UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended: April 30, 2017
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from ___________ to ____________
Commission File Number: 000-54954
MamaMancini's Holdings, Inc.
(Exact name of Registrant as specified in its charter)
Nevada | 27-067116 | |
(State
or other jurisdiction of incorporation) | (IRS
Employer I.D. No.) |
25 Branca Road
East Rutherford, NJ 07073
(Address of principal executive offices and zip Code)
(201) 531-1212
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files. Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act:
Large accelerated filer | [ ] | Accelerated filer | [ ] |
Non-accelerated filer | [ ] | Smaller reporting company | [X] |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
As of June 12, 2017, there were 27,947,539 shares outstanding of the registrant's common stock.
TABLE OF CONTENTS
Page | ||
PART I – FINANCIAL INFORMATION | ||
Item 1. | Financial Statements. | F-1 |
Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations. | 2 |
Item 3. | Quantitative and Qualitative Disclosures About Market Risk . | 6 |
Item 4. | Controls and Procedures. | 6 |
PART II – OTHER INFORMATION | ||
Item 1. | Legal Proceedings. | 6 |
Item 1A. | Risk Factors. | 7 |
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. | 7 |
Item 3. | Defaults Upon Senior Securities. | 7 |
Item 4. | Mine Safety Disclosures. | 7 |
Item 5. | Other Information | 7 |
Item 6. | Exhibits. | 7 |
Signatures | 8 |
1 |
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
MAMAMANCINI'S HOLDINGS, INC.
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 2017
Page(s) | |
Condensed Consolidated Balance Sheets as of April 30, 2017 (Unaudited) and January 31, 2017 | F-2 |
Condensed Consolidated Statements of Operations For the Three Months ended April 30, 2017 and 2016 (Unaudited) | F-3 |
Condensed Consolidated Statements of Changes in Stockholders' Equity For the Period from February 1, 2017 through April 30, 2017 (Unaudited) | F-4 |
Condensed Consolidated Statements of Cash Flows For the Three Months Ended April 30, 2017 and 2016 (Unaudited) | F-5 |
Notes to Condensed Consolidated Financial Statements | F-6 |
F-1 |
MamaMancini's Holdings, Inc.
Condensed Consolidated Balance Sheets
April 30, 2017 | January 31, 2017 | |||||||
(Unaudited) | ||||||||
Assets | ||||||||
Assets: | ||||||||
Cash | $ | 436,447 | $ | 666,580 | ||||
Accounts receivable, net | 2,301,737 | 1,817,820 | ||||||
Inventories | 180,929 | 443,623 | ||||||
Prepaid expenses | 79,686 | 135,747 | ||||||
Due from manufacturer - related party | 2,016,046 | 2,079,708 | ||||||
Total current assets | 5,014,845 | 5,143,478 | ||||||
Property and equipment, net | 1,311,777 | 1,175,508 | ||||||
Deposit on machinery and equipment | 423,383 | - | ||||||
Total Assets | $ | 6,750,005 | $ | 6,318,986 | ||||
Liabilities and Stockholders' Equity | ||||||||
Liabilities: | ||||||||
Accounts payable and accrued expenses | $ | 770,071 | $ | 484,752 | ||||
Line of credit, net | 1,608,191 | 1,363,145 | ||||||
Term loan | 140,004 | 140,004 | ||||||
Note payable - net | 1,666,950 | 1,401,906 | ||||||
Total current liabilities | 4,185,216 | 3,389,807 | ||||||
Term loan - net of current | 478,327 | 513,328 | ||||||
Note payable - net of current portion | 751,055 | 1,298,819 | ||||||
Notes payable - related party | 117,656 | 117,656 | ||||||
Total long-term liabilities | 1,347,038 | 1,929,803 | ||||||
Total Liabilities | 5,532,254 | 5,319,610 | ||||||
Commitments and contingencies | ||||||||
Stockholders' Equity: | ||||||||
Series A Preferred stock, $0.00001 par value; 120,000 shares authorized; 23,400 shares issued and outstanding, respectively | - | - | ||||||
Preferred stock, $0.00001 par value; 19,880,000 shares authorized; no shares issued and outstanding | - | - | ||||||
Common stock, $0.00001 par value; 250,000,000 shares authorized; 27,947,539 and 27,810,717 shares issued and outstanding, respectively | 279 | 278 | ||||||
Additional paid in capital | 15,961,978 | 15,825,029 | ||||||
Common stock subscribed, $0.00001 par value; 66,667 shares, respectively | 1 | 1 | ||||||
Accumulated deficit | (14,595,007 | ) | (14,676,432 | ) | ||||
Less: Treasury stock, 230,000 shares, respectively | (149,500 | ) | (149,500 | ) | ||||
Total Stockholders' Equity | 1,217,751 | 999,376 | ||||||
Total Liabilities and Stockholders' Equity | $ | 6,750,005 | $ | 6,318,986 |
See accompanying notes to the condensed consolidated financial statements
F- 2 |
MamaMancini's Holdings, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
For the Three Months Ended | ||||||||
April 30, 2017 | April 30, 2016 | |||||||
Sales - net of slotting fees and discounts | $ | 5,357,301 | $ | 3,923,977 | ||||
Cost of sales | 3,457,723 | 2,448,778 | ||||||
Gross profit | 1,899,578 | 1,475,199 | ||||||
Operating expenses | ||||||||
Research and development | 25,588 | 30,562 | ||||||
General and administrative expenses | 1,557,828 | 1,499,857 | ||||||
Total operating expenses | 1,583,416 | 1,530,419 | ||||||
Income (loss) from operations | 316,162 | (55,220 | ) | |||||
Other expenses | ||||||||
Interest expense | (170,657 | ) | (161,762 | ) | ||||
Amortization of debt discount | (17,280 | ) | (9,125 | ) | ||||
Total other expenses | (187,937 | ) | (170,887 | ) | ||||
Net income (loss) | 128,225 | (226,107 | ) | |||||
Less: preferred dividends | (46,800 | ) | (64,521 | ) | ||||
Net income (loss) available to common stockholders | $ | 81,425 | $ | (290,628 | ) | |||
Net income (loss) per common share - basic | $ | 0.00 | $ | (0.01 | ) | |||
Net income (loss) per common share - diluted | $ | 0.00 | $ | (0.01 | ) | |||
Weighted average common shares outstanding | ||||||||
- basic | 27,810,717 | 26,507,516 | ||||||
- diluted | 32,532,135 | 26,507,516 |
See accompanying notes to the condensed consolidated financial statements
F- 3 |
MamaMancini's Holdings, Inc.
