on their relative fair values as of the transaction date. The fair value of total consideration was approximately $ 5.2 million. The following table is a summary of the purchase price calculation (in thousands). Cash transferred upon acquisition $ 950 Related party debt issued upon acquisition 2,700 Sub-total 3,650 Carrying value of the Company’s equity method investment in CIF 1,567 Total purchase price 5,217 The allocation of the purchase price was as follows (amounts in thousands): Cash and cash equivalents 304 Net working capital (excluding cash) 357 Customer relationships 4,556 Net assets acquired $ 5,217 Note 5 – Intangible assets, net Intangible assets, net consisted of the following at October 31, 2023 (dollars in thousands): Gross Carrying Amount Accumulated Amortization Net Carrying Amount Weighted Average Remaining Life (years) Software $ 88 $ ( 88 ) $ - - Customer relationships 6,418 ( 1,082 ) 5,336 3.54 Tradename and trademarks 79 ( 48 ) 31 1.16 $ 6,585 $ ( 1,218 ) $ 5,367 F-17 Table of Contents Intangibles, net consisted of the following at January 31, 2023 (dollars in thousands): Gross Carrying Amount Accumulated Amortization Net Carrying Amount Weighted Average Remaining Life Software $ 88 $ ( 88 ) $ - - Customer relationships 1,862 ( 409 ) 1,453 3.41 Tradename and trademarks 79 ( 29 ) 50 1.91 $ 2,029 $ ( 526 ) $ 1,503 As described in Note 1 and 4, on June 28, 2023, the Company completed the CIF Acquisition which resulted in the recognition of Customer relationships in the amount of approximately $ 4.6 million. Amortization expense for the three and nine months ended October 31, 2023 was approximately $ 388 thousand and $ 692 thousand, respectively. Amortization expense for the three and nine months ended October 31, 2022 was approximately $ 137 thousand and $ 367 thousand, respectively. We expect the estimated aggregate amortization expense for each of the five succeeding fiscal years to be as follows (in thousands): 2024 (Remaining) $ 382 2025 1,539 2026 1,513 2027 1,467 2028 466 Total $ 5,367 Note 6 – Related Party Transactions Promissory Note – Related Party Upon consummation of the acquisition of T&L and Olive Branch on December 29, 2021, the Company executed a $ 3 million promissory note with the sellers. The promissory note requires annual principal payments of $ 750 thousand payable on each anniversary of the closing, together with accrued interest at a rate of three and one-half ( 3.5 %) per annum. As of October 31, 2023 and January 31, 2023, the outstanding balance under the note was $ 2.25 million, respectively, of which $ 750 thousand is recorded as Promissory notes – related parties and $ 1.5 million is recorded as Promissory notes – related parties, net of current in the Company’s Condensed Consolidated Balance Sheets. For the three and nine months ended October 31, 2023 interest expense for this note was approximately $ 20 thousand and $ 60 thousand respectively. For the three and nine months ended October 31, 2022 interest expense for this note was approximately $ 26 thousand and $ 79 thousand respectively. As of October 31, 2023 and January 31, 2023, accrued interest was approximately $ 67 thousand and $ 7 thousand, respectively. As part of the purchase price of the remaining interest in CIF, the Company agreed to pay $ 600 thousand to each Seller in cash by bank check(s) or wire transfer(s), without interest, on the first anniversary of the closing date and $ 750 thousand shall be paid by the Company to each seller in common stock of the Company, without interest, on the second anniversary of the Closing Date. As of October 31, 2023 $ 1.2 million is recorded as Promissory notes – related parties and $ 1.5 million is recorded as Promissory notes – related parties, net of current in the Company’s Condensed Consolidated Balance Sheet. Lease – Related Party The Company leases a fully contained facility in Farmingdale, NY from 148 Allen Blvd LLC for production and distribution of T&L Creative Salads and Olive Branch products. 148 Allen Blvd LLC is owned by Anthony Morello, Jr., President of T&L and various individuals related to Mr. Morello. This lease term is through November 30, 2031 with the option to extend the lease for two additional ten-year terms with base rent of approximately $ 20 thousand per month through December 31, 2026, increasing after that date to approximately $ 24 thousand through the end of the initial lease term. The exercise of optional renewal is uncertain and therefore excluded from the calculation of the right of use asset. F-18 Table of Contents Rent expense and other ancillary charges pursuant to the lease for the three and nine months ended October 31, 2023 was $ 96 thousand and $ 267 thousand, respectively. Rent expense and other ancillary charges pursuant to the lease for the three and nine months ended October 