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Mama's Creations, Inc. - Quarter Report: 2019 April (Form 10-Q)

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

 

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarter ended: April 30, 2019

 

OR

 

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Transition Period from ___________ to ____________

 

Commission File Number: 000-54954

 

MamaMancini’s Holdings, Inc.

(Exact name of Registrant as specified in its charter)

 

Nevada   27-067116
(State or other jurisdiction
of incorporation)
  (IRS Employer
I.D. No.)

 

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)

 

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 [X] 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 [X] 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:

 

Large accelerated filer [  ] Accelerated filer [  ]
       
Non-accelerated filer [  ] Smaller reporting company [X]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [  ] No [X]

 

As of June 14, 2019, there were 31,866,241 shares outstanding of the registrant’s common stock.

 

 

 

 
 

 

TABLE OF CONTENTS

 

      Page 
PART I – FINANCIAL INFORMATION    
       
Item 1. Financial Statements.   F-1
       
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.   2
       
Item 3. Quantitative and Qualitative Disclosures About Market Risk.   4
       
Item 4. Controls and Procedures.   4
       
PART II – OTHER INFORMATION    
       
Item 1. Legal Proceedings.   5
       
Item 1A. Risk Factors.   5
       
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.   5
       
Item 3. Defaults Upon Senior Securities.   5
       
Item 4. Mine Safety Disclosures.   5
       
Item 5. Other Information   5
       
Item 6. Exhibits.   5
       
Signatures   6

 

1
 

 

PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

MamaMancini’s Holdings, Inc.

Condensed Consolidated Balance Sheets

 

   April 30, 2019   January 31, 2019 
    (unaudited)      
Assets          
           
Current Assets:          
Cash  $686,505   $609,409 
Accounts receivable, net   2,335,516    2,698,562 
Inventories   1,459,984    1,396,400 
Prepaid expenses   253,829    155,178 
Total current assets   4,735,834    4,859,549 
           
Property and equipment, net   3,001,092    2,884,594 
           
Operating lease right of use assets, net   1,589,172    - 
           
Deposits   20,177    20,177 
Total Assets  $9,346,275   $7,764,320 
           
Liabilities and Stockholders’ Deficit          
           
Liabilities:          
Current Liabilities:          
Accounts payable and accrued expenses  $2,974,521   $3,061,932 
Term loan   500,000    500,000 
Operating lease liability   91,038    - 
Finance leases payable   55,850    53,730 
Total current liabilities   3,621,409    3,615,662 
           
Term loan – net   1,596,688    1,914,401 
Line of credit – net   2,596,169    2,612,034 
Operating lease liability – net   1,498,941    - 
Finance leases payable – net   200,449    162,527 
Notes payable - related party   641,844    641,844 
Total long-term liabilities   6,534,091    5,330,806 
           
Total Liabilities   10,155,500    8,946,468 
           
Commitments and contingencies          
           
Stockholders’ Deficit:          
Series A Preferred stock, $0.00001 par value; 120,000 shares authorized; 23,400 issued as of April 30, 2019 and January 31, 2019, 0 and 0 shares outstanding as of April 30, 2019 and January 31, 2019   -    - 
Preferred stock, $0.00001 par value; 19,880,000 shares authorized; no shares issued and outstanding   -    - 
Common stock, $0.00001 par value; 250,000,000 shares authorized; 31,866,241 shares issued and outstanding as of April 30, 2019 and January 31, 2019   320    320 
Additional paid in capital   16,564,544    16,547,287 
Accumulated deficit   (17,224,589)   (17,580,255)
Less: Treasury stock, 230,000 shares at cost, respectively   (149,500)   (149,500)
Total Stockholders’ Deficit   (809,225)   (1,182,148)
Total Liabilities and Stockholders’ Deficit  $9,346,275   $7,764,320 

 

See accompanying notes to the condensed consolidated financial statements

 

F-1
 

 

MamaMancini’s Holdings, Inc.

