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.
12
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.
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, disruption of and delays in healthcare service preparation and
delivery, prolonged quarantines, cancellations, supply chain disruptions, and
lower consumer demand, layoffs, defaults and other significant economic impacts,
as well as general concern and uncertainty.
13
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. 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. The cost of certain key
ingredients has increased substantially due to short-term supply issues related
to COVID-19. 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 impacted.
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 $2,069,000 as of
July 3, 2021 has improved since our fiscal year end
Results of Operations
Thirteen Weeks Ended July 3, 2021 Compared with Thirteen Weeks Ended June 27,
2020
Net sales for the thirteen weeks ended July 3, 2021 were $3,027,000, a decrease
of $216,000, or 7%, from net sales of $3,243,000 for the thirteen weeks ended
June 27, 2020. The decrease is mainly attributable to decreases in sales in our
frozen desserts, frozen foods and vegan cheese categories. Sales of vegan cheese
products decreased slightly to $2,497,000 in the 2021 period from $2,547,000 in
the 2020 period due to manufacturing delays at our co-packing facility for vegan
cheese slices, which have since been resolved. Frozen dessert and frozen food
products sales decreased by $166,000 to $530,000 in the thirteen weeks ended
July 3, 2021 from $696,000 for the thirteen weeks ended June 27, 2020. The
decrease in frozen dessert sales was due to the discontinuance of our Yours
Truly cones and Marry Me bars in the second quarter of 2021 due to the two
products' declining sales.
Our gross profit decreased to $758,000 in the thirteen weeks ended July 3, 2021
from $1,015,000 in the thirteen weeks ended July 3, 2021. Our gross profit
percentage was 25% for the thirteen weeks ending July 3, 2021 compared to 31%
for the thirteen weeks ending June 27, 2020. Our gross profit percentage was
negatively impacted by our export cheese business accounting for a larger
portion of our total vegan cheese business than in the same period last year.
The gross profit on our vegan cheese export sales is significantly less than on
our vegan cheese domestic sales. Sales allowances during the 2021 second quarter
were $30,000 higher than in the 2020 second quarter. Additionally, sudden cost
increases for ingredients due to COVID-related issues negatively impacted our
gross profit. We anticipate these ingredient cost increases to continue for the
balance of the year.
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 $42,000, or 19%, to $271,000
for the thirteen weeks ended July 3, 2021 compared with $229,000 for the
thirteen weeks ended June 27, 2020. As a percentage of sales, freight expense
was 9% percent for the thirteen weeks ended July 3, 2021 compared to 7% percent
for the thirteen weeks ended June 27, 2020. Our freight expense was negatively
impacted by a significant increase in freight rates caused by a shortage of
drivers due to COVID-19 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.
14
Selling expenses increased by $12,000, or 4%, to $303,000 for the thirteen weeks
ended July 3, 2021 from $291,000 for the thirteen weeks ended June 27, 2020.
This increase was principally due to increases in outside warehouse rental
expense of $24,000, bad debt expense of $10,000, and travel, entertainment and
auto expense of $6,000, which were partly offset by decreases in payroll expense
of $7,000 and commission expense of $20,000. We anticipate that our selling
expenses will remain at the same level for the remainder of 2021.
Marketing expenses increased by $19,000, or 40%, to $66,000 for the thirteen
weeks ended July 3, 2021 from $47,000 for the thirteen weeks ended June 27,
2020, due primarily to an increase in advertising expense of $17,000. We
anticipate that our marketing expenses will remain at the same level for the
remainder of fiscal 2021.
Research and development costs, which consist principally of salary expenses and
laboratory costs, decreased by $18,000, or 33%, to $36,000 for the thirteen
weeks ended July 3, 2021 from $54,000 for the thirteen weeks ended June 27,
2020, primarily due to decreases in payroll expense of $9,000 and lab costs and
supplies expense of $6,000. 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.