Condensed Consolidated Statements of Changes in Stockholders' Equity
For the Period from February 1, 2017 through April 30, 2017
(Unaudited)
Series A Preferred Stock | Common Stock | Treasury Stock | Additional Paid In | Common Stock | Accumulated | Stockholders' | ||||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Shares | Amount | Capital | Subscribed | Deficit | Equity | |||||||||||||||||||||||||||||||
Balance, February 1, 2017 | 23,400 | $ | - | 27,810,717 | $ | 278 | (230,000 | ) | $ | (149,500 | ) | $ | 15,825,029 | $ | 1 | $ | (14,676,432 | ) | $ | 999,376 | ||||||||||||||||||||
Common stock issued for services | - | - | 87,554 | 1 | - | - | 82,999 | - | - | 83,000 | ||||||||||||||||||||||||||||||
Stock options issued for services | - | - | - | - | - | - | 7,150 | - | - | 7,150 | ||||||||||||||||||||||||||||||
Series A Preferred dividend issued in common shares | - | - | 49,268 | - | - | - | 46,800 | - | - | 46,800 | ||||||||||||||||||||||||||||||
Series A Preferred dividend | - | - | - | - | - | - | - | - | (46,800 | ) | (46,800 | ) | ||||||||||||||||||||||||||||
Net income | - | - | - | - | - | - | - | - | 128,225 | 128,225 | ||||||||||||||||||||||||||||||
Balance, April 30, 2017 | 23,400 | $ | - | 27,947,539 | $ | 279 | (230,000 | ) | $ | (149,500 | ) | $ | 15,961,978 | $ | 1 | $ | (14,595,007 | ) | $ | 1,217,751 |
See accompanying notes to the condensed consolidated financial statements
F- 4 |
MamaMancini's Holdings, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
For the Three Months Ended | ||||||||
April 30, 2017 | April 30, 2016 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
Net income (loss) | $ | 128,225 | $ | (226,107 | ) | |||
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | ||||||||
Depreciation | 107,081 | 76,703 | ||||||
Amortization of debt discount and debt issuance costs | 17,280 | 9,125 | ||||||
Share-based compensation | 90,150 | 179,208 | ||||||
Changes in operating assets and liabilities: | ||||||||
(Increase) Decrease in: | ||||||||
Accounts receivable | (483,917 | ) | (248,619 | ) | ||||
Inventories | 262,694 | (254,233 | ) | |||||
Prepaid expenses | 56,061 | (15,087 | ) | |||||
Due from manufacturer - related party | 63,662 | 51,730 | ||||||
Increase (Decrease) in: | ||||||||
Accounts payable and accrued expenses | 285,319 | (10,582 | ) | |||||
Net Cash Provided by (Used In) Operating Activities | 526,555 | (437,862 | ) | |||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
Cash paid for fixed assets | (666,733 | ) | (18,650 | ) | ||||
Net Cash Used In Investing Activities | (666,733 | ) | (18,650 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
Repayment of note payable | (300,000 | ) | - | |||||
Borrowings (repayments) of line of credit, net | 245,046 | 481,039 | ||||||
Repayment of term loan | (35,001 | ) | (30,000 | ) | ||||
Repayment of promissory notes | - | (79,490 | ) | |||||
Net Cash (Used In) Provided By Financing Activities | (89,955 | ) | 371,549 | |||||
Net Decrease in Cash | (230,133 | ) | (84,963 | ) | ||||
Cash - Beginning of Period | 666,580 | 587,422 | ||||||
Cash - End of Period | $ | 436,447 | $ | 502,459 | ||||
SUPPLEMENTARY CASH FLOW INFORMATION: | ||||||||
Cash Paid During the Period for: | ||||||||
Income taxes | $ | - | $ | - | ||||
Interest | $ | 66,941 | $ | 72,311 | ||||
SUPPLEMENTARY DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: | ||||||||
Stock issued for Series A Preferred dividends | $ | 46,800 | $ | 131,513 | ||||
Accrued dividends | $ | 46,800 | $ | 64,521 | ||||
Debt extension fee included in principal balance of note | $ | 52,236 | $ | - |
See accompanying notes to the condensed consolidated financial statements
F- 5 |
MamaMancini's Holdings, Inc.