Condensed Consolidated Statements of Operations

(unaudited)

 

   For the Three Months Ended 
   April 30, 2019   April 30, 2018 
         
Sales - net of slotting fees and discounts  $7,364,824   $7,741,994 
           
Cost of sales   4,933,770    4,913,448 
           
Gross profit   2,371,054    2,828,546 
           
Operating expenses          
Research and development   25,326    30,096 
General and administrative   1,866,162    2,244,937 
Total operating expenses   1,891,488    2,275,033 
           
Income from operations   479,566    553,513 
           
Other expenses          
Interest   (116,612)   (188,141)
Amortization of debt discount   (7,288)   (41,371)
Total other expenses   (123,900)   (229,512)
           
Net income   355,666    324,001 
           
Less: preferred dividends   -    - 
           
Net income available to common stockholders  $355,666   $324,001 
           
Net income per common share - basic and diluted  $0.01   $0.01 
           
Weighted average common shares outstanding          
- basic   31,866,240    31,780,111 
- diluted   32,098,426    34,655,399 

 

See accompanying notes to the condensed consolidated financial statements

 

F-2
 

 

MamaMancini’s Holdings, Inc.

Condensed Consolidated Statements of Changes in Stockholders’ Deficit

(unaudited)

 

For the Period from February 1, 2019 through April 30, 2019

 

   Series A Preferred Stock   Common Stock   Treasury Stock   Additional
Paid In
   Accumulated   Stockholders’ 
   Shares   Amount   Shares   Amount   Shares   Amount   Capital   Deficit   Deficit 
                                              
Balance,
February 1, 2019
   -   $-    31,866,241   $320    (230,000)  $(149,500)  $16,547,287   $(17,580,255)  $(1,182,148)
                                              
Stock options issued for services   -    -    -    -    -    -    17,257    -    17,257 
                                              
Net income   -    -    -    -    -    -    -    355,666    355,666 
Balance,
April 30, 2019
   -   $-    31,866,241   $320    (230,000)  $(149,500)  $16,564,544   $(17,224,589)  $(809,225)

 

For the Period from February 1, 2018 through April 30, 2018

 

   Series A Preferred Stock   Common Stock   Treasury Stock   Additional
Paid In
   Accumulated   Stockholders’ 
   Shares   Amount   Shares   Amount   Shares   Amount   Capital   Deficit   Deficit 
                                              
Balance,
February 1, 2018
   -   $-    31,753,437   $319    (230,000)  $(149,500)  $16,344,794   $(18,130,303)  $(1,934,690)
                                              
Share-based compensation   -    -    -    -    -    -    42,218    -    42,218 
                                              
Common stock issued for the exercise of options   -    -    40,000    -    -    -    40,000    -    40,000 
                                              
Common stock issued for the exercise of warrants   -    -    30,556    -    -    -    -    -    30,556 
                                              
Net income   -    -    -    -    -    -    -    324,001    324,001 
Balance,
April 30, 2018
   -   $-    31,823,993   $319    (230,000)  $(149,500)  $16,427,012   $(17,806,302)  $(1,528,471)

 

See accompanying notes to the condensed consolidated financial statements

 

F-3
 

 

MamaMancini’s Holdings, Inc.

Condensed Consolidated Statements of Cash Flows

(unaudited)

   For the Three Months Ended 
   April 30, 2019   April 30, 2018 
           
CASH FLOWS FROM OPERATING ACTIVITIES:          
Net income  $355,666   $324,001 
Adjustments to reconcile net income to net cash provided by operating activities:          
Depreciation   180,485    155,242 
Amortization of debt discount   7,288    41,371 
Share-based compensation   17,257    42,218 
Amortization of right of use assets   10,658    - 
Changes in operating assets and liabilities:          
Accounts receivable   363,046    (697,253)
Inventories   (63,584)   (298,319)
Prepaid expenses   (98,651)   73,211 
Accounts payable and accrued expenses   (87,411)   498,427 
Current portion of operating lease liability   (9,851)   - 
Net Cash Provided by Operating Activities   674,903    138,898 
           
CASH FLOWS FROM INVESTING ACTIVITIES:          
Cash paid for fixed assets   (242,820)   (420,220)
Net Cash Used in Investing Activities   (242,820)   (420,220)
           
CASH FLOWS FROM FINANCING ACTIVITIES:          
Repayment of note payable   -    (300,000)
Borrowings (repayments) of line of credit, net   (15,865)   480,495 
Repayment of term loan   (325,001)   (41,385)
Repayment of capital lease obligations   (14,121)   - 
Proceeds from exercise of options   -    40,000 
Net Cash Provided by (Used in) Financing Activities   (354,987)   179,110 
           
Net Increase (Decrease) in Cash   77,096    (102,212)
           
Cash - Beginning of Period   609,409    581,322 
           
Cash - End of Period  $686,505   $479,110 
           
SUPPLEMENTARY CASH FLOW INFORMATION:          
Cash Paid During the Period for:          
Income taxes  $-   $- 
Interest  $151,968   $181,204 
           
SUPPLEMENTARY DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:          
Operating lease liability  $1,599,830   $- 
Finance lease asset additions  $54,163   $- 

 

See accompanying notes to the condensed consolidated financial statements

 

F-4
 

 

MamaMancini’s Holdings, Inc.

