Notes
to Condensed Consolidated Financial Statements
July
31, 2018
Note
1 - Nature of Operations and Basis of Presentation
Nature
of Operations
MamaMancini’s
Holdings, Inc. (the “Company”), (formerly known as Mascot Properties, Inc.) was organized on July 22, 2009 as a Nevada
corporation. The Company has a year-end of January 31.
The
Company is a manufacturer and distributor of beef meatballs with sauce, turkey meatballs with sauce, beef meat loaf and other
similar meats and sauces. The Company’s customers are located throughout the United States, with a large concentration in
the Northeast and Southeast.
Note
2 - Summary of Significant Accounting Policies
Basis
of Presentation
The
condensed consolidated financial statements and related notes have been prepared in accordance with accounting principles generally
accepted in the United States of America (“US GAAP”) and include the accounts of the Company and its wholly-owned
subsidiaries. All material intercompany balances and transactions have been eliminated in consolidation.
Following
the closing of the merger with Joseph Epstein Food Enterprises, Inc. (“JEFE”) on November 1, 2017, the financial statements
of JEFE are consolidated with that of the Company. The prior period financial statements included in the condensed consolidated
financial statements have been adjusted to reflect this transaction.
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, 2018 filed on May 16, 2018. 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, 2018 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, 2019.
Use
of Estimates
The
preparation of condensed consolidated financial statements in conformity with U.S. generally accepted accounting principles requires
management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying
notes. Such estimates and assumptions impact, among others, the following: allowance for doubtful accounts, inventory obsolescence
and the fair value of share-based payments.
Making
estimates requires management to exercise significant judgment. It is at least reasonably possible that the estimate of the effect
of a condition, situation or set of circumstances that existed at the date of the consolidated financial statements, which management
considered in formulating its estimate could change in the near term due to one or more future confirming events. Accordingly,
the actual results could differ significantly from our estimates.
Risks
and Uncertainties
The
Company operates in an industry that is subject to intense competition and change in consumer demand. The Company’s operations
are subject to significant risk and uncertainties including financial and operational risks including the potential risk of business
failure.
The
Company has experienced, and in the future expects to continue to experience, variability in sales and earnings. The factors expected
to contribute to this variability include, among others, (i) the cyclical nature of the grocery industry, (ii) general economic
conditions in the various local markets in which the Company competes, including a potential general downturn in the economy,
and (iii) the volatility of prices pertaining to food and beverages in connection with the Company’s distribution of the
product. These factors, among others, make it difficult to project the Company’s operating results on a consistent basis.
Cash
The
Company considers all highly liquid instruments purchased with a maturity of three months or less to be cash equivalents. The
Company held no cash equivalents at July 31, 2018 and January 31, 2018.
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, 2018 and January 31, 2018,
the Company had reserves of $2,000.
Inventories
Inventories
are stated at the lower of cost or net realizable value using the first-in, first-out (FIFO) valuation method. Inventory was comprised
of the following at July 31, 2018 and January 31, 2018:
|
|
July
31, 2018
|
|
|
January
31, 2018
|
|
Raw
Materials
|
|
$
|
512,869
|
|
|
$
|
486,917
|
|
Work
in Process
|
|
|
25,513
|
|
|
|
21,387
|
|
Finished
goods
|
|
|
741,175
|
|
|
|
315,972
|
|
|
|
$
|
1,279,557
|
|
|
$
|
824,276
|
|
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
years
|
|
Leasehold
improvements
|
|
|
*
|
|
(*)
Amortized on a straight-line basis over the term of the lease or the estimated useful lives, whichever period is shorter.
Upon
sale or retirement of property and equipment, the related cost and accumulated depreciation are removed from the accounts and
any gain or loss is reflected in the consolidated statements of operations.