Notes to Condensed Consolidated Financial Statements
April 30, 2017
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.
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, 2017 filed on April 23, 2017. 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, 2017 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, 2018.
Going Concern Analysis
Going Concern Analysis
The Company had a net income (loss) of $128,225 and $(226,107) for the three months ended April 30, 2017 and 2016. As a result, these conditions had raised substantial doubt regarding our ability to continue as a going concern. However, as of April 30, 2017, we had cash and working capital of $436,447 and $829,629, respectively. During the three months ended April 30, 2017, the Company generated cash from operations of $526,555. In addition, management was able to negotiate the terms of its note payable with one of the lenders and intends to exercise an option to extend the maturity date of the note payable to May 1, 2018. Also, the continued revenue growth coupled with improved gross margins and control of expenses leads management to conclude that it is probable that the Company's cash resources will be sufficient to meet our cash requirements through the first quarter of fiscal year ended January 31, 2019. If necessary, management also determined that it is probable that external sources of debt and/or equity financing could be obtained based on management's history of being able to raise capital coupled with current favorable market conditions. As a result of both management's plans and current favorable trends in improving cash flow, the Company concluded that the initial conditions which raised substantial doubt regarding the ability to continue as a going concern have been alleviated. Therefore, the accompanying condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern.
The condensed consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the matters discussed herein. While we believe in the viability of management's strategy to generate sufficient revenue, control costs and the ability to raise additional funds if necessary, there can be no assurances to that effect. The Company's ability to continue as a going concern is dependent upon the ability to further implement the business plan, generate sufficient revenues and to control operating expenses.
F- 6 |
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 consolidated financial statements, which management considered in formulating its estimate could change in the near term due to one or more future confirming events. Accordingly, the actual results could differ significantly from our estimates.
Risks and Uncertainties
The Company operates in an industry that is subject to intense competition and change in consumer demand. The Company's operations are subject to significant risk and uncertainties including financial and operational risks including the potential risk of business failure.
The Company has experienced, and in the future expects to continue to experience, variability in sales and earnings. The factors expected to contribute to this variability include, among others, (i) the cyclical nature of the grocery industry, (ii) general economic conditions in the various local markets in which the Company competes, including a potential general downturn in the economy, and (iii) the volatility of prices pertaining to food and beverages in connection with the Company's distribution of the product. These factors, among others, make it difficult to project the Company's operating results on a consistent basis.
Cash
The Company considers all highly liquid instruments purchased with a maturity of three months or less to be cash equivalents. The Company held no cash equivalents at April 30, 2017 or January 31, 2017.
The Company minimizes its credit risk associated with cash by periodically evaluating the credit quality of its primary financial institution. The balance at times may exceed federally insured limits.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable are stated at the amount management expects to collect from outstanding balances. The Company generally does not require collateral to support customer receivables. The Company provides an allowance for doubtful accounts based upon a review of the outstanding accounts receivable, historical collection information and existing economic conditions. The Company determines if receivables are past due based on days outstanding, and amounts are written off when determined to be uncollectible by management. The maximum accounting loss from the credit risk associated with accounts receivable is the amount of the receivable recorded, which is the face amount of the receivable net of the allowance for doubtful accounts. As of April 30, 2017 and January 31, 2017, 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 April 30, 2017 and January 31, 2017:
April 30, 2017 | January 31, 2017 | |||||||
Finished goods | $ | 180,929 | $ | 443,623 |
F- 7 |
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.
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.
Research and Development
Research and development is expensed as incurred. Research and development expenses for the three months ended April 30, 2017 and 2016 were $25,588 and $30,562, 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:
Three
Months Ended April 30, 2017 | Three
Months Ended April 30, 2016 | |||||||
Gross Sales | $ | 5,473,205 | $ | 4,040,988 | ||||
Less: Slotting, Discounts, Allowances | 115,905 | 117,011 | ||||||
Net Sales | $ | 5,357,301 | $ | 3,923,977 |
F- 8 |
Cost of Sales
Cost of sales represents costs directly related to the production and manufacturing of the Company's products. Costs include product development, freight, packaging, and print production costs.
Advertising
Costs incurred for producing and communicating advertising for the Company are charged to operations as incurred. Producing and communicating advertising expenses for the three months ended April 30, 2017 and 2016 were $317,594 and $420,892, 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 April 30, 2017 and 2016, share-based compensation amounted to $90,150 and $179,208, respectively.
For the three months ended April 30, 2017 and 2016, when computing fair value of share-based payments, the Company has considered the following variables:
April 30, 2017 | April 30, 2016 | |||||||
Risk-free interest rate | 1.18 | % | 1.28% to 1.33 | % | ||||
Expected life of grants | 4.0 years | 2.5 years | ||||||
Expected volatility of underlying stock | 188 | % | 178% to 179 | % | ||||
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 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.
