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 OUR MOST RECENT ANNUAL REPORT ON FORM 10-K, OTHER PRIOR COMPANY FILINGS AND THOSE INCLUDED ELSEWHERE IN THIS REPORT. Results of Operations for the Three Months Ended October 31, 2023 and 2022 The following table sets forth the summary of the condensed consolidated statements of operations for the three months ended October 31, 2023 and 2022 (in thousands): For the Three Months Ended October 31, 2023 October 31, 2022 Net sales $ 28,648 $ 25,694 Cost of Sales $ 20,013 $ 19,130 Gross Profit $ 8,635 $ 6,564 Operating Expenses $ 5,928 $ 5,065 Other Expenses $ (130) $ (187) Income Tax (Provision) Benefit $ (568) $ (286) Income from equity method investment in Chef Inspirational Foods, LLC $ — $ 72 Net Income $ 2,009 $ 1,098 For the three months ended October 31, 2023 and 2022, the Company reported net income of approximately $2.0 million and $1.1 million, respectively. The change in net income between the three months ended October 31, 2023 and 2022 reflects strong sales, successful pricing actions, same-customer cross-selling, product additions, normalization of costs for commodities and other materials, freight efficiencies, and other improvements in manufacturing execution. Net sales: Net Sales increased by approximately 11.5% to $28.6 million during the three months ended October 31, 2023, from $25.7 million during the three months ended October 31, 2022. The increase in sales is due to both volume gains and successful pricing actions. Volume gains were driven by increased demand at existing customers, the acquisition of new customers, same-customer cross-selling, the acquisition of CIF, and product additions. Cost of sales: Cost of sales increased by approximately 5% to $20.0 million or 70% of Net Sales during the three months ended October 31, 2023, from $19.1 million or 74% of Net Sales during the three months ended October 31, 2022. The decrease in cost of sales as a percentage of Net Sales is due to improvements in procurement and manufacturing efficiencies and normalization of costs for commodities. Gross Profit Margin: The gross profit margin was 30% and 26% for the three months ended October 31, 2023 and 2022, respectively. The change in gross profits between the three months ended October 31, 2023 and 2022 is due to successful pricing actions, improvements in procurement, manufacturing and logistics efficiencies and normalization of costs for commodities. Operating Expenses: Operating expenses increased by 17% during the three months ended October 31, 2023, as compared to the three months ended October 31, 2022. Operating expenses increased as a percentage of Net Sales to 21% in the third 2 Table of Contents quarter of fiscal 2024 compared to 20% in the same period of fiscal 2023. The $0.9 million increase in total operating expenses is primarily attributable to the following: • Payroll and Related Expenses inclusive of stock-based compensation increased by approximately $714 thousand related to executive and office hires; • Advertising expenses increased by approximately $274 thousand due to new strategies and enhanced focus to drive increased velocities of our existing products • Amortization of intangible assets increased by approximately $251 thousand due to the acquisition of CIF; • Professional fees and director fees increased by approximately $166 thousand due to the growth of the Company and the use of consultants for upgrades for manufacturing efficiencies as well as information technology integration (including ERP implementation); • Freight related expenses decreased by approximately $265 thousand due to the addition of dedicated logistics employees and capabilities; and • Bad debt expense decreased by approximately $237 thousand due to new management procedures related to accounts receivables in the prior year. Other Expenses: Other expenses decreased by approximately $57 thousand to $130 thousand for the three months ended October 31, 2023 as compared to $187 thousand for the three months ended October 31, 2022. For the three months ended October 31, 2023, other expenses consisted of approximately $124 thousand in interest expense on the Company’s financing arrangements and approximately $6 thousand in amortization of debt discount. For the three months ended October 31, 2022, other expenses consisted of approximately $184 thousand in interest expense incurred on the Company’s financing arrangements and approximately $3 thousand in amortization of debt discount. Results of Operations for the Nine Months Ended October 31, 2023 and 2022 The following table sets forth the summary of the condensed consolidated statements of operations for the nine months ended October 31, 2023 and 2022 (in thousands): For the Nine Months Ended October 31, 2023 October 31, 2022 Net Sales $ 76,559 $ 70,371 Cost of Sales $ 54,047 $ 57,385 Gross Profit $ 22,512 $ 12,986 Operating Expenses $ 15,587 $ 12,057 Other Expenses $ (473) $ (454) Income Tax (Provision) Benefit $ (1,522) $ (106) Income from equity method investment in Chef Inspirational Foods, LLC $ 223 $ 90 Net Income (Loss) $ 