The following is management's discussion and analysis of certain significant
factors which have affected our financial position and operating results during
the periods included in the accompanying financial statements.
The discussion and analysis which follows in this Quarterly Report and in other
reports and documents and in oral statements made on our behalf by our
management and others may contain trend analysis and other forward-looking
statements within the meaning of Section 21E of the Securities Exchange Act of
1934 which reflect our current views with respect to future events and financial
results. These include statements regarding our earnings, projected growth and
forecasts, and similar matters which are not historical facts. We remind
stockholders that forward-looking statements are merely predictions and
therefore are inherently subject to uncertainties and other factors which could
cause the actual future events or results to differ materially from those
described in the forward-looking statements. These uncertainties and other
factors include, among other things, business conditions in the food industry
and general economic conditions, both domestic and international; lower than
expected customer orders; competitive factors; changes in product mix or
distribution channels; and resource constraints encountered in developing new
products. The forward-looking statements contained in this Quarterly Report and
made elsewhere by or on our behalf should be considered in light of these
factors.
Critical Accounting Estimates
Our financial statements have been prepared in accordance with accounting
principles generally accepted in the United States. The preparation of these
financial statements requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period. The
policies discussed below are considered by management to be critical to an
understanding of our financial statements because their application places the
most significant demands on management's judgment, with financial reporting
results relying on estimation about the effect of matters that are inherently
uncertain. Specific risks for these critical accounting policies are described
in the following paragraphs. For all of these policies, management cautions that
future events rarely develop exactly as forecast, and the best estimates
routinely require adjustment.
Revenue Recognition. We primarily sell vegan and dairy-free soy-based cheeses,
frozen desserts and other food products. We recognize revenue when control over
the products transfers to our customers, deemed to be the performance
obligation, which generally occurs when the product is shipped or picked up from
one of our distribution locations by the customer. We account for product
shipping, handling and insurance as fulfillment activities with revenues for
these activities recorded within net revenue and costs recorded within cost of
sales. Revenues are recorded net of trade and sales incentives and estimated
product returns. Known or expected pricing or revenue adjustments, such as trade
discounts, rebates or returns, are estimated at the time of sale. We base these
estimates of expected amounts principally on historical utilization and
redemption rates. Estimates that affect revenue, such as trade incentives and
product returns, are monitored and adjusted each period until the incentives or
product returns are realized.
Key sales terms, such as pricing and quantities ordered, are established on a
frequent basis such that most customer arrangements and related incentives have
a one year or shorter duration. As such, we do not capitalize contract inception
costs and we capitalize product fulfillment costs in accordance with U.S. GAAP
and our inventory policies. We generally do not have any unbilled receivables at
the end of a period.
Accounts Receivable. The majority of our accounts receivables are due from
distributors (domestic and international) and retailers. Credit is extended
based on evaluation of a customers' financial condition and, generally,
collateral is not required. Accounts receivable are most often due within 30 to
90 days and are stated at amounts due from customers net of an allowance for
doubtful accounts and reserve for sales promotions. Accounts outstanding longer
than the contractual payment terms are considered past due. We determine whether
an allowance is necessary by considering a number of factors, including the
length of time trade accounts receivable are past due, our previous loss
history, the customer's current ability to pay its obligation, and the condition
of the general economy and the industry as a whole. We write-off accounts
receivable when they become uncollectible, and payments subsequently received on
such receivables are credited to the bad debt expense account. We do not accrue
interest on accounts receivable past due.
12
Inventory. Inventory is stated at lower of cost or net realizable value
determined by first in first out (FIFO) method. Inventories in excess of future
demand are written down and charged to the provision for inventories. At the
point of which loss is recognized, a new, lower cost basis for that inventory is
established and subsequent changes in facts and circumstances do not result in
the restoration or increase in the newly established cost basis.
Leases. Under Topic 842, operating lease expense is generally recognized evenly
over the term of the lease. We have operating leases primarily consisting of
facilities with remaining lease terms of approximately one to three years.
Leases with an initial term of twelve months or less are not recorded on the
balance sheet. For lease agreements entered into or reassessed after the
adoption of Topic 842, we have combined the lease and non-lease components in
determining the lease liabilities and right of use assets.
Income Taxes. Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date. A valuation allowance is recorded if
there is uncertainty as to the realization of deferred tax assets. We will
recognize a tax benefit in the financial statements for an uncertain tax
position only if management's assessment is that the position is "more likely
than not" (i.e., a likelihood greater than 50 percent) to be allowed by the tax
jurisdiction based solely on the technical merits of the position. The term "tax
position" refers to a position in a previously filed tax return or a position
expected to be taken in a future tax return that is reflected in measuring
current or deferred income tax assets and liabilities for financial reporting
purposes.
