Notes
to Condensed Consolidated Financial Statements
July
31, 2016
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, 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.
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, 2016 filed on April 21, 2016. 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, 2016 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, 2017.
The
Company adopted Accounting Standards Update (“ASU”) 2015-03, “
Interest-Imputation of Interest (Subtopic 835-30):
Simplifying the Presentation of Debt Issuance Costs
,” during the first quarter of 2016. In accordance with the guidance,
$26,620 of unamortized debt issuance costs, associated with the Company’s debt, were reclassified from other assets, as
previously reported on the Consolidated Balance Sheet as of January 31, 2016, to line of credit, net.
Going
Concern
The
accompanying financial statements have been prepared assuming that the Company will continue as a going concern. The Company incurred
a net loss available to common shareholders of $614,238 and $2,105,821 during the six months ended July 31, 2016 and 2015, respectively.
Also, as of July 31, 2016, the Company had $264,446 in cash, and working capital of $3,497,779. These factors all raise substantial
doubt about the ability of the Company to continue as a going concern. In their report for the fiscal year ended January 31, 2016,
the Company’s auditors have expressed an opinion that, as a result of the conditions noted, there is substantial doubt regarding
the ability to continue as a going concern.
Management’s
plans include raising additional funding from debt and/or equity transactions that will be used to refinance the Company’s
maturing debt and for general working capital purposes. These financial statements do not include any adjustments that might result
from the outcome of this uncertainty.
Note
2 - Summary of Significant Accounting Policies
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 condensed consolidated financial statements
and accompanying notes. Such estimates and assumptions impact, among others, the following: allowance for doubtful accounts, inventory
obsolescence and the fair value of share-based payments.
Making
estimates requires management to exercise significant judgment. It is at least reasonably possible that the estimate of the effect
of a condition, situation or set of circumstances that existed at the date of the 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 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 the 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, 2016 or January 31, 2016.
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 July 31, 2016 and January 31, 2016,
the Company had reserves of $2,000.
Inventories
Inventories
are stated at average cost using the first-in, first-out (FIFO) valuation method. Inventory was comprised of the following at
July 31, 2016 and January 31, 2016:
|
|
July 31, 2016
|
|
|
January 31, 2016
|
|
Finished goods
|
|
$
|
407,978
|
|
|
$
|
252,752
|
|
Property
and Equipment
Property
and equipment are recorded at cost. Depreciation expense is computed using straight-line methods over the estimated useful lives.
Asset
lives for financial statement reporting of depreciation are:
Machinery
and equipment
|
|
|
2-7
years
|
|
Furniture
and fixtures
|
|
|
3-5
years
|
|
Leasehold
improvements
|
|
|
3-10
years
|
|
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.
Stock
Issuance Costs
Stock
issuance costs are capitalized as incurred. Upon the completion of the offering, the stock issuance costs are reclassified to
equity and netted against proceeds. In the event the costs are in excess of the proceeds, the costs are recorded to expense. In
the case of an aborted offering, all costs are expensed. Offering costs recorded to equity for the three and six months ended
July 31, 2016 and 2015 were $0 and $0, respectively.
Research
and Development
Research
and development is expensed as incurred. Research and development expenses for the three months ended July 31, 2016 and 2015 were
$37,225 and $20,479, respectively. Research and development expenses for the six months ended July 31, 2016 and 2015 were $67,787
and $43,558, respectively.
Shipping
and Handling Costs
The
Company classifies freight billed to customers as sales revenue and the related freight costs as general and administrative expenses.
Revenue
Recognition
The
Company records revenue for products when all of the following have occurred: (1) persuasive evidence of an arrangement exists,
(2) the product is delivered, (3) the sales price to the customer is fixed or determinable, and (4) collectability of the related
customer receivable is reasonably assured. There is no stated right of return for products.
The
Company meets these criteria upon shipment.
Expenses
such as slotting fees, sales discounts, and allowances are accounted for as a direct reduction of revenues as follows:
|
|
Six Months Ended
July
31, 2016
|
|
|
Six Months Ended
July
31, 2015
|
|
Gross Sales
|
|
$
|
8,298,592
|
|
|
$
|
6,249,578
|
|
Less: Slotting, Discounts, Allowances
|
|
|
236,335
|
|
|
|
157,099
|
|
Net Sales
|
|
$
|
8,062,257
|
|
|
$
|
6,092,479
|
|
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 July 31, 2016 and 2015 were $350,665 and $521,626, respectively. Producing and
communicating advertising expenses for the six months ended July 31, 2016 and 2015 were $771,557 and $1,438,558, 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 accounts for share-based payments to non-employees
in accordance with ASC 505-50 “
Equity Based Payments to Non-Employees
”.
The
Company recognizes all forms of share-based payments, including stock option grants, warrants and restricted stock grants, at
their fair value on the grant date, which are based on the estimated number of awards that are ultimately expected to vest.
