Mama's Creations, Inc. - Quarter Report: 2023 July (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

For the quarter ended: July 31, 2023

OR

For the Transition Period from ___________ to ____________

Commission File Number: 001-40597

Mama’s Creations, 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 11, 2023, there were 37,443,387 shares outstanding of the registrant’s common stock.

TABLE OF CONTENTS

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

Certain statements in this report are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Exchange Act. The forward-looking statements involve substantial risks and uncertainties. All statements, other than statements related to present facts or current conditions or of historical facts, contained in this report, including statements regarding our strategy, future operations, future financial position, future revenues, and projected costs, prospects, plans and objectives of management, are forward-looking statements. Accordingly, these statements involve estimates, assumptions and uncertainties which could cause actual results to differ materially from those expressed in them. The words “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “ongoing,” “plan,” “potential,” “predict,” “project,” “should,” “target,” “will,” “would,” or the negative of these terms or other comparable terminology are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words.

Forward-looking statements are not guarantees of future performance and our actual results could differ materially from the results discussed in the forward-looking statements. Factors that could cause actual results to differ materially from those in the forward-looking statements include:

For more information regarding these risks and uncertainties as well as certain additional risks that we face, you should refer to “Item 1A. Risk Factors” in this report and “Item 1A. Risk Factors” in our most recent Annual Report on Form 10-K, and to subsequent reports and registration statements filed from time to time with the SEC. We caution you not to place undue reliance on these forward-looking statements, which are current only as of the date on which we issued this report. We do not intend to, and we disclaim any duty or obligation to, update or revise any forward-looking statements to reflect new information or future events or for any other reason.

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.

Mama’s Creations, Inc.

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

July 31, 2023

Mama’s Creations, Inc.

Condensed Consolidated Balance Sheets

See accompanying notes to the condensed consolidated financial statements.

Mama’s Creations, Inc.

Condensed Consolidated Statements of Operations

(Unaudited)

See accompanying notes to the condensed consolidated financial statements.

Mama’s Creations, Inc.

Condensed Consolidated Statements of Changes in Stockholders’ Equity

(Unaudited)

For the Period from May 1, 2023 through July 31, 2023

For the Period from May 1, 2022 through July 31, 2022

For the Period from February 1, 2023 through July 31, 2023

For the Period from February 1, 2022 through July 31, 2022

See accompanying notes to the condensed consolidated financial statements.

Mama’s Creations, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

See accompanying notes to the condensed consolidated financial statements.

Mama’s Creations, Inc.

Notes to Condensed Consolidated Financial Statements

July 31, 2023

Note 1 - Nature of Operations and Basis of Presentation

Nature of Operations

Mama’s Creations, Inc. (together with its subsidiaries, the “Company”), was organized on July 22, 2009 as a Nevada corporation. The Company has a year-end of January 31.

Our subsidiary, MamaMancini’s Inc., a Delaware Corporation (“Mamas”) is a marketer, manufacturer and distributor of beef meatballs with sauce, turkey meatballs with sauce, beef meat loaf, sausage & peppers, chicken parmesan and other similar meats and sauces. In addition, the Company continues to diversify its product line by introducing new products such as ready to serve meals, single-size pasta bowls, bulk deli, and packaged refrigerated protein products. Mamas products were submitted to the United States Department of Agriculture (the “USDA”) and approved as all natural. The USDA defines all natural as a product that contains no artificial ingredients, coloring ingredients or chemical preservatives and is minimally processed.

On December 29, 2021, the Company made two acquisitions which expanded the Company’s core product lines, occasions, and access to specific cohorts and markets. T&L Creative Salads, Inc. (“T&L”) and Olive Branch, LLC (“Olive Branch”), are related premier gourmet food manufacturers based in New York. T&L offers a full line of foods for retail food chains and club stores, delis, bagel stores, caterers and provision distributors. T&L uses high-quality meats, seafood and vegetables, prepared to meet the standards set forth by the USDA and the Food and Drug Administration (“FDA”). Olive Branch offers a full line of olives, olive mixes, and savory products to retail food chains and club stores, delis, bagel stores, caterers and provision distributors, primarily in pre-packaged containers.