F- 9 |
Earnings (Loss) Per Share
Earnings per share ("EPS") is the amount of earnings attributable to each share of common stock. For convenience, the term is used to refer to either earnings or loss per share. EPS is computed pursuant to Section 260-10-45 of the FASB Accounting Standards Codification. Pursuant to ASC Paragraphs 260-10-45-10 through 260-10-45-16, basic EPS shall be computed by dividing income available to common stockholders (the numerator) by the weighted-average number of common shares outstanding (the denominator) during the period. Income available to common stockholders shall be computed by deducting both the dividends declared in the period on preferred stock (whether or not paid) and the dividends accumulated for the period on cumulative preferred stock (whether or not earned) from income from continuing operations (if that amount appears in the income statement) and also from net income. The computation of diluted EPS is similar to the computation of basic EPS except that the denominator is increased to include the number of additional common shares that would have been outstanding if the dilutive potential common shares had been issued during the period to reflect the potential dilution that could occur from common shares issuable through contingent shares issuance arrangement, stock options or warrants.
The following table provides a reconciliation of the numerator and denominator used in computing basic and diluted net income (loss) attributable to common stockholders per common share.
For the Three Months Ended | ||||||||
April 30, 2017 | April 30, 2016 | |||||||
Numerator: | ||||||||
Net income/(loss) attributable to common stockholders | $ | 81,425 | $ | (290,628 | ) | |||
Effect of dilutive securities: | - | - | ||||||
Diluted net income (loss) | $ | 81,425 | $ | (290,628 | ) | |||
Denominator: | ||||||||
Weighted average common shares outstanding - basic | 27,810,717 | 26,507,516 | ||||||
Dilutive securities (a): | ||||||||
Series A Preferred | 3,466,667 | - | ||||||
Options | 198,495 | - | ||||||
Warrants | 1,056,256 | - | ||||||
Weighted average common shares outstanding and assumed conversion - diluted | 32,532,135 | 26,507,516 | ||||||
Basic net income (loss) per common share | $ | 0.00 | $ | (0.01 | ) | |||
Diluted net income (loss) per common share | $ | 0.00 | $ | (0.01 | ) | |||
(a) - Anti-dilutive securities excluded: | 3,779,884 | 9,189,805 |
F- 10 |
Income Taxes
Income taxes are provided in accordance with ASC No. 740, " Accounting for Income Taxes ". A deferred tax asset or liability is recorded for all temporary differences between financial and tax reporting and net operating loss carryforwards. Deferred tax expense (benefit) results from the net change during the period of deferred tax assets and liabilities.
Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
The Company is no longer subject to tax examinations by tax authorities for years prior to 2013.
Recent Accounting Pronouncements
In July 2015, the FASB issued the ASU No. 2015-11 " Inventory (Topic 330) : Simplifying the Measurement of Inventory" ("ASU 2015-11") . The amendments in this ASU do not apply to inventory that is measured using last-in, first-out (LIFO) or the retail inventory method. The amendments apply to all other inventory, which includes inventory that is measured using first-in, first-out (FIFO) or average cost. An entity should measure inventory within the scope of this ASU at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Subsequent measurement is unchanged for inventory measured using LIFO or the retail inventory method. For public business entities, the amendments in this ASU are effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. During the three months ended April 30, 2017, the Company adopted the methodologies prescribed by ASU 2015-11 and deemed that the adoption of the ASU did not have a material effect on its financial position or results of operations.
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. During the three months ended April 30, 2017, the Company adopted the methodologies prescribed by ASU 2016-09 and deemed that the adoption of the ASU did not have a material effect on its financial position or results of operations.
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 consolidated financial statements and disclosures.
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 the Company intends to adopt for interim and annual reporting periods beginning after December 15, 2017. The Company is in the process of evaluating the standard and does not expect the adoption will have a material effect on its consolidated financial statements and disclosures.
F- 11 |
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 standard and does not expect the adoption will have a material effect on its consolidated financial statements and disclosures.
In August 2016, the FASB issued ASU 2016-15, "Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments" ("ASU 2016-15"). ASU 2016-15 will make eight targeted changes to how cash receipts and cash payments are presented and classified in the statement of cash flows. ASU 2016-15 is effective for fiscal years beginning after December 15, 2017. The new standard will require adoption on a retrospective basis unless it is impracticable to apply, in which case it would be required to apply the amendments prospectively as of the earliest date practicable. The Company is currently in the process of evaluating the impact of ASU 2016-15 on its consolidated financial statements.
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 Company is currently evaluating the impact of the new standard.
In November 2016, the FASB issued ASU 2016-18, "Statement of Cash Flows (Topic 230)" , requiring that the statement of cash flows explain the change in the total cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. This guidance is effective for fiscal years, and interim reporting periods therein, beginning after December 15, 2017 with early adoption permitted. The provisions of this guidance are to be applied using a retrospective approach which requires application of the guidance for all periods presented. 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 April 30, 2017 and January 31, 2017 are as follows:
April 30, 2017 | January 31, 2017 | |||||||
Machinery and Equipment | $ | 1,193,726 | $ | 1,193,473 | ||||
Furniture and Fixtures | 23,067 | 17,942 | ||||||
Leasehold Improvements | 1,063,170 | 825,198 | ||||||
2,279,963 | 2,036,613 | |||||||
Less: Accumulated Depreciation | 968,186 | 861,105 | ||||||
$ | 1,311,777 | $ | 1,175,508 |
Depreciation expense charged to income for the three months ended April 30, 2017 and 2016 amounted to $107,081 and $76,703, 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.
F- 12 |
At December 31, 2011, the investment was written down to $0 due to losses incurred by MO.
The Company's ownership interest in MO has decreased due to dilution. At April 30, 2017 and January 31, 2017, 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 investments in equipment located at the Manufacturer's facility. The equipment is capitalized and depreciated by the Company over the estimated useful life.