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, 2018 and 2017 were
$37,083 and $33,333, respectively. Research and development expenses for the six months ended July 31, 2018 and 2017 were $67,179
and $67,331, 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
In
May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers (Topic 606)
. ASU 2014-09 supersedes the revenue
recognition requirements under Topic 605,
Revenue Recognition
, and most industry-specific guidance throughout the
Industry Topics of the ASC. The core principle of the guidance is that an entity should recognize revenue to depict the transfer
of promised goods or services to customers in an amount that reflects the consideration to which an entity expects to be entitled
in exchange for those goods or services. Under the new guidance, an entity is required to perform the following five steps: (1)
identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction
price; (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue when (or as)
the entity satisfies a performance obligation. The new guidance will significantly enhance comparability of revenue recognition
practices across entities, industries, jurisdictions and capital markets. Additionally, the guidance requires improved disclosures
as to the nature, amount, timing and uncertainty of revenue that is recognized. In May 2016, the FASB issued ASU No. 2016-12,
Revenue
from Contracts with Customers (Topic 606)—Narrow-Scope Improvements and Practical Expedients
. This ASU clarified guidance
on assessing collectability, presenting sales tax, measuring noncash consideration, and certain transition matters.
The
Company adopted this guidance and related amendments as of the first quarter of fiscal 2019, applying the full retrospective transition
method. The Company has determined that there are no material changes to the recognition, timing and classification of revenues
and expenses; additionally, the adoption of ASU 2014-09 did not have a significant impact to pretax income upon adoption or on
the consolidated financial statement disclosures.
The
Company’s sales predominantly contain a single performance obligation and revenue is recognized at a single point in time
when ownership, risks and rewards transfer. Typically, this occurs when the goods are shipped to the customer. Revenues are recognized
in an amount that reflects the net consideration the Company expects to receive in exchange for the goods. The Company reports
all amounts billed to a customer in a sale transaction as revenue, including those amounts related to shipping and handling. Shipping
and handling costs are included in cost of goods sold. Under the new revenue guidance, the Company recognizes shipping and handling
activities as a fulfillment of the Company’s promise to transfer products to its customers.
The
Company promotes its products with advertising, consumer incentives and trade promotions. These programs include discounts, slotting
fees, coupons, rebates, in-store display incentives and volume-based incentives. Customer trade promotion and consumer incentive
activities are recorded as a reduction to the sale 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.
Payment
terms in the Company’s invoices are based on the billing schedule established in contracts and purchase orders with customers.
The Company generally recognizes the related trade receivable when the goods are shipped.
Expenses
such as slotting fees, sales discounts, and allowances are accounted for as a direct reduction of revenues as follows:
|
|
Six
Months
Ended
July 31, 2018
|
|
|
Six
Months
Ended
July 31, 2017
|
|
Gross
Sales
|
|
$
|
13,585,549
|
|
|
$
|
12,587,604
|
|
Less:
Slotting, Discounts, Allowances
|
|
|
202,725
|
|
|
|
224,869
|
|
Net
Sales
|
|
$
|
13,382,824
|
|
|
$
|
12,362,735
|
|
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, 2018 and 2017 were $391,026 and $412,849, respectively. Producing and
communicating advertising expenses for the six months ended July 31, 2018 and 2017 were $906,183 and $738,943, 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 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, 2018, share-based compensation amounted to $36,945 relating to options issued to employees
and consultants for services rendered.
For
the three months ended July 31, 2017, share-based compensation amounted to $57,349 for options and common stock issued to employees
and consultants for services rendered.
For
the six months ended July 31, 2018, share-based compensation amounted to $79,163 relating to options issued to employees
and consultants for services rendered.
For
the six months ended July 31, 2017, share-based compensation amounted to $147,499 for options and common stock issued to employees
and consultants for services rendered.
For
the six months ended July 31, 2018 and 2017, when computing fair value of share-based payments, the Company has considered the
following variables:
|
|
July
31, 2018
|
|
|
July
31, 2017
|
|
Risk-free
interest rate
|
|
|
1.99
|
%
|
|
|
1.18
|
%
|
Expected
life of grants
|
|
|
2.0
years
|
|
|
|
3.76
years
|
|
Expected
volatility of underlying stock
|
|
|
172
|
%
|
|
|
298
|
%
|
Dividends
|
|
|
0
|
%
|
|
|
0
|
%
|
The
expected option term is computed using the “simplified” method as permitted under the provisions of ASC 718-10-S99.