On June 28, 2022, the Company acquired a 24% minority interest in Chef Inspirational Foods, LLC (“CIF”), a leading developer, innovator, marketer and sales company selling prepared foods, for an investment of $1.2 million. The investment consisted of $500,000 in cash and $700,000 in the Company’s common stock. The acquisition of the interest in CIF was accounted for under the equity method of accounting for investments up until the Company acquired the remaining interest of CIF (the “CIF Acquisition”). On June 28, 2023, the Company completed the acquisition of the remaining 76% of CIF, in accordance with the terms of the Membership Interest Purchase Agreement dated June 28, 2023 by and among the Company, Siegel Suffolk Family, LLC, and R&I Loeb Family, LLC (the “Sellers”). Per the terms of the Membership Interest Purchase Agreement the purchase price was $3.65 million, including $950 thousand in cash at closing and $2.7 million in a promissory note. The promissory note requires a principal payment of $1.2 million in cash on the first anniversary of the closing date, and a payment of $1.5 million in common stock of the Company on the second anniversary of the closing date.

The following presents the unaudited results of operations for the period February 1, 2023 through June 28, 2023 of CIF.

 Schedule of Results of Operations

On July 31, 2023, MamaMancini’s Holdings, Inc. filed an amendment to the Articles of Incorporation with the Secretary of State of the State of Nevada to change the Company’s name from “MamaMancini’s Holdings, Inc.” to “Mama’s Creations, Inc.” (the “Name Change”). The Name Change, which was approved by the Company’s stockholders at its annual meeting on July 31, 2023, did not alter the voting powers or relative rights of the Company Common Stock, reflects the evolution of the Company from its origins as a home style, old world Italian food company to a broader provider of all-natural specialty prepared refrigerated foods for sale in retailers around the country. The Company also amended and restated its Amended and Restated Bylaws, solely to reflect the name change (as amended, the “Second Amended and Restated Bylaws”).

Note 2 - Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X of the SEC for interim financial information. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, the accompanying Condensed Consolidated Financial Statements of the Company and its subsidiaries, which are unaudited, include all normal and recurring adjustments considered necessary to present fairly the Company’s financial position as of July 31, 2023, and the results of its operations and its cash flows for the periods presented. The unaudited Condensed Consolidated Financial Statements herein should be read together with the historical consolidated financial statements of the Company for the years ended January 31, 2023 and 2022 included in our 2023 Form 10-K. Operating results for the three and six months ended July 31, 2023 are not necessarily indicative of the results that may be expected for the year ending January 31, 2024.

Principles of Consolidation

The Condensed Consolidated Financial Statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany balances have been eliminated in consolidation.

Use of Estimates

The preparation of Condensed Consolidated Financial Statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the Condensed Consolidated Financial Statements and accompanying notes. The Company bases its estimates on historical experience and other assumptions believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Such estimates and assumptions impact, among others, the following: allowance for doubtful accounts, the fair value of stock-based payments, valuation of the acquisition of the remaining interest of CIF (which was accounted for as an asset acquisition as substantially all of the fair value is concentrated in customer relationships), inventory reserves, and estimates for unrealized returns, discounts, and other allowances that are netted against revenue.

Making estimates requires management to exercise significant judgment. It is at least reasonably possible that the estimate of the effect of a condition, situation or set of circumstances that existed at the date of the Condensed Consolidated Financial Statements, which management considered in formulating its estimate could change in the near term due to one or more future confirming events. Accordingly, the actual results could differ significantly from our estimates.

Risks and Uncertainties

The Company operates in an industry that is subject to intense competition and changes in consumer demand. The Company’s operations are subject to significant risk and uncertainties including financial and operational risks including the potential risk of business failure.

The Company has experienced, and in the future expects to continue to experience variability in sales and earnings. The factors expected to contribute to this variability include, among others, (i) the cyclical nature of the grocery industry, (ii) general economic conditions in the various local markets in which the Company competes, including a potential general downturn in the economy, and (iii) the volatility of prices pertaining to food and beverages in connection with the Company’s distribution of the product. These factors, among others, make it difficult to project the Company’s operating results on a consistent basis.