31, 2022 was approximately $ 66 thousand and $ 197 thousand, respectively. Chef Inspirational Foods, LLC – Related Party As noted above in Note 1, the Company owned a 24 % minority interest in CIF (until June 28, 2023). For the period from February 1, 2023 to June 28, 2023, the Company recorded sales of approximately $ 10.89 million with CIF. For the period from February 1, 2022 to October 31, 2022, the Company recorded sales of approximately $ 5.4 million with CIF. For the nine months ended October 31, 2023 and 2022 the company recorded commission expense of approximately $ 175 thousand and $ 81 thousand, respectively. As of January 31, 2023, the Company had an account receivable balance with CIF of approximately $ 1.45 million. On June 28, 2023 the Company acquired the remaining interest in CIF (refer to Note 1 and 4). Note 7 – Loan and Security Agreements M&T Bank The Company has a working capital line with M&T Bank (the “Credit Agreement”) with total available borrowings of $ 5.5 million. On July 18, 2023 the Company extended the maturity of the working capital line from June 30, 2024 to October 31, 2025. Interest is payable on the unpaid principal amount of the Loan at a variable rate per annum based on the Company’s Senior Funded Debt/EBITDA Ratio (as defined i n the Credit Agreement) as of the date of any advance under the Credit Agreement as follows: if the Senior Funded Debt/EBITDA ratio is: (i) greater than 2.25 , 3.87 percentage point(s) above one-day (i.e., overnight) SOFR (as defined); (II) greater than 1.50 but less than or equal to 2.25 , 3.37 percentage points above one-day SOFR; or (iii) 1.50 or less, 2.87 percentage points above one-day SOFR. In all events set forth at subsections (i) through (iii) in the preceding sentence, if SOFR shall at any time be less than 0.25%, one-day SOFR shall be deemed to be 0.25% and the foregoing margins shall be applied to the SOFR Index Floor. Th e Credit Agreement is secured by a first priority security interest in all of the Company’s business assets and is further subject to various affirmative and negative financial covenants. The Company was in compliance with the covenants as of October 31, 2023 and January 31, 2023. Advances under the line of credit are limited to eighty percent ( 80 %) of eligible accounts receivable (which is subject to an agreed limitation and is further subject to certain asset concentration provisions) and fifty percent ( 50 %) of eligible inventory (which is subject to an agreed dollar limitation). All advances under the line of credit are due upon maturity. Th e outstanding balance on the line of credit was $ 0 and $ 890 thousand as of October 31, 2023 and January 31, 2023, respectively. During the three months ended October 31, 2023 and 2022, the Company incurred interest of approximately $ 1 thousand and $ 26 thousand, respectively, pursuant to borrowings under the Credit Agreement. During the nine months ended October 31, 2023 and 2022, the Company incurred interest of approximately $ 47 thousand and $ 47 thousand, respectively, pursuant to borrowings under the Credit Agreement. On December 29, 2021, the Company entered into a Multiple Disbursement Term Loan with M&T Bank, which was amended and restated on October 26, 2022, for the original principal amount of $ 7.5 million payable in equal monthly principal installments over a 60-month amortization period (the “Term Loan Agreement”). The maturity date of the Term Loan Agreement is January 17, 2027. Interest is payable on the unpaid principal under the Term Loan Agreement at a variable rate per annum based on the Company’s Senior Funded Debt/EBITDA Ratio (as defined in the Term Loan Agreement) as of the date of any advance under the Term Loan Agreement as follows: if the Senior Funded Debt/EBITDA ratio is: (i) greater than 2.25 , 4.12 percentage point(s) above the Variable Loan Rate (as defined in the agreement); (ii) greater than 1.50 but less than or equal to 2.25 , 3.62 percentage points above Variable Loan Rate; or (iii) less than or equal to 1.50 , 3.12 percentage points above Variable Loan Rate. In all events set forth at subsections (i) through (iii) in the preceding sentence, if SOFR shall at any time be less than 0.25% , one-day SOFR shall be deemed to be 0.00% and the foregoing margins shall be applied to the Variable Loan Rates. All disbursements available under the Term Loan Agreement have been previously made. As of October 31, 2023, the outstanding balance and unamortized discount of the Term Loan Agreement was approximately $ 4.9 million and $ 43 thousand, respectively. As of January 31, 2023, the outstanding balance and unamortized discount of the Acquisition Note was approximately $ 6.2 million and $ 60 thousand, respectively. During the three and nine months ended October 31, 2023, the Company incurred interest