The Company uses the simplified method to calculate expected term of share options and similar instruments as the Company does
not have sufficient historical exercise data to provide a reasonable basis upon which to estimate expected term.
The
expected stock price volatility for the Company’s stock options was estimated using the historical volatilities of the Company’s
common stock. Risk free interest rates were obtained from U.S. Treasury rates for the applicable periods.
Earnings
(Loss) Per Share
Earnings
per share (“EPS”) is the amount of earnings attributable to each share of common stock. For convenience, the term
is used to refer to either earnings or loss per share. EPS is computed pursuant to Section 260-10-45 of the FASB Accounting Standards
Codification. Pursuant to ASC Paragraphs 260-10-45-10 through 260-10-45-16, basic EPS shall be computed by dividing income available
to common stockholders (the numerator) by the weighted-average number of common shares outstanding (the denominator) during the
period. Income available to common stockholders shall be computed by deducting both the dividends declared in the period on preferred
stock (whether or not paid) and the dividends accumulated for the period on cumulative preferred stock (whether or not earned)
from income from continuing operations (if that amount appears in the income statement) and also from net income. The computation
of diluted EPS is similar to the computation of basic EPS except that the denominator is increased to include the number of additional
common shares that would have been outstanding if the dilutive potential common shares had been issued during the period to reflect
the potential dilution that could occur from common shares issuable through contingent shares issuance arrangement, stock options
or warrants.
The
following table provides a reconciliation of the numerator and denominator used in computing basic and diluted net income (loss)
attributable to common stockholders per common share.
|
|
For
the Three Months Ended
|
|
|
|
July
31, 2018
|
|
|
July
31, 2017
|
|
Numerator:
|
|
|
|
|
|
|
Net
(loss) income attributable to common stockholders
|
|
$
|
(210,195
|
)
|
|
$
|
123,595
|
|
Effect
of dilutive securities:
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Diluted
net (loss) income
|
|
$
|
(210,195
|
)
|
|
$
|
123,595
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding - basic
|
|
|
31,859,812
|
|
|
|
28,100,066
|
|
Dilutive
securities (a):
|
|
|
|
|
|
|
|
|
Series
A Preferred
|
|
|
-
|
|
|
|
-
|
|
Options
|
|
|
-
|
|
|
|
347,949
|
|
Warrants
|
|
|
-
|
|
|
|
2,369,266
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding and assumed conversion – diluted
|
|
|
31,859,812
|
|
|
|
30,817,281
|
|
|
|
|
|
|
|
|
|
|
Basic
net (loss) income per common share
|
|
$
|
(0.01
|
)
|
|
$
|
0.00
|
|
|
|
|
|
|
|
|
|
|
Diluted
net (loss) income per common share
|
|
$
|
(0.01
|
)
|
|
$
|
0.00
|
|
|
|
|
|
|
|
|
|
|
(a)
- Anti-dilutive securities excluded:
|
|
|
7,216,665
|
|
|
|
3,110,149
|
|
|
|
For
the Six Months Ended
|
|
|
|
July
31, 2018
|
|
|
July
31, 2017
|
|
Numerator:
|
|
|
|
|
|
|
Net
income attributable to common stockholders
|
|
$
|
113,806
|
|
|
$
|
72,562
|
|
Effect
of dilutive securities:
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Diluted
net income
|
|
$
|
113,806
|
|
|
$
|
72,562
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding - basic
|
|
|
31,820,898
|
|
|
|
27,957,789
|
|
Dilutive
securities (a):
|
|
|
|
|
|
|
|
|
Series
A Preferred
|
|
|
-
|
|
|
|
-
|
|
Options
|
|
|
166,259
|
|
|
|
347,949
|
|
Warrants
|
|
|
577,775
|
|
|
|
2,369,266
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding and assumed conversion – diluted
|
|
|
32,564,932
|
|
|
|
30,675,004
|
|
|
|
|
|
|
|
|
|
|
Basic
net income per common share
|
|
$
|
0.00
|
|
|
$
|
0.00
|
|
|
|
|
|
|
|
|
|
|
Diluted
net income per common share
|
|
$
|
0.00
|
|
|
$
|
0.00
|
|
|
|
|
|
|
|
|
|
|
(a)
- Anti-dilutive securities excluded:
|
|
|
3,365,001
|
|
|
|
3,779,884
|
|
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 2014.
