Notes
to Condensed Consolidated Financial Statements
July
31, 2020
Note
1 - Nature of Operations and Basis of Presentation
Nature
of Operations
MamaMancini’s
Holdings, Inc. (the “Company”), (formerly known as Mascot Properties, Inc.) was organized on July 22, 2009 as a Nevada
corporation. The Company has a year-end of January 31.
The
Company is a manufacturer and distributor of beef meatballs with sauce, turkey meatballs with sauce, beef meat loaf, chicken parmesan
and other similar meats and sauces. In addition, the Company continues to diversify its product line by introducing new products
such as ready to serve dinners, single-size Pasta Bowls, bulk deli, packaged refrigerated and frozen products. The Company’s
products were submitted to the United States Department of Agriculture (the “USDA”) and approved as all natural. The
USDA defines all natural as a product that contains no artificial ingredients, coloring ingredients or chemical preservatives
and is minimally processed. The Company’s customers are located throughout the United States, with large concentrations
in the Northeast and Southeast.
Note
2 - Summary of Significant Accounting Policies
Basis
of Presentation
The
condensed consolidated financial statements and related notes have been prepared in accordance with accounting principles generally
accepted in the United States of America (“US GAAP”) and include the accounts of the Company and its wholly-owned
subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
The
unaudited 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, 2020 filed on April 23, 2020. 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, 2020 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, 2021.
Principles
of Consolidation
The
condensed consolidated financial statements include all accounts of the entities as of the reporting period ending date(s) and
for the reporting period(s). All inter-company balances and transactions have been eliminated.
Use
of Estimates
The
preparation of 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 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, 2020 and January 31, 2020.
The
Company minimizes its credit risk associated with cash by periodically evaluating the credit quality of its primary financial
institution. The balance at times may exceed federally insured limits.
Accounts
Receivable and Allowance for Doubtful Accounts
Accounts
receivable are stated at the amount management expects to collect from outstanding balances. The Company generally does not require
collateral to support customer receivables. The Company provides an allowance for doubtful accounts based upon a review of the
outstanding accounts receivable, historical collection information and existing economic conditions. The Company determines if
receivables are past due based on days outstanding, and amounts are written off when determined to be uncollectible by management.
As of July 31, 2020 and January 31, 2020, 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, 2020 and January 31, 2020:
|
|
July
31, 2020
|
|
|
January
31, 2020
|
|
Raw
Materials
|
|
$
|
714,172
|
|
|
$
|
893,204
|
|
Work
in Process
|
|
|
180,360
|
|
|
|
37,764
|
|
Finished
goods
|
|
|
864,229
|
|
|
|
315,449
|
|
|
|
$
|
1,758,761
|
|
|
$
|
1,246,417
|
|
Property
and Equipment
Property
and equipment are recorded at cost net of depreciation. Depreciation expense is computed using straight-line methods over the
estimated useful lives.
Asset
lives for financial statement reporting of depreciation are:
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.
Leases
In
February 2016, the FASB issued ASU 2016-02 “Leases” (Topic 842) which amended guidance for lease arrangements
to increase transparency and comparability by providing additional information to users of financial statements regarding an entity’s
leasing activities. Subsequent to the issuance of Topic 842, the FASB clarified the guidance through several ASUs; hereinafter
the collection of lease guidance is referred to as ASC 842. The revised guidance seeks to achieve this objective by requiring
reporting entities to recognize lease assets and lease liabilities on the balance sheet for substantially all lease arrangements.
On
February 1, 2019, the Company adopted ASC 842 using the modified retrospective approach and recognized a right of use (“ROU”)
asset and liability in the consolidated balance sheet in the amount of $1,599,830 related to the operating lease for office and
warehouse space.
As
part of the adoption the Company elected the practical expedients permitted under the transition guidance within the new standard,
which among other things, allowed the Company to:
|
1.
|
Not
separate non-lease components from lease components and instead to account for each separate lease component and the non-lease
components associated with that lease component as a single lease component.
|
|
|
|
|
2.
|
Not
to apply the recognition requirements in ASC 842 to short-term leases.
|
|
|
|
|
3.
|
Not
record a right of use asset or right of use liability for leases with an asset or liability balance that would be considered
immaterial.
|
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, 2020 and 2019 were
$25,857 and $24,509, respectively. Research and development expenses for the six months ended July 31, 2020 and 2019 were $55,338
and $49,835, 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 update clarifies
the objectives of collectability, sales and other taxes, noncash consideration, contract modifications at transition, completed
contracts at transition and technical correction. The amendments in this update affect the guidance in ASU 2014-09. In September
2017, the FASB issued additional amendments providing clarification and implementation guidance.