of approximately $ 112 thousand and $ 350 thousand for the Acquisition Note, respectively. During the three and nine months ended October 31, 2022, the Company incurred interest of approximately $ 114 thousand and $ 234 thousand for the Acquisition Note, respectively. F-19 Table of Contents Note 8 – Concentrations Revenues For the nine months ended October 31, 2023, the Company’s revenue was concentrated in three customers that accounted for approximately 22 %, 14 %, and 11 % of gross revenue, respectively. For the nine months ended October 31, 2022, the Company’s revenue was concentrated in three customers that accounted for approximately 26 %, 13 %, and 10 % respectively, of gross revenue. For the three months ended October 31, 2023, the Company’s revenue was concentrated in two customers that accounted for approximately 39 % and 12 %, of gross revenue, respectively. For the three months ended October 31, 2022, the Company’s revenue was concentrated in two customers that accounted for approximately 28 % and 13 %, respectively, of gross revenue. Receivables As of October 31, 2023 three customers represented approximately 40 %, 11 %, and 10 %, of the total gross outstanding receivables. As of January 31, 2023, three customers represented approximately 20 %, 15 % and 11 %, of total gross outstanding receivables, respectively. Note 9 – Stockholders’ Equity Preferred Stock and Series A Preferred Stock The Company is authorized to issue 20 million shares of Preferred Stock, $ 0.00001 par value per share. The Company has designated 120 thousand shares of Preferred Stock as Series A Convertible Preferred stock. As of October 31, 2023 and January 31, 2023, no shares of Series A Convertible Preferred Stock are outstanding. The Company has designated 200 thousand shares of preferred stock, Series B Preferred Stock. Series B Preferred Stock The holders of the Series B Preferred Stock shall be entitled to receive, upon liquidation, dissolution or winding up of the Company, the original issue price, plus any dividends declared but unpaid or the amount of cash, securities or other property to which such holder would be entitled to receive with respect to such shares of Series B Preferred Stock if such shares had been converted to common stock immediately prior to such liquidation. Holders of the Series B Preferred Stock were entitled to receive cumulative cash dividends at an annual rate of eight percent ( 8 %) . Holders of the Series B Preferred Stock had no voting rights. Each share of Series B Preferred Stock was convertible, at the option of the holder, into shares of common stock at a rate of 1 share of Series B Preferred Stock into 15 shares of common stock. The Company was able to force conversion at $ 2.00 per share of Common Stock at any time after 6 months after issue if the Common Stock has a closing price of $ 2.00 or higher in any 20 consecutive trading days. After 18 months, the Company could force holders to convert at a 20 % discount to the most recent 20 -day average closing price per share The Company also has the right to cause a conversion following a Fundamental Change. On September 13, 2022, the Company closed the first round of the Series B Preferred Stock offering with the sale of 47,200 shares, raising gross proceeds of approximately $ 1.18 million. On November 17, 2022, the company held a final closing of its offering of Series B Preferred Stock, wherein it sold an additional 7,400 shares raising gross proceeds of $ 185 thousand. As of January 31, 2023 there were 54,600 shares of Series B Preferred Stock outstanding. On June 22, 2023, all the holders of the Series B Preferred Stock converted the shares of Series B Preferred Stock into 819,000 shares of Common Stock of the Company. As of October 31, 2023, no shares of Series B Preferred Stock remain outstanding. During the three months ended October 31, 2023 and 2022, the Company paid dividends of approximately $ 0 thousand and $ 12 thousand, respectively. During the nine months ended October 31, 2023 and 2022, the Company paid dividends of approximately $ 49 thousand and $ 12 thousand respectively. F-20 Table of Contents Restricted Stock Units During the nine months ended October 31, 2023, the Company awarded restricted stock units (“RSUs”) to certain employees and independent directors with an aggregate grant date fair value of $ 610 thousand. The RSUs will be expensed over the requisite service period. The terms of the RSUs include vesting provisions based solely on continued service. The following is a summary of the Company’s restricted stock units activity: Restricted Stock Units Weighted Average Exercise Price Unvested – February 1, 2023 367,647 $ 1.36 Granted 232,721 $ 2.62 Vested ( 118,210 ) $ 1.14 Forfeited ( 39,773 ) $ 1.76 Outstanding – October 31, 2023 442,385 $ 1.91 During the three and nine