UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM10-Q
For the quarter ended: July 31, 2021
OR
For the Transition Period from ___________ to ____________
Commission File Number: 000-54954
MamaMancini’s Holdings, Inc.
(Exact name of Registrant as specified in its charter)
25 Branca Road
East Rutherford, NJ 07073
(Address of principal executive offices and zip Code)
(201)531-1212
(Registrant’s telephone number, including area code)
Securities Registered Pursuant to Section 12(g) of the Act:
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files. Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of September 9, 2021, there were 35,724,992 shares outstanding of the registrant’s common stock.
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
MAMAMANCINI’S HOLDINGS, INC.
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2021
Condensed Consolidated Balance Sheets
See accompanying notes to the condensed consolidated financial statements
Condensed Consolidated Statements of Income
(unaudited)
Condensed Consolidated Statements of Changes in Stockholders’ Equity
For the Period from May 1, 2021 through July 31, 2021
Additional
Paid In
For the Period from May 1, 2020 through July 31, 2020
For the Period from February 1, 2021 through July 31, 2021
For the Period from February 1, 2020 through July 31, 2020
Condensed Consolidated Statements of Cash Flows
Notes to Condensed Consolidated Financial Statements
Note 1 - Nature of Operations and Basis of Presentation
Nature of Operations
MamaMancini’s Holdings, Inc. (the “Company”), (formerly known as Mascot Properties, Inc.) was organized on July 22, 2009 as a Nevada corporation. The Company has a year-end of January 31.
The Company is a manufacturer and distributor of beef meatballs with sauce, turkey meatballs with sauce, beef meat loaf, 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 dinners, single-size Pasta Bowls, bulk deli, packaged refrigerated and frozen products. The Company’s 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. The Company’s customers are located throughout the United States, with large concentrations in the Northeast and Southeast.
Note 2 - Summary of Significant Accounting Policies
Basis of Presentation
The condensed consolidated financial statements and related notes have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) and include the accounts of the Company and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
The unaudited interim financial information furnished herein reflects all adjustments, consisting solely of normal recurring items, which in the opinion of management are necessary to fairly state the financial position of the Company and the results of its operations for the periods presented. This report should be read in conjunction with the Company’s consolidated financial statements and notes thereto included in the Company’s Form 10-K for the year ended January 31, 2021 filed on April 21, 2021. The Company assumes that the users of the interim financial information herein have read or have access to the audited financial statements for the preceding fiscal year and that the adequacy of additional disclosure needed for a fair presentation may be determined in that context. The condensed consolidated balance sheet at January 31, 2021 was derived from audited financial statements but does not include all disclosures required by accounting principles generally accepted in the United States of America. The results of operations for the interim periods presented are not necessarily indicative of results for the year ending January 31, 2022.
Principles of Consolidation
The condensed consolidated financial statements include all accounts of the entities as of the reporting period ending date(s) and for the reporting period(s). All inter-company balances and transactions have been eliminated.
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.
Risks and Uncertainties
The Company operates in an industry that is subject to intense competition and change 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
The Company considers all highly liquid instruments purchased with a maturity of three months or less to be cash equivalents. The Company held no cash equivalents at July 31, 2021 and January 31, 2021.
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. At July 31, 2021, the Company had $4,009,891 in cash balances that 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 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 July 31, 2021 and January 31, 2021, the Company had reserves of $2,000.
Inventories
Inventories are stated at the lower of cost or net realizable value using the first-in, first-out (FIFO) valuation method. Inventory was comprised of the following at July 31, 2021 and January 31, 2021:
Schedule of Inventories
Property and Equipment
Property 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:
Schedule of Property and Equipment Estimated Useful Lives
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.
Intangible Assets
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 year ended January 31, 2021 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. The Company did not record amortization for the software license since the license has yet to be implemented as of July 31, 2021.
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.
Leases
In February 2016, the FASB issued ASU 2016-02 “Leases” (Topic 842) which amended guidance for lease arrangements to increase transparency and comparability by providing additional information to users of financial statements regarding an entity’s leasing activities. Subsequent to the issuance of Topic 842, the FASB clarified the guidance through several ASUs; hereinafter the collection of lease guidance is referred to as ASC 842. The revised guidance seeks to achieve this objective by requiring reporting entities to recognize lease assets and lease liabilities on the balance sheet for substantially all lease arrangements.
As part of the adoption the Company elected the practical expedients permitted under the transition guidance within the new standard, which among other things, allowed the Company to:
Fair Value of Financial Instruments
For purpose of this disclosure, 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 July 31, 2021 and 2020 were $30,541and $25,857, respectively. Research and development expenses for the six months ended July 31, 2021 and 2020 were $53,977 and $55,338, respectively.