Share-based
payments, excluding restricted stock, are valued using a Black-Scholes option pricing model. Grants of share-based payment awards
issued to non-employees for services rendered have been recorded at the fair value of the share-based payment, which is the more
readily determinable value. The grants are amortized on a straight-line basis over the requisite service periods, which is generally
the vesting period. If an award is granted, but vesting does not occur, any previously recognized compensation cost is reversed
in the period related to the termination of service. Stock-based compensation expenses are included in cost of goods sold or selling,
general and administrative expenses, depending on the nature of the services provided, in the condensed consolidated statement
of operations. Share-based payments issued to placement agents are classified as a direct cost of a stock offering and are recorded
as a reduction in additional paid in capital.
For
the three months ended July 31, 2016 and 2015, share-based compensation amounted to $172,929 and $77,621, respectively. For the
six months ended July 31, 2016 and 2015, share-based compensation amounted to $352,137 and $79,663, respectively. During the three
and six months ended June 30, 2015, share-based compensation included stock issuance costs of $76,608 paid in form of warrants.
For
the six months ended July 31, 2016, when computing fair value of share-based payments, the Company has considered the following
variables:
|
|
July
31, 2016
|
|
Risk-free
interest rate
|
|
|
1.07%
to 1.33
|
%
|
Expected
life of grants
|
|
|
2.5
to 3.5 years
|
|
Expected
volatility of underlying stock
|
|
|
166%
to 179
|
%
|
Dividends
|
|
|
0
|
%
|
The
expected option term is computed using the “simplified” method as permitted under the provisions of ASC 718-10-599.
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 determined by the historical volatilities for industry
peers and used an average of those volatilities. Risk free interest rates were obtained from U.S. Treasury rates for the applicable
periods.
Earnings
(Loss) Per Share
Basic
earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding
during each period. Diluted earnings (loss) per share is computed by dividing net income (loss), adjusted for changes in income
or loss that resulted from the assumed conversion of convertible shares, by the weighted average number of shares of common stock,
common stock equivalents and potentially dilutive securities outstanding during the period.
The
Company had the following potential common stock equivalents at July 31, 2016:
Series A Preferred
|
|
|
3,466,667
|
|
Common stock warrants, exercise price range of $0.675-$2.50
|
|
|
4,964,734
|
|
Common stock options, exercise price of $0.39-$2.97
|
|
|
799,404
|
|
Total common stock equivalents
|
|
|
9,230,805
|
|
The
Company had the following potential common stock equivalents at July 31, 2015:
Series A Preferred
|
|
|
1,000,000
|
|
Liabilities to be settled in stock
|
|
|
65,617
|
|
Common stock warrants, exercise price range of $1.00-$2.50
|
|
|
1,884,735
|
|
Common stock options, exercise price of $1.00-$2.97
|
|
|
496,404
|
|
Total common stock equivalents
|
|
|
3,446,756
|
|
Since
the Company reflected a net loss during the three and six months ended July 31, 2016 and 2015, the effect of considering any common
stock equivalents, would have been anti-dilutive. A separate computation of diluted earnings (loss) per share is not presented.
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 2012.
Reclassification
Certain
prior period amounts have been reclassified to conform to current period presentation.
Recent
Accounting Pronouncements
In
May 2014, the FASB issued a comprehensive new revenue recognition standard that will supersede nearly all existing revenue recognition
guidance under U.S. GAAP. The standard’s core principle (issued as ASU 2014-09 by the FASB), is that a company will recognize
revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company
expects to be entitled in exchange for those goods or services. These may include identifying performance obligations in the contract,
estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each
separate performance obligation. The new guidance must be adopted using either a full retrospective approach for all periods presented
in the period of adoption or a modified retrospective approach. In August 2015, the FASB issued ASU No. 2015-14, which defers
the effective date of ASU 2014-09 by one year, and would allow entities the option to early adopt the new revenue standard as
of the original effective date. This ASU is effective for public reporting companies for interim and annual periods beginning
after December 15, 2017. The Company is currently evaluating its adoption method and the impact of the standard on its condensed
consolidated financial statements.
In
March 2015, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) No. 2015-03, “
Interest
- Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs
. The amendments in this ASU
require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction
from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for
debt issuance costs are not affected by the amendments in this ASU. The amendments are effective for financial statements issued
for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early adoption of the amendments
is permitted for financial statements that have not been previously issued. The amendments should be applied on a retrospective
basis, wherein the balance sheet of each individual period presented should be adjusted to reflect the period-specific effects
of applying the new guidance. Upon transition, an entity is required to comply with the applicable disclosures for a change in
an accounting principle. These disclosures include the nature of and reason for the change in accounting principle, the transition
method, a description of the prior-period information that has been retrospectively adjusted, and the effect of the change on
the financial statement line items (i.e., debt issuance cost asset and the debt liability). The Company adopted ASU 2015-03 during
the six months ended July 31, 2016.