Notes to Condensed Consolidated Financial Statements

April 30, 2019

 

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 and other similar meats and sauces. The Company’s customers are located throughout the United States, with a large concentration 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 material intercompany balances and transactions have been eliminated in consolidation.

 

The unaudited 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, 2019 filed on April 23, 2019. 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, 2019 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, 2020.

 

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.

 

Following the closing of the merger with Joseph Epstein Food Enterprises, Inc. (“JEFE”) on November 1, 2017, the financial statements of JEFE are consolidated with that of the Company. The prior period financial statements included in the condensed consolidated financial statements have been adjusted to reflect this transaction.

 

Use of Estimates

 

The preparation of condensed 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.

 

F-5
 

 

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 April 30, 2019 and January 31, 2019.

 

The Company minimizes its credit risk associated with cash by periodically evaluating the credit quality of its primary financial institution. The balance at times may exceed federally insured limits.

 

Accounts Receivable and Allowance for Doubtful Accounts

 

Accounts receivable are stated at the amount management expects to collect from outstanding balances. The Company generally does not require collateral to support customer receivables. The Company provides an allowance for doubtful 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. The maximum accounting loss from the credit risk associated with accounts receivable is the amount of the receivable recorded, which is the face amount of the receivable net of the allowance for doubtful accounts. As of April 30, 2019 and January 31, 2019, 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 April 30, 2019 and January 31, 2019:

 

   April 30, 2019   January 31, 2019 
Raw Materials  $830,981   $556,703 
Work in Process   27,496    38,769 
Finished goods   601,507    800,928 
   $1,459,984   $1,396,400 

 

Property and Equipment

 

Property and equipment are recorded at cost. Depreciation expense is computed using straight-line methods over the estimated useful lives.

 

F-6
 

 

Asset lives for financial statement reporting of depreciation are:

 

Machinery and equipment   2-7 years  
Furniture and fixtures   3 years  
Leasehold improvements   *  

 

(*) Amortized on a straight-line basis over the term of the lease or the estimated useful lives, whichever period is shorter.

 

Upon sale or retirement of property and equipment, the related cost and accumulated depreciation are removed from the accounts and any gain or loss is reflected in the condensed consolidated statements of operations.

 

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.

 

On January 1, 2019, the Company adopted ASC 842 using the modified retrospective approach and recognized a right of use (“ROU”) asset and liability in the condensed consolidated balance sheet in the amount of $1,599,830 related to the operating lease for office and warehouse space. Results for the three months ended April 30, 2019 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.

 

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:

 

  1. Not separate non-lease components from lease components and instead to account for each separate lease component and the non-lease components associated with that lease component as a single lease component.
     
  2. Not to apply the recognition requirements in ASC 842 to short-term leases.
     
  3. Not record a right of use asset or right of use liability for leases with an asset or liability balance that would be considered immaterial.

 

Refer to Note 7. Leases for additional disclosures required by ASC 842.

 

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 April 30, 2019 and 2018 were $25,326 and $30,096, 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.

 

F-7
 

 

Revenue Recognition

 

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 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 generally recognizes the related trade receivable when the goods are shipped.

 

Expenses such as slotting fees, sales discounts, and allowances are accounted for as a direct reduction of revenues as follows:

 

   For the Three Months Ended 
   April 30, 2019   April 30, 2018 
Gross Sales  $7,456,956   $7,858,034 
Less: Slotting, Discounts, Allowances   92,132    116,040 
Net Sales  $7,364,824   $7,741,994 

 

F-8
 

 

Disaggregation of Revenue from Contracts with Customers. The following table disaggregates gross revenue by significant geographic area for the three months ended April 30, 2019 and 2018:

 

   For the Three Months Ended 
   April 30, 2019   April 30, 2018 
Northeast  $2,396,830   $2,365,565 
Southeast   1,861,809    1,826,419 
Midwest   987,186    1,241,378 
West   1,260,184    1,395,325 
Southwest   950,947    1,029,347 
Total revenue  $7,456,956   $7,858,034 

 

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, 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 April 30, 2019 and 2018 were $342,822 and $515,157, 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 accounts for compensation cost for stock option plans in accordance with ASC 718.