The
Company adopted this guidance and related amendments as of the first quarter of fiscal 2019, applying the full retrospective transition
method. As the underlying principles of the new standard, relating to the measurement of revenue and the timing of recognition,
are closely aligned with the Company’s current business model and practices, the adoption of ASU 2014-09 did not have a
material impact on the consolidated financial statements. In addition, the adoption of ASC 606 did not impact the previously reported
financial statements in any prior period nor did it result in a cumulative effect adjustment to retained earnings.
The
Company’s sales predominantly are generated from the sale of finished products to customers, contain a single performance
obligation and revenue is recognized at a single point in time when ownership, risks and rewards transfer. Typically, this occurs
when the goods are shipped to the customer. Revenues are recognized in an amount that reflects the net consideration the Company
expects to receive in exchange for the goods. The Company reports all amounts billed to a customer in a sale transaction as revenue.
Under the new revenue guidance, the Company elected to treat shipping and handling activities as fulfillment activities, and the
related costs are recorded as selling expenses in general and administrative expenses on the consolidated statement of operations.
The
Company promotes its products with advertising, consumer incentives and trade promotions. These programs include discounts, slotting
fees, coupons, rebates, in-store display incentives and volume-based incentives. Customer trade promotion and consumer incentive
activities are recorded as a reduction to the transaction price based on amounts estimated as being due to customers and consumers
at the end of a period. The Company derives these estimates principally on historical utilization and redemption rates. The Company
does not receive a distinct service in relation to the advertising, consumer incentives and trade promotions.
Payment
terms in the Company’s invoices are based on the billing schedule established in contracts and purchase orders with customers.
The Company generally recognizes the related trade receivable when the goods are shipped.
Expenses
such as slotting fees, sales discounts, and allowances are accounted for as a direct reduction of revenues as follows:
|
|
For the Six Months Ended
|
|
|
|
July 31, 2020
|
|
|
July 31, 2019
|
|
Gross Sales
|
|
$
|
21,816,491
|
|
|
$
|
15,658,081
|
|
Less: Slotting, Discounts, Allowances
|
|
|
331,088
|
|
|
|
193,812
|
|
Net Sales
|
|
$
|
21,485,403
|
|
|
$
|
15,464,269
|
|
Disaggregation
of Revenue from Contracts with Customers. The following table disaggregates gross revenue by significant geographic area for
the six months ended July 31, 2020 and 2019:
|
|
For
the Six Months Ended
|
|
|
|
July
31, 2020
|
|
|
July
31, 2019
|
|
Northeast
|
|
$
|
6,257,552
|
|
|
$
|
5,032,954
|
|
Southeast
|
|
|
6,642,906
|
|
|
|
4,046,018
|
|
Midwest
|
|
|
2,937,245
|
|
|
|
1,981,774
|
|
West
|
|
|
3,412,840
|
|
|
|
2,713,142
|
|
Southwest
|
|
|
2,565,948
|
|
|
|
1,909,692
|
|
Total
revenue
|
|
$
|
21,816,491
|
|
|
$
|
15,658,081
|
|
Cost
of Sales
Cost
of sales represents costs directly related to the production and manufacturing of the Company’s products. Costs include
product development, freight-in, packaging, and print production costs.
Advertising
Costs
incurred for producing and communicating advertising for the Company are charged to operations as incurred. Producing and communicating
advertising expenses for the three months ended July 31, 2020 and 2019 were $288,152 and $413,973, respectively. Producing and
communicating advertising expenses for the six months ended July 31, 2020 and 2019 were $670,100 and $756,795, respectively.
Stock-Based
Compensation
The
Company accounts for stock-based compensation in accordance with ASC Topic 718, “Compensation – Stock Compensation”
(“ASC 718”), which establishes financial accounting and reporting standards for stock-based employee compensation.
It defines a fair value-based method of accounting for an employee stock option or similar equity instrument. The Company accounts
for compensation cost for stock option plans in accordance with ASC 718.
The
Company recognizes all forms of share-based payments, including stock option grants, warrants and restricted stock grants, at
their fair value on the grant date, which are based on the estimated number of awards that are ultimately expected to vest.