In
July 2015, the FASB issued ASU No. 2015-11, “
Inventory (Topic 330): Simplifying the Measurement of Inventory”
,
which modifies existing requirements regarding measuring inventory at the lower of cost or market. Under current inventory standards,
the market value requires consideration of replacement cost, net realizable value and net realizable value less an approximately
normal profit margin. The new guidance replaces market with net realizable value defined as estimated selling prices in the ordinary
course of business, less reasonably predictable costs of completion, disposal and transportation. This eliminates the need to
determine and consider replacement cost or net realizable value less an approximately normal profit margin when measuring inventory.
The standard is required to be adopted for annual periods beginning after December 15, 2016, including interim periods within
that annual period, which is our fiscal year 2018. The amendment is to be applied prospectively with early adoption permitted.
The Company is in the process of evaluating the effect of the new guidance on its condensed consolidated financial statements
and disclosures.
In
February 2016, the FASB issued ASU 2016-02,
“Leases (Topic 842).”
Under ASU 2016-02, lessees will be required
to recognize, for all leases of 12 months or more, a liability to make lease payments and a right-of-use asset representing the
right to use the underlying asset for the lease term. Additionally, the guidance requires improved disclosures to help users of
financial statements better understand the nature of an entity’s leasing activities. This ASU is effective for public reporting
companies for interim and annual periods beginning after December 15, 2018, with early adoption permitted, and must be adopted
using a modified retrospective approach. The Company is in the process of evaluating the effect of the new guidance on its condensed
consolidated financial statements and disclosures.
In
April 2016, the FASB issued ASU No. 2016-09, “
Compensation – Stock Compensation”
(topic 718). The FASB
issued this update to improve the accounting for employee share-based payments and affect all organizations that issue share-based
payment awards to their employees. Several aspects of the accounting for share-based payment award transactions are simplified,
including: (a) income tax consequences; (b) classification of awards as either equity or liabilities; and (c) classification on
the statement of cash flows. The updated guidance is effective for annual periods beginning after December 15, 2016, including
interim periods within those fiscal years. Early adoption of the update is permitted. The Company is currently evaluating the
impact of the new standard.
In
April 2016, the FASB issued ASU No. 2016-10, “
Revenue from Contracts with Customers: Identifying Performance Obligations
and Licensing
” (topic 606). In March 2016, the FASB issued ASU No. 2016-08, “
Revenue from Contracts with Customers:
Principal versus Agent Considerations (Reporting Revenue Gross verses Net)”
(topic 606). These amendments provide additional
clarification and implementation guidance on the previously issued ASU 2014-09, “Revenue from Contracts with Customers”.
The amendments in ASU 2016-10 provide clarifying guidance on materiality of performance obligations; evaluating distinct performance
obligations; treatment of shipping and handling costs; and determining whether an entity’s promise to grant a license provides
a customer with either a right to use an entity’s intellectual property or a right to access an entity’s intellectual
property. The amendments in ASU 2016-08 clarify how an entity should identify the specified good or service for the principal
versus agent evaluation and how it should apply the control principle to certain types of arrangements. The adoption of ASU 2016-10
and ASU 2016-08 is to coincide with an entity’s adoption of ASU 2014-09, which we intend to adopt for interim and annual
reporting periods beginning after December 15, 2017. The Company is currently evaluating the impact of the new standard.
In
May 2016, the FASB issued ASU No. 2016-12, “
Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements
and Practical Expedients”
, which narrowly amended the revenue recognition guidance regarding collectability, noncash
consideration, presentation of sales tax and transition and is effective during the same period as ASU 2014-09. The Company is
currently evaluating the impact of the new standard.
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 and Equipment:
Property
and equipment on July 31, 2016 and January 31, 2016 are as follows:
|
|
July 31, 2016
|
|
|
January 31, 2016
|
|
Machinery and Equipment
|
|
$
|
1,311,480
|
|
|
$
|
1,112,522
|
|
Furniture and Fixtures
|
|
|
23,067
|
|
|
|
17,942
|
|
Leasehold Improvements
|
|
|
429,282
|
|
|
|
429,282
|
|
|
|
|
1,763,829
|
|
|
|
1,559,746
|
|
Less: Accumulated Depreciation
|
|
|
671,994
|
|
|
|
512,291
|
|
|
|
$
|
1,091,835
|
|
|
$
|
1,047,455
|
|
Depreciation
expense charged to income for the three months ended July 31, 2016 and 2015 amounted to $83,000 and $70,385, respectively. Depreciation
expense charged to income for the six months ended July 31, 2016 and 2015 amounted to $159,703 and $137,585, 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 July 31, 2016 and January 31, 2016, the Company’s
ownership interest in MO was 12% and 12%, respectively.
Note
5 - Related Party Transactions
Joseph
Epstein Foods
On
March 1, 2010, the Company entered into a five year agreement with Joseph Epstein Foods (the “Manufacturer”) who is
a related party. The Manufacturer is co-owned by the CEO and President of the Company. The Company analyzed the relationship with
the Manufacturer to determine if the Manufacturer is a variable interest entity as defined by FASB ASC 810 “
Consolidation
”.