During the three months ended April 30, 2017 and 2016, the Company purchased inventory of $3,307,107 and $2,843,012, respectively, from the Manufacturer.
During the three months ended April 30, 2017 and 2016, the Manufacturer incurred expenses of $15,000 and $6,000, respectively, on behalf of the Company for shared administrative expenses and salary expenses.
At April 30, 2017 and January 31, 2017, the amount due from the Manufacturer is $2,016,046 and $2,079,708 respectively.
F- 13 |
Meatball Obsession, LLC
A current director of the Company is the chairman of the board and shareholder of Meatball Obsession LLC ("MO").
For the three months ended April 30, 2017 and 2016, the Company generated approximately $22,571 and $10,102 in revenues from MO, respectively.
As of April 30, 2017 and January 31, 2017, the Company had a receivable of $9,849 and $8,189 due from MO, respectively.
WWS, Inc.
A current director of the Company is the president of WWS, Inc.
For the three months ended April 30, 2017 and 2016, the Company recorded $12,000 and $12,000 in commission expense from WWS, Inc. generated sales, respectively.
Notes Payable – Related Party
During the year ended January 31, 2016, the Company received aggregate proceeds of $125,000 from notes payable with the CEO of the Company. The notes bear interest at a rate of 4% per annum and matured on December 31, 2016. The notes were subsequently extended until February 2019. As of April 30, 2017 and January 31, 2017, the outstanding principal balance of the notes was $117,656.
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. As of April 30, 2017 and January 31, 2017, the outstanding balance on the line of credit was $1,608,191 and $1,363,145, 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.
F- 14 |
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 is required to pay an annual facility fee equal to 0.75% of the total $3,200,000 facility and pays an annualized maintenance fee equal to 2.16% 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. Due to the terms of the agreement regarding a subjective acceleration clause and a lockbox arrangement, the line of credit is shown as a current 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. 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 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 $618,331 and $653,332 as of April 30, 2017 and January 31, 2017, respectively.
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 7 –Note 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. 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 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 consolidated statements of operations.
F- 15 |
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 and also removed the convertible feature of the note. The principal amount of the note was increased to $2,898,523, which is inclusive of accrued interest payable through October 31, 2016. In addition, the Company paid an origination fee of $50,000 on October 31, 2016 which is recorded as a debt discount and will be amortized over the remaining life of the note using the effective interest method.
On March 10, 2017, the Company further extended the maturity date to May 1, 2018. Per the terms of the amended agreement:
1) | The Company will pay 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 March 31, 2017, which shall include all interest which would be accrued on the note through March 31, 2017; | |
2) | The Company shall make monthly principal payments to Manatuck as follows: |
March 2017-December 2017 | $ | 150,000 | ||
January 2018-May 1, 2018 | $ | 200,000 |
Based on management's review of the amended agreement and extension, the accounting for debt modification applied. The Company accrued the 2% fee totaling $52,236 which is recorded 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 $83,050 and $48,094 as of April 30, 2017 and January 31, 2017, respectively.
The outstanding balance including principal and interest and net of debt discount at April 30, 2017 and January 31, 2017 was $2,418,005 and $2,700,725, respectively.
Future maturities of all debt (including debt discussed above in Notes 5, 6 and 7) are as follows:
For the Twelve-Month Period Ending April 30, | ||||
2018 | $ | 3,498,195 | ||
2019 | 1,008,715 | |||
2020 | 140,004 | |||
2021 | 140,004 | |||
2022 | 58,315 | |||
$ | 4,845,233 |
F- 16 |
Note 8 - Concentrations
Revenues
During the three months ended April 30, 2017, the Company earned revenues from two customers representing approximately 35% and 13% of gross sales. During the three months ended April 30, 2016, the Company earned revenues from four customers representing approximately 14%, 13%, 12% and 11% of gross sales.
As of April 30, 2017, these two customers represented approximately 41% and 15% of total gross outstanding receivables, respectively. As of April 30, 2016, these four customers represented approximately 16%, 8%, 14% and 25% of total gross outstanding receivables, respectively
Cost of Sales
For the three months ended April 30, 2017 and 2016, one vendor (a related party) represented approximately 100% and 98% of the Company's purchases, respectively.
Note 9 - Stockholders' Equity
Common Stock
During the three months ended April 30, 2017, the Company issued 49,268 shares of its common stock to the holders of the Series A Preferred stockholders for the dividends in arrears totaling $46,800.
During the three months ended April 30, 2017, the Company issued 87,554 shares of its common stock to employees and consultants for services rendered of $83,000.
Treasury Stock
As discussed in Note 7, 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, 2017 | 881,404 | $ | 0.78 | |||||
Exercisable – January 31, 2017 | 799,404 | $ | 0.78 | |||||
Granted | - | $ | - | |||||
Exercised | - | $ | - | |||||
Forfeited/Cancelled | (229,404 | ) | $ | 1.00 | ||||
Outstanding – April 30, 2017 | 652,000 | $ | 0.71 | |||||
Exercisable – April 30, 2017 | 576,000 | $ | 0.80 |
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 | 652,000 | 2.76 years | $ | 0.71 | 576,000 | $ | 0.80 |
F- 17 |
At April 30, 2017 the total intrinsic value of options outstanding and exercisable was $188,570 and $159,870, respectively.