Shipping and Handling Costs
The Company classifies freight billed to customers as sales revenue and the related freight costs as general and administrative expenses.
Revenue Recognition
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. The Company elected to treat shipping and handling activities as fulfillment activities, and the related costs are recorded as selling expenses in general and administrative expenses on the condensed consolidated statement of operations.
The Company promotes its products with advertising, 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 advertising, consumer incentives and trade promotions.
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 shipped.
Expenses such as slotting fees, sales discounts, promotions and allowances are accounted for as a direct reduction of revenues as follows (see Note 11):
Schedule of Expenses of Slotting Fees, Sales Discounts and Allowances are Accounted as Direct Reduction of Revenues
Disaggregation of Revenue from Contracts with Customers. The following table disaggregates gross revenue by significant geographic area for the six months ended July 31, 2021 and 2020:
Schedule of Disaggregates Gross Revenue by Significant Geographic Area
Cost of Sales
Cost of sales represents costs directly related to the production and manufacturing of the Company’s products. Costs include product development, freight-in, packaging, and print production costs.
Advertising
Costs incurred for producing and communicating advertising for the Company are charged to operations as incurred. Producing and communicating advertising expenses for the three months ended July 31, 2021 and 2020 were $118,881 and $151,232 respectively. Producing and communicating advertising expenses for the six months ended July 31, 2021 and 2020 were $245,061 and $267,202 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 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 condensed 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.
For the three months ended July 31, 2021 and 2020, share-based compensation amounted to $285 and $22,870, respectively.
For the six months ended July 31, 2021 and 2020, share-based compensation amounted to $786 and $49,975, respectively.
For the six months ended July 31, 2021 and 2020, when computing fair value of share-based payments, the Company has considered the following variables:
Schedule of Fair Value of Share-Based Payments
The expected option term is computed using the “simplified” method as permitted under the provisions of ASC 718-10-S99. The Company uses the simplified method to calculate expected term of share options and similar instruments as the Company does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate expected term.
The expected stock price volatility for the Company’s stock options was estimated using the historical volatilities of the Company’s common stock. Risk free interest rates were obtained from U.S. Treasury rates for the applicable periods.
Earnings Per Share
Earnings per share (“EPS”) is the amount of earnings attributable to each share of common stock. Pursuant to ASC Paragraphs 260-10-45-10 through 260-10-45-16, basic EPS shall be computed by dividing income available to common stockholders (the numerator) by the weighted-average number of common shares outstanding (the denominator) during the period. Income available to common stockholders shall be computed by deducting both the dividends declared in the period on preferred stock (whether or not paid) and the dividends accumulated for the period on cumulative preferred stock (whether or not earned) from income from continuing operations (if that amount appears in the income statement) and also from net income. The computation of diluted EPS is similar to the computation of basic EPS except that the denominator is increased to include the number of additional common shares that would have been outstanding if the dilutive potential common shares had been issued during the period to reflect the potential dilution that could occur from common shares issuable through contingent shares issuance arrangement, stock options or warrants.
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.
Schedule of Earnings Per Share, Basic and Diluted
Income Taxes
Income taxes are provided in accordance with ASC No. 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 (benefit) 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 and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. As of July 31, 2021 and January 31, 2021, the Company recognized a deferred tax asset of $353,794 and $744,973, 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.
The Company is no longer subject to tax examinations by tax authorities for years prior to 2019.
In response to the COVID-19 pandemic, the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) was signed into law in March 2020. The CARES Act lifts certain deduction limitations originally imposed by the Tax Cuts and Jobs Act of 2017 2017 Tax Act'. Corporate taxpayers may carryback net operating losses (“NOLs”) originating between 2018 and 2020 for up to five years, which was not previously allowed under the (“2017 Tax Act”). The CARES Act also eliminates the 80% of taxable income limitations by allowing corporate entities to fully utilize NOL carryforwards to offset taxable income in 2019, 2020 or 2021. Taxpayers may generally deduct interest up to the sum of 50% of adjusted taxable income plus business interest income 30% limit under the 2017 Tax Act for 2019 and 2020. The CARES Act allows taxpayers with alternative minimum tax credits to claim a refund in 2020 for the entire amount of the credits instead of recovering the credits through refunds over a period of years, as originally enacted by the 2017 Tax Act.
In addition, the CARES Act raises the corporate charitable deduction limit to 25% of taxable income and makes qualified improvement property generally eligible for 15-year cost-recovery and 100% bonus depreciation. The enactment of the CARES Act did not result in any material adjustments to the income tax provision.