Share-based
payments, excluding restricted stock, are valued using a Black-Scholes option pricing model. Grants of share-based payment awards
issued to non-employees for services rendered have been recorded at the fair value of the share-based payment, which is the more
readily determinable value. The grants are amortized on a straight-line basis over the requisite service periods, which is generally
the vesting period. If an award is granted, but vesting does not occur, any previously recognized compensation cost is reversed
in the period related to the termination of service. Stock-based compensation expenses are included in cost of goods sold or selling,
general and administrative expenses, depending on the nature of the services provided, in the 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, 2020 and 2019, share-based compensation amounted to $22,870 and $12,686, respectively.
For
the six months ended July 31, 2020 and 2019, share-based compensation amounted to $49,975 and $29,943, respectively.
For
the six months ended July 31, 2020 and 2019, when computing fair value of share-based payments, the Company has considered the
following variables:
|
|
July
31, 2020
|
|
|
July
31, 2019
|
|
Risk-free
interest rate
|
|
|
0.37
|
%
|
|
|
1.84
- 2.29
|
%
|
Expected
life of grants
|
|
|
3.5
years
|
|
|
|
3
- 3.5 years
|
|
Expected
volatility of underlying stock
|
|
|
125
|
%
|
|
|
129
- 150
|
%
|
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 attributable
to common stockholders per common share.
|
|
For the Three Months Ended
|
|
|
|
July 31, 2020
|
|
|
July 31, 2019
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net income attributable to common stockholders
|
|
$
|
739,767
|
|
|
|
358,308
|
|
Effect of dilutive securities:
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Diluted net income
|
|
$
|
739,767
|
|
|
$
|
358,308
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding - basic
|
|
|
32,262,375
|
|
|
|
31,947,763
|
|
Dilutive securities (a):
|
|
|
|
|
|
|
|
|
Series A Preferred
|
|
|
-
|
|
|
|
-
|
|
Options
|
|
|
492,672
|
|
|
|
34,403
|
|
Warrants
|
|
|
788,518
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding and assumed conversion – diluted
|
|
|
33,543,565
|
|
|
|
31,981,806
|
|
|
|
|
|
|
|
|
|
|
Basic net income per common share
|
|
$
|
0.02
|
|
|
$
|
0.01
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per common share
|
|
$
|
0.02
|
|
|
$
|
0.01
|
|
|
|
|
|
|
|
|
|
|
(a) - Anti-dilutive securities excluded:
|
|
|
-
|
|
|
|
6,777,164
|
|
|
|
For the Six Months Ended
|
|
|
|
July 31, 2020
|
|
|
July 31, 2019
|
|
Numerator:
|
|
|
|
|
|
|
Net income attributable to common stockholders
|
|
$
|
1,645,969
|
|
|
|
713,974
|
|
Effect of dilutive securities:
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Diluted net income
|
|
$
|
1,645,969
|
|
|
$
|
713,974
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding - basic
|
|
|
33,128,298
|
|
|
|
31,907,676
|
|
Dilutive securities (a):
|
|
|
|
|
|
|
|
|
Series A Preferred
|
|
|
-
|
|
|
|
-
|
|
Options
|
|
|
492,672
|
|
|
|
34,043
|
|
Warrants
|
|
|
788,518
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding and assumed conversion – diluted
|
|
|
33,409,488
|
|
|
|
31,941,719
|
|
|
|
|
|
|
|
|
|
|
Basic net income per common share
|
|
$
|
0.05
|
|
|
$
|
0.02
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per common share
|
|
$
|
0.05
|
|
|
$
|
0.02
|
|
|
|
|
|
|
|
|
|
|
(a) - Anti-dilutive securities excluded:
|
|
|
-
|
|
|
|
6,777,164
|
|
Income
Taxes
Income
taxes are provided in accordance with ASC No. 740, “Accounting for Income Taxes”. A deferred tax asset or liability
is recorded for all temporary differences between financial and tax reporting and net operating loss carryforwards. Deferred tax
expense (benefit) results from the net change during the period of deferred tax assets and liabilities.
Deferred
tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion
or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes
in tax laws and rates on the date of enactment.
The
Company is no longer subject to tax examinations by tax authorities for years prior to 2017.
