Mama's Creations, Inc. (MAMA) FY 2024 MD&A

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.

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Overview

Mama’s Creations, Inc. (“Mama’s,” “Mama’s Creations” or the “Company”) is a leading marketer and manufacturer of fresh deli prepared foods, found in over 8,000 grocery, mass, club and convenience stores nationally. The Company’s broad product portfolio, born from MamaMancini’s rich history in Italian foods, now consists of a variety of high-quality, fresh, clean and easy to prepare foods to address the needs of both our consumers and retailers. Our vision is to become a one-stop-shop deli solutions platform, leveraging vertical integration and a diverse family of brands to offer a wide array of prepared foods to meet the changing demands of the modern consumer.

Recent Developments

On June 28, 2023, the Company completed the acquisition of the remaining 76% of Chef Inspirational Foods, LLC (“CIF”), a leading developer, innovator, marketer and sales company selling prepared foods for approximately $3.7 million, including approximately $1.0 million in cash at closing and $2.7 million in a promissory note (the "CIF Acquisition"). The promissory note requires a principal payment of $1.2 million in cash on the first anniversary of the closing date, and a payment of $1.5 million in common stock of the Company on the second anniversary of the closing date. The CIF Acquisition was accounted for as an asset acquisition as substantially all of the fair value was concentrated in customer relationships. The Company had previously acquired a 24% minority interest in CIF in June 2022.

Results of Operations for the Years Ended January 31, 2024 and 2023

The following table sets forth the summary of the consolidated statements of operations for the years ended January 31, 2024 and 2023 (in thousands):

For the years ended January 31, 2024 and 2023, the Company reported net income of approximately $6.6 million and $2.3 million, respectively. The change in net income between the years ended January 31, 2024 and 2023 reflects strong revenue growth, normalization of costs for commodities and other materials, freight optimization, improvements in manufacturing efficiencies, as well as the CIF Acquisition, which allowed the Company to sell its products to the end retailer, wholesaler, and/or distributor.

Sales - Net of Slotting Fees and Discounts: Sales, net of slotting fees and discounts increased by approximately 11% to $103.3 million for the year ended January 31, 2024, from $93.2 million for the year ended January 31, 2023. The increase is due to higher volume of sales and introduction of new products at existing customers, successful pricing actions, and the acquisition of Chef Inspirational Foods, LLC, which allowed the Company to sell its products to the end retailer, wholesaler, and/or distributor.

Gross Profit: The gross profit margin was 29% and 21% for the years ended January 31, 2024 and 2023, respectively. The increase in gross profit margin is due to normalization of commodity costs, successful pricing actions, higher utilization and investments in the Company's manufacturing facilities, as well as the CIF Acquisition.

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Operating Expenses: Operating expenses increased by 29% during the year ended January 31, 2024, as compared to the year ended January 31, 2023. Operating expenses increased as a percentage of sales to 21% in 2024 compared to 18% in 2023. The approximate $4.8 million increase in total operating expenses is primarily attributable to the following:

•Payroll and Related Expenses inclusive of stock-based compensation rose by approximately $3.3 million related to executive and SG&A hires;

•Amortization of intangible assets increased by approximately $598 thousand due to the CIF Acquisition;

•Insurance expenses rose by approximately $581 thousand due to the growth of the Company and increases in coverage levels;

•Advertising expenses increased by approximately $550 thousand due to new strategies and an enhanced focus on marketing to help drive increased velocities of our existing products

•Commission Expenses rose by approximately $251 thousand due to increased sales;

•Freight-related expenses decreased by approximately $885 thousand due to the addition of dedicated logistics employees and capabilities, increased sales to major retailers, wholesalers and distributors, as well as load-sharing between the Company's two manufacturing facilities;

•Allowance for credit losses decreased by approximately $373 thousand due to our establishment of a reserve in the prior year.