Related Parties
The Company follows subtopic ASC 850-10 for the identification of related parties and disclosure of related party transactions.
Pursuant to Section 850-10-20, the related parties include: (a) affiliates of the Company (“Affiliate” means, with respect to any specified person, any other person that, directly or indirectly through one or more intermediaries, controls, is controlled by or is under common control with such person, as such terms are used in and construed under Rule 405 under the Securities Act); (b) entities for which investments in their equity securities would be required, absent the election of the fair value option under the Fair Value Option Subsection of Section 825-10-15, to be accounted for by the equity method by the investing entity; (c) trusts for the benefit of employees, such as pension and profit-sharing trusts that are managed by or under the trusteeship of management; (d) principal owners of the Company; (e) management of the Company; (f) other parties with which the Company may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests; and (g) other parties that can significantly influence the management or operating policies of the transacting parties or that have an ownership interest in one of the transacting parties and can significantly influence the other to an extent that one or more of the transacting parties might be prevented from fully pursuing its own separate interests.
Recent Accounting Pronouncements
In December 2019, the FASB issued authoritative guidance intended to simplify the accounting for income taxes (ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes”). This guidance eliminates certain exceptions to the general approach to the income tax accounting model and adds new guidance to reduce the complexity in accounting for income taxes. This guidance is effective for annual periods after December 15, 2020, including interim periods within those annual periods. The adoption of the new standard did not have a significant impact on the Company’s condensed consolidated financial statements.
Management does not believe that any recently issued, but not yet effective accounting pronouncements, when adopted, will have a material effect on the accompanying condensed consolidated financial statements.
Subsequent Events
The Company evaluates subsequent events and transactions that occur after the balance sheet date for potential recognition or disclosure. Any material events that occur between the balance sheet date and the date that the financial statements were issued are disclosed as subsequent events, while the financial statements are adjusted to reflect any conditions that existed at the balance sheet date.
Note 3 - Property and Equipment:
Property and equipment on July 31, 2021 and January 31, 2021 are as follows:
Schedule of Property and Equipment
Depreciation expense charged to income for the three months ended July 31, 2021 and 2020 amounted to $197,971 and $159,285, respectively. Depreciation expense charged to income for the six months ended July 31, 2021 and 2020 amounted to $381,732 and $319,078, respectively.
Note 4 - Related Party Transactions
WWS, Inc.
Alfred D’Agostino and Tom Toto, two directors of the Company, are affiliates of WWS, Inc.
For the three months ended July 31, 2021 and 2020, the Company recorded $12,000 in commission expense from WWS, Inc. generated sales. For the six months ended July 31, 2021 and 2020, the Company recorded $24,000 in commission expense from WWS, Inc. generated sales.
During the three and six months ended July 31, 2020, members of the board of directors and the CEO exercised 940,807 warrants with exercise price of $1 in exchange for 940,807 shares of common stock.
Other Related Party Transactions
During the three months ended July 31, 2021 and 2020, the Company reimbursed an entity 100% owned by the CEO of the Company for certain investor relation conference expenses totaling $0 and $0, respectively. During the six months ended July 31, 2021 and 2020, the Company reimbursed an entity 100% owned by the CEO of the Company for certain investor relation conference expenses totaling $4,517 and $14,570, respectively.
Note 5 - Loan and Security Agreement
M&T Bank
Effective, January 4, 2019, the Company entered into a $2.5 million five-year note with M&T Bank at LIBOR plus four points with repayments in equal payments over 60 months. The facility is supported 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 and a limited Guaranty by the Company’s Chief Executive Officer, Carl Wolf. The Company recorded $89,321 as a debt discount, which was amortized over the remaining life of the note using the effective interest method. There was unamortized debt discount of $0 as of July 31, 2021 and January 31, 2021. The outstanding balance on the term loan was $0 as of July 31, 2021 and January 31, 2021.
Effective, January 4, 2019, the Company has arranged a $3.5 million working capital line of credit with M&T Bank at LIBOR plus four points with a two-year expiration. On January 29, 2020, the facility was amended to increase the total available balance to $4.0 million as well as extend the maturity date to June 30, 2022. On June 11, 2021, the facility was amended to increase the total available balance to $4.5million as well as extend the maturity date to June 30, 2023. On August 4, 2021, the facility was amended to increase the total available balance to $6.0 million as well as extend the maturity date to August 4, 2026. The facility is supported 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 and a limited Guaranty by the Company’s Chief Executive Officer, Carl Wolf. 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. The outstanding balance on the line of credit was $0 as of July 31, 2021 and January 31, 2021.