Based on this analysis, the Company has determined that the Manufacturer is a variable interest entity but the Company is not
the primary beneficiary of the variable interest entity and therefore consolidation is not required. In addition, based on the
analysis the Company determined that the CEO and President of the Company is the primary beneficiary of the variable interest
entity and bears the risk of loss. Under the terms of the agreement, the Company grants to the Manufacturer a revocable license
to use the Company’s recipes, formulas, methods and ingredients for the preparation and production of Company’s products,
for manufacturing the Company’s product and all future improvements, modifications, substitutions and replacements developed
by the Company. The Manufacturer in turn grants the Company the exclusive right to purchase the product. Under the terms of the
agreement the Manufacturer agrees to manufacture, package, and store the Company’s products and the Company has the right
to purchase products from one or more other manufacturers, distributors or suppliers. In September 2016, the agreement was amended
and restated to extend the agreement until August 2, 2021. The amended agreement contains a perpetual automatic renewal clause
for a period of one year after the expiration of the initial term. During the renewal period either party may cancel the contract
with written notice nine months prior to the termination date. The term of this Agreement shall expire on the later of the expiration
date or a date which is three (3) years following a Change of Control. For purposes of the agreement, a Change of Control shall
occur when a third party who is not currently a shareholder of the Company acquires control of at least fifty-one percent (51%)
of the voting shares of the Company.
Under
the terms of the agreement if the Company specifies any change in packaging or shipping materials which results in the manufacturer
incurring increased expense for packaging and shipping materials or in the Manufacturer being unable to utilize obsolete packaging
or shipping materials in ordinary packaging or shipping, the Company agrees to pay as additional product cost the additional cost
for packaging and shipping materials and to purchase at cost such obsolete packaging and shipping materials. If the Company requests
any repackaging of the product, other than due to defects in the original packaging, the Company will reimburse the Manufacturer
for any labor costs incurred in repackaging. Per the agreement, all product delivery shipping costs are the expense of the Company.
The Company agreed with the Manufacturer at the end of the last fiscal year that Company would purchase a minimum of $963,000
of product each month and that any amount below that sum would be a charge of 12% of that shortfall each month. In return, the
Manufacturer obligated itself to offer the Company competitive prices and would not co-pack for other suppliers and would either
maintain or lower its payable to the Company each quarter. In addition, the Manufacturer agreed to rebate the Company any overage
of gross margin above 12% each month.
From
time to time the Company will make improvements to the Manufacturer’s facility. The improvements are capitalized and depreciated
over the estimated useful life.
During
the three months ended July 31, 2016 and 2015, the Company purchased inventory of $2,667,959 and $1,624,008, respectively, from
the Manufacturer. During the six months ended July 31, 2016 and 2015, the Company purchased inventory of $5,368,970 and $4,049,630,
respectively, from the Manufacturer.
During
the three months ended July 31, 2016 and 2015, the Manufacturer incurred expenses of $6,000 and $6,000, respectively, on behalf
of the Company for shared administrative expenses and salary expenses. During the six months ended July 31, 2016 and 2015, the
Manufacturer incurred expenses of $12,000 and $12,000, respectively, on behalf of the Company for shared administrative expenses
and salary expenses.
At
July 31, 2016 and January 31, 2016, the amount due from the Manufacturer is $2,180,863 and $2,248,781 respectively.
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 July 31, 2016 and 2015, the Company generated approximately $223 and $6,528 in revenues from MO, respectively.
For the six months ended July 31, 2016 and 2015, the Company generated approximately $10,325 and $31,936 in revenues from MO,
respectively.
As
of July 31, 2016 and January 31, 2016, the Company had a receivable of $0 and $6,512 due from MO, respectively.
WWS,
Inc.
A
current director of the Company is the president of WWS, Inc.
For
the three months ended July 31, 2016 and 2015, the Company recorded $12,000 and $12,000 in commissions and consulting expense
from WWS, Inc. generated sales, respectively. For the six months ended July 31, 2016 and 2015, the Company recorded $24,000 and
$24,000 in commissions and consulting expense from WWS, Inc. generated sales, respectively.
Notes
Payable
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 mature on December 31, 2016. During the six months ended July 31, 2016,
the notes were extended until February 2018. As of July 31, 2016, the outstanding principal balance of the notes was $125,000.
Note
6 - Promissory Notes
On
October 31, 2015, the Company entered into a promissory note agreement with a third party to settle outstanding payables. The
note is for a total principal balance of $358,832, bearing interest at a rate of 10% and maturing in October 2017. The Company
is required to prepay the note 10% of the net proceeds received upon the closing of a capital raise, except for, those transactions
conducted with the Company’s Chief Executive Officer. The Company paid $248,373 toward the outstanding balance, a portion
of which is 10% of the net proceeds from the final closing of the private placement in November 2015. As of July 31, 2016 and
January 31, 2016, the outstanding balance on the note was $120,272 and $239,459, respectively.