In
response to the COVID-19 pandemic, the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) was
signed into law in March 2020. The CARES Act lifts certain deduction limitations originally imposed by the Tax Cuts and Jobs Act
of 2017 (“2017 Tax Act”). Corporate taxpayers may carryback net operating losses (“NOLs”)
originating between 2018 and 2020 for up to five years, which was not previously allowed under the 2017 Tax Act. The CARES Act
also eliminates the 80% of taxable income limitations by allowing corporate entities to fully utilize NOL carryforwards to offset
taxable income in 2018, 2019 or 2020. Taxpayers may generally deduct interest up to the sum of 50% of adjusted taxable income
plus business interest income (30% limit under the 2017 Tax Act) for 2019 and 2020. The CARES Act allows taxpayers with alternative
minimum tax credits to claim a refund in 2020 for the entire amount of the credits instead of recovering the credits through refunds
over a period of years, as originally enacted by the 2017 Tax Act.
In
addition, the CARES Act raises the corporate charitable deduction limit to 25% of taxable income and makes qualified improvement
property generally eligible for 15-year cost-recovery and 100% bonus depreciation. The enactment of the CARES Act did not result
in any material adjustments to the income tax provision.
Related
Parties
The
Company follows subtopic ASC 850-10 for the identification of related parties and disclosure of related party transactions.
Pursuant
to Section 850-10-20, the related parties include: (a) affiliates of the Company (“Affiliate” means, with respect
to any specified person, any other person that, directly or indirectly through one or more intermediaries, controls, is controlled
by or is under common control with such person, as such terms are used in and construed under Rule 405 under the Securities Act);
(b) entities for which investments in their equity securities would be required, absent the election of the fair value option
under the Fair Value Option Subsection of Section 825-10-15, to be accounted for by the equity method by the investing entity;
(c) trusts for the benefit of employees, such as pension and profit-sharing trusts that are managed by or under the trusteeship
of management; (d) principal owners of the Company; (e) management of the Company; (f) other parties with which the Company may
deal if one party controls or can significantly influence the management or operating policies of the other to an extent that
one of the transacting parties might be prevented from fully pursuing its own separate interests; and (g) other parties that can
significantly influence the management or operating policies of the transacting parties or that have an ownership interest in
one of the transacting parties and can significantly influence the other to an extent that one or more of the transacting parties
might be prevented from fully pursuing its own separate interests.
Recent
Accounting Pronouncements
In
October 2016, the FASB issued ASU 2016-16, “Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other than Inventory”,
which eliminates the exception that prohibits the recognition of current and deferred income tax effects for intra-entity
transfers of assets other than inventory until the asset has been sold to an outside party. The updated guidance is effective
for annual periods beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption of the
update is permitted. The adoption of the new standard did not have a significant impact on the Company’s condensed consolidated
financial statements.
In
August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework—Changes to
the Disclosure Requirements for Fair Value Measurement”. This update is to improve the effectiveness of disclosures
in the notes to the financial statements by facilitating clear communication of the information required by U.S. GAAP that is
most important to users of each entity’s financial statements. The amendments in this update apply to all entities that
are required, under existing U.S. GAAP, to make disclosures about recurring or nonrecurring fair value measurements. The amendments
in this update are effective for all entities for fiscal years beginning after December 15, 2019, and interim periods within those
fiscal years. The adoption of the new standard did not have a significant impact on the Company’s condensed consolidated
financial statements.
In
August 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
ASU 2018-15, “Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is
a Service Contract”. The amendments in this update align the requirements for capitalizing implementation costs incurred
in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop
or obtain internal-use software. The Company adopted this guidance on February 1, 2020 on a prospective basis. The adoption of
this guidance did not have a material impact on the condensed consolidated financial statements.
In
December 2019, the FASB issued authoritative guidance intended to simplify the accounting for income taxes (ASU 2019-12, “Income
Taxes (Topic 740): Simplifying the Accounting for Income Taxes”). This guidance eliminates certain exceptions
to the general approach to the income tax accounting model and adds new guidance to reduce the complexity in accounting
for income taxes. This guidance is effective for annual periods after December 15, 2020, including interim periods within those
annual periods. The Company is currently evaluating the potential impact of this guidance on its condensed consolidated financial
statements.
Management
does not believe that any recently issued, but not yet effective accounting pronouncements, when adopted, will have a material
effect on the accompanying condensed consolidated financial statements.
Subsequent
Events
The
Company evaluates subsequent events and transactions that occur after the balance sheet date for potential recognition or disclosure.