For the three months ended April 30, 2017 and 2016, the Company recognized an aggregate of $7,150 and $80,470, respectively. At April 30, 2017, unrecognized stock based compensation was $40,248.
(D) Warrants
The following is a summary of the Company's warrant activity:
Warrants | Weighted
Average Exercise Price | |||||||
Outstanding – January 31, 2017 | 7,311,770 | $ | 1.04 | |||||
Exercisable – January 31, 2017 | 7,311,770 | $ | 1.04 | |||||
Granted | - | $ | - | |||||
Exercised | - | $ | - | |||||
Forfeited/Cancelled | (150,000 | ) | $ | 1.00 | ||||
Outstanding – April 30, 2017 | 7,161,770 | $ | 1.05 | |||||
Exercisable – April 30, 2017 | 7,161,770 | $ | 1.05 |
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 | 7,161,770 | 3.31 years | $ | 1.05 | 7,161,770 | $ | 1.05 |
At April 30, 2017, the total intrinsic value of warrants outstanding and exercisable was $1,003,444 and $1,033,444, respectively.
Note 10 - 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.
F- 18 |
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 $116,947 and $85,704 of royalty expenses for the three months ended April 30, 2017 and 2016. Royalty expenses are included in general and administrative expenses on the consolidated statement of operations.
F- 19 |
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. During the three months ended April 30, 2017, no payments were made to Spartan.
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 $18,847.
Total future minimum payments required under operating lease as of April 30, 2017 are as follows:
For the Twelve Months Ending April 30, | ||||
2018 | $ | 18,847 | ||
2019 | 17,281 | |||
$ | 36,218 |
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 no reportable subsequent events other than those disclosed elsewhere in these financials.
F- 20 |
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
THE FOLLOWING DISCUSSION OF OUR PLAN OF OPERATION AND RESULTS OF OPERATIONS SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL STATEMENTS AND RELATED NOTES TO THE FINANCIAL STATEMENTS INCLUDED ELSEWHERE IN THIS REPORT. THIS DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT RELATE TO FUTURE EVENTS OR OUR FUTURE FINANCIAL PERFORMANCE. THESE STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS THAT MAY CAUSE OUR ACTUAL RESULTS, LEVELS OF ACTIVITY, PERFORMANCE OR ACHIEVEMENTS TO BE MATERIALLY DIFFERENT FROM ANY FUTURE RESULTS, LEVELS OF ACTIVITY, PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY THESE FORWARD- LOOKING STATEMENTS. THESE RISKS AND OTHER FACTORS INCLUDE, AMONG OTHERS, THOSE LISTED UNDER "FORWARD-LOOKING STATEMENTS" AND "RISK FACTORS" DETAILED IN PRIOR COMPANY FILINGS AND THOSE INCLUDED ELSEWHERE IN THIS REPORT.
Results of Operations for the Three Months ended April 30, 2017 and April 30, 2016
The following table sets forth the summary statements of operations for the three months ended April 30, 2017 and April 30, 2016:
Three Months Ended | ||||||||
April 30, 2017 | April 30, 2016 | |||||||
Sales - Net of Slotting Fees and Discounts | $ | 5,357,301 | $ | 3,923,977 | ||||
Gross Profit | $ | 1,899,578 | $ | 1,475,199 | ||||
Operating Expenses | $ | (1,583,416 | ) | $ | (1,530,419 | ) | ||
Other Expenses | $ | (187,937 | ) | $ | (170,887 | ) | ||
Net Income (Loss ) | $ | 128,225 | $ | (226,107 | ) |
For the three months ended April 30, 2017 and April 30, 2016, the Company reported a net income (loss) of $128,225 and $(226,107), respectively. The change in net loss between the three months ended April 30, 2017 and April 30, 2016, which was primarily attributable to an increase in sales of 37%.
Sales: Sales, net of slotting fees and discounts increased by approximately 37% to $5,357,301 during the three months ended April 30, 2017, from $3,923,977 during the three months ended April 30, 2016. During the three months ended April 30, 2017, the Company sold into higher volume locations compared to the three months ended April 30, 2016. The Company has sold into approximately 38,600 SKU's in 11,700 retail and grocery locations at April 30, 2017 as compared to approximately 35,000 SKU's in 11,400 retail and grocery locations at April 30, 2016. In addition, during the three months ended April 30, 2017, the Company was able to increase its sales through new customers as well as its existing customer base.
Gross Profit: The gross profit margin was 35% for the three months ended April 30, 2017 compared to 38% for the three months ended April 30, 2016. The decrease in gross profit margin is attributable to the change in product mix and an increase in commodity costs.
Operating Expenses: Operating expenses increased by 3% during the three months ended April 30, 2017, as compared to the three months ended April 30, 2016. The $52,997 increase in operating expenses is primarily attributable to the following approximate increases in operating expenses:
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● | Postage and freight of $110,825 due to higher sales offset by better efficiency; |
● | Commission expenses of $47,555 related to increased sales; |
● | Royalty expense of $31,243 related to increased sales; and |
● | Depreciation expense of $30,377 due to new fixed asset purchases during the period. |
These expense increases were offset by decreases in the following expenses:
● | Advertising, social media and promotional expenses of $99,548 related to a decrease in spending on special promotions; |
● | Stock-based compensation for services rendered by employees and consultants decreased by of $80,057 compared to the prior year; |
● | Trade show and travel expenses decreased by $27,808 due to better management of this expense. |
Other Expense: Other expenses increased by $17,050 to $187,937 for the three months ended April 30, 2017 as compared to $170,887 during the three months ended April 30, 2016. For three months ended April 30, 2017, other expenses consisted of $170,657 in interest expense incurred on the Company's financing arrangements. In addition, the Company recorded $17,280 of amortization expense related to the debt discount. For the three months ended April 30, 2016, other expenses consisted of $161,762 in interest expense incurred on the Company's finance arrangements. In addition, the Company recorded $9,125 of amortization expense related to the debt discount and finance arrangements.