 

The Company recognizes all forms of share-based payments, including stock option grants, warrants and restricted stock grants, at their fair value on the grant date, which are based on the estimated number of awards that are ultimately expected to vest.

 

Share-based payments, excluding restricted stock, are valued using a Black-Scholes option pricing model. Grants of share-based payment awards issued to non-employees for services rendered have been recorded at the fair value of the share-based payment, which is the more readily determinable value. The grants are amortized on a straight-line basis over the requisite service periods, which is generally the vesting period. If an award is granted, but vesting does not occur, any previously recognized compensation cost is reversed in the period related to the termination of service. Stock-based compensation expenses are included in cost of goods sold or selling, general and administrative expenses, depending on the nature of the services provided, in the consolidated statement of operations. Share-based payments issued to placement agents are classified as a direct cost of a stock offering and are recorded as a reduction in additional paid in capital.

 

For the three months ended April 30, 2019 and 2018, share-based compensation amounted to $17,257 and $42,218, respectively.

 

For the three months ended April 30, 2019 and 2018, when computing fair value of share-based payments, the Company has considered the following variables:

 

   April 30, 2019   April 30, 2018 
Risk-free interest rate   2.29%   1.60% to 1.99%
Expected life of grants   3.5 years     2.0 – 4.0 years 
Expected volatility of underlying stock   150%   139% to 177%
Dividends   0%   0%

 

F-9
 

 

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 (Loss) Per Share

 

Earnings per share (“EPS”) is the amount of earnings attributable to each share of common stock. For convenience, the term is used to refer to either earnings or loss per share. EPS is computed pursuant to Section 260-10-45 of the FASB Accounting Standards Codification. 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 (loss) attributable to common stockholders per common share.

 

   For the Three Months Ended 
   April 30, 2019   April 30, 2018 
Numerator:          
Net income attributable to common stockholders  $335,666   $324,001 
Effect of dilutive securities:        
           
Diluted net income  $335,666   $324,001 
           
Denominator:          
Weighted average common shares outstanding - basic   31,866,240    31,780,111 
Dilutive securities (a):          
Series A Preferred   -    - 
Options   108,854    212,229 
Warrants   123,332    2,663,059 
           
Weighted average common shares outstanding and assumed
conversion – diluted
   32,098,426    34,655,399 
           
Basic net income per common share  $0.01   $0.01 
           
Diluted net income per common share  $0.01   $0.01 
           
(a) - Anti-dilutive securities excluded:   3,106,167    3,079,001 

 

F-10
 

 

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.

 

The Company is no longer subject to tax examinations by tax authorities for years prior to 2017.

 

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 August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement”. This update is to improve the effectiveness of disclosures in the notes to the financial statements by facilitating clear communication of the information required by U.S. GAAP that is most important to users of each entity’s financial statements. The amendments in this update apply to all entities that are required, under existing U.S. GAAP, to make disclosures about recurring or nonrecurring fair value measurements. The amendments in this update are effective for all entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. The Company is currently evaluating this guidance and the impact of this update on its 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.

 

F-11
 

 

Note 3 - Property and Equipment:

 

Property and equipment on April 30, 2019 and January 31, 2019 are as follows:

 

   April 30, 2019   January 31, 2019 
Machinery and Equipment  $2,941,002   $2,662,403 
Furniture and Fixtures   89,627    81,099 
Leasehold Improvements   2,904,802    2,894,949 
    5,935,431    5,638,451 
Less: Accumulated Depreciation   2,934,339    2,753,857 
   $3,001,092   $2,884,594 

 

Depreciation expense charged to income for the three months ended April 30, 2019 and 2018 amounted to $180,485 and $155,242, respectively.

 

Note 4 - Investment in Meatball Obsession, LLC

 

During 2011, the Company acquired a 34.62% interest in Meatball Obsession, LLC (“MO”) for a total investment of $27,032. This investment is accounted for using the equity method of accounting. Accordingly, investments are recorded at acquisition cost plus the Company’s equity in the undistributed earnings or losses of the entity.