Other Income (Expenses): Other expenses decreased by approximately $109 thousand to approximately $544 thousand for the year ended January 31, 2024, as compared to approximately $653 thousand for the year ended January 31, 2023. The decrease is mainly due to a decrease in interest expense of approximately $85 thousand, which was a result of lower debt balances outstanding as well as higher interest earned on Company cash balances.

Liquidity and Capital Resources

We finance our operations with internally generated funds, supplemented by credit arrangements with third parties and, potentially, capital market financing.

Working Capital:

The following table summarizes total current assets, liabilities and working capital at January 31, 2024 compared to January 31, 2023 (in thousands):

As of January 31, 2024, we had working capital of approximately $6.9 million as compared to working capital of approximately $3.8 million as of January 31, 2023, an increase of approximately $3.1 million. The increase in working capital is primarily attributable to an increase in cash of approximately $6.6 million, an increase in accounts receivable of approximately $1.0 million due to increased sales, and an increase in prepaid expenses and other current assets of approximately $547 thousand, due to deposits placed for machinery and equipment, partially offset by better cash management, which resulted in an increase in accounts payable and accrued expenses of approximately $3.4 million, and an increase in Promissory notes - related parties of $1.2 million due to the CIF Acquisition.

Long term Requirements:

As of January 31, 2024, we have $0 outstanding under our Line of Credit Agreement and approximately $4.5 million outstanding under our Term Loan Agreement with M&T Bank (the "Term Loan Agreement"). The Term Loan Agreement

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has a maturity date of January 17, 2027. In addition we have payments of $750 thousand (plus accrued interest) due on December 29, 2024, and December 29, 2025 pursuant to promissory notes issued to the sellers of T&L Creative Salads ("T&L") and Olive Branch LLC ("Olive Branch"), as discussed in Item 8, Note 5. In addition we have a promissory note of $2.7 million with the sellers of CIF as discussed in Item 8, Note 5. Of the $2.7 million, a payment of $1.2 million is due on June 28, 2024, and $1.5 million is payable in common stock on June 28, 2025. We also have operating leases for offices and other facilities used for our operations, and finance leases comprised primarily of machinery and equipment, as discussed in Item 8, Note 10.

Cash Flows:

The following table summarizes the key components of our cash flows for the years ended January 31, 2024 and January 31, 2023 (in thousands).

Net cash provided by operating activities for the year ended January 31, 2024 was approximately $11.6 million compared to net cash provided by operating activities for the year ended January 31, 2023 of approximately $5.5 million. Net income for the years ended January 31, 2024 and 2023 was approximately $6.6 million and $2.3 million, respectively. During the year ended January 31, 2024, net income was affected by non-cash adjustments of approximately $2.8 million and by changes in operating activities which provided cash of approximately $2.2 million. During the year ended January 31, 2023, net income was affected by non-cash adjustments of approximately $1.7 million and changes in operating activities which used cash of approximately $1.5 million.

Net cash used in investing activities for the years ended January 31, 2024 was approximately $1.4 million as compared to approximately $1.1 million for the year ended January 31, 2023, respectively. For the year ended January 31, 2024, the Company used cash of approximately $786 thousand to purchase new machinery and equipment. In addition, the Company paid net cash of approximately $646 thousand for the CIF Acquisition. For the year ended January 31, 2023, the cash used in investing activities of approximately $593 thousand was to purchase new machinery and equipment and $500 thousand for the acquisition of the minority interest in CIF in 2022.

Net cash used in financing activities for the year ended January 31, 2024 was $3.5 million as compared to $0.9 million for the year January 31, 2023. During the year ended January 31, 2024, the Company had payments of the term loan, line of credit, related party loan, and finance lease liabilities of approximately $1.7 million, $890 thousand, $750 thousand, and $272 thousand, respectively. During the year ended January 31, 2023, the Company had net borrowings from the line of credit of approximately $125 thousand and received proceeds of approximately $1.4 million from the sale of Series B Preferred Stock. This was offset by payments of the term loan, related party loan, and finance lease liabilities of approximately $1.3 million, $750 thousand, and $235 thousand, respectively.