In
January 2016, the Company entered into a promissory note agreement with a third party to settle outstanding payables. The note
is for a total principal balance of $116,003, bearing interest at a rate of 6% and maturing in October 2016. As of July 31, 2016
and January 31, 2016, the outstanding balance on the note was $36,003 and $97,116, respectively.
As
of July 31, 2016 and January 31, 2016, the aggregate outstanding balance on the notes was $156,275 and $336,575, respectively.
Note
7 - Loan and Security Agreement
On
September 3, 2014, the Company entered into a Loan and Security Agreement (“Loan and Security Agreement”) with Entrepreneur
Growth Capital, LLC (“EGC”) which contains a line of credit. As of July 31, 2016 and January 31, 2016, the outstanding
balance on the line of credit was $1,096,630 and $933,001, respectively, net of debt discount of $7,801 and $26,620, respectively.
In September 2016 the agreement was amended and the total facility increased to an aggregate principal amount of up to $3,200,000.
The facility consists of the following:
●
|
|
Accounts
Revolving Line of Credit:
|
|
$
|
2,150,000
|
|
●
|
|
Inventory
Revolving Line of Credit:
|
|
$
|
350,000
|
|
●
|
|
Term
Loan:
|
|
$
|
700,000
|
|
EGC
may from time to time make loans in an aggregate amount not to exceed the Accounts Revolving Line of Credit up to 85% of the net
amount of Eligible Accounts (as defined in the Loan and Security Agreement). EGC may from time to time make loans in an aggregate
amount not to exceed the Inventory Revolving Line of Credit against Eligible Inventory (as defined in the Loan and Security Agreement)
in an amount up to 50% of finished goods and in an amount up to 20% of raw material.
The
revolving interest rates is equal to the highest prime rate in effect during each month as generally reported by Citibank, N.A.
plus (a) 2.5% on loans and advances made against eligible accounts and (b) 4.0% on loans made against eligible inventory. The
term loan bears interest at a rate of the highest prime rate in effect during each month as generally reported by Citibank, N.A.
plus 4.0%. The initial term of the facility is for a period of two years and will automatically renew for an additional one year
period. The Company was required to pay a one-time, up-front facility fee equal to 2.25% of the total $3,100,000 facility and
pays an annualized maintenance fee equal to 3% of the total facility. In the event of default, the Company shall pay 10% above
the stated rates of interest per the Agreement. The drawdowns are secured by all of the assets of the Company.
During
the first quarter of 2016, the Company adopted ASU 2015-03, “
Interest – Imputation of Interest (Subtopic 835-30):
Simplifying the Presentation of Debt Issuance Costs
.” In accordance with the guidance, $26,620 of unamortized debt issuance
costs, specifically attributable to each of the Company’s debt issuances, were reclassified from other assets, as previously
reported on the Consolidated Balance Sheet as of January 31, 2016, to line of credit, net. The unamortized debt issuance costs
are now presented as a direct deduction from each debt liability, consistent with the presentation of the corresponding debt discount,
where applicable.
The
debt discount will be amortized over the earlier of (i) the term of the debt or (ii) conversion of the debt, using the straight-line
method which approximates the effective interest method. The amortization of debt discount is included as a component of other
expense in the condensed consolidated statements of operations. There was unamortized debt discount of $7,801 and $26,620 as of
July 31, 2016 and January 31, 2016, respectively.
As
of July 31, 2016 and January 31, 2016 the outstanding balance on the line of credit was $1,104,431 and $959,621, respectively.
In September 2016, the line of credit maturity date was extended to September 30, 2018 and is consequently shown as a long-term
liability on the condensed consolidated balance sheets.
On
September 3, 2014, the Company also entered into a 5 year $600,000 Secured Promissory Note (“EGC Note”) with EGC.
The EGC Note is payable in 60 monthly installments of $10,000. The EGC Note bears interest at the prime rate plus 4.0% and is
payable monthly, in arrears. In the event of default, the Company shall pay 10% above the stated rates of interest per the Loan
and Security Agreement. The EGC Note is secured by all of the assets of the Company. The outstanding balance on the term loan
was $380,000 and $440,000 as of July 31, 2016 and January 31, 2016, respectively. In September 2016, the ECG Note was increased
to $700,000 with an extended maturity date of September 30, 2021.
Additionally,
in connection with the Loan and Security Agreement, Carl Wolf, the Company’s Chief Executive Officer entered into a Guarantee
Agreement with EGC, personally guaranteeing all the amounts borrowed on behalf of the Company under the Loan and Security Agreement.
