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 October 31, 2021 and 2020
The following table sets forth the summary statements of operations for the
three months ended October 31, 2021 and 2020:
Three Months Ended
October 31, 2021 October 31, 2020
(as revised)
Sales - Net of Slotting Fees and Discounts $ 10,852,682 $ 9,684,195
Gross Profit $ 2,729,165 $ 2,910,533
Operating Expenses $ (2,727,964 ) $ (2,123,405 )
Other Expenses $ (8,731 ) $ (52,986 )
Income Tax Benefit $ 2,075 $ -
Net (Loss) Income $ (5,455 ) $ 734,142
1
For the three months ended October 31, 2021 and 2020, the Company reported net
loss of $5,455 and net income of $734,142, respectively. The change between the
three months ended October 31, 2021 and 2020 was mainly the result of a decrease
in gross profit percentage (as discussed below) and an increase in operating
expenses (principally freight).
Sales: Sales, net of slotting fees and discounts increased by approximately 12%
to $10,852,682 during the three months ended October 31, 2021, from $9,684,195
during the three months ended October 31, 2020. The increase was mainly to major
customer volume increases.
Gross Profit: The gross profit margin was 25% for the three months ended October
31, 2021 compared to 30% for the three months ended October 31, 2020. The change
in gross profit margin is due to increases in raw material costs, packaging
costs and in-bound freight costs.
Operating Expenses: Operating expenses increased by 29% during the three months
ended October 31, 2021, as compared to the three months ended October 31, 2020.
Operating expenses as a percentage of sales was 25% in 2021 and 22% in 2020. The
$601,458 increase in total operating expenses is primarily attributable to the
following:
? Postage and Freight of $311,482 mainly due to transportation rate increases;
? Advertising and promotion of $103,275;
? Payroll and related expenses of $60,402 due to salary adjustments and
additional accounting payroll, and senior operational management hire;
? Director fees of $42,500 due to the increase in the number of directors, an
increase in compensation to each director and an additional shareholder meeting
of $11,437.
These expense increases were offset by minimal decreases in other expense
categories.
Other Expenses: Other expenses decreased by $44,255 to $8,731 for the three
months ended October 31, 2021 as compared to $52,986 during the three months
ended October 31, 2020. For the three months ended October 31, 2021, other
expenses consisted of $8,731 in interest expense incurred on the Company's
financing arrangements. For three months ended October 31, 2020, other expenses
consisted of $45,822 in interest expense incurred on the Company's financing
arrangements and the Company recorded $7,164 of amortization expense related to
the debt discount.
Results of Operations for the Nine Months ended October 31, 2021 and 2020
The following table sets forth the summary statements of operations for the nine
months ended October 31, 2021 and 2020:
Nine Months Ended
October 31, 2021 October 31, 2020
(as revised)
Sales - Net of Slotting Fees and Discounts $ 33,230,666 $ 30,766,700
Gross Profit $ 9,442,802 $ 9,449,316
Operating Expenses $ (8,004,489 ) $ (6,879,469 )
Other Income (Expenses) $ 10,994 $ (189,736 )
Income Tax Provision $ (391,313 ) $ -
Net Income $ 1,057,994 $ 2,380,111
2
For the nine months ended October 31, 2021 and 2020, the Company reported net
income of $1,057,994 and $2,380,111, respectively. The change in net income
between the nine months ended October 31, 2021 and 2020 was mainly the result of
a decrease in gross profit percentage (as discussed below) and the income tax
provision of $391,313 recorded during the nine months ended October 31, 2021
compared to $0 during the nine months ended October 31, 2020.
Sales: Sales, net of slotting fees and discounts increased by approximately 8%
to $33,230,666 during the nine months ended October 31, 2021, from $30,766,700
during the nine months ended October 31, 2020. The increase in sales can be
attributed to major customer volume increases.
Gross Profit: The gross profit margin was 28% for the nine months ended October
31, 2021 compared to 31% for the nine months ended October 31, 2020. The change
in gross profit margin is due to increases in raw material costs, packaging
costs and in-bound freight costs.
Operating Expenses: Operating expenses increased by 16% during the nine months
ended October 31, 2021, as compared to the nine months ended October 31, 2020.
Operating expenses increased as a percentage of sales to 24% in 2021 compared to
22% in 2020. The $1,125,020 increase in total operating expenses is primarily
attributable to the following:
? Postage and Freight of $582,556 due to increased transportation rate increases;
? Payroll and related expenses of $177,427 due, bonuses paid to executives;
addition of senior personnel in operations and accounting personnel;
? Director fees of $108,972 due to the increase in the number of directors, an
increase in compensation to each director and an additional shareholder meeting
of $11,437; and
? NASDAQ up-listing costs of $80,000.