5,153 $ 459 For the nine months ended October 31, 2023 and 2022, the Company reported net income of approximately $5.2 million and $459 thousand, respectively. The change in net income between the nine months ended October 31, 2023 and 2022 reflects strong sales, successful pricing actions, same-customer cross-selling, product additions, normalization of costs for commodities, as well as other materials, freight efficiencies, and other improvements in manufacturing execution. Net Sales: Net sales increased by approximately 9% to $76.6 million during the nine months ended October 31, 2023, from $70.4 million during the nine months ended October 31, 2022. The increase in sales is due to both volume gains as well as successful pricing actions. Volume gains were driven by increased demand at existing customers, acquisition of new customers, same-customer cross-selling, the acquisition of CIF, and product additions. Cost of sales: Cost of sales decreased by approximately 6% to $54.0 million during the nine months ended October 31, 2023, from $57.4 million during the nine months ended October 31, 2022. The decrease in cost of sales is due to improvements in procurement and manufacturing efficiencies and normalization of costs for commodities. 3 Table of Contents Gross Profit Margin: The gross profit margin was 29% and 18% for the nine months ended October 31, 2023 and 2022, respectively. The change in gross profits between the nine months ended October 31, 2023 and 2022 is due to successful pricing actions, improvements in procurement, manufacturing and logistics efficiencies and normalization of costs for commodities. Operating Expenses: Operating expenses increased by 29% during the nine months ended October 31, 2023, as compared to the nine months ended October 31, 2022. Operating expenses increased as a percentage of sales to 20% in the nine months ended October 31, 2023 compared to 17% in the same period ended October 31, 2022. The $3.5 million increase in total operating expenses is primarily attributable to the following: • Payroll and related expenses inclusive of stock-based compensation increased by approximately $2.46 million related to executive and office hires; • Insurance expenses increased by approximately $487 thousand due to the growth of the Company and increases in coverage, including enhanced cyber security; • Amortization of intangible assets increased by approximately $325 thousand due to the acquisition of CIF; • Professional fees and director fees increased by approximately $277 thousand due to the growth of the Company, the use of consultants to upgrade manufacturing efficiencies as well as information technology integration (including ERP implementation); • Advertising expenses increased by approximately $278 thousand due to new strategies and enhanced focus to drive increased velocities of our existing products • Commission and royalty expenses increased by approximately $224 thousand due to increased sales; and • Freight related expenses decreased by approximately $724 thousand due to the addition of dedicated logistics employees and capabilities; and • Bad debt expense decreased by approximately $237 thousand due to new management procedures related to accounts receivables in the prior year. Other Expenses: Other expenses increased by approximately $19 thousand to $473 thousand for the nine months ended October 31, 2023 as compared to $454 thousand for the nine months ended October 31, 2022. For the nine months ended October 31, 2023, other income (expenses) consisted of $483 thousand in interest expense on the Company’s financing arrangements and $17 thousand in amortization of debt discount, partially offset by $27 thousand in other income. For the nine months ended October 31, 2022, other expenses consisted of $447 thousand in interest expense incurred on the Company’s financing arrangements and $10 thousand in amortization of debt discount and $3 thousand of other income. Liquidity and Capital Resources We finance our operations with internally generated funds, supplemented by credit arrangements with third parties and, potentially, capital market financing. Working Capital The following table summarizes total current assets, liabilities and working capital at October 31, 2023 compared to January 31, 2023 (in thousands): October 31, 2023 January 31, 2023 Change Current Assets $ 20,338 $ 15,674 $ 4,664 Current Liabilities 14,341 11,879 2,462 Working Capital $ 5,997 $ 3,795 $ 2,202 As of October 31, 2023, we had working capital of approximately $6.0 million as compared to working capital of approximately $3.8 million as of January 31, 2023, an increase of approximately $2.2 million. The increase in working capital is primarily attributable to an increase in cash of approximately $1.2 million, and an increase of accounts receivables of approximately $4.3 million, partially offset by an increase in related party promissory notes of 4 Table of Contents approximately $1.2 million, a decrease in inventory of approximately $1.1 million and an increase in accounts payable and accrued expenses of approximately $1.0 