Related
Parties
The
Company follows subtopic ASC 850-10 for the identification of related parties and disclosure of related party transactions.
Pursuant
to Section 850-10-20, the related parties include: (a) affiliates of the Company (“Affiliate” means, with respect
to any specified person, any other person that, directly or indirectly through one or more intermediaries, controls, is controlled
by or is under common control with such person, as such terms are used in and construed under Rule 405 under the Securities Act);
(b) entities for which investments in their equity securities would be required, absent the election of the fair value option
under the Fair Value Option Subsection of Section 825-10-15, to be accounted for by the equity method by the investing entity;
(c) trusts for the benefit of employees, such as pension and profit-sharing trusts that are managed by or under the trusteeship
of management; (d) principal owners of the Company; (e) management of the Company; (f) other parties with which the Company may
deal if one party controls or can significantly influence the management or operating policies of the other to an extent that
one of the transacting parties might be prevented from fully pursuing its own separate interests; and (g) other parties that can
significantly influence the management or operating policies of the transacting parties or that have an ownership interest in
one of the transacting parties and can significantly influence the other to an extent that one or more of the transacting parties
might be prevented from fully pursuing its own separate interests.
Recent
Accounting Pronouncements
In
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.
Management
does not believe that any recently issued, but not yet effective accounting pronouncements, when adopted, will have a material
effect on the accompanying condensed consolidated financial statements.
Reclassification
Certain
prior period amounts have been reclassified to conform to current period presentation.
Subsequent
Events
The
Company evaluates subsequent events and transactions that occur after the balance sheet date for potential recognition or disclosure.
Any material events that occur between the balance sheet date and the date that the financial statements were issued are disclosed
as subsequent events, while the financial statements are adjusted to reflect any conditions that existed at the balance sheet
date.
Note
3 - Property and Equipment:
Property
and equipment on July 31, 2018 and January 31, 2018 are as follows:
|
|
July
31, 2018
|
|
|
January
31, 2018
|
|
Machinery
and Equipment
|
|
$
|
2,639,550
|
|
|
$
|
2,431,589
|
|
Furniture
and Fixtures
|
|
|
81,099
|
|
|
|
71,969
|
|
Leasehold
Improvements
|
|
|
2,788,037
|
|
|
|
2,071,169
|
|
|
|
|
5,508,686
|
|
|
|
4,574,727
|
|
Less:
Accumulated Depreciation
|
|
|
2,412,685
|
|
|
|
2,074,852
|
|
|
|
$
|
3,096,001
|
|
|
$
|
2,499,875
|
|
During
the six months ended July 31, 2018, leasehold improvements increase by approximately $717,000 in relation to the continued plant
expansion in progress since 2017.
Depreciation
expense charged to income for the three months ended July 31, 2018 and 2017 amounted to $203,591 and $133,124, respectively. Depreciation
expense charged to income for the six months ended July 31, 2018 and 2017 amounted to $337,833 and $240,205, 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, 2018 and January 31, 2018, the Company’s
ownership interest in MO was 12% and 12%, respectively.
Note
5 - Related Party Transactions
Meatball
Obsession, LLC
A
current director of the Company is the chairman of the board and shareholder of Meatball Obsession LLC (“MO”).
For
the three months ended July 31, 2018 and 2017, the Company generated approximately $11,972 and $10,468 in revenues from MO, respectively.
For the six months ended July 31, 2018 and 2017, the Company generated approximately $40,710 and $33,039 in revenues from MO,
respectively.
As
of July 31, 2018 and January 31, 2018, the Company had a receivable of $21,410 and $32,869 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, 2018 and 2017, the Company recorded $12,000 in commission expense from WWS, Inc. generated sales.
For the six months ended July 31, 2018 and 2017, the Company recorded $24,000 in commission expense from WWS, Inc. generated sales.
Notes
Payable – Related Party
During
the year ended January 31, 2016, the Company received aggregate proceeds of $125,000 from notes payable with the CEO of the Company.