Any material events that occur between the balance sheet date and the date that the financial statements were issued are disclosed
as subsequent events, while the financial statements are adjusted to reflect any conditions that existed at the balance sheet
date.
Note
3 - Property and Equipment:
Property
and equipment on July 31, 2020 and January 31, 2020 are as follows:
|
|
July 31, 2020
|
|
|
January 31, 2020
|
|
Machinery and Equipment
|
|
$
|
3,653,857
|
|
|
$
|
3,176,638
|
|
Furniture and Fixtures
|
|
|
107,255
|
|
|
|
89,443
|
|
Leasehold Improvements
|
|
|
3,029,508
|
|
|
|
2,933,865
|
|
|
|
|
6,790,620
|
|
|
|
6,199,946
|
|
Less: Accumulated Depreciation
|
|
|
3,713,181
|
|
|
|
3,394,103
|
|
|
|
$
|
3,077,439
|
|
|
$
|
2,805,843
|
|
Depreciation
expense charged to income for the three months ended July 31, 2020 and 2019 amounted to $159,285 and $189,567, respectively. Depreciation
expense charged to income for the six months ended July 31, 2019 and 2018 amounted to $319,078 and $370,052, 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, 2020 and January 31, 2020, the Company’s
ownership interest in MO was 0% and 12%, respectively. As of December 31, 2019, MO had wound down and ceased operations. Major
accounts were transitioned to the Company as a part of the wind down.
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, 2020 and 2019, the Company generated approximately $0 and $3,911 in revenues from MO, respectively.
For the six months ended July 31, 2020 and 2019, the Company generated approximately $0 and $33,248 in revenues from MO, respectively.
As
of July 31, 2020 and January 31, 2020, the Company had a receivable of $0 and $1,604 due from MO, respectively.
WWS,
Inc.
Alfred
D’Agostino and Tom Toto, two directors of the Company, are affiliates of WWS, Inc.
For
the three months ended July 31, 2020 and 2019, the Company recorded $12,000 and $12,000 in commission expense from WWS, Inc. generated
sales, respectively. For the six months ended July 31, 2020 and 2019, the Company recorded $24,000 and $24,000 in commission expense
from WWS, Inc. generated sales, respectively.
Notes
Payable – Related Party
During
the year ended January 31, 2016, the Company received aggregate proceeds of $125,000 from notes payable with the CEO of the Company.
The notes bear interest at a rate of 4% per annum and matured on December 31, 2016. The notes were subsequently extended until
January 2024. As of July 31, 2020 and January 31, 2020, the outstanding principal balance of the notes was $0 and $109,844, respectively.
The
Company received advances from the CEO of the Company which bear interest at 8%. The advances are due on January 2024. At July
31, 2020 and January 31, 2020, there was $0 and $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 January 2024. At July 31, 2020 and January 31, 2020, there was $0 and $132,000 of principal outstanding, respectively.
For
the three months ended July 31, 2020 and 2019, the Company recorded interest expense of $11,775 and $11,881, respectively, related
to the above related party notes payable. For the six months ended July 31, 2020 and 2019, the Company recorded interest expense
of $23,550 and $22,769, respectively, related to the above related party notes payable. At July 31, 2020 and January 31, 2020,
there was $0 and $2,863, respectively, of accrued interest on the above related party notes.
Other
Related Party Transactions
During
the three months ended July 31, 2020 and 2019, the Company reimbursed an entity 100% owned by the CEO of the Company for certain
investor relation conference expenses totaling $0 and $0, respectively. During the six months ended July 31, 2020 and 2019, the
Company reimbursed an entity 100% owned by the CEO of the Company for certain investor relation conference expenses totaling $14,570
and $15,722, respectively.
During
the three and six months ended July 31, 2020, members of the board of directors and the CEO exercised 940,807 warrants with exercise
price of $1 in exchange for 940,807 shares of common stock.
Note
6 - Loan and Security Agreement
M&T
Bank
Effective,
January 4, 2019, the Company entered into a $2.5 million five-year note with M&T Bank at LIBOR plus four points with repayments
in equal payments over 60 months. The new facility is supported by a first priority security interest in all of the Company’s
business assets and is further subject to various affirmative and negative financial covenants and a limited Guaranty by the Company’s
Chief Executive Officer, Carl Wolf. The Company recorded $89,321 as a debt discount and will be amortized over the remaining life
of the note using the effective interest method. There was unamortized debt discount of $7,164 and $17,864 as of July 31, 2020
and January 31, 2020, respectively. The outstanding balance on the term loan was $191,661 and $441,663 as of July 31, 2020 and
January 31, 2020, respectively.