Note
8 - Convertible Note
On
December 19, 2014, the Company entered into a securities purchase agreement (the “Manatuck Purchase Agreement”) with
Manatuck Hill Partners, LLC (“Manatuck”) whereby the Company issued a convertible redeemable debenture (the “Manatuck
Debenture”) in favor of Manatuck. The Manatuck Debenture is for $2,000,000 bearing interest at a rate of 14% and matures
in February 2016. Upon issuance of the Manatuck Debenture, the Company granted Manatuck 200,000 shares of the Company’s
restricted common stock. In April 2015, the maturity date was extended to May 2016 and 30,000 shares of restricted common stock
were issued to Manatuck. Based on management’s review, the accounting for debt modification applied. The Company valued
the 30,000 shares at the grant date share price of $1.32 and recorded $39,600 to debt discount on the condensed consolidated balance
sheet.
Upon
issuance of the debenture and subsequent extension, a debt discount of $498,350 was recorded for the fees incurred by the buyer
as well as the value of the common shares granted to Manatuck. The debt discount will be amortized over the earlier of (i) the
term of the debt or (ii) conversion of the debt, using the straight-line method which approximates the effective interest method.
The amortization of debt discount is included as a component of other expense in the condensed consolidated statements of operations.
There was unamortized debt discount of $0 and $0 as of July 31, 2016 and January 31, 2016, respectively.
On
October 29, 2015, the note was further amended to extend the maturity date to December 19, 2016. Per the terms of the execution
of the extension, the Company was required to purchase the above 230,000 shares issued to Manatuck for a share price of $0.65,
a value of $149,500 and incurred an amendment fee of $170,500, both of which were added to the outstanding principal of the debt.
In addition, the extension reduced accrued interest by $220,000 and increased the outstanding principal of the debt by $220,000.
Based on management’s review, the accounting for debt extinguishment applied. In accordance with the accounting for debt
extinguishment, the Company wrote-off the existing debt of $2,000,000, wrote-off the unamortized debt discount of $190,483 and
wrote-off the remaining debt issuance costs relating to this note of $19,106. The loss on debt extinguishment of $380,089 on the
statement of operations is comprised of the write-off of the remaining debt discount of $190,483, the write-off of the debt issuance
costs of $19,106, and the amendment fee of $170,500.
In
August 2016, the note was further amended to extend the maturity date to September 30, 2017. The principal amount of the note
shall be increased to $2,898,523, which shall be inclusive of accrued interest payable through October 31, 2016. In addition,
the Company shall pay an origination fee of $50,000, payable in cash on October 31, 2016.
The
outstanding balance including principal and interest at July 31, 2016 was $2,810,323. The outstanding principal balance as of
January 31, 2016 was $2,540,000.
Optional
conversion to convertible preferred stock is available upon completion of a qualified offering (as defined in the Manatuck Purchase
Agreement) while the Manatuck Debenture is outstanding. Upon conversion of the Manatuck Debenture, the Company shall issue Manatuck
shares of common stock as defined in the Manatuck Purchase Agreement.
Future
maturities of long-term debt are as follows:
For the Twelve Month Period Ending July 31,
|
|
|
|
2017
|
|
$
|
546,275
|
|
2018
|
|
|
2,785,323
|
|
2019
|
|
|
1,216,630
|
|
2020
|
|
|
20,000
|
|
|
|
$
|
4,568,228
|
|
Note
9 - Concentrations
Revenues
During
the six months ended July 31, 2016, the Company earned revenues from four customers representing approximately 20%, 13%, 12% and
11% of gross sales. As of July 31, 2016, these customers represented approximately 22%, 21%, 6% and 11% of total gross outstanding
receivables, respectively.
During
the six months ended July 31, 2015, the Company earned revenues from three customers representing approximately 19%, 17% and 12%
of gross sales. As of July 31, 2015, these customers represented approximately 15%, 22% and 10% of total gross outstanding receivables,
respectively.
Cost
of Sales
For
the six months ended July 31, 2016 and 2015, one vendor (a related party) represented 100% and 95% of the Company’s purchases,
respectively.
Note
10 - Stockholders’ Equity
(A)
Series A Convertible Preferred Stock Transactions
On
May 28, 2015, the Company amended its articles of incorporation to establish the designation, powers, rights, privileges, preferences
and restrictions of the Series A Convertible Preferred Stock (“Series A Preferred”). The Company authorized 120,000
shares of Series A Preferred with each share of our Series A Preferred having a par value of $0.00001 and stated value equal to
$100, as adjusted for stock dividends, combinations, splits and certain other events. The Company analyzed the conversion feature
for potential derivative classification. On May 28, 2015, the Company amended its articles of incorporation to establish the designation,
powers, rights, privileges, preferences and restrictions of the Series A Convertible Preferred Stock (“Series A Preferred”).