Recent Developments
An outbreak of an infectious respiratory illness caused by a novel coronavirus
known as COVID-19 was first detected in China in December 2019 and has now
spread globally. This outbreak has resulted in travel restrictions, closed
international borders, enhanced health screenings at ports of entry and
elsewhere, prolonged quarantines, order cancellations, supply chain disruptions,
increased costs for raw materials, and lower consumer demand, and other
significant economic impacts, as well as general concern and uncertainty.
The severity of the pandemic and the future uncertainty regarding the length of
its effects could have negative consequences for our company. To date, the
effects of the pandemic have negatively affected certain aspects of our
operations. All of our co-packing facilities are currently operating normally,
and the pandemic has not constrained any of our production requirements. The
cost of certain key ingredients and packaging has increased substantially due to
short-term supply issues related to COVID-19. Additionally, we are currently
experiencing longer lead times in receiving certain ingredients and packaging.
We anticipate that these longer lead times will persist for the balance of 2022.
We continue to be able to schedule trucks for delivery and a large majority of
our customers are still operating and ordering our products as before. However,
our freight costs have increased substantially due to a driver shortage caused
by COVID-19 and a significant increase in fuel costs. Fuel costs have continued
to increase substantially due to record high petroleum costs caused by the
current unsettled world political situation. In response to these cost increases
and the potential for additional cost increases affecting various aspects of our
operations, we initiated a series of sales price increases commencing in the
fourth quarter of 2021 and continuing into the first quarter of 2022 to help
offset these cost increases. As these costs have either continued to increase,
or have remained at their high historic levels, we have been forced to implement
further price increases to our customers which will become effective during the
fourth quarter of the current year.
13
Our ability to handle customer and consumer communications, schedule production,
and order ingredients necessary for our production has not been materially
impacted. Nor have we experienced a significant change in the timeliness of
payments of our invoices. Our cash position is $1,283,292 as of August 8, 2022
as compared to our fiscal year end January 1, 2022 balance of $1,698,000
Results of Operations
Thirteen Weeks Ended July 2, 2022 Compared with Thirteen Weeks Ended July 3,
2021
Net sales for the thirteen weeks ended July 2, 2022 decreased by $48,000, or 2%,
to $2,979,000, from net sales of $3,027,000 for the thirteen weeks ended July 3,
2021. Sales of our vegan cheese products increased slightly to $2,526,000 in the
thirteen weeks ended July 2, 2022 from $2,497,000 in the thirteen weeks ended
July 3, 2021. Sales of our frozen dessert and frozen food products, which
consist primarily of frozen dessert products, decreased to $453,000 in the
thirteen weeks ended July 2, 2022 from $530,000 for the thirteen weeks ended
July 3, 2021. We anticipate an increase in sales dollars over the balance of the
current fiscal year as the price increases we implemented take effect.
Our gross profit decreased significantly to $525,000 for the thirteen weeks
ended July 2, 2022 from $758,000 for the thirteen weeks ended July 3, 2021. Our
gross profit percentage was 18% for the thirteen weeks ending July 2, 2022
compared to 25% for the thirteen weeks ending July 3, 2021. The decrease in both
our gross profit and gross profit percentage were caused by the substantial
increases in certain ingredients and freight expense. These substantial cost
increases were due primarily to the lingering supply chain issues caused by the
Covid-19 pandemic and the record high cost of petroleum. Besides causing
substantial increases in our freight expenses, the high cost of petroleum has
also directly impacted the costs of certain ingredients and packaging such as
the plastic packaging we use for our spreadable cheese products. Our gross
profit dollars and gross profit percentage were also negatively impacted by an
increase in our sales promotion and allowance expenses to $403,000 in the second
quarter of this year as compared to $336,000 in the second quarter of prior
fiscal year. We anticipate that our gross profit dollars and gross profit
percentage will continue to be negatively affected for the balance of fiscal
year 2022.
Freight out expense, a significant part of our cost of sales, increased by
$53,000, or 20%, to $324,000 for the thirteen weeks ended July 2, 2022 compared
with $271,000 for the thirteen weeks July 3, 2021. Freight out expense was 11%
of sales for the thirteen weeks ended July 2, 2022 compared to 9% of sales for
the thirteen weeks ended July 3, 2021. The increase in freight out expenses was
primarily due to the increases in shipping costs due to the large increase in
the cost of fuel and the unavailability of trucks and drivers. We anticipate
that our freight out expense will continue at the current higher rate for the
balance of 2022.