 

At December 31, 2011, the investment was written down to $0 due to losses incurred by MO.

 

The Company’s ownership interest in MO has decreased due to dilution. At April 30, 2019 and January 31, 2019, the Company’s ownership interest in MO was 12% and 12%, respectively.

 

Note 5 - Related Party Transactions

 

Meatball Obsession, LLC

 

A current director of the Company is the chairman of the board and shareholder of Meatball Obsession LLC (“MO”).

 

For the three months ended April 30, 2019 and 2018, the Company generated approximately $29,338 and $28,738 in revenues from MO, respectively.

 

As of April 30, 2019 and January 31, 2019, the Company had a receivable of $48,587 and $57,374 due from MO, respectively.

 

WWS, Inc.

 

A current director of the Company is the president of WWS, Inc.

 

For the three months ended April 30, 2019 and 2018, the Company recorded $6,000 and $12,000 in commission expense from WWS, Inc. generated sales, respectively.

 

Notes Payable – Related Party

 

During the year ended January 31, 2016, the Company received aggregate proceeds of $125,000 from notes payable with the CEO of the Company. The notes bear interest at a rate of 4% per annum and matured on December 31, 2016. The notes were subsequently extended until January 2024. As of April 30, 2019 and January 31, 2019, the outstanding principal balance of the notes was $109,844.

 

The Company received advances from the CEO of the Company which bear interest at 8%. The advances are due on January 2024. At April 30, 2019 and January 31, 2019, there was $400,000 of principal outstanding.

 

F-12
 

 

The Company received advances from an entity 100% owned by the CEO of the Company, which bear interest at 8%. The advances are due on January 2024. At April 30, 2019 and January 31, 2019, there was $132,000 of principal outstanding, respectively.

 

For the three months ended April 30, 2019 and 2018, the Company recorded interest expense of $10,888 and $11,826, respectively, related to the above related party notes payable. At April 30, 2019 and January 31, 2019, there was $2,473 and $48,141 of accrued interest on the above related party notes, respectively.

 

Note 6 - Loan and Security Agreement

 

M&T Bank

 

Effective, January 4, 2019, the Company also 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 new 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 and will be amortized over the remaining life of the note using the effective interest method. There was unamortized debt discount of $78,311 and $85,599 as of April 30, 2019 and January 31, 2019, respectively. The outstanding balance on the term loan was $2,174,999 and $2,500,000 as of April 30, 2019 and January 31, 2019, respectively.

 

Effective, January 4, 2019, the Company has arranged a new $3.5 million working capital line of credit with M&T Bank at LIBOR plus four points with a two-year expiration. The new 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 $2,596,169 and $2,612,034 as of April 30, 2019 and January 31, 2019, respectively.

 

Future maturities of all debt (excluding debt discount discussed above in Notes 5 and 6) are as follows:

 

For the Years Ending April 30,    
2020  $500,000 
2021   3,096,172 
2022   500,004 
2023   500,004 
2024   816,832 
   $5,413,012 

 

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.

 

F-13
 

 

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:

 

   Three Months Ended
April 30, 2019
 
Finance leases:     
Depreciation of assets   16,567 
Interest on lease liabilities   7,167 
Operating leases   62,991 
Short-term lease   2,087 
Total net lease cost  $88,812 

 

F-14
 

 

Supplemental balance sheet information related to leases was as follows:

 

   April 30, 2019 
Operating leases:     
Operating lease ROU assets  $1,589,172 
      
Current operating lease liabilities, included in current liabilities  $91,038 
Noncurrent operating lease liabilities, included in long-term liabilities   1,498,941 
Total operating lease liabilities  $1,589,979 
      
Finance leases:     
Property and equipment, at cost  $297,416 
Accumulated depreciation   73,840 
Property and equipment, net  $223,576 
      
Current obligations of finance leases, included in current portion of long-term debt  $55,850 
Finance leases, net of current obligations, included in long-term debt   200,449 
Total finance lease liabilities  $256,299 

 

Supplemental cash flow and other information related to leases was as follows:

 

   Three Months Ended
April 30, 2019
 
Cash paid for amounts included in the measurement of lease liabilities:     
Operating cash flows from operating leases  $807 
Financing cash flows from finance leases   14,121 
      
ROU assets obtained in exchange for lease liabilities:     
Operating leases  $1,599,830 
Finance leases   54,163 

 