Cash

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, 2023 and January 31, 2023.

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. As of July 31, 2023 and January 31, 2023, the reserve for uncollectible accounts was approximately $93,000 and $233,000, respectively. During the three and six months ended July 31, 2023 the Company wrote off approximately $140,000 accounts that were deemed to be uncollectible.

Inventories

The Company values its inventory at the lower of cost or net realizable value (“NRV”) and include direct material, direct labor, warehousing, and overhead costs. NRV is defined as the estimated selling prices less the costs of completion, disposal, and transportation. The cost of inventory is determined on the first-in, first-out basis. Inventories have been reduced by an allowance for excess, obsolete and unsaleable inventories. The allowance is an estimate based on management’s review of inventories on hand compared to estimated future usage and sales. The reserve for obsolescence as of July 31, 2023 and January 31, 2023 was approximately $126,000 and $32,000, respectively.

Inventories by major category are as follows:

 Schedule of Inventories

Property, Plant and Equipment

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

Asset lives for financial statement reporting of depreciation are:

 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.

Goodwill and Other Intangible Assets

Goodwill

Goodwill represents the excess of the purchase price over the fair values of the underlying net assets of an acquired business. The Company tests goodwill for impairment on an annual basis during the fourth quarter of its fiscal year, or immediately if conditions indicate that such impairment could exist. The Company evaluates qualitative factors to determine if it is more likely than not that the fair value is less than its carrying value and whether it is necessary to perform goodwill impairment process.

As of July 31, 2023 and January 31, 2023, there were no impairment losses recognized for goodwill.

Other Intangible Assets

Other intangible assets consist of trademarks, trade names and customer relationships. Intangible asset lives for financial statement reporting of amortization are:

 Schedule of Other Intangible Assets Impairment Losses Recognized for Goodwill

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, 2023 and 2022 were $94,871 and $41,792, respectively. Research and development expenses for the six months ended July 31, 2023 and 2022 were $166,056 and $68,327, respectively.

Revenue Recognition

The Company recognizes revenue in accordance with FASB Topic 606, Revenue from Contracts with Customers (Topic 606).

The Company’s sales are generated from the sale of finished products to customers, which contains a single performance obligation and revenue is recognized at a single point in time when ownership, risks and rewards transfer. Typically, this occurs when the goods are received and accepted by the customer. Revenues are recognized in an amount that reflects the net consideration the Company expects to receive in exchange for the goods. The Company reports all amounts billed to a customer in a sale transaction as revenue. The Company elected to treat shipping and handling activities as fulfillment activities, and the related costs are recorded as selling expenses in selling, general and administrative expenses on the condensed consolidated statements of operations.

The Company promotes its products with consumer incentives and trade promotions. These programs include discounts, slotting fees, coupons, rebates, in-store display incentives and volume-based incentives. Customer trade promotion and consumer incentive activities are recorded as a reduction to the transaction price based on amounts estimated as being due to customers and consumers at the end of a period. The Company derives these estimates principally on historical utilization and redemption rates. The Company does not receive a distinct service in relation to the consumer incentives and trade promotions and as a result, these incentives and promotions are accounted for as a reduction of the transaction price.

Payment terms in the Company’s invoices are based on the billing schedule established in contracts and purchase orders with customers. The Company recognizes the related trade receivable when the goods are received by the customer.

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

 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 three months ended July 31, 2023 and 2022:

Schedule of Disaggregates Gross Revenue by Significant Geographic Area 

The following table disaggregates gross revenue by significant geographic area for the six months ended July 31, 2023 and 2022:

Cost of Sales

Cost of sales represents costs directly related to the production and manufacturing of the Company’s products. Costs include production costs, freight-in, packaging, and print production costs.

Advertising

Costs incurred for advertising for the Company are charged to selling, general and administrative expenses as incurred. Advertising expenses for the three months ended July 31, 2023 and 2022 were approximately $95,000 and $119,000 respectively. Advertising expenses for the six months ended July 31, 2023 and 2022 were $304,000 and $307,000 respectively.