Selling expenses increased slightly by $6,000, or 2%, to $309,000 for the
thirteen weeks ended July 2, 2022 from $303,000 for the thirteen weeks ended
July 3, 2021. The increase was due to an increase in meetings and conventions of
$20,000, commissions expense of $20,000, and travel, entertainment and auto
expense of $12,000 which were partially offset by a decrease in outside
warehouse rental expense of $41,000. We anticipate that our selling expenses
will remain unchanged for the remainder of 2022.
Marketing expenses increased by $45,000, or 68%, to $111,000 for the thirteen
weeks ended July 2, 2022 from $66,000 for the thirteen weeks ended July 3, 2021.
The increase was primarily due to increases in artwork and plates expense of
$54,000, advertising expense of $3,000, marketing materials of $6,000 and
promotion expense of $17,000. The increase in artwork and plate expense was due
to a complete redesign of all the Company's packaging. We anticipate that our
marketing expenses for the balance of the year will be higher that the
corresponding periods in fiscal year 2021.
Product development costs, which consist principally of salary expenses and
laboratory costs, increased slightly by $6,000, or 17%, to $42,000 for the
thirteen weeks ended July 2, 2022 from $36,000 for the thirteen weeks ended July
3, 2021. We anticipate our product development costs to continue at a slightly
lower level than the corresponding 2021 periods
14
General and administrative expenses increased by $30,000, or 9%, to $349,000 for
the thirteen weeks ended July 2, 2022 from $319,000 for the thirteen weeks ended
July 3, 2021, primarily due to increases in payroll expense of 47,000, and
public relations expense of $15,000, which were partially offset by decreases in
IT expense of $13,000 and travel, entertainment, and auto expense of $9,000. We
anticipate our general and administrative expense for the remaining periods in
2022 will approximate the same levels as in the corresponding 2021 periods.
Income tax benefit was $78,000 for the thirteen weeks ended July 2, 2022 and $0
for the thirteen weeks ended July 3, 2021 resulting from the lower taxable
income during the thirteen weeks ended July 2, 2022 compared to the thirteen
weeks ended July 3, 2021.
Twenty Six Weeks Ended July 2, 2022 Compared with Twenty Six Weeks Ended July 3,
2021
Net sales for the twenty-six weeks ended July 2, 2022 increased by $265,000, or
4%, to $6,442,000, from net sales of $6,177,000 for the twenty-six weeks ended
July 3, 2021. Sales of our vegan cheese products increased to $5,442,000 in the
twenty-six weeks ended July 2, 2022 from $5,217,000 in the twenty-six weeks
ended July 3, 2021. Sales of our frozen dessert and frozen food products, which
consist primarily of frozen dessert products, increased to $1,000,000 in the
twenty-six weeks ended July 2, 2022 from $960,000 for the twenty-six weeks ended
July 3, 2021.
Our gross profit decreased to $1,382,000 in the twenty-six weeks ended July 2,
2022 from $1,759,000 in the twenty-six weeks ended July 3, 2021. Our gross
profit percentage was 21% for the twenty-six weeks ending July 2, 2022 compared
to 28% for the twenty-six weeks ending July 3, 2021. The decrease in both our
gross profit and gross profit percentage were caused by the substantial
increases in certain ingredients and freight expense. These substantial cost
increases were due primarily to the lingering supply chain issues caused by the
Covid-19 pandemic and the record high cost of petroleum. Besides causing
substantial increases in our freight expenses, the high cost of petroleum has
also directly impacted the costs of certain ingredients and packaging such as
the plastic packaging we use for our spreadable cheese product.
Freight out expense, a significant part of our cost of sales, increased by
$145,000, or 29%, to $643,000 for the twenty-six weeks ended July 2, 2022
compared with $498,000 for the twenty-six weeks July 3, 2021. Freight out
expense was 10% of sales for the twenty-six weeks ended July 2, 2022 compared to
8% of sales for the twenty-six weeks ended July 3, 2021. The increase in freight
out expenses was due to the increase in sales, but primarily due to the
increases in shipping costs due to the large increase in the cost of fuel and
the unavailability of trucks.
