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" AND
THOSE INCLUDED ELSEWHERE IN THIS REPORT.
Results of Operations for the Year ended January 31, 2022 and 2021
The following table sets forth the summary statements of operations for the year
ended January 31, 2022 and 2021:
For the Year Ended
January 31, 2022 January 31, 2021Sales - Net of Slotting Fees and Discounts $ 47,083,740 $ 40,758,605
Gross Profit
$ 11,853,873 $ 12,739,309
Operating Expenses $ (11,771,106 ) $ (9,261,461 )
Other Expenses $ (38,221 ) $ (155,615 )
Income Tax (Provision) Benefit $ (296,472 ) $ 744,973
Net (Loss) Income $ (251,926 ) $ 4,067,206
For the year ended January 31, 2022 and 2021, the Company reported net (loss)
income of $(251,926) and $4,067,206, respectively. The change in net income
between the year ended January 31, 2022 and 2021 was mainly the result of a
decrease in gross profit percentage (as discussed below), one-time expenses
equal to $661,293 associated with acquisition closing costs and the income tax
provision of $296,472 recorded during the year ended January 31, 2022 compared
to a benefit of $744,973 during the year ended January 31, 2021.
Sales: Sales, net of slotting fees and discounts increased by approximately 16%
to $47,083,740 during the year ended January 31, 2022, from $40,758,605 during
the year ended January 31, 2021. During the year ended January 31, 2022, the
Company established a greater balance of major customer volumes attributed to
growth in sales across a strong portfolio of both national and large regional
grocery chains and club stores. Of this increase, $3,370,825 is attributable to
the acquisitions in December 2021.
Gross Profit: The gross profit margin was 25% for the year ended January 31,
2022 compared to 31% for the year ended January 31, 2021. The change in gross
profit margin is due to increases in raw material costs, packaging costs and
in-bound freight costs which outpaced sales price increases during the year
ended January 31, 2022. Management believes price increases will catch up to the
rise in materials and services by the end of the second quarter of fiscal year
end January 31, 2023.
Operating Expenses: Operating expenses increased by 27% during the year ended
January 31, 2022, as compared to the year ended January 31, 2021. Operating
expenses increased as a percentage of sales to 25% in 2022 compared to 22% in
2021. The $2,509,645 increase in total operating expenses is primarily
attributable to the following:
? Postage and Freight of $1,059,855 due to increased Finished Goods
transportation rate increases and fuel surcharges; and increased QVC handling
charges.
? Commission Expenses of $142,777 due to higher sales and greater QVC Sales which
carries a higher commission
? Director Fees of $148,974, due to the increase in the number of Independent
Directors for NASDAQ compliance, an increase in compensation to each
Independent Director and an additional shareholder meeting of $12,500.
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? NASDAQ up-listing costs of $39,000.
? Professional Fees and Investment Banking fees of $748,293 in one-time charges
related to the acquisition on December 29, 2021 of T&L Creative Salads and
Olive Branch LLC.
? Insurance Expenses of $109,652 related to rising premiums and addition of
coverage for the acquisitions of T&L Creative Salads, Inc. and Olive Branch
LLC.
Other Income (Expenses): Other income (expenses) decreased by $117,394 to
$38,221 for the year ended January 31, 2022 as compared to expenses of $155,615
during the year ended January 31, 2021. For the year ended January 31, 2022,
other income (expenses) consisted of $73,487 in interest expense incurred on the
Company's financing arrangements and amortization of debt discount of $2,438
which was offset by the net insurance proceeds relating to the property damage
claim of $37,704. For year ended January 31, 2021, other expenses consisted of
$137,751 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 January 31, 2022 compared to January 31, 2021:
January 31, 2022 January 31, 2021 Change
Current Assets $ 11,638,317 $ 8,879,451 $ 2,758,866
Current Liabilities $ 8,985,128 $ 4,045,349 $ 4,939,779
Working Capital $ 2,653,189 $ 4,834,102 $ (2,180,913 )As of January 31, 2022, we had working capital of $2,653,189 as compared to a
working capital of $4,834,102 as of January 31, 2021, a decrease of $2,180,913.
The decrease in working capital is primarily attributable to a decrease in cash
of $2,339,962 used for acquisitions, an increase in accounts payable and accrued
expenses of $2,772,029, increase in current portion of lease obligations of
$172,500, an increase in the related party promissory note of $759,917 and an
increase in the term loan of $1,253,333. These amounts were offset by an
increase in inventory of $1,695,582 and an increase in accounts receivable of
$3,653,924.
Net cash provided by operating activities for the year ended January 31, 2022
was $909,841 compared to net cash provided by operating activities for the year
ended January 31, 2021 of $3,698,540. The net income (loss) for the year ended
January 31, 2022 and 2021 was ($251,926) and $4,067,206, respectively.
Net cash used in investing activities for the year ended January 31, 2022 was
$11,270,957 as compared to $(451,940) for the year ended January 31, 2021,
respectively. For the year ended January 31, 2022, the cash used in investing
activities was to acquire two new companies and purchase of additional fixed
assets. For the year ended January 31, 2021, the cash used in investing
activities was to purchase additional fixed assets and intangible assets.
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Net cash used in all financing activities for the year ended January 31, 2022
was $8,021,154 as compared to $449,723 used by financing activities for the year
ended January 31, 2021. During the year ended January 31, 2022, the Company
received proceeds of new loan borrowings of $7,500,000 from a term loan and
$765,000 from the Company's line of credit. These cash in-flows (among others of
a lesser amount) were offset by payments of $199,176 paid for finance lease
payments. During the year ended January 31, 2021, the Company received proceeds
of $330,505 from the Paycheck Protection Program promissory note and proceeds of
$3,787,582 from the exercise of options and warrants. These cash in-flows were
offset by payments on its line of credit of $2,997,348, payments on its term
loan of $441,663, payments of $641,844 on the related party loans and $156,450
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 May 27, 2023 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 consolidated financial
statements.