Weighted average remaining lease term (in years):    
Operating leases   9.7 
Finance leases   3.2 
      
Weighted average discount rate:     
Operating leases   6.54%
Finance leases   7.17%

 

F-15
 

 

Total future minimum payments required under the lease obligations as of April 30, 2019 are as follows:

 

Twelve Months Ending April 30,    
2020  $306,164 
2021   307,166 
2022   348,420 
2023   228,331 
2024   213,007 
Thereafter   1,041,663 
Total lease payments  $2,444,751 
Less: amounts representing interest   (608,887)
Total lease obligations  $1,835,864 

 

Note 9 - Concentrations

 

Revenues

 

During the three months ended April 30, 2019, the Company earned revenues from three customers representing approximately 44%, 12% and 10% of gross sales. During the three months ended April 30, 2018, the Company earned revenues from one customer representing approximately 55% of gross sales. As of April 30, 2019, three customers represented approximately 45%, 14% and 12% of total gross outstanding receivables, respectively. As of April 30, 2018, this one customer represented approximately 60% of total gross outstanding receivables.

 

Note 10 - Stockholders’ Deficit

 

(A) Options

 

The following is a summary of the Company’s option activity:

 

   Options   Weighted
Average
Exercise Price
 
Outstanding – January 31, 2019   649,000   $0.77 
Exercisable – January 31, 2019   521,500   $0.71 
Granted   7,500   $0.74 
Exercised   -   $- 
Forfeited/Cancelled   -   $- 
Outstanding – April 30, 2019   656,500   $0.77 
Exercisable – April 30, 2019   556,500   $0.72 

 

F-16
 

 

    Options Outstanding       Options Exercisable 
Exercise
Price
   Number
Outstanding
   Weighted
Average
Remaining
Contractual
Life
(in years)
   Weighted
Average
Exercise Price
   Number
Exercisable
   Weighted
Average
Exercise Price
 
                            
$0.39 – 1.38    656,000    2.62   $0.77    556,500   $0.72 

 

At April 30, 2019 the total intrinsic value of options outstanding and exercisable was $76,187 and $76,187, respectively.

 

During the three months ended April 30, 2018, 40,000 options were exercised by the option holders. The Company issued 40,000 shares of common stock as a result of this exercise and received proceeds of $40,000. No options were exercised during the three months ended April 30, 2019.

 

For the three months ended April 30, 2019 and 2018, the Company recognized share-based compensation related to options of an aggregate of $17,257 and $42,218, respectively. At April 30, 2019, unrecognized share-based compensation was $13,708.

 

(B) Warrants

 

The following is a summary of the Company’s warrant activity:

 

   Warrants   Weighted
Average
Exercise Price
 
         
Outstanding – January 31, 2019   6,245,331   $1.04 
Exercisable – January 31, 2019   6,245,331   $1.04 
Granted   -   $- 
Exercised   -   $- 
Forfeited/Cancelled   -   $- 
Outstanding – April 30, 2019   6,245,331   $1.04 
Exercisable – April 30, 2019   6,245,331   $1.04 

 

Warrants Outstanding   Warrants Exercisable 
Exercise
Price
   Number
Outstanding
   Weighted
Average
Remaining
Contractual
Life
(in years)
   Weighted
Average
Exercise Price
   Number
Exercisable
   Weighted
Average
Exercise Price
 
                            
$0.68 – 2.50    6,245,331    1.58   $1.04    6,245,331   $1.04 

 

At April 30, 2019, the total intrinsic value of warrants outstanding and exercisable was $86,320 and $86,320, respectively.

 

During the three months ended April 30, 2019, no warrants were exercised by the warrant holders.

 

During the three months ended April 30, 2018, 120,430 warrants were exercised by the warrant holders on a cashless basis. The Company issued 30,556 shares of common stock as a result of this exercise.