Stock-Based Compensation

The Company accounts for stock-based compensation in accordance with ASC Topic 718, “Compensation – Stock Compensation” (“ASC 718”), which establishes financial accounting and reporting standards for stock-based employee compensation. It defines a fair value-based method of accounting for an employee stock option or similar equity instrument.

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

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

For the three months ended July 31, 2023 and 2022, stock-based compensation related to options amounted to approximately $18,000 and $12,000, respectively.

For the six months ended July 31, 2023 and 2022, stock-based compensation related to options amounted to approximately $41,000 and $12,000, respectively.

For the three and six months ended July 31, 2023, the Company issued 19,960 shares valued at approximately $50,000 to certain employees as compensation.

For the six months ended July 31, 2023 and 2022, when computing fair value of stock-based payments, the Company has considered the following variables:

 Schedule of Fair Value of Share-Based Payments

Earnings Per Share

Basic net income per share attributable to common stockholders excludes dilution and is computed by dividing net income or loss attributable to common stockholders during the period by the weighted average number of common shares outstanding during the period. Diluted net income or loss per share reflects potential dilution and is computed by dividing net income attributable to common stockholders by the weighted average number of common shares outstanding during the period, which is increased by the number of additional common shares that would have been outstanding if the potential common shares had been issued. However, if the effect of any additional securities are anti-dilutive (i.e., resulting in a higher net income per share or lower net loss per share), they are excluded from the dilutive net income computation. The dilutive effect of stock options, warrants, and restricted stock is calculated using the treasury-stock method and the dilutive effect of the Series B Preferred Stock is calculated using the if-converted method.

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 740, “Accounting for Income Taxes”. A deferred tax asset or liability is recorded for all temporary differences between financial and tax reporting and net operating loss carryforwards. Deferred tax expense results from the net change during the period of deferred tax assets and liabilities.

Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets are adjusted for the effects of changes in tax laws and rates on the date of enactment. As of July 31, 2023 and January 31, 2023, the Company recognized a deferred tax asset of $67,908 and $717,559, respectively, which is included in other long-term assets on the condensed consolidated balance sheets. The Company regularly evaluates the need for a valuation allowance related to the deferred tax asset.

Recent Accounting Pronouncements

In August 2020, the FASB issued ASU No. 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06”), which simplifies an issuer’s accounting for convertible instruments by reducing the number of accounting models that require separate accounting for embedded conversion features. ASU 2020-06 also simplifies the settlement assessment that entities are required to perform to determine whether a contract qualifies for equity classification and makes targeted improvements to the disclosures for convertible instruments and earnings-per-share (EPS) guidance. This update will be effective for the Company’s fiscal years beginning after December 15, 2023, and interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. Entities can elect to adopt the new guidance through either a modified retrospective method of transition or a fully retrospective method of transition. The adoption of the new standard is not expected to have a significant impact on the Company’s consolidated financial statements.

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.

Note 3 – Property Plant and Equipment:

Property plant and equipment on July 31, 2023 and January 31, 2023 are as follows:

 Schedule of Property and Equipment

Depreciation expense for the three months ended July 31, 2023 and 2022 amounted to $263,176 and $192,297, respectively. Depreciation expense for the six months ended July 31, 2023 and 2022 amounted to $511,589 and $401,126, respectively.

Note 4 – Acquisition of CIF

As described in Note 1, on June 28, 2023, the Company completed the CIF Acquisition. The acquisition of the remaining interest in CIF was accounted for as an asset acquisition as substantially all of the fair value was concentrated in customer relationships. CIF’s assets (except for cash and working capital) were measured and recognized as an allocation of the transaction price based on their relative fair values as of the transaction date. The fair value of total consideration was $5,216,828. The following table is a summary of the purchase price calculation.

 Schedule of Purchase Price Calculation

The allocation of the purchase price was as follows (amounts in thousands):

 Schedule of Allocation of Purchase Price

Note 5 – Intangible assets, net

Intangible assets, net consisted of the following at July 31, 2023:

 Schedule of Intangibles Assets

Intangibles, net consisted of the following at January 31, 2023:

As described in Note 1 and 4, on June 28, 2023, the Company completed the CIF Acquisition which resulted in the recognition of Customer relationships in the amount of $4,555,621.

