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. Overview Mama’s Creations, Inc. (“Mama’s,” “Mama’s Creations” or the “Company”) is a leading marketer and manufacturer of fresh deli prepared foods, found in over 8,000 grocery, mass, club and convenience stores nationally. The Company’s broad product portfolio, born from MamaMancini’s rich history in Italian foods, now consists of a variety of high-quality, fresh, clean and easy to prepare foods to address the needs of both our consumers and retailers. Our vision is to become a one-stop-shop deli solutions platform, leveraging vertical integration and a diverse family of brands to offer a wide array of prepared foods to meet the changing demands of the modern consumer. Results of Operations for the Three Months Ended July 31, 2024 and 2023 The following table sets forth the summary of the condensed consolidated statements of operations for the three months ended July 31, 2024 and 2023 (in thousands): For the Three Months Ended July 31, 2024 July 31, 2023 Net sales $ 28,382 $ 24,790 Costs of sales $ 21,503 $ 17,284 Gross Profit $ 6,879 $ 7,506 Operating Expenses $ 5,267 $ 5,231 Other Expenses $ (63) $ (181) Income Tax Expense $ (401) $ (430) Income from equity method investment in Chef Inspirational Foods, LLC $ — $ 78 Net Income $ 1,148 $ 1,742 For the three months ended July 31, 2024 and 2023, the Company reported net income of approximately $1.1 million and $1.7 million respectively. The change in net income between the three months ended July 31, 2024 and 2023 is due to the changes in net sales, costs of sales and operating expenses described below. Net sales: Net Sales increased by approximately 14.5% to $28.4 million during the three months ended July 31, 2024, from $24.8 million during the three months ended July 31, 2023. The increase in sales is due to volume gains, successful pricing actions, and the acquisition of CIF in June 2023. Volume gains were driven by increased demand at existing customers, successful trade and marketing promotions, same-customer cross-selling of new items, and new customer door expansion. Costs of sales: Costs of sales increased by approximately 24% to $21.5 million, or 76% of Net Sales, during the three months ended July 31, 2024, from $17.3 million, or 70% of Net Sales, during the three months ended July 31, 2023. The increase in costs of sales as a percentage of Net Sales is due to increases in commodity costs, in particular the price of chicken, partially offset by improvements in procurement, manufacturing and labor efficiencies. Gross Profit Margin: The gross profit margin was 24% and 30% for the three months ended July 31, 2024 and 2023, respectively. The decrease in gross profit margin between the three months ended July 31, 2024 and 2023 is due to 2 Table of Contents increased commodity costs, in particular the price of chicken, which were partially offset by customer price increases, improvements in procurement, and manufacturing efficiencies. Operating Expenses: Operating expenses were relatively flat in aggregate during the three months ended July 31, 2024, as compared to the three months ended July 31, 2023. The change in total operating expenses is primarily attributable to the following: • Payroll and Related Expenses inclusive of stock-based compensation decreased by approximately $364 thousand mainly related to variable compensation arrangements; • Insurance expense decreased by approximately $213 thousand mainly related to updated terms of coverage; • Professional fees and director fees decreased by approximately $73 thousand mainly related to private offerings done in the prior year; • Freight related expenses decreased by approximately $112 thousand mainly related to a greater focus on full truckload sales versus less than full truckload sales as well as stronger supplier management of carriers. • Advertising expenses increased by approximately $214 thousand du e to new strategies and enhanced focus to drive increased velocities of our existing products; • Amortization of intangible assets increased by approximately $211 thousand due to the acquisition of CIF, which was completed in June 2023; • Other operating expenses increased by approximately $174 thousand due to additional travel and office expenses; and • Commission expenses increased by approximately $203 thousand due to increased sales; and • Other Expenses: Other expenses decreased by approximately $118 thousand to $63 thousand for the three months ended July 31, 2024, as compared to $181 thousand for the three months ended July 31, 2023. The decrease is primarily due to interest income of approximately $63 thousand and a decrease of interest expense of approximately $127 thousand, due to a lower debt balance . Results of Operations for the Six Months Ended July 31, 2024 and 2023 The following table sets forth the summary of the condensed consolidated statements of operations for the six months ended July 31, 2024 as compared to the six months ended July 31, 2023 (in thousands): For the Six Months Ended July 31, 2024 July 31, 2023 Net Sales $ 58,220 $ 47,911 Costs of Sales $ 43,878 $ 34,034 Gross Profit $ 14,342 $ 13,877 Operating Expenses $ 11,957 $ 9,659 Other Expenses $ (104) $ (343) Income Tax Expense $ (580) $ (954) Income from equity method investment in Chef Inspirational Foods, LLC $ — $ 223 Net Income $ 1,701 $ 3,144 For the six months ended July 31, 2024 and 2023, the Company reported net income of approximately $1.7 million and $3.1 million, respectively. The change in net income between the six months ended July 31, 2024 and 2023 is due to the changes in net sales, costs of sales and operating expenses described below. Net sales: Net Sales increased by approximately 21.5% to $58.2 million during the six months ended July 31, 2024, from $47.9 million during the six months ended July 31, 2023. The increase in sales is due to volume gains, successful pricing actions, and the acquisition of CIF in June 2023. Volume gains were driven by increased demand at existing customers, successful trade and marketing promotions, same-customer cross-selling of new items, and new customer door expansion. 