The notes bear interest at a rate of 4% per annum and matured on December 31, 2016. The notes were subsequently extended until
February 2019. As of July 31, 2018 and January 31, 2018, the outstanding principal balance of the notes was $109,844 and $117,656,
respectively.
The
Company received advances from the CEO of the Company which bear interest at 8%. The advances are due on February 1, 2020. At
July 31, 2018 and January 31, 2018, there was $400,000 of principal outstanding, respectively.
The
Company received advances from an entity 100% owned by the CEO of the Company, which bear interest at 8%. The advances are due
on February 1, 2020. At July 31, 2018 and January 31, 2018 and 2017, there was $132,000 of principal outstanding, respectively.
For
the three months ended July 31, 2018 and 2017, the Company recorded interest expense of $19,601 and $15,694, respectively, related
to the above related party notes payable. For the six months ended July 31, 2018 and 2017, the Company recorded interest expense
of $32,687 and $31,424, respectively, related to the above related party notes payable.
Note
6 - 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. In September 2016, the agreement was amended and the
total facility increased to an aggregate principal amount of up to $3,200,000. In June 2018, the line was increased by $300,000.
The increase was personally guaranteed by the CEO of the Company. As of July 31, 2018 and January 31, 2018, the outstanding
balance on the line of credit was $1,993,481 and $2,702,390, respectively. In May 2018, the agreement was amended to extend
the termination date to October 1, 2020.
On
September 3, 2014, the Company also entered into a 5-year $600,000 Secured Promissory Note (“EGC Note”) with EGC.
In September 2016, the ECG Note was increased to $700,000 with an extended maturity date of September 30, 2021. The amended EGC
Note is payable in 60 monthly installments of $11,667. The EGC Note was further amended in October 2017 to increase the note to
$800,000 with principal payments of $13,795. 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.
Effective
June 6, 2018, the Company executed a Secured Promissory Note with EGC which provides for $300,000 in financing with a maturity
date of June 1, 2020. The Note provides for 24 monthly payments of $12,500 together with interest on the outstanding balance at
Four percent (4%) over the applicable prime rate.
The
outstanding balance on the term loans was $963,345 and $758,615 as of July 31, 2018 and January 31, 2018, respectively.
Note
7 – Notes Payable
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. Subsequent to issuance, the note was amended to extend the maturity date and also removed
the convertible feature of the note. On January 22, 2018, the Company further extended the maturity date to November 1, 2018.
On
July 17, 2018, the Company further extended the maturity date to May 1, 2019. The Company paid to Manatuck a cash fee equal to
two percent (2%) of the mutually-agreed pro-forma balance payable on account of the note as of July 17, 2018, which shall include
all interest which would be accrued on the note through July 17, 2018. Total accrued interest of $392,702 was added to the
outstanding principal balance as of the extension date. The 2% fee was expensed in accordance with debt extinguishment accounting.
There
was unamortized debt discount of $0 and $84,841 as of July 31, 2018 and January 31, 2018, respectively.
The
outstanding principal net of debt discount at July 31, 2018 and January 31, 2018 was $1,380,625 and $1,403,082, respectively.
On
April 29, 2015, the Company entered into a note payable with a bank for $250,000, which was used to pay down and replace a prior
note payable. The note bears interest at 3.75%, with interest being due monthly. The note is due in full on the maturity date
of April 1, 2019. The note is fully guaranteed by the Company’s Chief Executive Officer. The outstanding balance on the
note was $250,000 as of July 31, 2018 and January 31, 2018.