During the six months ended July 31, 2021 and 2020, the Company paid total interest of $0 and $43,080 to M&T Bank for the above agreements, respectively.
Note 6 – Promissory Note
On April 21, 2020, the Company entered into a term note with its principal bank, M&T, with a principal amount of $330,505 pursuant to the Paycheck Protection Program (“PPP Term Note”) under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). The PPP Loan is evidenced by a promissory note. The PPP Term Note bears interest at a fixed annual rate of 1.00%, with the first six months of interest deferred. The Company returned the $330,505 received from the Paycheck Protection Program on May 6, 2020, inclusive of interest.
Note 7 - Leases
The Company determines if an arrangement contains a lease at inception. ROU assets represent the right to use an underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising from the lease. ROU assets and liabilities are recognized at the lease commencement date based on the estimated present value of lease payments over the lease term.
The Company’s leases consist of leaseholds on office space, manufacturing space and machinery and equipment. The Company utilized a portfolio approach in determining the discount rate. The portfolio approach takes into consideration the range of the term, the range of the lease payments, the category of the underlying asset and the Company’s estimated incremental borrowing rate, which is derived from information available at the lease commencement date, in determining the present value of lease payments. The Company also considered its recent debt issuances as well as publicly available data for instruments with similar characteristics when calculating the incremental borrowing rates.
On March 1, 2021, the Company amended its existing lease with the landlord for a new premise with a greater square footage. Upon cancellation of the existing lease, the Company wrote-off the net right of use asset and corresponding lease liability of $22,870. The Company recorded a right of use asset and related liability of $347,585 for the new space which will be occupied over a 60-month period.
The lease term includes options to extend the lease when it is reasonably certain that the Company will exercise that option. These operating leases contain renewal options for periods ranging from three to five years that expire at various dates with no residual value guarantees. Future obligations relating to the exercise of renewal options is included in the measurement if, based on the judgment of management, the renewal option is reasonably certain to be exercised. Factors in determining whether an option is reasonably certain of exercise include, but are not limited to, the value of leasehold improvements, the value of the renewal rate compared to market rates, and the presence of factors that would cause a significant economic penalty to the Company if the option is not exercised. Management reasonably plans to exercise all options, and as such, all renewal options are included in the measurement of the right-of-use assets and operating lease liabilities.
Leases with a term of 12 months or less are not recorded on the balance sheet, per the election of the practical expedient noted above.
The Company recognizes lease expense for these leases on a straight-line basis over the lease term. The Company recognizes variable lease payments in the period in which the obligation for those payments is incurred. Variable lease payments that depend on an index or a rate are initially measured using the index or rate at the commencement date, otherwise variable lease payments are recognized in the period incurred.
The components of lease expense were as follows:
Schedule of Components of Lease Expense
Supplemental balance sheet information related to leases was as follows:
Schedule of Supplemental Balance Sheet Information Related to Leases
Supplemental cash flow and other information related to leases was as follows:
Schedule of Supplemental Cash Flow and Other Information Related to Leases
Total future minimum payments required under the lease obligations as of July 31, 2021 are as follows:
Schedule of Future Minimum Payments Required Under Lease Obligations
Note 8 - Concentrations
Revenues
During the six months ended July 31, 2021, the Company earned revenues from three customers representing approximately 33%, 21% and 10% of gross sales. As of April 30, 2021, these three customers represented approximately 40%, 24% and 9% of total gross outstanding receivables, respectively. During the six months ended July 31, 2020, the Company earned revenues from two customers representing approximately 48% and 11% of gross sales. As of July 31, 2020, these two customers represented approximately 41% and 6% of total gross outstanding receivables, respectively.
Note 9 - Stockholders’ Equity
Options
The following is a summary of the Company’s option activity:
Summary of Option Activity
Weighted
Average Exercise Price
Summary of Option Outstanding and Exercisable
At July 31, 2021, the total intrinsic value of options outstanding and exercisable was $1,498,651 and $1,494,601, respectively.
During the six months ended July 31, 2021, six employees exercised a total of 152,000 options at an average exercise price of $0.72 per share for aggregate proceeds of $19,080. In June 2020, two employees exercised a total of 12,000 options at an exercise price of $0.60 per share for aggregate proceeds of $7,200.
For the six months ended July 31, 2021 and 2020, the Company recognized share-based compensation related to options of an aggregate of $786and $49,795, respectively. At July 31, 2021, unrecognized share-based compensation was $1,147.