months ended October 31, 2023, the Company recognized stock-based compensation related to restricted stock units of an aggregate of approximately $ 98 thousand and $ 167 thousand, respectively, which was recorded to selling, general and administrative expenses or cost of goods sold depending on the nature of the employee on the Condensed Consolidated Statement of Operations. During the three and nine months ended October 31, 2022, the C ompany recognized stock-based compensation related to restricted stock units of an aggregate of approximately $ 8 thousand, w hich was recorded to selling, general and administrative expenses on the Condensed Consolidated Statement of Operations.. As of October 31, 2023 there was unrecognized stock-based compensation of approximately $ 823 thousand related to future vesting of restricted stock units. Options The following is a summary of the Company’s option activity: Options Weighted Average Exercise Price Weighted Average Remaining Contractual Life (in years) Aggregate Intrinsic Value (in thousands) Outstanding – February 1, 2023 689,000 $ 0.77 2.95 $ 545 Granted - $ - Exercised ( 231,000 ) $ 0.53 Expired/forfeited ( 333,000 ) $ 0.67 Outstanding – October 31, 2023 125,000 $ 1.48 6.12 $ 238 Exercisable – October 31, 2023 12,500 $ 1.48 6.12 $ 24 During the three months ended October 31, 2023, there were 25,000 options exercised at a weighted average exercise price of $ 1.48 per share and resulted in the issuance of 25,000 shares of common stock. The Company received approximately $ 37 thousand for the exercise of these options. During the nine months ended October 31, 2023, there were 231,000 options exercised at a weighted average exercise price o f $ 0.53 per share and resulted in the issuance of 197,920 shares of common stock. The Company received approximately $ 65 thousand for the exercise of these options, as a portion of the options were cashless exercised. For the nine months ended October 31, 2023 and 2022, the Company recognized stock-based compensation related to options of an aggregate of approximately $ 53 thousand and $ 28 thousand, respectively, which is included in selling, general and administrative expenses on the accompanying consolidated statements of operations. For the three months ended October 31, 2023 and 2022, stock-based compensation related to options amounted to approximately $ 12 thousand and $ 16 thousand, respectively. At October 31, 2023, there was unrecognized stock-based compensation related to the issuance of options of approximately $ 68 thousand. F-21 Table of Contents Warrants The following is a summary of the Company’s warrant activity: Warrants Weighted Average Exercise Price Outstanding – February 1, 2023 13,650 $ 2.25 Exercisable – February 1, 2023 13,650 $ 2.25 Granted - $ Exercised 13,650 $ - Outstanding – October 31, 2023 - $ - Exercisable – October 31, 2023 - $ - During the nine months ended October 31, 2023, the Company issued 13,650 shares of common stock upon the cashless exercise of the warrants. Note 10 - Commitments and Contingencies Litigation, Claims and Assessments From time to time, the Company may become involved in various lawsuits and legal proceedings, which arise in the ordinary course of business. Litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm its business. The Company is currently not aware of any such legal proceedings or claims that they believe will have, individually or in the aggregate, a material adverse effect on its business, financial condition or operating results. Licensing and Royalty Agreements On March 1, 2010, the Company was assigned a Development and License agreement, dated January 1, 2009, with Daniel Dougherty (the “License Agreement”). Under the terms of the License Agreement the licensor shall exclusively develop for the Company a line of beef meatballs with sauce, turkey meatballs with sauce and other similar meats and sauces for commercial manufacture, distribution and sale (each a “Licensor Product” and collectively the “Licensor Products”). Licensor shall work with the Company to develop Licensor Products that are acceptable to the Company. Upon acceptance of a Licensor Product by Licensee, Licensor’s trade secret recipes, formulas methods and ingredients for the preparation and production of such Licensor Products (the “Recipes”) shall be subject to the License Agreement. The exclusive term began on January 1, 2009 (the “Effective Date”) and ends on the 50 th anniversary of the Effective Date. The royalty rate payable by the Company is: 6 % of net sales up to $ 500 thousand of net sales (as defined in the agreement) for each year under the License Agreement; 4 % of net sales from $ 500 thousand up to $ 2.5 million of net sales for each year under the License Agreement; 2 % of net sales from $ 2.5 million up to $ 20 million of net sales