The Company authorized 120,000 shares of Series A Preferred with each share of our Series A Preferred having a par value of $0.00001
and stated value equal to $100 (“Stated Value”), as adjusted for stock dividends, combinations, splits and certain
other events. The Company analyzed the conversion feature for potential derivative classification. Despite the ratchet features
included in the conversion option, the Company concluded that equity treatment was warranted since the feature was clearly and
closely related to the host contract. The holders of the Series Preferred A will be entitled to (a) dividends at a rate of 8%
per annum, (b) a liquidation preference equal to $0.675 per Series A Preferred share, (c) the option to convert the Series A Preferred
shares to a number of shares of common stock calculated by dividing the Stated Value by $0.675 and (d) warrants to purchase a
number of common shares calculated by dividing the Stated Value by $0.675 exercisable for a period of five years at a price of
$1.00 per share. There is also an automatic conversion based on the occurrence of certain events detailed in the Certificate of
Designation. As of July 31, 2016, all accrued dividends had been paid in Company common stock. Additionally, in April 2016 the
Company granted an aggregate of an additional 2,510,001 Warrants to investors in a prior offering. These Warrants are for a term
of five (5) years at an exercise price of $1.50 per share.
During
May 2015, six directors of the Company entered into convertible note agreements with a maturity date of July 22, 2016 for total
proceeds to the Company of $650,000. In June 2015, the notes were converted into Series A Preferred. Additional proceeds of $560,000
were received pursuant to closings that occurred in June, August and September. In connection with the closings, the Company also
granted warrants to purchase 1,481,481 and 179,259 shares of common stock at $0.675 per share to shareholders and the placement
agent, respectively. The warrants granted to the placement agent have a grant date fair value of $84,547 which is treated as a
direct cost of the Financing and has been recorded as a reduction in additional paid in capital.
During
November 2015, the Company completed the final closing of a private placement with 11 accredited investors and issued an aggregate
of 10,200 shares of Series A Preferred and warrants to purchase 1,511,112 shares of common stock for aggregate gross proceeds
to the Company of $1,020,000. Stock issuance costs of $132,600 were paid to placement agents yielding net proceeds of $887,400.
Of these issuance costs, approximately $86,000 were pursuant to the promissory note agreement as discussed in Note 6.
As
discussed in Note 6, during January 2016, the Company settled an outstanding payable with one of its vendors by issuing a promissory
note in the principal amount of $116,003 and 1,100 shares of the Company’s Series A Preferred and warrants to purchase 162,963
shares of common stock.
(B)
Common Stock Transactions
Common
Stock
During
the six months ended July 31, 2016, the Company issued 333,902 shares of its common stock to the holders of the Series A Preferred
stockholders for the dividends in arrears totaling $178,314.
During
the six months ended July 31, 2016, the Company issued 403,916 shares of its common stock to employees and consultants for services
rendered a value of $259,881.
Treasury
Stock
As
discussed in Note 8, upon amendment of the Manatuck Debenture on October 29, 2015, the Company repurchased the 230,000 shares
for an aggregate purchase price of $149,500 which is presented as Treasury Stock on the condensed consolidated balance sheets.
(C)
Options
The
following is a summary of the Company’s option activity:
|
|
Options
|
|
|
Weighted
Average
Exercise Price
|
|
|
|
|
|
|
|
|
Outstanding – January 31, 2016
|
|
|
496,404
|
|
|
$
|
1.04
|
|
Exercisable – January 31, 2016
|
|
|
496,404
|
|
|
$
|
1.04
|
|
Granted
|
|
|
385,000
|
|
|
$
|
0.46
|
|
Exercised
|
|
|
-
|
|
|
$
|
-
|
|
Forfeited/Cancelled
|
|
|
-
|
|
|
$
|
-
|
|
Outstanding – July 31, 2016
|
|
|
881,404
|
|
|
$
|
0.78
|
|
Exercisable – July 31, 2016
|
|
|
799,404
|
|
|
$
|
0.78
|
|
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
– 2.97
|
|
|
|
881,404
|
|
|
2.76
years
|
|
$
|
0.78
|
|
|
|
799,404
|
|
|
$
|
0.78
|
|
At
July 31, 2016 and 2015, the total intrinsic value of options outstanding and exercisable was $107,720 and $0, respectively.
(D) Warrants
The following is a summary of the Company’s
warrant activity:
|
|
Warrants
|
|
|
Weighted
Average
Exercise Price
|
|
|
|
|
|
|
|
|
Outstanding – January 31, 2016
|
|
|
4,964,734
|
|
|
$
|
0.80
|
|
Exercisable – January 31, 2016
|
|
|
4,964,734
|
|
|
$
|
0.80
|
|
Granted
|
|
|
-
|
|
|
$
|
-
|
|
Exercised
|
|
|
-
|
|
|
$
|
-
|
|
Forfeited/Cancelled
|
|
|
-
|
|
|
$
|
-
|
|
Outstanding – July 31, 2016
|
|
|
4,964,734
|
|
|
$
|
0.80
|
|
Exercisable – July 31, 2016
|
|
|
4,964,734
|
|
|
$
|
0.80
|
|
Warrants
Outstanding
|
|
|
Warrants
Exercisable
|
|
Range
of
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
|
|
|
|
4,964,734
|
|
|
|
3.61 years
|
|
|
$
|
0.80
|
|
|
|
4,964,734
|
|
|
$
|
0.80
|
|
At July 31, 2016 and 2015, the total intrinsic
value of warrants outstanding and exercisable was $247,770 and $0, respectively.