Liquidity and Capital Resources
The following table summarizes total current assets, liabilities and working capital at April 30, 2017 compared to January 31, 2017:
April 30, 2017 | January 31, 2017 | Increase/(Decrease) | ||||||||||
Current Assets | $ | 5,014,845 | $ | 5,143,478 | $ | (128,633 | ) | |||||
Current Liabilities | $ | 4,185,216 | $ | 3,389,807 | $ | 795,409 | ||||||
Working Capital | $ | 829,629 | $ | 1,753,671 | $ | (924,042 | ) |
As of April 30, 2017, we had a working capital of $829,629 as compared to a working capital of $1,753,671 as of January 31, 2017, a decrease of $924,042. The decrease in working capital is primarily attributable to decreases in cash, inventories and prepaid expenses which were offset by increases in accounts receivable, due from manufacturer and increases in accounts payable and accrued expenses, line of credit, related party notes and note payable.
Net cash provided by (used in) operating activities for the three months ended April 30, 2017 and 2016 was $526,555 and ($437,892), respectively. The net income (loss) for the three months ended April 30, 2017 and 2016 was $128,225 and $(437,862), respectively.
Net cash used in all investing activities for the three months ended April 30, 2017 was $666,733 as compared to $18,650 for the three months ended April 30, 2016, respectively, to acquire new machinery and equipment and leasehold improvements. Our capital expenditures primarily relate to continuous improvement to our equipment and facilities in order to increase manufacturing capacity, supporting our growth and continued commercialization of our products.
Net cash (used in) provided by all financing activities for the three months ended April 30, 2017 was $(89,955) as compared to cash provided by financing activities of $371,549 for the three months ended April 30, 2016. During the three months ended April 30, 2017, the Company had net borrowings of $245,046 for transactions pursuant to the line of credit. These borrowings were offset by $35,001 and $300,000 paid for repayments on a term loan and net payments of the note payable, respectively. During the year ended January 31, 2016, the Company had net borrowings of $481,039 pursuant to the line of credit. The increase was offset by $30,000 repayments of term loan and $79,490 repayments of promissory notes, respectively.
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As reflected in the accompanying condensed consolidated financial statements, the Company has a net income and net cash provided by operations of $128,225 and $526,555, respectively, for the three months ended April 30, 2017.
Although the continued revenue growth coupled with improved gross margins and control of expenses leads management to believe that it is probable that the Company's cash resources will be sufficient to meet our cash requirements through the first quarter of fiscal year ended January 31, 2019, the Company may require additional funding to finance the growth of its current and expected future operations as well as to achieve its strategic objectives. There can be no assurance that financing will be available in amounts or terms acceptable to the Company, if at all. In that event, the Company would be required to change its growth strategy and seek funding on that basis, though there is no guarantee it will be able to do so.
Going Concern Analysis
The Company had a net income (loss) of $128,225 and $(226,107) for the three months ended April 30, 2017 and 2016. As a result, these conditions had raised substantial doubt regarding our ability to continue as a going concern. However, as of April 30, 2017, we had cash and working capital of $436,447 and $829,629, respectively. During the three months ended April 30, 2017, the Company generated cash from operations of $526,555. In addition, management was able to negotiate the terms of its note payable with one of the lenders and intends to exercise an option to extend the maturity date of the note payable to May 1, 2018. Also, the continued revenue growth coupled with improved gross margins and control of expenses leads management to conclude that it is probable that the Company's cash resources will be sufficient to meet our cash requirements through the first quarter of fiscal year ended January 31, 2019. If necessary, management also determined that it is probable that external sources of debt and/or equity financing could be obtained based on management's history of being able to raise capital coupled with current favorable market conditions. As a result of both management's plans and current favorable trends in improving cash flow, the Company concluded that the initial conditions which raised substantial doubt regarding the ability to continue as a going concern have been alleviated. Therefore, the accompanying condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern.
The condensed consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the matters discussed herein. While we believe in the viability of management's strategy to generate sufficient revenue, control costs and the ability to raise additional funds if necessary, there can be no assurances to that effect. The Company's ability to continue as a going concern is dependent upon the ability to further implement the business plan, generate sufficient revenues and to control operating expenses.
Recent Accounting Pronouncements
Our condensed consolidated financial statements and related public financial information are based on the application of accounting principles generally accepted in the United States ("GAAP"). GAAP requires the use of estimates; assumptions, judgments and subjective interpretations of accounting principles that have an impact on the assets, liabilities, revenues and expense amounts reported. These estimates can also affect supplemental information contained in our external disclosures including information regarding contingencies, risk and financial condition. We believe our use of estimates and underlying accounting assumptions adhere to GAAP and are consistently and conservatively applied. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ materially from these estimates under different assumptions or conditions. We continue to monitor significant estimates made during the preparation of our financial statements.
