# Mama's Creations, Inc. (MAMA) FY 2022 MD&A

Verbatim Item 7 Management's Discussion and Analysis from Mama's Creations, Inc.'s 10-K for fiscal year 2022.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1520358/000149315222015305/form10-k.htm
Accession: 0001493152-22-015305
Filing date: 2022-05-27
Report date: 2022-01-31
Extracted from Item 7 to the first post-MD&A boundary after HTML sanitization.
Confidence: high

Company profile: /company/MAMA/
All MD&A years: /company/MAMA/mda/
Next year: /company/MAMA/mda/fy2023/ (FY 2023)

Item
7. 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” 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:

[[GREPCENT_TABLE]]
[["","","For the Year Ended"],["","","January 31, 2022","","","January 31, 2021"],["Sales - 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"]]
[[/GREPCENT_TABLE]]

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: 

[[GREPCENT_TABLE]]
[["\u25cf","Postage and Freight of $1,059,855 due to increased Finished Goods transportation rate increases and fuel surcharges; and increased QVC handling charges."],["\u25cf","Commission Expenses of $142,777 due to higher sales and greater QVC Sales which carries a higher commission"],["\u25cf","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."]]
[[/GREPCENT_TABLE]]

11

[[GREPCENT_TABLE]]
[["\u25cf","NASDAQ up-listing costs of $39,000."],["\u25cf","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."],["\u25cf","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."]]
[[/GREPCENT_TABLE]]

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:

[[GREPCENT_TABLE]]
[["","","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",")"]]
[[/GREPCENT_TABLE]]

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.

12

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.

13

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:

[[GREPCENT_TABLE]]
[["","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."]]
[[/GREPCENT_TABLE]]

Revenue
Recognition

The Company recognizes revenue in accordance with
ASU 2014-09, Revenue from Contracts with Customers (Topic 606).

14

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:

[[GREPCENT_TABLE]]
[["\u25cf","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."],["\u25cf","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."],["\u25cf","The expected option term is computed using the \u201csimplified\u201d method as permitted under the provisions of Staff Accounting Bulletin (\u201cSAB\u201d) 110."],["\u25cf","The term is the life of the grant."],["\u25cf","The expected volatility was estimated using the historical volatilities of the Company\u2019s common stock."],["\u25cf","The forfeiture rate is based on the historical forfeiture rate for the Company\u2019s unvested stock options, which was 0%."]]
[[/GREPCENT_TABLE]]

Advertising

Costs
incurred for producing and communicating advertising for the Company are charged to operations as incurred.