 

F-17
 

 

Note 11 - Commitments and Contingencies

 

Litigations, 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 $2,500,000 of 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:

 

Agreement Year  Minimum
Royalty
to be Paid with
Respect to Such
Agreement Year
 
1st and 2nd  $- 
3rd and 4th  $50,000 
5th, 6th and 7th  $75,000 
8th and 9th  $100,000 
10th and thereafter  $125,000 

 

The Company incurred $116,466 and $129,863 of royalty expenses for the three months ended April 30, 2019 and 2018. Royalty expenses are included in general and administrative expenses on the 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, the Company shall pay to Spartan a non-refundable monthly fee of $10,000 through October 1, 2015. The monthly fee shall survive any termination of the Agreement. Additionally, (i) if at least $4,000,000 is raised in the Financing, the Company shall pay to Spartan a non-refundable fee of $5,000 per month from November 1, 2015 through October 2017; and (ii) if at least $5,000,000 is raised in the Financing, the Company shall pay to Spartan a non-refundable fee of $5,000 per month from November 1, 2017 through October 2019. If $10,000,000 or more is raised in the Financing, the Company shall issue to Spartan shares of its common stock having an aggregate value of $5,000 (as determined by reference to the average volume weighted average trading price for the last five trading days of the immediately preceding month) on the first day of each month during the period from November 1, 2015 through October 1, 2019.

 

F-18
 

 

The Company, upon closing of the Financing, shall pay consideration to Spartan, in cash, a fee in an amount equal to 10% of the aggregate gross proceeds raised in the Financing and 3% of the aggregate gross proceeds raised in the Financing for expenses incurred by Spartan. The Company shall grant and deliver to Spartan at the closing of the Financing, for nominal consideration, five-year warrants to purchase a number of shares of the Company’s common stock equal to 10% of the number of shares of common stock (and/or shares of common stock issuable upon exercise of securities or upon conversion or exchange of convertible or exchangeable securities) sold at such closing. The warrants shall be exercisable at any time during the five-year period commencing on the closing to which they relate at an exercise price equal to the purchase price per share of common stock paid by investors in the Financing or, in the case of exercisable, convertible, or exchangeable securities, the exercise, conversion or exchange price thereof. If the Financing is consummated by means of more than one closing, Spartan shall be entitled to the fees provided herein with respect to each such closing.

 

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.

 

F-19
 

 

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 April 30, 2019 and 2018

 

The following table sets forth the summary statements of operations for the three months ended April 30, 2019 and 2018:

 

   Three Months Ended 
   April 30, 2019   April 30, 2018 
Sales - Net of Slotting Fees and Discounts  $7,364,824   $7,741,994 
Gross Profit  $2,371,054   $2,828,546 
Operating Expenses  $(1,891,488)  $(2,275,033)
Other Expenses  $(123,900)  $(229,512)
Net Income  $355,666   $324,001 

 

For the three months ended April 30, 2019 and 2018, the Company reported a net income of $355,666 and $324,001, respectively. The change in net income between the three months ended April 30, 2019 and 2018 was primarily attributable to lower interest and amortization expenses in 2019.

 

Sales: Sales, net of slotting fees and discounts decreased by approximately 5% to $7,364,824 during the three months ended April 30, 2019, from $7,741,994 during the three months ended April 30, 2018. During the three months ended April 30, 2019, the Company did not participate in any major merchandising events versus the prior year which resulted in the sales decrease. Also in the prior year period there was 13 ship weeks and in this year, there was 12. Management estimates that this effected sales by about $500,000 during the three months ended April 30, 2019.

 

Gross Profit: The gross profit margin was 32% for the three months ended April 30, 2019 compared to 37% for the three months ended April 30, 2018. During the three months ended April 30, 2019, cost of sales included an increase in depreciation expense of approximately $179,000 (representing approximately 3% of sales) related to the significant plant capacity additions during the last 12 months. Gross margin also decreased slightly due to a change in product mix and lower plant efficiencies. In future periods the Company expects sales to increase from the current quarter level which should increase gross profit margin as plant efficiencies should take effect.

 

Operating Expenses: Operating expenses decreased by 17% during the three months ended April 30, 2019, as compared to the three months ended April 30, 2018. The change in total operating expenses is primarily attributable to the following approximate decreases in operating expenses:

 

Advertising, social media and promotional expenses of $172,335 related to a change in customer mix and lower demo merchandising expenses.
   
Stock-based compensation for services rendered by employees and consultants decreased by $24,961 compared to the prior year; and

 

2
 

 

Other Expense: Other expenses decreased by $105,612 to $123,900 for the three months ended April 30, 2019 as compared to $229,512 during the three months ended April 30, 2018. For three months ended April 30, 2019, other expenses consisted of $116,612 in interest expense incurred on the Company’s financing arrangements. In addition, the Company recorded $7,288 of amortization expense related to the debt discount. For the three months ended April 30, 2018, other expenses consisted of $188,141 in interest expense incurred on the Company’s finance arrangements. In addition, the Company recorded $41,371 of amortization expense related to the debt discount and finance arrangements.