Note 10 - Commitments and Contingencies
Insurance Claim
The Company maintains insurance for both property damage and business interruption relating to catastrophic events, such as fires. Insurance recoveries received for property damage and business interruption in excess of the net book value of damaged assets, clean-up and demolition costs, and post-event costs are recognized as income in the period received or committed when all contingencies associated with the recoveries are resolved. Gains on insurance recoveries related to business interruption are recorded within “Cost of sales” and any gains or losses related to property damage are recorded within “Other income (expense)” on the condensed consolidated statements of income.
On December 7, 2020, the Company experienced a fire at its plant in a spiral oven. The spiral oven was rebuilt and was fully put back into service in late February 2021. The estimated loss is approximately $656,700 which includes loss of business, the rebuild of the spiral oven, additional expenses to clean plant and lost material and packaging. During the six months ended July 31, 2021, the Company received $67,426 relating to business interruption insurance which was recorded as a component of costs of sales on the condensed consolidated statement of income. The Company received the remaining amount of proceeds for the property damage claim, resulting in other income of $91,312. This amount was offset by repairs and maintenance expense of $12,475 as well as the costs of additions and parts of the oven and roof totaling $47,669. On July 31, 2021, the Company recorded a receivable of $107,896 for proceeds to be received pursuant to an updated claim. This amount is for business interruption losses and is recorded within cost of sales on the condensed consolidated statements of income. The insurance claim remains open in order for the Company to review for additional business income losses.
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 (the “Agreement”). Under the terms of the Agreement the Licensor shall 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 Licensee to develop Licensor Products that are acceptable to Licensee. 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 this Development and License Agreement.
The Exclusive Term began on January 1, 2009 (the “Effective Date”) and ends on the 50th anniversary of the Effective Date.
The Royalty Rate shall be: 6% of net sales up to $500,000 of net sales for each Agreement year; 4% of Net Sales from $500,000 up to $2,500,000of Net Sales for each Agreement year; 2% of Net Sales from $2,500,000 up to $20,000,000 of Net Sales for each Agreement year; and 1% of Net Sales in excess of $20,000,000 of Net Sales for each Agreement year.
In order to continue the Exclusive term, the Company shall pay a minimum royalty with respect to the preceding Agreement year as follows:
Schedule of Royalty Minimum Payment by Preceding Agreement Year
Minimum
Royalty
to be Paid with
Respect to Such
Agreement Year
The Company incurred $143,540 and $125,618 of royalty expenses for the three months ended July 31, 2021 and 2020, respectively. The Company incurred $291,976 and $287,445 of royalty expenses for the six months ended July 31, 2021 and 2020, respectively. Royalty expenses are included in general and administrative expenses on the condensed consolidated statement of operations.
Agreements with Placement Agents and Finders
The Company entered into a fourth Financial Advisory and Investment Banking Agreement with Spartan Capital Securities, LLC (“Spartan”) effective April 1, 2015 (the “Spartan Advisory Agreement”). Pursuant to the Spartan Advisory Agreement, if the Company enters into a change of control transaction during the term of the agreement through October 1, 2022, the Company shall pay to Spartan a fee equal to 3% of the consideration paid or received by the Company and/or its stockholders in such transaction.
Advisory Agreements
The Company entered into an Advisory Agreement with Spartan effective June 1, 2019 (the “Advisory Agreement”). Pursuant to the agreement, the Company shall pay to Spartan a non-refundable monthly fee of $5,000 over a 21-month period. Additionally, the Company granted Spartan 125,000 shares of common stock which are considered fully-paid and non-assessable upon execution of the agreement. During the term of this Agreement, the Consultant will provide non-exclusive consulting services related to general corporate matters, including, but not limited to (i) advice and input with respect to raising capital and potential M&A transactions, (ii) identifying suitable personal for management and Board positions (iii) developing corporate structure and finance strategies, (iv) assisting the Company with strategic introductions, (v) assisting management with enhancing corporate and shareholder value, and (vi) introducing the Company to potential investors (collectively, the “Advisory Services”). The advisory agreement was terminated according to its terms on March 31, 2020.
The Company entered into an Advisory Agreement with B. Riley Securities, Inc. effective September 25, 2020 (the “B. Riley Advisory Agreement”). Pursuant to the agreement, the Company shall pay to B. Riley a non-refundable fee of $175,000 upon delivery of a fairness opinion in the event a transaction has value over $50 million ($125,000 if a transaction has a value less than $50 million). In addition, additional fees may be paid to B. Riley based on the terms of the agreement and transactions consummated. During the term or this Agreement, the Consultant will provide non-exclusive consulting services related to general corporate matters, including, but not limited to (i) advice and input with respect to raising capital and potential M&A transactions, (ii) identifying potential purchasers or targets, (iii) soliciting proposals from purchasers or targets, (iv) assisting the Company with strategic introductions and negotiations, (v) evaluating proposals, and (vi) other financial advisory and investment banking services (collectively, the “B. Riley Advisory Services”).