Note
8 – Capital Leases Payable
Capital
lease obligations consisted of the following at July 31, 2018:
|
|
|
July
31, 2018
|
|
|
|
|
|
|
|
|
(i)
|
Capital
lease obligation to a financing company for a term of four (4) years, collateralized by equipment, with interest at 7.5%
per annum, with principal and interest due and payable in monthly installments of $5,152 and buyout purchase option of
$31,988 at end of lease
|
|
$
|
201,643
|
|
|
|
|
|
|
|
|
|
(ii
)
|
Capital
lease obligation to a financing company for a term of five (5) years, collateralized by kitchen equipment, with interest at
5.9% per annum, with principal and interest due and payable in monthly installments of $610 and buyout purchase option of
$1 at end of lease
|
|
|
29,570
|
|
|
|
|
|
|
|
|
|
|
|
|
|
231,213
|
|
|
|
|
|
|
|
|
|
|
Less
current maturities
|
|
|
53,730
|
|
|
|
|
|
|
|
|
|
|
Capital
lease obligation, net of current maturities
|
|
$
|
177,483
|
|
|
|
(i)
|
In
May 2018, the Company executed a sale-leaseback arrangement with an unrelated third party
whereby the Company sold its equipment and leased it back for a period of 4 years. Pursuant
to the agreement, the Company received gross proceeds of $213,250. This transaction is
recorded as a financing transaction with the assets and related financing obligation
on the condensed consolidated balance sheet. The lease expires in April 2022 and includes
purchase, renewal and return options and certain default provisions requiring the Company
to perform repairs and maintenance, make timely rent payments and insure the equipment.
|
Future
maturities of all debt and capital leases (including debt discussed above in Notes 5, 6, 7 and 8) are as follows:
For
the Twelve Months Ending July 31,
|
|
|
|
2019
|
|
$
|
4,103,220
|
|
2020
|
|
|
892,837
|
|
2021
|
|
|
227,714
|
|
2022
|
|
|
216,871
|
|
2023
|
|
|
19,866
|
|
|
|
$
|
5,460,508
|
|
Note
9- Concentrations
Revenues
During
the six months ended July 31, 2018, the Company earned revenues from one customer representing approximately 52% of gross sales.
During the six months ended July 31, 2017, the Company earned revenues from three customers representing approximately 39%, 11%
and 10% of gross sales.
As
of July 31, 2018, this one customer represented approximately 49% of total gross outstanding receivables, respectively.
As of July 31, 2017, these three customers represented approximately 43%, 11% and 19% of total gross outstanding receivables,
respectively.
Note
10 - Stockholders’ Deficit
(A)
Options
The
following is a summary of the Company’s option activity:
|
|
Options
|
|
|
Weighted
Average
Exercise Price
|
|
|
|
|
|
|
|
|
Outstanding
– January 31, 2018
|
|
|
866,000
|
|
|
$
|
0.87
|
|
Exercisable
– January 31, 2018
|
|
|
699,000
|
|
|
$
|
0.78
|
|
Granted
|
|
|
30,000
|
|
|
$
|
1.21
|
|
Exercised
|
|
|
(40,000
|
)
|
|
$
|
1.00
|
|
Forfeited/Cancelled
|
|
|
(218,000
|
)
|
|
$
|
-
|
|
Outstanding
– July 31, 2018
|
|
|
638,000
|
|
|
$
|
0.79
|
|
Exercisable
– July 31, 2018
|
|
|
532,000
|
|
|
$
|
0.68
|
|
|
|
|
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
|
|
|
|
638,000
|
|
|
2.64
years
|
|
$
|
0.79
|
|
|
|
532,000
|
|
|
$
|
0.68
|
|
At
July 31, 2018 the total intrinsic value of options outstanding and exercisable was $134,670.
For
the six months ended July 31, 2018 and 2017, the Company recognized share-based compensation related to options of an aggregate
of $79,163 and $8,999, respectively. At July 31, 2018, unrecognized share-based compensation was $62,345.
(D)
Warrants
The
following is a summary of the Company’s warrant activity:
|
|
Warrants
|
|
|
Weighted
Average
Exercise Price
|
|
|
|
|
|
|
|
|
Outstanding
– January 31, 2018
|
|
|
7,061,399
|
|
|
$
|
1.06
|
|
Exercisable
– January 31, 2018
|
|
|
7,061,399
|
|
|
$
|
1.06
|
|
Granted
|
|
|
-
|
|
|
$
|
-
|
|
Exercised
|
|
|
(467,496
|
)
|
|
$
|
1.00
|
|
Forfeited/Cancelled
|
|
|
(15,238
|
)
|
|
$
|
-
|
|
Outstanding
– July 31, 2018
|
|
|
6,578,665
|
|
|
$
|
1.06
|
|
Exercisable
– July 31, 2018
|
|
|
6,578,665
|
|
|
$
|
1.06
|
|
Warrants
Outstanding
|
|
|
Warrants
Exercisable
|
|
Exercise
Price
|
|
|
Number
Outstanding
|
|
|
Weighted
Average
Remaining
Contractual
Life
(in years)
|
|
|
Weighted
Average
Exercise Price
|
|
|
Number
Exercisable
|
|
|
Weighted
Average
Exercise Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.68
– 2.50
|
|
|
|
6,578,665
|
|
|
|
2.22
years
|
|
|
$
|
1.06
|
|
|
|
6,578,665
|
|
|
$
|
1.06
|
|
At
July 31, 2018, the total intrinsic value of warrants outstanding and exercisable was $468,000 and $468,000, respectively.
