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 Policies
Our financial statements have been prepared in accordance with accounting
principles generally accepted in the United States. The preparation of these
unaudited condensed 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 receivable 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.
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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
On February 24, 2021 David Mintz, our founder, Chief Executive Officer and
Chairman of the Board of Directors, passed away. Steven Kass, Chief Financial
Officer, was appointed interim CEO by our Board of Directors and was confirmed
as permanent CEO by the Board on April 27, 2021.
An outbreak of 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 current severity of the pandemic and the uncertainty regarding the length of
its effects could have negative consequences for our company. To date, the
effects of the pandemic have 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 has increased substantially due to short-term supply issues related
to COVID-19. 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. Additionally, our freight costs have increased due to a driver shortage
caused by COVID-19. Our ability to collect money, pay bills, handle customer and
consumer communications, schedule production, and order ingredients necessary
for our production has not been materially impacted. However, due to the future
uncertainty of potential cost increases affecting various aspects of our
operations, we have initiated a series of sales price increases commencing in
the fourth quarter of this year to help offset these cost increases.
13
To date, the pandemic has had minimal impact on our sales. The majority of our
sales relate to retail products sold in supermarkets. Supermarket sales in
general have seen a substantial surge in business due to the pandemic, as
consumers stock up on all products that they would normally purchase. The only
negative effect to our business to date has been with respect to our food
service sales to retail outlets, such as restaurants and small food shops, which
account for a small part of our total business and with respect to our inability
to regain our level of export sales to foreign jurisdictions. Our marketing
efforts have also been constrained due to social distancing restrictions and
other current government rules and regulations that preclude face to face sales
meeting, attendance at trade shows and the initiation of new promotions.
To date we have not experienced a significant change in the timeliness of
payments of our invoices and our cash position of approximately $3,009,000 as of
October 2, 2021 has improved since our fiscal year end
Results of Operations
Thirteen Weeks Ended October 2, 2021 Compared with Thirteen Weeks Ended
September 26, 2020
Net sales for the thirteen weeks ended October 2, 2021 were $3,356,000, an
increase of $204,000, or 6%, from net sales of $3,152,000 for the thirteen weeks
ended September 26, 2020. The increase is mainly attributable to increases in
sales in our vegan cheese categories and frozen desserts. Sales of vegan cheese
products increased by $161,000 to $2,816,000 in the 2021 period from $2,655,000
in the 2020 period. Frozen dessert sales increased by $43,000 to $540,000 in the
thirteen weeks ended October 2, 2021 from $497,000 for the thirteen weeks ended
September 26, 2020.
Our gross profit decreased to $818,000 in the thirteen weeks ended October 2,
2021 from $1,033,000 in the thirteen weeks ended October 2, 2021. Our gross
profit percentage was 24% for the thirteen weeks ending October 2, 2021 compared
to 33% for the thirteen weeks ending September 26, 2020. Sudden cost increases
due to COVID-related supply chain issues for ingredients used in the production
of our products have negatively impacted our gross profit. We anticipate these
ingredient cost increases will continue for the balance of the year and at least
into the first half of 2022.
Our gross profit percentage was also negatively impacted by an increase in
freight expense, which is a component of cost of sales. Freight expense, a
significant part of our cost of sales, increased by $39,000, or 16%, to $277,000
for the thirteen weeks ended October 2, 2021 compared with $238,000 for the
thirteen weeks ended September 26, 2020. As a percentage of sales, freight
expense was 8% percent for both the thirteen weeks ended October 2, 2021 and the
thirteen weeks ended September 26, 2020. Our freight expense was negatively
impacted by a significant increase in freight rates caused by a shortage of
drivers due to COVID-19, increased fuel costs, and the continued implementation
of the 2019 Electronic Logging Device rules and regulations, or ELD, which limit
the number of hours a truck driver can drive in a 24-hour period for over the
road carriers. We expect this increase in freight expense to continue for the
balance of 2021 and into 2022.
Selling expenses decreased by $1,000 to $282,000 for the thirteen weeks ended
October 2, 2021 from $283,000 for the thirteen weeks ended September 26, 2020.