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 April 26, 2025, 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.

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Recent Accounting Pronouncements

See Note 2 to our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K for information regarding recently issued accounting pronouncements.

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 (“US GAAP”). US 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 US GAAP and are consistently 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 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 the Consolidated Financial Statements in conformity with U.S. GAAP 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, valuation of the CIF Acquisition (which was accounted for as an asset acquisition as substantially all of the fair value is concentrated in customer relationships), the fair value of stock-based compensation, inventory reserves, impairment of goodwill and intangible assets, and estimates for unrealized returns, discounts, and other allowances that are netted against revenue.

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.

Goodwill

Goodwill is the excess of the consideration paid for a business over the fair value of the identifiable net assets acquired. Goodwill and other indefinite lived intangible assets are not amortized. Instead, these assets are reviewed at least annually for impairment. The Company has the option to perform a qualitative assessment to determine whether it is necessary to perform the quantitative goodwill impairment test. However, the Company may elect to perform the quantitative goodwill impairment test even if no indications of a potential impairment exist.

When performing its quantitative annual goodwill impairment test the Company is comparing the fair value with its carrying amounts. The Company would recognize an impairment charge for the amount by which the carrying amount exceeds the fair value; however, the loss recognized would not exceed the total amount of goodwill. Additionally, the Company considers income tax effects from any tax-deductible goodwill on the carrying amount when measuring the goodwill impairment loss, if applicable. The fair value is estimated using discounted cash flow methodologies, as well as considering third party market value indicators. The Company’s use of a discounted cash flow methodology includes estimates of future revenue based upon budgets and projections. The Company also develops estimates for future levels of gross and operating profits and projected capital expenditures. The Company’s methodology also includes the use of

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estimated discount rates based upon industry and competitor analysis as well as other factors. Calculating the fair value requires significant estimates and assumptions by management. Should the estimates and assumptions regarding the fair value of the reporting units prove to be incorrect, the Company may be required to record impairments to its goodwill in future periods and such impairments could be material.

As of January 31, 2024, there were no impairment losses recognized for goodwill.

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.

Revenue Recognition

The Company recognizes revenue in accordance with FASB Topic 606, Revenue from Contracts with Customers (Topic 606).

The Company’s sales are primarily generated from the sale of finished products to customers. Revenue is recognized when the performance obligation is satisfied, and the promised goods have been transferred. Control transfers when the product is shipped or delivered based upon applicable shipping terms. For each contract, the Company considers the transfer of product to be the performance obligation. Although some payment terms may be extended, generally the Company’s payment terms are approximately 15- 30 days. Accordingly, there is no significant financing components to consider when determining the transaction price. The Company elected to treat shipping and handling activities as fulfillment activities, and the related costs are recorded as selling expenses in selling, general and administrative expenses on the Consolidated Statements of Operations.

The Company promotes its products with trade incentives and promotions. These programs include discounts, slotting fees, coupons, rebates, in-store display incentives and volume-based incentives. The trade incentives and promotions are recorded as a reduction to the transaction price based on amounts estimated as being due to customers at the end of the period. The Company derives these estimates based on historical experience. The Company does not receive a distinct service in relation to the trade incentives and promotions. The Company’s contracts are all short term in nature, therefore there are no unsatisfied performance obligations requiring disclosure as of January 31, 2024.

Stock-Based Compensation

The Company uses the Black-Scholes option-pricing model or Monte Carlo simulation to determine the fair value of equity-based grants, excluding restricted stock. In estimating fair value, management is required to make certain assumptions and estimates such as the expected life of units, volatility of the Company’s future share price, risk-free rates, future dividend yields and estimated forfeitures at the initial grant date. Changes in assumptions used to estimate fair value could result in materially different results.