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Critical Accounting Policies
Our condensed consolidated financial statements and related public financial information are based on the application of accounting principles generally accepted in the United States ("GAAP"). GAAP requires the use of estimates; assumptions, judgments and subjective interpretations of accounting principles that have an impact on the assets, liabilities, revenues and expense amounts reported. These estimates can also affect supplemental information contained in our external disclosures including information regarding contingencies, risk and financial condition. We believe our use of estimates and underlying accounting assumptions adhere to GAAP and are consistently and conservatively applied. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ materially from these estimates under different assumptions or conditions. We continue to monitor significant estimates made during the preparation of our financial statements.
Our significant accounting policies are summarized in Note 2 of our condensed consolidated financial statements. While all these significant accounting policies impact our financial condition and results of operations, we view certain of these policies as critical. Policies determined to be critical are those policies that have the most significant impact on our financial statements and require management to use a greater degree of judgment and estimates. Actual results may differ from those estimates. Our management believes that given current facts and circumstances, it is unlikely that applying any other reasonable judgments or estimate methodologies would cause effect on our consolidated results of operations, financial position or liquidity for the periods presented in this report.
We believe the following critical accounting policies and procedures, among others, affect our more significant judgments and estimates used in the preparation of our consolidated financial statements:
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 bad debt, inventory obsolescence, 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 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.
Stock-Based Compensation - The Company accounts for stock-based compensation in accordance with ASC Topic 718, " Accounting for Stock-Based Compensation " established 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 " Accounting for Equity Instruments Issued to Non-Employees for Acquiring, or in Conjunction with Selling, Goods or Services ".
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. Share-based payment awards issued to non-employees for services rendered are recorded at either the fair value of the services rendered or the fair value of the share-based payment, whichever is more readily determinable. 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.
When computing fair value of share-based payments, the Company has considered the following variables:
● | The risk-free interest rate assumption is based on the U.S. Treasury yield for a period consistent with the expected term of the option in effect at the time of the grant. |
● | The Company has not paid any dividends on common stock since its inception and does not anticipate paying dividends on its common stock in the foreseeable future. |
● | The expected option term is computed using the "simplified" method as permitted under the provisions of Staff Accounting Bulletin ("SAB") 110. |
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● | The warrant term is the life of the warrant. |
● | The expected volatility was benchmarked against similar companies in a similar industry. |
● | The forfeiture rate is based on the historical forfeiture rate for the Company's unvested stock options, which was 0%. |
Revenue Recognition - The Company follows the guidance of the Securities and Exchange Commission's Staff Accounting Bulletin No. 104 for revenue recognition and records revenue 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. Sales are recognized upon shipment of products to customers.
Advertising - Costs incurred for producing and communicating advertising for the Company are charged to operations as incurred.
Off Balance Sheet Arrangements:
We do not have any off-balance sheet arrangements, financings, or other relationships with unconsolidated entities or other persons, also known as "special purpose entities" (SPEs).
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We do not hold any derivative instruments and do not engage in any hedging activities.
Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
Based on evaluation as of the end of the period covered by this Form 10-Q, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(c) and 15d-15(e) under the Exchange Act) are effective to ensure that information required to be disclosed by us in report that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the U.S. Securities and Exchange Commission's rules and forms and to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.
(b) Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
We are currently not involved in any litigation that we believe could have a material adverse effect on our financial condition or results of operations. There is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the executive officers of our company or any of our subsidiaries, threatened against or affecting our company, our common stock, any of our subsidiaries or of our companies or our subsidiaries' officers or directors in their capacities as such, in which an adverse decision could have a material adverse effect.
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Item 1A. Risk Factors.
Smaller reporting companies are not required to provide the information required by this item.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Below is a list of securities issued by us from February 1, 2017 through June 8, 2017 which were not registered under the Securities Act.
During the period between February 1, 2017 and June 8, 2017 the Company issued an aggregate of 136,817 shares of its Common stock as follows:
Stock in lieu of compensation | 87,554 shares |
Series A Preferred Stock Dividends | 49,263 shares |
The securities issued in the abovementioned transactions were issued in connection with transactions which were exempt from the registration requirements of Section 5 of the Securities Act of 1933, as amended, pursuant to the terms of Section 4(2) of that Act.
Item 3. Defaults upon Senior Securities.
There has been no default in payment of principal, interest, sinking or purchase fund installment, or any other material default, with respect to any indebtedness of the Company.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
There is no other information required to be disclosed under this item which was not previously disclosed.
Item 6. Exhibits.
Exhibit No. | Description | |
31.1 | Certification of Principal Executive Officer, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 302 of 2002* | |
31.2 | Certification of Principal Financial Officer, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 302 of 2002* | |
32.1 | Certification of Principal Executive Officer, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002* | |
32.2 | Certification of Principal Financial Officer, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002* | |
101.INS | XBRL Instance Document** | |
101.SCH | XBRL Taxonomy Extension Schema Document** | |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document** | |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document** | |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document** | |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document** |
* Filed herewith.
** Furnished herewith.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
MAMAMANCINI'S HOLDINGS, INC. | ||
Date: June 12, 2017 | By: | /s/ Carl Wolf |
Name: | Carl Wolf | |
Title: | Chief Executive Officer | |
(Principal Executive Officer) |
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