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 term of the Agreement (the “Term”)
shall consist of the Exclusive Term and the Non-Exclusive Term. The 12-month period beginning on each January 1 and ending on
each December 31 is referred to herein as an “Agreement Year”.
The Exclusive Term began on January 1, 2009
(the “Effective Date”) and ends on the 50th anniversary of the Effective Date, unless terminated or extended as provided
herein. Licensor, at its option, may terminate the Exclusive Term by notice in writing to Licensee, delivered between the 60th
and the 90th day following the end of any Agreement Year if, on or before the 60th day following the end of such Agreement Year,
Licensee has not paid Licensor Royalties with respect to such Agreement Year at least equal to the minimum royalty (the “Minimum
Royalty”) for such Agreement Year. Subject to the foregoing sentence, and provided Licensee has not breached this Agreement
and failed to cure such breach in accordance herewith, Licensee may extend the Exclusive Term for an additional twenty five (25)
years, by notice in writing to Licensor, delivered on or before the 50th anniversary of the Effective Date.
The Non-Exclusive Term begins upon expiration
of the Exclusive Term and continues indefinitely thereafter, until terminated by Licensor due to a material breach hereof by Licensee
that remains uncured after notice and opportunity to cure in accordance herewith, or until terminated by Licensee.
Either party may terminate this Agreement
in the event that the other party materially breaches its obligations and fails to cure such material breach within sixty (60)
days following written notice from the non-breaching party specifying the nature of the breach. The following termination rights
are in addition to the termination rights provided elsewhere in the agreement.
|
●
|
Termination
by Licensee - Licensee shall have the right to terminate this Agreement at any time on sixty (60) days written notice to Licensor.
In such event, all moneys paid to Licensor shall be deemed non-refundable.
|
Under the terms of the Agreement the Company
is required to pay quarterly royalty fees as follows:
During the Exclusive Term and the Non-Exclusive
Term the Company will pay a royalty equal to the royalty rate (the “Royalty Rate”), multiplied by Company’s
“Net Sales”. As used herein, “Net Sales” means gross invoiced sales of Products, directly or indirectly
to unrelated third parties, less (a) discounts (including cash discounts), and retroactive price reductions or allowances actually
allowed or granted from the billed amount (collectively “Discounts”); (b) credits, rebates, and allowances actually
granted upon claims, rejections or returns, including recalls (voluntary or otherwise) (collectively, “Credits”);
(c) freight, postage, shipping and insurance charges; (d) taxes, duties or other governmental charges levied on or measured by
the billing amount, when included in billing, as adjusted for rebates and refunds; and (e) provisions for uncollectible accounts
determined in accordance with reasonable accounting methods, consistently applied.
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
|
|
1
st
and 2
nd
|
|
$
|
-
|
|
3
rd
and 4
th
|
|
$
|
50,000
|
|
5
th
, 6th and 7
th
|
|
$
|
75,000
|
|
8
th
and 9
th
|
|
$
|
100,000
|
|
10
th
and thereafter
|
|
$
|
125,000
|
|
The Company incurred $55,980 and $45,542 of
royalty expenses for the three months ended July 31, 2016 and 2015. The Company incurred $141,684 and $131,379 of royalty expenses
for the six months ended July 31, 2016 and 2015. Royalty expenses are included in general and administrative expenses on the condensed
consolidated statement of operations.
Agreements with Placement Agents and Finders
(A) April 1, 2015
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.
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.
During the year ended January 31, 2016, the
Company paid to Spartan a one-time engagement fee of $10,000. In connection with the Initial Closing, the Company agreed to pay
an aggregate cash fee and non-accountable allowance of $157,300. The Company also granted warrants to purchase 179,259 shares
of common stock at $0.675 per share. The warrants have a grant date fair value of $84,547 which is treated as a direct cost of
the Financing and has been recorded as a reduction in additional paid in capital.
Operating Lease
In January 2015, the Company began a lease
agreement for office space in East Rutherford, NJ. The lease is for a 51 month term expiring on March 31, 2019 with annual payments
of $18,848.
Total future minimum payments required under
operating lease as of July 31, 2016 are as follows.
For
the Twelve Month Period Ending July 31,
|
|
|
|
2017
|
|
$
|
18,848
|
|
2018
|
|
|
18,848
|
|
2019
|
|
|
12,565
|
|
|
|
$
|
50,261
|
|
Note 12 – Subsequent
Events
The
Company has evaluated subsequent events through the date the financial statements were available to be issued. Based on this evaluation,
the Company has identified no reportable subsequent events other than those disclosed elsewhere in these financials.