Amortization expense for the three and six months ended July 31, 2023 was $202,053 and $303,949, respectively.

Amortization expense for the three and six months ended July 31, 2022 was $116,986 and $ 230,156, respectively.

We expect the estimated aggregate amortization expense for each of the five succeeding fiscal years to be as follows:

 Schedule of Estimated Aggregate Amortization Expense

Note 6 – Related Party Transactions

Promissory Note – Related Party

Upon consummation of the acquisition of T&L and Olive Branch on December 29, 2021, the Company executed a $3,000,000 promissory note with the sellers. The promissory note requires annual principal payments of $750,000 payable on each anniversary of the closing, together with accrued interest at a rate of three and one-half (3.5%) per annum. As of July 31, 2023 and January 31, 2023, the outstanding balance under the note was $2,250,000, respectively, of which $750,000 is recorded as Promissory notes – related parties and $1,500,000 is recorded as Promissory notes – related parties, net of current in the Company’s Condensed Consolidated Balance Sheets. For the three and six months ended July 31, 2023 interest expense for this note was $20,137 and $39,451 respectively. For the three and six months ended July 31, 2022 interest expense for this note was $27,237 and $53,356 respectively. As of July 31, 2023 and January 31, 2023, accrued interest was $46,140 and $6,688, respectively.

As part of the purchase price of the remaining interest in CIF, the Company agreed to pay $600,000 to each Seller in cash by bank check(s) or wire transfer(s), without interest, on the first anniversary of the closing date and $750,000 shall be paid by the Company to each seller in common stock of the Company, without interest, on the second anniversary of the Closing Date. As of July 31, 2023 $1,200,000 is recorded as Promissory notes – related parties and $1,500,000 is recorded as Promissory notes – related parties, net of current in the Company’s Condensed Consolidated Balance Sheet.

Lease – Related Party

The Company leases a fully contained facility in Farmingdale, NY from 148 Allen Blvd LLC for production and distribution of T&L Creative Salads and Olive Branch products. 148 Allen Blvd LLC is owned by Anthony Morello, Jr., President of T&L and various individuals related to Mr. Morello. This lease term is through November 30, 2031 with the option to extend the lease for two additional ten-year terms with base rent of $20,200 per month through December 31, 2026, increasing after that date to $23,567 through the end of the initial lease term. The exercise of optional renewal is uncertain and therefore excluded from the calculation of the right of use asset. Rent expense and other ancillary charges pursuant to the lease for the three and six months ended July 31, 2023 was $105,691 and $171,299, respectively. Rent expense and other ancillary charges pursuant to the lease for the three and six months ended July 31, 2022 was $65,608 and $131,216, respectively.

Chef Inspirational Foods, LLC – Related Party

As noted above in Note 1, the Company owned a 24% minority interest in CIF (until June 28, 2023). For the period from May 1, 2023 to June 28,2023 and the period from February 1, 2023 to June 28, 2023, the Company recorded sales of $4,349,203 and $10,889,277 with CIF. As of January 31, 2023, the Company had an account receivable balance with CIF of $1,449,009. On June 28, 2023 the Company acquired the remaining interest in CIF (refer to Note 1 and 4).