Selling expenses decreased by $54,000, or 9%, to $573,000 for the twenty-six
weeks ended July 2, 2022 from $627,000 for the twenty-six weeks ended July 3,
2021. This decrease was primarily attributable to decreases in payroll expense
of $24,000 and outside warehouse rental expense of $59,000, which were offset by
increases in meetings and convention expense of $20,000 and travel,
entertainment, and auto expense of $18,000.
Marketing expenses increased by $132,000, or 98%, to $267,000 for the twenty-six
weeks ended July 2, 2022 from $135,000 for the twenty-six weeks ended July 3,
2021. The increase was primarily due to increases in promotions expense of
$38,000, artwork and plates expense of $13,000, and advertising expense of
$3,000.
Product development costs, which consist principally of salary expenses and
laboratory costs, increased by $7,000, or 9%, to $82,000 for the twenty-six
weeks ended July 2, 2022 from $75,000 for the twenty-six weeks ended July 3,
2021, primarily due to the increase in professional fees and outside services of
$22,000 which was partially offset by a decrease in lab costs and supplies of
$9,000.
General and administrative expenses decreased by $80,000, or 10%, to $686,000
for the twenty-six weeks ended July 2, 2022 from $766,000 for the twenty-six
weeks ended July 3, 2021, primarily due to decreases in payroll expense of
$56,000, professional fees and outside services expense of $15,000, and travel,
entertainment, and auto expense of $20,000 which were partially offset by an
increase in public relations expense of $45,000. The decrease in payroll expense
was due to no salary being paid to Mr. Mintz this period compared to the same
period in the prior year.
Income tax benefit was $58,000 for the twenty-six weeks ended July 2, 2022 and
income tax expense was $36,000 for the twenty-six weeks ended July 3, 2021
resulting from the lower taxable income during the twenty-six weeks ended July
2, 2022 compared to the twenty-six weeks ended July 3, 2021.
15
Liquidity and Capital Resources
As of July 2, 2022, we had approximately $1,176,000 in cash and our working
capital was approximately $4,259,000, compared with approximately $1,698,000 in
cash and working capital of $4,326,000 at January 1, 2022.
In order to provide our company with additional working capital, on January 6,
2016, David Mintz, our former Chairman and Chief Executive Officer, provided our
company with a convertible loan of $500,000. On December 22, 2021, the loan
balance of $500,000 plus accrued interest of $25,000 was paid by the Company to
Mr. Mintz's estate.
The following table summarizes our cash flows for the periods presented:
Twenty-six Twenty-six
weeks ended weeks ended
July 2, 2022 July 3, 2021
Net cash (used in) provided by operating activities $ (522,000 ) $ 610,000
Net cash used in operating activities for the thirteen weeks ended July 2, 2022
was $522,000 compared to $610,000 provided by operating activities for the
thirteen weeks ended July 3, 2021. Net cash used in operating activities for the
twenty-six weeks ended July 2, 2022 was primarily a result of a net loss of
$3,000, SBA loan forgiveness of $165,000, an increase in inventories of
$700,000, deferred taxes of $62,000 and a non-cash lease expense of $4,000,
offset by a decrease in accounts receivable of $199,000, an increase in accounts
payable and accrued expenses of $140,000, and a decrease in prepaid expenses and
other current assets of $57,000. The significant increase in inventories during
the period is due to management's decision to purchase certain key ingredients
in advance of production needs to ensure an adequate supply and to prevent
future production disruptions.
We believe our existing cash on hand at July 2, 2022, existing working capital
and the cash flows expected from operations, will be sufficient to support our
operating and capital requirements during the next twelve months.
Inflation and Seasonality
We do not believe that our operating results have been materially affected by
inflation during the preceding two years. However, beginning in 2022, due to
substantial increases in ingredient, packaging, freight, and co-packing
expenses, we are now experiencing negative effects on our operations from
inflation. While we do believe that certain of these costs and expenses will
return to their previous lower levels, there is no assurance that they will do
so. Our business is subject to minimal seasonal variations with slightly
increased sales historically in the second and third quarters of the fiscal
year. We expect to continue to experience slightly higher sales in the second
and third quarters, and slightly lower sales in the fourth and first quarters,
as a result of reduced sales of dairy free frozen desserts during those periods.
Off-balance Sheet Arrangements
None.
Contractual Obligations
We had no material contractual obligations as of July 2, 2022.
Recently Issued Accounting Standards
See Note 2 to the unaudited condensed financial statements included in Part I,
Item 1, Financial Statements, of this Quarterly Report on Form 10-Q.
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