3 Table of Contents Costs of sales: Costs of sales increased by approximately 29% to $43.9 million, or 75% of Net Sales, during the six months ended July 31, 2024, from $34.0 million, or 71% of Net Sales, during the six months ended July 31, 2023. The increase in costs of sales as a percentage of Net Sales is due to increases in commodity costs, in particular the price of chicken, partially offset by improvements in procurement, manufacturing and labor efficiencies. Gross Profit Margin: The gross profit margin was 25% and 29% for the three months ended July 31, 2024 and 2023, respectively. The decrease in gross profit margin between the six months ended July 31, 2024 and 2023 is due to increased commodity costs, partially offset by customer price increases and manufacturing efficiencies. Operating Expenses: Operating expenses increased by 24% during the six months ended July 31, 2024, as compared to the six months ended July 31, 2023. The $2.3 million increase in total operating expenses is primarily attributable to the following: • One time legal settlement expense of approximately $900 thousand, due to the Settlement Agreement with directors; • Advertising expenses increased by approximately $419 thousand due to new strategies and enhanced focus to drive increased velocities of our existing products; • Amortization of intangible assets increased by approximately $478 thousand due to the acquisition of CIF, which was completed in June 2023; • Commission expenses increased by approximately $219 thousand due to increased sales; • Payroll and Related Expenses inclusive of stock-based compensation decreased by approximately $93 thousand, mainly related to variable compensation arrangements; and • Insurance expense decreased by approximately $166 thousand mainly related to updated terms of our coverage; and • Other Expenses: Other expenses decreased by approximately $239 thousand to $104 thousand for the six months ended July 31, 2024, as compared to $343 thousand for the six months ended July 31, 2023. The decrease is primarily due to interest income in the current year of approximately $155 thousand, and a decrease of interest expense of approximately $110 thousand, due to a lower debt balance. 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 July 31, 2024 compared to January 31, 2024 (in thousands): July 31, 2024 January 31, 2024 Change Current Assets $ 19,706 $ 23,566 $ (3,860) Current Liabilities 14,353 16,690 (2,337) Working Capital $ 5,353 $ 6,876 $ (1,523) As of July 31, 2024, we had working capital of approximately $5.4 million as compared to working capital of approximately $6.9 million as of January 31, 2024. The decrease in working capital is primarily attributable to a decrease in cash and cash equivalents of approximately $3.7 million, a decrease in inventory of approximately $0.5 million a decrease in accounts payable and accrued expenses of approximately $2.6 million, and an increase in promissory notes - related parties of $0.3 million, partially offset by an increase in accounts receivable of approximately $0.3 million. Long-Term Requirements As of July 31, 2024, we have $0 outstanding under our Credit Agreement and approximately $3.8 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 thousand (plus accrued interest) due on December 29, 2024 and 2025 pursuant to the promissory notes issued to the sellers of T&L and Olive Branch, as discussed in Item 1, Note 6. In addition, we have a payment of $1.5 million in common stock due to the sellers of CIF on June 28, 2025. We also have operating leases for 4 Table of Contents offices and other facilities used for our operations and finance leases comprised primarily of machinery and equipment, as discussed in Item 1. Note 10. Cash Flows The following table summarizes the key components of our cash flows for the six months ended July 31, 2024 and 2023 (in thousands). For the Six Months Ended July 31, 2024 2023 Net Cash Provided by Operating Activities $ 1,234 $ 3,358 Net Cash (Used in) Investing Activities (2,740) (899) Net Cash (Used in) Financing Activities (2,128) (1,280) Net (Decrease) Increase in cash (3,634) 1,179 Cash, beginning of period 11,022 4,378 Cash, end of period $ 7,388 $ 5,557 Operating activities Net cash provided by operating activities for the six months ended July 31, 2024 was approximately $1.2 million, which consisted of (i) net income of approximately $1.7 million, (ii) non-cash expenses of approximately $2.3 million, and (iii) a decrease in operating assets and liabilities of approximately $2.8 million. Net cash provided by operating activities for the six months ended July 31, 2023 was approximately $3.4 million, which consisted of (i) net income of approximately $3.1 million, (ii) non-cash expenses of approximately $1.6 million, and (iii) a decrease in operating assets and liabilities of approximately $1.5 million. Investing activities Net cash used in investing activities for the six months ended July 31, 2024 was approximately $2.7 million and consisted of purchases of fixed assets. Net cash used in investing activities for the six months ended July 31, 2023 was approximately $0.9 million and consisted of approximately $0.3 million purchases of fixed assets and $0.6 million for the purchase of the remaining interest in CIF. Financing activities Net cash used in financing activities for the six months ended July 31, 2024 was approximately $2.1 million and consisted of approximately $1.2 million of payments of related party promissory notes, approximately $0.8 million of payments on the Term Loan and approximately $0.2 million payments on finance leases. Net cash used in financing activities for the six months ended July 31, 2023 was approximately $1.3 million and consisted of approximately $0.8 million of payments on the Term Loan, approximately $0.4 million of payments on the line of credit, and approximately $0.1 million payments on finance leases. Liquidity and capital requirements outlook Although the expected revenue growth and control of expenses leads 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 strategic objectives. If such financing is required, there can be no assurance that financing will be available in amounts or on 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 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. 5 Table of Contents 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 2024 Form 10-K. Item 3. Quantitative and Qualitative Disclosures About Market Risk. Not applicable.