Effective,
January 4, 2019, the Company has arranged a new $3.5 million working capital line of credit with M&T Bank at LIBOR plus four
points with a two-year expiration. On January 29, 2020, the facility was amended to increase the total available balance to $4.0
million as well as extend the maturity date to June 30, 2022. The facility is supported by a first priority security interest
in all of the Company’s business assets and is further subject to various affirmative and negative financial covenants and
a limited Guaranty by the Company’s Chief Executive Officer, Carl Wolf. Advances under the line of credit are limited to
eighty percent (80%) of eligible accounts receivable (which is subject to an agreed limitation and is further subject to certain
asset concentration provisions) and fifty percent (50%) of eligible inventory (which is subject to an agreed dollar limitation).
All advances under the line of credit are due upon maturity. The outstanding balance on the line of credit was $2,497,348 and
$2,997,348 as of July 31, 2020 and January 31, 2020, respectively.
Future maturities of all debt (excluding debt discount discussed
above in Note 6) are as follows:
For the Twelve Months Ending July 31,
|
|
|
|
2021
|
|
$
|
191,661
|
|
2022
|
|
|
2,497,348
|
|
|
|
$
|
2,689,009
|
|
Note
7 – Promissory Note
On
April 21, 2020, the Company entered into a term note with its principal bank, M&T, with a principal amount of $330,000 pursuant
to the Paycheck Protection Program (“PPP Term Note”) under the Coronavirus Aid, Relief, and Economic Security
Act (the “CARES Act”). The PPP Loan is evidenced by a promissory note. The PPP Term Note bears interest at
a fixed annual rate of 1.00%, with the first six months of interest deferred. Beginning in November 2020, the Company will make
18 equal monthly payments of principal and interest with the final payment due in April 2022. The Company returned the $330,505
received from the Paycheck Protection Program on May 6, 2020, inclusive of interest.
Note
8 - Concentrations
Revenues
During
the six months ended July 31, 2020, the Company earned revenues from two customers representing approximately 48% and 11% of gross
sales. As of July 31, 2020, these two customers represented approximately 41% and 6% of total gross outstanding receivables, respectively.
During the six months ended July 31, 2019, the Company earned revenues from three customers representing approximately 46%, 10%
and 10% of gross sales. As of July 31, 2019, three customers represented approximately 41%, 12% and 11% of total gross outstanding
receivables, respectively.
Note
9 - Stockholders’ Equity
(A)
Options
The
following is a summary of the Company’s option activity:
|
|
Options
|
|
|
Weighted
Average
Exercise Price
|
|
Outstanding – January 31, 2020
|
|
|
914,000
|
|
|
$
|
0.77
|
|
Exercisable – January 31, 2020
|
|
|
779,000
|
|
|
$
|
0.71
|
|
Granted
|
|
|
7,500
|
|
|
$
|
1.16
|
|
Exercised
|
|
|
(12,000
|
)
|
|
$
|
0.60
|
|
Forfeited/Cancelled
|
|
|
-
|
|
|
$
|
-
|
|
Outstanding – July 31, 2020
|
|
|
909,500
|
|
|
$
|
0.71
|
|
Exercisable – July 31, 2020
|
|
|
897,000
|
|
|
$
|
0.70
|
|
|
|
|
Options Outstanding
|
|
|
|
|
|
Options Exercisable
|
|
Exercise Price
|
|
|
Number
Outstanding
|
|
|
Weighted
Average
Remaining
Contractual
Life (in years)
|
|
|
Weighted
Average
Exercise Price
|
|
|
Number
Exercisable
|
|
|
Weighted
Average
Exercise Price
|
|
$
|
0.39 –
1.38
|
|
|
|
909,500
|
|
|
|
2.12
|
|
|
$
|
0.71
|
|
|
|
897,000
|
|
|
$
|
0.70
|
|
At
July 31, 2020, the total intrinsic value of options outstanding and exercisable was $776,906 and $768,569, respectively.
In
June 2020, two employees exercised a total of 12,000 options at an exercise price of $0.60 per share for aggregate proceeds of
$7,200. No options were exercised during the
six months ended July 31, 2019.