Note 11 – Impact on Previously Issued Financial Statements
During the audit for the year ended January 31, 2021, the Company identified and recorded a prior period adjustment related to promotion expenses that should have been recorded in the year ended January 31, 2021 as an offset to revenue as discussed in the Company’s revenue recognition policy instead of general and administrative expenses as originally recorded.
In accordance with the guidance provided by the SEC’s Staff Accounting Bulletin 99, Materiality and Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statementsthe Company determined that previously issued financial statements for the three and six months ended July 31, 2020 should be revised to reflect the correction of these errors..
As a result of the aforementioned correction of accounting errors, the relevant financial statements have been revised as follows:
Schedule of Revision of Prior Year Financials
Note 12 – Subsequent Events
On August 3, 2021, M&T Bank approved an acquisition line of credit for $6.0 million. The Company has two years to draw the line. If the Company draws on the line, it must pay down the line in 60 months. The current pricing is 3.5% above the one-day Libor rate.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
THE FOLLOWING DISCUSSION OF OUR PLAN OF OPERATION AND RESULTS OF OPERATIONS SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL STATEMENTS AND RELATED NOTES TO THE FINANCIAL STATEMENTS INCLUDED ELSEWHERE IN THIS REPORT. THIS DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT RELATE TO FUTURE EVENTS OR OUR FUTURE FINANCIAL PERFORMANCE. THESE STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS THAT MAY CAUSE OUR ACTUAL RESULTS, LEVELS OF ACTIVITY, PERFORMANCE OR ACHIEVEMENTS TO BE MATERIALLY DIFFERENT FROM ANY FUTURE RESULTS, LEVELS OF ACTIVITY, PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY THESE FORWARD- LOOKING STATEMENTS. THESE RISKS AND OTHER FACTORS INCLUDE, AMONG OTHERS, THOSE LISTED UNDER “FORWARD-LOOKING STATEMENTS” AND “RISK FACTORS” DETAILED IN PRIOR COMPANY FILINGS AND THOSE INCLUDED ELSEWHERE IN THIS REPORT.
Results of Operations for the Three Months ended July 31, 2021 and 2020
The following table sets forth the summary statements of operations for the three months ended July 31, 2021 and 2020:
For the three months ended July 31, 2021 and 2020, the Company reported net income of $431,925 and $739,767, respectively. The change in net income between the three months ended July 31, 2021 and 2020 was mainly the result of a decrease in gross profit percentage (as discussed below) and the income tax provision of $145,439 recorded during the three months ended July 31, 2021 compared to $0 during the three months ended July 31, 2020.
Sales:Sales, net of slotting fees and discounts increased by approximately 18% to $12,064,584 during the three months ended July 31, 2021, from $10,247,564 during the three months ended July 31, 2020. The increase was mainly to new product introductions and major customer volume increases.
Gross Profit: The gross profit margin was 28% for the three months ended July 31, 2021 compared to 30% for the three months ended July 31, 2020. The change in gross profit margin is due to increases in raw material costs, packaging costs and in-bound freight costs.
Operating Expenses: Operating expenses increased by 23% during the three months ended July 31, 2021, as compared to the three months ended July 31, 2020. Operating expenses as a percentage of sales was 23% in 2021 and 22% in 2020. The $513,975 increase in total operating expenses is primarily attributable to the following:
These expense increases were offset by minimal decreases in other expense categories.
Other Expenses: Other expenses decreased by $59,449 to $7,549 for the three months ended July 31, 2021 as compared to $66,998 during the three months ended July 31, 2020. For the three months ended July 31, 2021, other expenses consisted of $7,549 in interest expense incurred on the Company’s financing arrangements. For three months ended July 31, 2020, other expenses consisted of $61,648 in interest expense incurred on the Company’s financing arrangements and the Company recorded $5,350 of amortization expense related to the debt discount.
Results of Operations for the Six Months ended July 31, 2021 and 2020
The following table sets forth the summary statements of operations for the six months ended July 31, 2021 and 2020:
For the six months ended July 31, 2021 and 2020, the Company reported net income of $1,063,449 and $1,645,969, respectively. The change in net income between the six months ended July 31, 2021 and 2020 was mainly the result of a decrease in gross profit percentage (as discussed below) and the income tax provision of $393,388 recorded during the six months ended July 31, 2021 compared to $0 during the six months ended July 31, 2020.