These expense increases were offset by decreases in the following as well as
minimal decreases in other expense categories:
? Professional fees decreased by $65,488 due to a decrease in contractual
investment banking fees.
Other Income (Expenses): Other income (expenses) increased by $200,730 to income
of $10,994 for the nine months ended October 31, 2021 as compared to expenses of
$(189,736) during the nine months ended October 31, 2020. For the nine months
ended October 31, 2021, other income (expenses) consisted of $(26,710) in
interest expense incurred on the Company's financing arrangements which was
offset by the net insurance proceeds relating to the property damage claim of
$37,704. For nine months ended October 31, 2020, other expenses consisted of
$(171,872) in interest expense incurred on the Company's financing arrangements
and the Company recorded $(17,864) of amortization expense related to the debt
discount.
Liquidity and Capital Resources
The following table summarizes total current assets, liabilities and working
capital at October 31, 2021 compared to January 31, 2021:
October 31, 2021 January 31, 2021 Change
Current Assets $ 10,711,077 $ 8,879,451 $ 1,831,626
Current Liabilities $ 4,683,907 $ 4,045,349 $ 638,558
Working Capital $ 6,027,170 $ 4,834,102 $ 1,193,068
As of October 31, 2021, we had working capital of $6,027,170 as compared to a
working capital of $4,834,102 as of January 31, 2021, an increase of $1,193,068.
The increase in working capital is primarily attributable to an increase in cash
of $1,349,360 and an increase in inventory of $419,527. These amounts were
offset by an increase in accounts payable and accrued expenses of $562,095 and
an increase in current portion of lease obligations of $76,463.
3
Net cash provided by operating activities for the nine months ended October 31,
2021 and 2020 was $2,132,797 and $2,518,012, respectively. The net income for
the nine months ended October 31, 2021 and 2020 was $1,057,994 and $2,380,111,
respectively.
Net cash used in all investing activities for the nine months ended October 31,
2021 was $657,607 as compared to $320,332 for the nine months ended October 31,
2020, respectively, to acquire new machinery and equipment and leasehold
improvements. Our capital expenditures are attributed to a Plant Expansion
Project in progress since mid-2017 to expand plant capacity and efficiency to
meet growing demand.
Net cash used in all financing activities for the nine months ended October 31,
2021 was $125,830 as compared to $798,520 used by financing activities for the
nine months ended October 31, 2020. During the nine months ended October 31,
2021, the Company received proceeds of $19,080 from the exercise of options.
These cash in-flows were offset by payments of $144,910 paid for finance lease
payments. During the nine months ended October 31, 2020, the Company received
proceeds of $330,505 from the Paycheck Protection Program promissory note and
proceeds of $2,735,697 from the exercise of options and warrants. These cash
in-flows were offset by payments on its line of credit of $2,347,348, payments
on its term loan of $441,663, payments of $641,844 on the related party loans
and $110,562 paid for capital lease payments. The Company returned the $330,505
received from the Paycheck Protection Program in May 2020.
Although the expected revenue growth and control of expenses lead management to
believe that it is probable that the Company's cash resources will be sufficient
to meet its cash requirements through December 14, 2022 based on current and
projected levels of operations, the Company may require additional funding to
finance growth and achieve its strategic objectives. If such financing is
required, there can be no assurance that financing will be available in amounts
or terms acceptable to the Company, if at all. In the event funding is not
available on reasonable terms, the Company might be required to change its
growth strategy and/or seek funding on an alternative basis, but there is no
guarantee it will be able to do so. Because of the rapidly changing environment
in response to COVID-19, the current expectations of the Company may be altered
as conditions change.
Recent Accounting Pronouncements
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 adoption of the new standard
did not have a significant impact on the Company's 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 consolidated financial statements.
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.
4
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 consolidated financial statements in conformity with U.S.
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Such estimates and assumptions impact, among
others, the following: allowance for doubtful accounts, inventory obsolescence
and the fair value of share-based payments.
Making estimates requires management to exercise significant judgment. It is at
least reasonably possible that the estimate of the effect of a condition,
situation or set of circumstances that existed at the date of the consolidated
financial statements, which management considered in formulating its estimate
could change in the near term due to one or more future confirming events.
Accordingly, the actual results could differ significantly from our estimates.
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. Results for the year ended
January 31, 2021 are presented under ASC 842, while prior period amounts were
not adjusted and continue to be reported in accordance with the legacy
accounting guidance under ASC Topic 840, Leases.
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.
5
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.
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 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.
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.
? The term is the life of the grant.
? The expected volatility was estimated using the historical volatilities of the
Company's common stock.
? The forfeiture rate is based on the historical forfeiture rate for the
Company's unvested stock options, which was 0%.
6
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).
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