During
the six months ended July 31, 2020, the Company issued to 7,500 options to an employee. The options have an exercise price of
$1.16 per share, a term of 5 years, and 2-year vesting. The options have an aggregated fair value of approximately $7,617 that
was calculated using the Black-Scholes option-pricing model based on the assumptions discussed above in Note 2.
For
the six months ended July 31, 2020 and 2019, the Company recognized share-based compensation related to options of an aggregate
of $49,975 and $23,098, respectively. At July 31, 2020, unrecognized share-based compensation was $4,853.
(B)
Warrants
The
following is a summary of the Company’s warrant activity:
|
|
Warrants
|
|
|
Weighted
Average
Exercise
Price
|
|
|
|
|
|
|
|
|
Outstanding – January 31, 2020
|
|
|
6,056,664
|
|
|
$
|
1.21
|
|
Exercisable – January 31, 2020
|
|
|
6,056,664
|
|
|
$
|
1.21
|
|
Granted
|
|
|
-
|
|
|
$
|
-
|
|
Exercised
|
|
|
(1,557,103
|
)
|
|
$
|
1.00
|
|
Forfeited/Cancelled
|
|
|
-
|
|
|
$
|
-
|
|
Outstanding – July 31, 2020
|
|
|
4,499,561
|
|
|
$
|
1.28
|
|
Exercisable – July 31, 2020
|
|
|
4,499,561
|
|
|
$
|
1.28
|
|
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
|
|
$
|
1.00 –
1.50
|
|
|
|
4,499,561
|
|
|
|
0.53
|
|
|
$
|
1.28
|
|
|
|
4,499,561
|
|
|
$
|
1.28
|
|
During
the six months ended July 31, 2020, warrant holders exercised a total of 1,557,103 warrants and the Company issued 1,513,860 shares
of common stock as a result of these exercises and received gross proceeds of $1,477,103. Of the 1,557,103 exercised warrants,
80,000 warrants were exercised on a cashless basis by Spartan Capital and the Company issued 36,757 shares of common stock.
At
July 31, 2020, the total intrinsic value of warrants outstanding and exercisable was $1,264,754 and $1,264,754, respectively.
Note
10 - 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
|
|
1st and 2nd
|
|
$
|
-
|
|
3rd and 4th
|
|
$
|
50,000
|
|
5th, 6th
and 7th
|
|
$
|
75,000
|
|
8th and 9th
|
|
$
|
100,000
|
|
10th and
thereafter
|
|
$
|
125,000
|
|
The
Company incurred $125,618 and $104,380 of royalty expenses for the three months ended July 31, 2020 and 2019, respectively. The
Company incurred $287,445 and $220,846 of royalty expenses for the six months ended July 31, 2020 and 2019, respectively. Royalty
expenses are included in general and administrative expenses on the condensed consolidated statement of operations.
Agreements
with Placement Agents and Finders
The
Company entered into a fourth Financial Advisory and Investment Banking Agreement with Spartan Capital Securities, LLC (“Spartan”)
effective April 1, 2015 (the “Spartan Advisory Agreement”). Pursuant to the Spartan Advisory Agreement, 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.
Advisory
Agreement
The
Company entered into an Advisory Agreement with Spartan effective June 1, 2019 (the “Advisory Agreement”). Pursuant
to the agreement, the Company shall pay to Spartan a non-refundable monthly fee of $5,000 over a 21-month period. Additionally,
the Company granted Spartan 125,000 shares of common stock which are considered fully-paid and non-assessable upon execution of
the agreement. During the term or this Agreement, the Consultant will provide non-exclusive consulting services related to general
corporate matters, including, but not limited to (i) advice and input with respect to raising capital and potential M&A transactions,
(ii) identifying suitable personal for management and Board positions (iii) developing corporate structure and finance strategies,
(iv) assisting the Company with strategic introductions, (v) assisting management with enhancing corporate and shareholder value,
and (vi) introducing the Company to potential investors (collectively, the “Advisory Services”). The advisory agreement
was terminated according to its terms on March 31, 2020.
Note
11 – 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 the following reportable subsequent events other than those disclosed elsewhere in these financials.
Subsequent
to July 31, 2020, a warrant holder exercised 200,000 warrants at $1.00 per share into 200,000 shares of common stock. The Company
received aggregate proceeds of $200,000 upon exercise.