During
the six months ended July 31, 2018, 467,496 warrants were exercised by the warrant holders on a cashless basis. The Company
issued 72,804 shares of common stock as a result of this exercise.
Note
11 - Commitments and Contingencies
Litigation,
Claims and Assessments
From
time to time, the Company may become involved in various lawsuits and legal proceedings, which arise in the ordinary course of
business. Litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time
to time that may harm its business. The Company is currently not aware of any such legal proceedings or claims that they believe
will have, individually or in the aggregate, a material adverse effect on its business, financial condition or operating results.
Licensing
and Royalty Agreements
On
March 1, 2010, the Company was assigned a Development and License agreement (the “Agreement”). Under the terms of
the Agreement the Licensor shall develop for the Company a line of beef meatballs with sauce, turkey meatballs with sauce and
other similar meats and sauces for commercial manufacture, distribution and sale (each a “Licensor Product” and collectively
the “Licensor Products”). Licensor shall work with Licensee to develop Licensor Products that are acceptable to Licensee.
Upon acceptance of a Licensor Product by Licensee, Licensor’s trade secret recipes, formulas methods and ingredients for
the preparation and production of such Licensor Products (the “Recipes”) shall be subject to this Development and
License Agreement.
The
Exclusive Term began on January 1, 2009 (the “Effective Date”) and ends on the 50th anniversary of the Effective Date.
The
Royalty Rate shall be: 6% of net sales up to $500,000 of net sales for each Agreement year; 4% of Net Sales from $500,000 up to
$2,500,000 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 $70,993 and $89,061 of royalty expenses for the three months ended July 31, 2018 and 2017. The Company incurred
$200,856 and $206,191 of royalty expenses for the six months ended July 31, 2018 and 2017. Royalty expenses are included in general
and administrative expenses on the condensed consolidated statement of operations.
Agreements
with Placement Agents and Finders
The
Company entered into a fourth Financial Advisory and Investment Banking Agreement with Spartan Capital Securities, LLC (“Spartan”)
effective April 1, 2015 (the “Spartan Advisory Agreement”). Pursuant to the Spartan Advisory Agreement, 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.
If
the Company enters into a change of control transaction during the term of the agreement through October 1, 2022, the Company
shall pay to Spartan a fee equal to 3% of the consideration paid or received by the Company and/or its stockholders in such transaction.
During
the six months ended July 31, 2018, no payments were made to Spartan.
Operating
Lease
The
Company has a lease for office, manufacturing, and warehouse space in East Rutherford, NJ. The lease expires on March 31, 2024,
with a 5-year renewal option. The Company leases additional office space in East Rutherford, NJ. This lease is for a 51-month
term expiring on March 31, 2019 with annual payments of $18,847.
Rent
expense for the six months ended July 31, 2018 and 2017 was $124,174 and $145,557, respectively.
Total
future minimum payments required under the lease as of July 31, 2018 are as follows:
Twelve
Months Ending January 31,
|
|
|
|
2019
(remaining)
|
|
$
|
114,831
|
|
2020
|
|
|
201,599
|
|
2021
|
|
|
199,757
|
|
2022
|
|
|
209,846
|
|
2023
|
|
|
211,864
|
|
Thereafter
|
|
|
247,174
|
|
Total
|
|
$
|
1,185,071
|
|
Note
12 – Subsequent Events
The
Company has evaluated subsequent events through the date the financial statements were available to be issued.