Note 7 – Loan and Security Agreements

M&T Bank

The Company has a working capital line with M&T Bank (the “Credit Agreement”) with total available borrowings of $5.5 million. On July 18, 2023 the Company extended the maturity of the working capital line from June 30, 2024 to October 31, 2025. Interest is payable on the unpaid principal amount of the Loan at a variable rate per annum based on the Company’s Senior Funded Debt/EBITDA Ratio (as defined in the Credit Agreement) as of the date of any advance under the Credit Agreement as follows: if the Senior Funded Debt/EBITDA ratio is: (i) greater than 2.25, 3.87 percentage point(s) above one-day (i.e., overnight) SOFR (as defined); (ii) greater than 1.50 but less than or equal to 2.25, 3.37 percentage points above one-day SOFR; or (iii) 1.50 or less, 2.87 percentage points above one-day SOFR. In all events set forth at subsections (i) through (iii) in the preceding sentence, if SOFR shall at any time be less than 0.25%, one-day SOFR shall be deemed to be 0.25% and the foregoing margins shall be applied to the SOFR Index Floor. The Credit Agreement is secured by a first priority security interest in all of the Company’s business assets and is further subject to various affirmative and negative financial covenants. The Company was in compliance with the covenants as of July 31, 2023 and January 31, 2023. Advances under the line of credit are limited to eighty percent (80%) of eligible accounts receivable (which is subject to an agreed limitation and is further subject to certain asset concentration provisions) and fifty percent (50%) of eligible inventory (which is subject to an agreed dollar limitation). All advances under the line of credit are due upon maturity. The outstanding balance on the line of credit was $500,000 and $890,000 as of July 31, 2023 and January 31, 2023, respectively. During the three months ended July 31, 2023 and 2022, the Company incurred interest of $26,244 and $32,943, respectively, pursuant to borrowings under the Credit Agreement. During the six months ended July 31, 2023 and 2022, the Company incurred interest of $46,776 and $49,053, respectively, pursuant to borrowings under the Credit Agreement.

On December 29, 2021, the Company entered into a Multiple Disbursement Term Loan with M&T Bank, which was amended and restated on October 26, 2022, for the original principal amount of $7,500,000 payable in equal monthly principal installments over a 60-month amortization period (the “Term Loan Agreement”). The maturity date of the Term Loan Agreement is January 17, 2027. Interest is payable on the unpaid principal under the Term Loan Agreement at a variable rate per annum based on the Company’s Senior Funded Debt/EBITDA Ratio (as defined in the Term Loan Agreement) as of the date of any advance under the Term Loan Agreement as follows: if the Senior Funded Debt/EBITDA ratio is: (i) greater than 2.25, 4.12 percentage point(s) above the Variable Loan Rate (as defined in the agreement); (ii) greater than 1.50 but less than or equal to 2.25, 3.62 percentage points above Variable Loan Rate; or (iii) less than or equal to 1.50, 3.12 percentage points above applicable Variable Loan Rate. In all events set forth at subsections (i) through (iii) in the preceding sentence, if SOFR shall at any time be less than 0.25%, one-day SOFR shall be deemed to be 0.00% and the foregoing margins shall be applied to the Variable Loan Rates. All disbursements available under the Term Loan Agreement have been previously made. As of July 31, 2023, the outstanding balance and unamortized discount of the Term Loan Agreement was $5,431,042 and $49,022, respectively. As of January 31, 2023, the outstanding balance and unamortized discount of the Acquisition Note was $6,206,905 and $60,082, respectively. During the three and six months ended July 31, 2023, the Company incurred interest of $117,606 and $237,315 for the Acquisition Note, respectively. During the three and six months ended July 31, 2022, the Company incurred interest of $73,484 and $148,606 for the Acquisition Note, respectively.

Note 8 – Concentrations

Revenues

For the six months ended July 31, 2023, the Company’s revenue was concentrated in three customers that accounted for approximately 22%, 13%, and 11% of gross revenue, respectively. For the six months ended July 31, 2022, the Company’s revenue was concentrated in three customers that accounted for approximately 24%, 13%, and 12% respectively, of gross revenue.

For the three months ended July 31, 2023, the Company’s revenue was concentrated in three customers that accounted for approximately 18%, 17%, and 10% of gross revenue, respectively. For the three months ended July 31, 2022, the Company’s revenue was concentrated in three customers that accounted for approximately 23%, 14%, and 12% respectively, of gross revenue.

Receivables

As of July 31, 2023 one customer represented approximately 40% of the total gross outstanding receivables. As of January 31, 2023, three customers represented approximately 20%, 15% and 11%, totaling 46%, of total gross outstanding receivables, respectively.