Sales:Sales, net of slotting fees and discounts increased by approximately 6% to $22,377,984 during the six months ended July 31, 2021, from $21,082,505 during the six months ended July 31, 2020. The increase in sales can be attributed to new product introduction and major customer volume increases.
Gross Profit: The gross profit margin was 30% for the six months ended July 31, 2021 compared to 31% for the six months ended July 31, 2020. The change in gross profit margin is due to increases in raw material costs, packaging costs and in-bound freight costs.
Operating Expenses: Operating expenses increased by 11% during the six months ended July 31, 2021, as compared to the six months ended July 31, 2020. Operating expenses increased as a percentage of sales to 24% in 2021 compared to 23% in 2020. The $383,541 increase in total operating expenses is primarily attributable to the following:
These expense increases were offset by decreases in the following as well as minimal decreases in other expense categories:
Other Income (Expenses): Other income (expenses) increased by $156,475 to income of $19,725 for the six months ended July 31, 2021 as compared to expenses of $(136,750) during the six months ended July 31, 2020. For the six months ended July 31, 2021, other income (expenses) consisted of $(17,979) in interest expense incurred on the Company’s financing arrangements which was offset by the net insurance proceeds relating to the property damage claim of $37,704. For six months ended July 31, 2020, other expenses consisted of $(126,050) in interest expense incurred on the Company’s financing arrangements and the Company recorded $(10,700) of amortization expense related to the debt discount.
Liquidity and Capital Resources
The following table summarizes total current assets, liabilities and working capital at July 31, 2021 compared to January 31, 2021:
As of July 31, 2021, we had working capital of $6,065,546 as compared to a working capital of $4,834,102 as of January 31, 2021, an increase of $1,231,444. The increase in working capital is primarily attributable to an increase in cash of $1,062,321, an increase in accounts receivable of $728,920 and an increase in inventory of $212,403. These amounts were offset by an increase in accounts payable and accrued expenses of $749,822 and an increase in current portion of lease obligations of $58,281.
Net cash provided by operating activities for the six months ended July 31, 2021 and 2020 was $1,618,610 and $1,465,898, respectively. The net income for the six months ended July 31, 2021 and 2020 was $1,063,449 and $1,645,969, respectively.
Net cash used in all investing activities for the six months ended July 31, 2021 was $481,295 as compared to $189,287 for the six months ended July 31, 2020, respectively, to acquire new machinery and equipment and leasehold improvements. Our capital expenditures are attributed to a Plant Expansion Project in progress since mid-2017 to expand plant capacity and efficiency to meet growing demand.
Net cash used in all financing activities for the six months ended July 31, 2021 was $74,994 as compared to $28,292 provided by for the six months ended July 31, 2020. During the six months ended July 31, 2021, the Company received proceeds of $19,080 from the exercise of options. These cash in-flows were offset by payments of $94,074 paid for finance lease payments. During the six months ended July 31, 2020, the Company received proceeds of $330,505 from the Paycheck Protection Program promissory note and proceeds of $1,484,303 from the exercise of options and warrants. These cash in-flows were offset by payments on its line of credit of $500,000, payments on its term loan of $250,002, payments of $641,844 on the related party loans and $64,165 paid for capital lease payments. The Company returned the $330,505 received from the Paycheck Protection Program in May 2020.
Although the expected revenue growth and control of expenses lead management to believe that it is probable that the Company’s cash resources will be sufficient to meet its cash requirements through September 9, 2022 based on current and projected levels of operations, the Company may require additional funding to finance growth and achieve its strategic objectives. If such financing is required, there can be no assurance that financing will be available in amounts or terms acceptable to the Company, if at all. In the event funding is not available on reasonable terms, the Company might be required to change its growth strategy and/or seek funding on an alternative basis, but there is no guarantee it will be able to do so. Because of the rapidly changing environment in response to COVID-19, the current expectations of the Company may be altered as conditions change.
Management does not believe that any recently issued, but not yet effective accounting pronouncements, when adopted, will have a material effect on the accompanying consolidated financial statements.
Critical Accounting Policies
Our condensed consolidated financial statements and related public financial information are based on the application of accounting principles generally accepted in the United States (“GAAP”). GAAP requires the use of estimates; assumptions, judgments and subjective interpretations of accounting principles that have an impact on the assets, liabilities, revenues and expense amounts reported. These estimates can also affect supplemental information contained in our external disclosures including information regarding contingencies, risk and financial condition. We believe our use of estimates and underlying accounting assumptions adhere to GAAP and are consistently and conservatively applied. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ materially from these estimates under different assumptions or conditions. We continue to monitor significant estimates made during the preparation of our financial statements.