We anticipate that our selling expenses will remain at the same level for the
remainder of 2021.
Marketing expenses were $38,000 for both the thirteen weeks ended October 2,
2021 and the thirteen weeks ended September 26, 2020. We anticipate that our
marketing expenses will remain at the same level for the remainder of fiscal
2021.
Research and development costs decreased by $26,000, or 52%, to $24,000 for the
thirteen weeks ended October 2, 2021 from $50,000 for the thirteen weeks ended
September 26, 2020, primarily due to decreases in payroll expense of $7,000, lab
costs and supplies expense of $6,000, and professional fees and outside services
expense of $5,000. Because we do not anticipate that our research and
development department will resume operations at the pre-COVID level in 2021, we
expect that product development costs will remain significantly lower for the
remainder of fiscal 2021.
14
General and administrative expenses decreased by $80,000, or 19%, to $331,000
for the thirteen weeks ended October 2, 2021 from $411,000 for the thirteen
weeks ended September 26, 2020. The decrease in general and administrative
expenses was due to a decrease in payroll expense of $122,000, public relations
expense of $8,000, equipment rental of $6,000, and general insurance expense of
$11,000, which were partially offset by increases in professional fees and
outside services expense of $34,000, IT expense of $7,000, and a one-time loss
on the sale of equipment of $36,000. The decrease in payroll expense was due to
the elimination of Mr. Mintz's salary at the start of the second quarter. The
increase in IT expenses was due to an upgrade of our ransomware protection
systems.
Income tax expense increased by $9,000 of 36%, to $16,000 for the thirteen weeks
ended October 2, 2021 from $25,000 for the thirteen weeks ended September 26,
2020 resulting from the lower pre-tax income during this period compared to
prior year.
Thirty-nine Weeks Ended October 2, 2021 Compared with Thirty-nine Weeks Ended
September 26, 2020
Net sales for the thirty-nine weeks ended October 2, 2021 were $9,533,000, a
decrease of $88,000 from net sales of $9,621,000 for the thirty-nine weeks ended
September 26, 2020. Sales of vegan cheese products increased slightly to
$8,033,000 in the 2021 period from $8,016,000 in the 2020 period. Sales of our
frozen dessert and frozen food products decreased to $1,500,000 for the
thirty-nine weeks ended October 2, 2021 from $1,605,000 for the thirty-nine
weeks ended September 26, 2020. The decrease in our sales for the 2021
thirty-nine-week period was mostly due to the decrease in frozen dessert sales
resulting from the discontinuance of our Yours Truly cones and Marry Me bars in
the 2021 period due to the two products' declining sales.
Our gross profit decreased by $467,000 or 15% to $2,577,000 in the thirty-nine
weeks ended October 2, 2021 from $3,044,000 in the thirty-nine-week period ended
September 26, 2020. Our gross profit percentage was 27% for the thirty-nine
weeks ended October 2, 2021 compared to 32% for the thirty-nine weeks ended
September 26, 2020. Freight expense increased by $57,000, or 8%, to $775,000 for
the thirty-nine weeks ended October 2, 2021 compared with $718,000 for the
thirty-nine weeks ended September 26, 2020. As a percentage of sales, freight
expense was 8% percent for the thirty-nine weeks ended October 2, 2021 compared
to 7% percent for the thirty-nine weeks ended September 26, 2020. We anticipate
our gross profit and gross profit percentage will continue to be negatively
impacted for the balance of 2021 and into 2022 due to the significant ingredient
cost increases caused by COVID-19 supply chain issues.
Selling expenses increased by $28,000, or 3%, to $909,000 for the thirty-nine
weeks ended October 2, 2021 from $881,000 for the thirty-nine weeks ended
September 26, 2020. This increase was due principally to increases in outside
warehouse rental expense of $19,000 and bad debt expense of $10,000.
Marketing expenses decreased by $37,000, or 18%, to $173,000 for the thirty-nine
weeks ended October 2, 2021 from $210,000 for the thirty-nine weeks ended
September 26, 2020, due to a decrease in promotion expense of $49,000, which was
partially offset by an increase in advertising expense of $8,000.