 

Liquidity and Capital Resources

 

The following table summarizes total current assets, liabilities and working capital at April 30, 2019 compared to January 31, 2019:

 

   April 30, 2019   January 31, 2019   Increase/(Decrease) 
Current Assets  $4,735,834   $4,859,549   $(123,715)
Current Liabilities  $3,621,409   $3,615,662   $5,747 
Working Capital (Deficit)  $1,114,425   $1,243,887   $(129,462)

 

As of April 30, 2019, we had working capital of $1,114,425 as compared to a working capital deficit of $1,243,887 as of January 31, 2019, a decrease of $129,462. The decrease in working capital deficit is primarily attributable to an increase in cash balances of approximately $77,100, an increase in inventories of $63,600, an increase in prepaid expenses of approximately $98,700 and a decrease in accounts payable and accrued expenses of approximately $87,400. These amounts were offset by a decrease in accounts receivable of $363,000 and an approximate $93,200 increase in the current portion of debt.

 

Net cash provided by operating activities for the three months ended April 30, 2019 and 2018 was $674,903 and $138,898, respectively. The net income for the three months ended April 30, 2019 and 2018 was $355,666 and $324,001, respectively.

 

Net cash used in all investing activities for the three months ended April 30, 2019 was $242,820 as compared to $420,220 for the three months ended April 30, 2018, 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 by all financing activities for the three months ended April 30, 2019 was $354,987 as compared to $179,110 provided by financing activities for the three months ended April 30, 2018. During the three months ended April 30, 2019, the Company made net repayments of the line of credit of $15,865, payments of term loan of $325,001 and $14,121 paid for capital lease payments. During the three months ended April 30, 2018, the Company had net borrowings increase of $480,495 for transactions pursuant to the line of credit in addition to proceeds of $40,000 received from the exercise of options. These cash in-flows were offset by $41,385 and $300,000 paid for repayments on a term loan and net payments of the note payable to Manatuck Hill Partners, respectively.

 

As reflected in the accompanying condensed consolidated financial statements, the Company has a net income and net cash provided by operations of $355,666 and $674,903, respectively, for the three months ended April 30, 2019.

 

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 our cash requirements through the fiscal year ending January 31, 2020, the Company may require additional funding to finance the growth of its current and expected future operations as well as to achieve its strategic objectives. table to the Company, if at all. In that event, the Company would be required to change its growth strategy and seek funding on that basis, though there is no guarantee it will be able to do so.

 

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Recent Accounting Pronouncements

 

In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement”. This update is to improve the effectiveness of disclosures in the notes to the financial statements by facilitating clear communication of the information required by U.S. GAAP that is most important to users of each entity’s financial statements. The amendments in this update apply to all entities that are required, under existing U.S. GAAP, to make disclosures about recurring or nonrecurring fair value measurements. The amendments in this update are effective for all entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. The Company is currently evaluating this guidance and the impact of this update on its 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.

 

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.

 

Other than the adoption of FASB ASU 2016-02, “Leases” (Topic 842), there have been no material changes to our critical accounting policies and estimates from the information provided in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included in our January 31, 2019 Annual Report.

 

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.

 

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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, 2019 and June 14, 2019 the Company did not issue any shares of its Common Stock.

 

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.
  Description
     
31.1   Certification of Principal Executive Officer, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 302 of 2002*
     
31.2   Certification of Principal Financial Officer, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 302 of 2002*
     
32.1   Certification of Principal Executive Officer, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*
     
32.2   Certification of Principal Financial Officer, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*
     
101.INS   XBRL Instance Document**
101.SCH   XBRL Taxonomy Extension Schema Document**
101.CAL   XBRL Taxonomy Extension Calculation Linkbase Document**
101.DEF   XBRL Taxonomy Extension Definition Linkbase Document**
101.LAB   XBRL Taxonomy Extension Label Linkbase Document**
101.PRE   XBRL Taxonomy Extension Presentation Linkbase Document**

 

* Filed herewith.

** Furnished herewith.

 

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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.

 

  MAMAMANCINI’S HOLDINGS, INC.
     
Date: June 14, 2019 By: /s/ Carl Wolf
  Name: Carl Wolf
  Title: Chief Executive Officer
    (Principal Executive Officer)

 

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