Our significant accounting policies are summarized in Note 2 of our condensed consolidated financial statements. While all these significant accounting policies impact our financial condition and results of operations, we view certain of these policies as critical. Policies determined to be critical are those policies that have the most significant impact on our financial statements and require management to use a greater degree of judgment and estimates. Actual results may differ from those estimates. Our management believes that given current facts and circumstances, it is unlikely that applying any other reasonable judgments or estimate methodologies would cause effect on our consolidated results of operations, financial position or liquidity for the periods presented in this report.
We believe the following critical accounting policies and procedures, among others, affect our more significant judgments and estimates used in the preparation of our consolidated financial statements:
On February 1, 2019, the Company adopted ASC 842 using the modified retrospective approach and recognized a right of use (“ROU”) asset and liability in the consolidated balance sheet in the amount of $1,599,830 related to the operating lease for office and warehouse space. Results for the year ended January 31, 2020 are presented under ASC 842, while prior period amounts were not adjusted and continue to be reported in accordance with the legacy accounting guidance under ASC Topic 840, Leases.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-09 supersedes the revenue recognition requirements under Topic 605, Revenue Recognition, and most industry-specific guidance throughout the Industry Topics of the ASC. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which an entity expects to be entitled in exchange for those goods or services. Under the new guidance, an entity is required to perform the following five steps: (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue when (or as) the entity satisfies a performance obligation. The new guidance will significantly enhance comparability of revenue recognition practices across entities, industries, jurisdictions and capital markets. Additionally, the guidance requires improved disclosures as to the nature, amount, timing and uncertainty of revenue that is recognized. In May 2016, the FASB issued ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606)—Narrow-Scope Improvements and Practical Expedients. This update clarifies the objectives of collectability, sales and other taxes, noncash consideration, contract modifications at transition, completed contracts at transition and technical correction. The amendments in this update affect the guidance in ASU 2014-09. In September 2017, the FASB issued additional amendments providing clarification and implementation guidance.
The Company adopted this guidance and related amendments as of the first quarter of fiscal 2019, applying the full retrospective transition method. As the underlying principles of the new standard, relating to the measurement of revenue and the timing of recognition, are closely aligned with the Company’s current business model and practices, the adoption of ASU 2014-09 did not have a material impact on the consolidated financial statements. In addition, the adoption of ASC 606 did not impact the previously reported financial statements in any prior period nor did it result in a cumulative effect adjustment to retained earnings.
The Company’s sales predominantly are generated from the sale of finished products to customers, contain a single performance obligation and revenue is recognized at a single point in time when ownership, risks and rewards transfer. Typically, this occurs when the goods are shipped to the customer. Revenues are recognized in an amount that reflects the net consideration the Company expects to receive in exchange for the goods. The Company reports all amounts billed to a customer in a sale transaction as revenue. Under the new revenue guidance, the Company elected to treat shipping and handling activities as fulfillment activities, and the related costs are recorded as selling expenses in general and administrative expenses on the consolidated statement of operations.
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.
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:
Costs incurred for producing and communicating advertising for the Company are charged to operations as incurred.
Off Balance Sheet Arrangements:
We do not have any off-balance sheet arrangements, financings, or other relationships with unconsolidated entities or other persons, also known as “special purpose entities” (SPEs).
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We do not hold any derivative instruments and do not engage in any hedging activities.
Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
Based on evaluation as of the end of the period covered by this Form 10-Q, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(c) and 15d-15(e) under the Exchange Act) are effective to ensure that information required to be disclosed by us in report that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the U.S. Securities and Exchange Commission’s rules and forms and to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.
(b) Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
We are currently not involved in any litigation that we believe could have a material adverse effect on our financial condition or results of operations. There is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the executive officers of our company or any of our subsidiaries, threatened against or affecting our company, our common stock, any of our subsidiaries or of our companies or our subsidiaries’ officers or directors in their capacities as such, in which an adverse decision could have a material adverse effect.
Item 1A. Risk Factors.
Smaller reporting companies are not required to provide the information required by this item.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
During the period between February 1, 2021 and July 31, 2021, the Company had no sales of unregistered securities.
Item 3. Defaults upon Senior Securities.
There has been no default in payment of principal, interest, sinking or purchase fund installment, or any other material default, with respect to any indebtedness of the Company.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
There is no other information required to be disclosed under this item which was not previously disclosed.
Item 6. Exhibits.
Exhibit
No.
* Filed herewith.
** Furnished herewith.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.