Note 9 – Stockholders’ Equity

Preferred Stock and Series A Preferred Stock

The Company is authorized to issue 20,000,000 shares of Preferred Stock, $0.00001 par value per share. The Company has designated 120,000 shares of Preferred Stock as Series A Convertible Preferred stock. As of July 31, 2023 and January 31, 2023, no shares of Series A Convertible Preferred Stock are issued and outstanding. The Company has designated 200,000 shares of preferred stock, Series B Preferred Stock.

Series B Preferred Stock

The holders of the Series B Preferred Stock shall be entitled to receive, upon liquidation, dissolution or winding up of the Company, the original issue price, plus any dividends declared but unpaid or the amount of cash, securities or other property to which such holder would be entitled to receive with respect to such shares of Series B Preferred Stock if such shares had been converted to common stock immediately prior to such liquidation.

Holders of the Series B Preferred Stock were entitled to receive cumulative cash dividends at an annual rate of eight percent (8%). Holders of the Series B Preferred Stock had no voting rights. Each share of Series B Preferred Stock was convertible, at the option of the holder, into shares of common stock at a rate of 1 share of Series B Preferred Stock into 15 shares of common stock. The Company was able to force conversion at $2.00 per share of Common Stock at any time after six (6) months after issue if the Common Stock has a closing price of $2.00 or higher in any 20 consecutive trading days. After 18 months, the Company could force holders to convert at a 20% discount to the most recent 20-day average closing price per share. The Company also has the right to cause a conversion following a Fundamental Change.

On September 13, 2022, the Company closed the first round of the Series B Preferred Stock offering with the sale of 47,200 shares, raising gross proceeds of $1,180,000. On November 17, 2022, the company held a final closing of its offering of Series B Preferred Stock, wherein it sold an additional 7,400 shares of Series B. Preferred Stock for gross proceeds of $185,000

As of January 31, 2023 there were 54,600 shares of Series B Preferred Stock outstanding. On June 22, 2023, all the holders of the Series B Preferred Stock converted the shares of Series B Preferred Stock into 819,000 shares of Common Stock of the Company. As of July 31, 2023, no shares of Series B Preferred Stock remain outstanding.

During the three months ended July 31, 2023 and 2022, the Company paid dividends of $21,233 and $0, respectively.

During the six months ended July 31, 2023 and 2022, the Company paid dividends of $48,533 and $0 respectively.

Restricted Stock Units

During the six months ended July 31, 2023, the Company awarded 39,733 restricted stock units (“RSUs”) to certain employees with an aggregate grant date fair value of $70,000. The RSUs will be expensed over the requisite service period. The terms of the RSUs include vesting provisions based solely on continued service. If the service criteria is satisfied, the RSUs will vest in equal installments over a three-year period.

The following is a summary of the Company’s restricted stock units activity:

Schedule of Restricted Stock Option Activity

During the three and six months ended July 31, 2023, the Company recognized stock-based compensation related to restricted stock units of an aggregate of $37,083 and $69,612, respectively, which was recorded to selling, general and administrative expense on the Condensed Consolidated Statement of Operations, and there was unrecognized stock-based compensation of $449,960 as of July 31, 2023 related to future vesting of restricted stock units.

Options

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

Summary of Option Activity

During the three months ended July 31, 2023, there were 6,000 options exercised at a weighted average exercise price of $1.38 per share and resulted in the issuance of 6,000 shares of common stock. The Company received $8,280 for the exercise of these options.

During the six months ended July 31, 2023, there were 206,000 options exercised at a weighted average exercise price of $0.40 per share and resulted in the issuance of 172,920 shares of common stock. The Company received $27,780 for the exercise of these options, as a portion of the options were cashless exercised.

For the six months ended July 31, 2023 and 2022, the Company recognized stock-based compensation related to options of an aggregate of $40,561 and $12,333, respectively, which is included in selling, general and administrative expenses on the accompanying consolidated statements of operations. At July 31, 2023, there was unrecognized stock-based compensation related to the issuance of options of $79,928.

Warrants

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

Schedule of Warrants Activity

During the three months ended July 31, 2023, the Company issued 13,650 shares of common stock upon the cashless exercise of the warrants.

Note 10 - Commitments and Contingencies

Litigation, Claims and Assessments