In May 2021, the FASB issued accounting standards update ASU 2021-04, "Earnings
Per Share (Topic 260), Debt- Modifications and Extinguishments (Subtopic
470-50), Compensation-Stock Compensation (Topic 718), and Derivatives and
Hedging-Contracts in Entity's Own Equity (Subtopic 815-40): Issuer's Accounting
for Certain Modifications or Exchanges of Freestanding Equity-Classified Written
Call Options", to clarify and reduce diversity in an issuer's accounting for
modifications or exchanges of freestanding equity-classified written call
options (for example, warrants) that remain equity classified after modification
or exchange. The amendments in this ASU are effective for public and nonpublic
entities for fiscal years beginning after December 15, 2021, and interim periods
with fiscal years beginning after December 15, 2021. Early adoption is
permitted, including adoption in an interim period. The Company is currently
evaluating the effects of the adoption of ASU No. 2021-04 on its consolidated
financial statements.
In August 2020, the FASB issued ASU No. 2020-06, Accounting for Convertible
Instruments and Contracts in an Entity's Own Equity ("ASU 2020-06"), which
simplifies an issuer's accounting for convertible instruments by reducing the
number of accounting models that require separate accounting for embedded
conversion features. ASU 2020-06 also simplifies the settlement assessment that
entities are required to perform to determine whether a contract qualifies for
equity classification and makes targeted improvements to the disclosures for
convertible instruments and earnings-per-share (EPS) guidance. This update will
be effective for the Company's fiscal years beginning after December 15, 2023,
and interim periods within those fiscal years. Early adoption is permitted, but
no earlier than fiscal years beginning after December 15, 2020, and interim
periods within those fiscal years. Entities can elect to adopt the new guidance
through either a modified retrospective method of transition or a fully
retrospective method of transition. The Company is currently evaluating the
impact of the pending adoption of the new standard on its financial statements
and intends to adopt the standard as of January 1, 2024.
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 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 3 of our 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.
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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.
Intangible Assets
Software
The Company accounts for acquired internal-use software licenses and certain
costs within the scope of ASC 350-40, Intangibles - Goodwill and Other -
Internal-Use Software as intangible assets. The Company capitalized $87,639 of
costs incurred in the year ended January 31, 2022 to implement cloud computing
arrangements. Acquired internal-use software licenses are amortized over the
term of the arrangement on a straight-line basis to the line item within the
consolidated statements of operations that reflects the nature of the license.
Additionally, the Company evaluates its accounting for fees paid in an agreement
to determine whether it includes a license to internal-use software. If the
agreement includes a software license, the Company accounts for the software
license as an intangible asset. Acquired software licenses are recognized and
measured at cost, which includes the present value of the license obligation if
the license is to be paid for over time. If the agreement does not include a
software license, the Company accounts for the arrangement as a service contract
(hosting arrangement) and hosting costs are generally expensed as incurred.
Goodwill
The Company does not amortize goodwill or indefinite-lived intangible assets.
The Company tests goodwill for impairment annually as of January 31 or if an
event occurs or circumstances change that indicate that the fair value of the
entity, or the reporting unit, may be below its carrying amount (a "triggering
event"). Whenever events or circumstances change, entities have the option to
first make a qualitative evaluation about the likelihood of goodwill impairment.
If impairment is deemed more likely than not, management would perform the
two-step goodwill impairment test. Otherwise, the two-step impairment test is
not required. In assessing the qualitative factors, the Company assessed
relevant events and circumstances that may impact the fair value and the
carrying amount of the reporting unit. The identification of the relevant events
and circumstances and how these may impact a reporting unit's fair value or
carrying amount involve significant judgements and assumptions. The judgement
and assumptions include the identification of macroeconomic conditions, industry
and market considerations, overall financial performance, Company specific
events and share price trends, an assessment of whether each relevant factor
will impact the impairment test positively or negatively, and the magnitude of
an such impact.
If a quantitative assessment is performed, a reporting unit's fair value is
compared to its carrying value. A reporting unit's fair value is determined
based upon consideration of various valuation methodologies, including the
income approach, which utilizes projected future cash flows discounted at rates
commensurate with the risks involved and multiples of current and future
earnings. If the fair value of a reporting unit is less than its carrying
amount, an impairment charge is recognized for the amount by which the carrying
amount exceeds the reporting unit's fair value; however, the loss recognized
cannot exceed the total amount of goodwill allocated to that reporting unit.
Management evaluates the remaining useful life of an intangible asset that is
not being amortized each reporting period to determine whether events and
circumstances continue to support an indefinite useful life. If an intangible
asset that is not being amortized is subsequently determined to have a finite
useful life, it is amortized prospectively over its estimated remaining useful
life.
Other Intangibles
Amortizable intangible assets, including tradenames and trademarks, are
amortized on a straight-line basis over 3 years. Customer relationships are
amortized on a straight-line basis over 4 to 5 years.
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.
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.
Revenue Recognition
The Company recognizes revenue in accordance with ASU 2014-09, Revenue from
Contracts with Customers (Topic 606).
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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%.
Advertising
Costs incurred for producing and communicating advertising for the Company are
charged to operations as incurred.
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MAMA'S CREATIONS, INC. 