Research and development costs decreased by $95,000, or 49%, to $99,000 for the
thirty-nine weeks ended October 2, 2021 from $194,000 for the thirty-nine weeks
ended September 26, 2020, due primarily to decreases in payroll expense of
$44,000, equipment repair expense of $14,000 and professional fees and outside
services expense of $28,000.
General and administrative expenses decreased by $132,000, or 11%, to $1,097,000
for the thirty-nine weeks ended October 2, 2021 from $1,229,000 for the
thirty-nine weeks ended September 26, 2020. This decrease was a result of
decreases in payroll expense of $259,000, public relation expense of $8,000, and
general insurance expense of $17,000, which were partially offset by increases
in professional fees and outside services expense of $104,000 and the loss on
the sale of equipment of $37,000. The decrease in payroll expense was due to the
elimination of Mr. Mintz's salary at the start of the second quarter. The
increase in professional fees and outside services expense was due to a one-time
fee charged by our former accountants.
Income tax expense was $52,000 for the thirty-nine weeks ended October 2, 2021
compared to $101,000 for the thirty-nine weeks ended September 26, 2020
resulting from the lower pre-tax income during this period compared to prior
year.
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Liquidity and Capital Resources
As of October 2, 2021, we had approximately $3,009,000 in cash and our working
capital was approximately $4,886,000, compared with approximately $1,459,000 in
cash and working capital of $4,639,000 at January 2, 2021.
Small Business Administration Loan
On May 4, 2020, we were granted a loan (the "Loan") from Valley National Bank in
the aggregate amount of approximately $165,000, pursuant to the Paycheck
Protection Program under the Coronavirus Aid, Relief, and Economic Security Act
(the "CARES Act"), which was enacted on March 27, 2020. The term of the loan is
two years, with monthly payments due the first day of each month, beginning
seven months from the date of initial disbursement, or December 1, 2020,
whichever is earlier. Interest accrues at 1% per year, effective on the date of
initial disbursement. In addition, a portion of the loan may be forgiven under
provisions under the CARES Act based on payments for payroll, rent and utilities
during the period subsequent to obtaining the loan. The Company has applied for
loan forgiveness and is awaiting the results.
The following table summarizes our cash flows for the periods presented:
Thirty-nine Thirty-nine
Weeks ended Weeks ended
October 2, 2021 September 26, 2020
Net cash provided by operating
activities $ 1,500,000 $ 720,000
Net cash provided by investing
activities 50,000 -
Net cash provided by financing
activities - 165,000
Net increase in cash and cash
equivalents $ 1,550,000 $ 885,000
Net cash provided by operating activities was $1,500,000 for the thirty-nine
weeks ended October 2, 2021 compared to $720,000 for the thirty-nine weeks ended
September 26, 2020. Net cash provided by operating activities for the
thirty-nine weeks ended October 2, 2021 was primarily a result of a result of
our net income of $228,000, a gain on sale of equipment of $37,000 a decrease in
accounts receivable of $665,000, a decrease in inventory of $311,000, and an
increase of accounts payable of $551,000, offset by a decrease in accrued
expenses of $184,000 and income taxes payable of $115,000. Net cash provided by
investing activities was $50,000 for the thirty-nine weeks ended October 2, 2021
compared to $0 for the thirty-nine weeks ended September 26, 2020. Net cash
provided by investing activities for the thirty-nine weeks ended October 2, 2021
was a result of selling equipment. Net cash provided by financing activities was
$0 for the thirty-nine weeks ended October 2, 2021 compared to $165,000 for the
thirty-nine weeks ended September 26, 2020 as a result of a loan pursuant to the
Paycheck Protection Program under the CARES Act in 2020.
We believe our existing working capital and cash on hand at October 2, 2021, 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, other than the COVID related
ingredient costs increases and freight expenses. There can be no assurance,
however, that our operating results will not be materially affected by inflation
in the future. 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 nondairy frozen desserts during those
periods.
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Off-balance Sheet Arrangements
None.
Contractual Obligations
We had no material contractual obligations as of October 2, 2021.
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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