for each year under the License Agreement; and 1 % of net sales in excess of $ 20 million of net sales for each year under the License Agreement. In order to continue exclusivity, the Company shall pay a minimum royalty of $ 125,000 each year. The Company incurred approximately $ 119 thousand and $ 117 thousand of royalty expenses for the three months ended October 31, 2023 and 2022, respectively. The Company incurred approximately $ 437 thousand and $ 392 thousand of royalty expenses for the nine months ended October 31, 2023 and 2022, respectively. Royalty expenses are included in selling, general and administrative expenses on the Condensed Consolidated Statements of Operations. Note 11 – Leases We account for leases in accordance with ASC 842 “Leases” (“ASC 842”). We determine whether an arrangement is a lease at inception. This determination generally depends on whether the arrangement conveys the right to control the use of an identified fixed asset explicitly or implicitly for a period of time in exchange for consideration. We have operating leases for offices and other facilities used for our operations. We also have finance leases comprised primarily of machinery and equipment. Our leases have remaining lease terms of approximately 1 year to 8 years. F-22 Table of Contents Supplemental cash flow and other information related to leases was as follows (in thousands): October 31, 2023 October 31, 2022 Cash paid for amounts included in the measurement of lease liabilities Operating cash flows from operating leases $ ( 237 ) $ ( 261 ) Financing cash flows from finance leases ( 175 ) ( 191 ) The following table shows the weighted average lease term and weighted average discount rate for our ROU assets: October 31, 2023 January 31, 2023 Weighted average remaining lease term (in years) Operating leases 6.75 7.50 Finance leases 4.69 2.60 Weighted average discount rate: Operating leases 4.85 % 4.85 % Finance Leases 6.70 % 3.41 % Maturities of lease liabilities for each of the succeeding fiscal years are as follows (in thousands): For the fiscal years ended Finance Leases Operating Leases Total Maturities of Lease Liabilities 2024 remaining $ 120 $ 142 $ 262 2025 459 572 1,031 2026 355 573 928 2027 307 464 771 2028 299 495 794 Thereafter 300 1,330 1,630 Total undiscounted future lease payments 1,840 3,576 5,416 Less: imputed interest ( 287 ) ( 524 ) ( 811 ) Total present value of future lease liabilities $ 1,553 $ 3,052 $ 4,605 Note 12 - Income Tax Provision The Company’s effective tax rate for the three and nine months ending October 31, 2023 is 22.0 % and 22.8 % Differences with statutory rate primarily relate to state taxes. Deferred tax assets are net operating loss carryforwards and other assets. Deferred taxes are caused primarily by net operating loss carryforwards. Net Operating Losses (“NOLs”) generated in 2017 and prior years can be carried forward for 20 years. NOLs generated in 2018 – 2020, as enacted by the CARES Act, can be carried forward indefinitely. However, NOLs generated in 2021 are also carried forward indefinitely but limited to 80% of taxable income. In assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon future generation for taxable income during the periods in which temporary differences representing net future deductible amounts become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. There was no valuation allowance as of October 31, 2023 or January 31, 2023. The Company evaluated the provisions of ASC 740 related to the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements. ASC 740 prescribes a comprehensive model for how a company should recognize, present, and disclose uncertain positions that the Company has taken or expects to take in its tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. F-23 Table of Contents Differences between tax positions taken or expected to be taken in a tax return and the net benefit recognized and measured pursuant to the interpretation are referred to as “unrecognized benefits.” A liability is recognized (or amount of net operating loss carry forward or amount of tax refundable is reduced) for unrecognized tax benefit because it represents an enterprise’s potential future obligation to the taxing authority for a tax position that was not recognized as a result of applying the provisions of ASC 740. The actual yearly tax rate will vary due to numerous factors, such as level and geographic mix of income and losses, acquisitions, investments, intercompany transactions, our stock price, changes in our deferred tax assets and liabilities and their valuation, changes in the laws, regulations, administrative practices, principles, and interpretations related to tax, including changes to the global tax framework and other laws and accounting rules in various jurisdictions. F-24 Table of Contents