million. Long Term Requirements As of October 31, 2023, we have $0 outstanding under our Credit Agreement and $4.9 million outstanding under our Term Loan Agreement, with M&T Bank. The Term Loan Agreement has a maturity date of January 17, 2027. In addition we have payments of $750,000 (plus accrued interest) due on December 29, 2023, 2024, and 2025 pursuant to promissory notes issued to the sellers of T&L and Olive Branch, as discussed in Item 1. Note 6. In addition we have a promissory note of $2.7 million with the sellers of CIF (as discussed in Note 1). Of the $2.7 million, a payment of $1.2 million is due on June 28, 2024, and $1.5 million is payable in common stock on June 28, 2025. We also have operating leases for offices and other facilities used for our operations, and finance leases comprised primarily of machinery and equipment, as discussed in Note 11. Cash Flows The following table summarizes the key components of our cash flows for the nine months ended October 31, 2023 and 2022 (in thousands). For the Nine Months Ended October 31, 2023 2022 USD USD Net Cash Provided by Operating Activities $ 4,878 $ 3,185 Net Cash (Used in) Investing Activities (1,317) (1,008) Net Cash (Used in) Provided by Financing Activities (2,314) 452 Net changes in cash 1,247 2,629 Cash, beginning of period 4,378 851 Cash, end of period $ 5,625 $ 3,480 Net cash provided by operating activities for the nine months ended October 31, 2023 was approximately $4.9 million compared to net cash provided by operating activities for the nine months ended October 31, 2022 of approximately $3.2 million. The net income for the nine months ended October 31, 2023 and 2022 was approximately $5.2 million and $459 thousand, respectively. During the nine months ended October 31, 2023, net income was affected by non-cash adjustments of approximately $2.1 million and by changes in operating activities which used cash of approximately $2.3 million. During the nine months ended October 31, 2022, net income was affected by non-cash adjustments of approximately $1.4 million offset by changes in operating activities which provided cash of $1.4 million. Net cash used in investing activities for nine months ended October 31, 2023 was approximately $1.3 million as compared to approximately $1.0 million for the nine months ended October 31, 2022, respectively. For the nine months ended October 31, 2023, the Company used cash of $671 thousand to purchase new machinery and equipment and used approximately $646 thousand for the acquisition of the remaining interest of CIF. For the nine months ended October 31, 2022, the cash used in investing activities of $508 thousand was to purchase new machinery and equipment and $500 thousand was used to purchase a 24% interest in CIF. Net cash used in financing activities for the nine months ended October 31, 2023 was approximately $2.3 million as compared to approximately $452 thousand provided by financing activities for the nine months ended October 31, 2022. During the nine months ended October 31, 2023, the Company had repayments of approximately $890 thousand from borrowings pursuant to the line of credit, payments of the term loan and finance lease payments of approximately $1.3 million, and $175 thousand, respectively. In addition, during the nine months ended October 31, 2023, the Company received proceeds of $65 thousand for the exercise of options. During the nine months ended October 31, 2023, the Company paid dividends on the Series B Preferred stock of approximately $49 thousand. During the nine months ended October 31, 2022, the Company received net proceeds of approximately $225 thousand from borrowings pursuant to the line of credit and approximately $1.4 million from the sale of Series B Preferred Stock, which were offset by payments of the term loan and finance lease payments of approximately $905 thousand and $191 thousand, respectively. 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 at least the next twelve months, based on current and projected levels of operations, the Company may require additional funding to finance growth or achieve its 5 Table of Contents 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. Recent Accounting Pronouncements As of the filing date of this report, there were no significant changes in our critical accounting estimates from those discussed in our 2023 Form 10-K. See Note 2 of Notes to Unaudited Condensed Consolidated Financial Statements for accounting pronouncements issued but not yet adopted that may impact the Company’s consolidated financial position, earnings, cash flows or disclosures.” Critical Accounting Estimates and Policies As of the filing date of this report, there were no significant changes in our critical accounting estimates from those discussed in our 2023 Form 10-K. See Note 2 of Notes to Unaudited Condensed Consolidated Financial Statements for accounting pronouncements issued but not yet adopted that may impact the Company’s consolidated financial position, earnings, cash flows. Item 3. Quantitative and Qualitative Disclosures About Market Risk. Not applicable.