General and administrative expenses decreased by $88,000, or 21%, to $319,000
for the thirteen weeks ended July 3, 2021 from $407,000 for the thirteen weeks
ended June 27, 2020. The decrease in general and administrative expenses was due
to a decrease in payroll expense of $138,000, which was partially offset by
increases in professional fees and outside services expense of $40,000 and IT
expense of $10,000. 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. The increase in IT expenses was due to an upgrade of
our ransomware protection systems.
There was de-minimus income tax expense for the thirteen weeks ended July 3,
2021.
Twenty-Six Weeks Ended July 3, 2021 Compared with Twenty-Six Weeks Ended June
27, 2020
Net sales for the twenty-six weeks ended July 3, 2021 were $6,177,000, a
decrease of $292,000, or 5%, from net sales of $6,469,000 for the twenty-six
weeks ended June 27, 2020. Sales of vegan cheese products decreased to
$5,217,000 in the 2021 period from $5,361,000 in the 2020 period. Sales of our
frozen dessert and frozen food products decreased to $960,000 for the twenty-six
weeks ended July 3, 2021 from $1,108,000 for the twenty-six weeks ended June 27,
2020. The decrease in our sales for the 2021 twenty-six 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 to $1,759,000 in the twenty-six weeks ended July 3,
2021 from $2,011,000 in the twenty-six week period ended June 27, 2020. Our
gross profit percentage was 28% for the twenty-six weeks ended July 3, 2021
compared to 31% for the twenty-six weeks ended June 27, 2020. Freight expense
increased by $25,000, or 5%, to $498,000 for the twenty-six weeks ended July 3,
2021 compared with $473,000 for the twenty-six weeks ended June 27, 2020. As a
percentage of sales, freight expense was 8% percent for the twenty-six weeks
ended July 3, 2021 compared to 7% percent for the twenty-six weeks ended June
27, 2020.
Selling expenses increased by $29,000, or 5%, to $627,000 for the twenty-six
weeks ended July 3, 2021 from $598,000 for the twenty-six weeks ended June 27,
2020. This increase was due principally to increases in outside warehouse rental
expense of $22,000, bad debt expense of $10,000, and commission expense of
$5,000, which were partly offset by a decrease in payroll expense of $7,000.
15
Marketing expenses decreased by $37,000, or 22%, to $135,000 for the twenty-six
weeks ended July 3, 2021 from $172,000 for the twenty-six weeks ended June 27,
2020, due to a decrease in promotion expense of $54,000, which was partially
offset by an increase in advertising expense of $21,000.
Research and development costs, which consist principally of salary expenses and
laboratory costs, decreased by $69,000, or 48%, to $75,000 for the twenty-six
weeks ended July 3, 2021 from $144,000 for the twenty-six weeks ended June 27,
2020, due primarily to decreases in payroll expense of $37,000, equipment repair
expense of $14,000 and professional fees and outside services expense of
$13,000.
General and administrative expenses decreased by $52,000, or 6%, to $766,000 for
the twenty-six weeks ended July 3, 2021 from $818,000 for the twenty-six weeks
ended June 27, 2020. This decrease was a result of decreases in payroll expense
of $136,000, which was partially offset by increases in professional fees and
outside services expense of $65,000 and IT expense of $16,000. 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. The
increase in IT expenses was due to an upgrade of our ransomware protection
systems
Income tax expense was $36,000 for the twenty-six weeks ended July 3, 2021
compared to $76,000 for the twenty-six weeks ended June 27, 2020.
Liquidity and Capital Resources
As of July 3, 2021, we had approximately $2,069,000 in cash and our working
capital was approximately $4,691,000, 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. There has been no further
communication from the SBA on the status.
The following table summarizes our cash flows for the periods presented:
Twenty-Six Weeks Twenty-Six Weeks
ended July 3, 2021 ended June 27, 2020
Net cash provided by operating
activities $ 610,000 $ 455,000
Net cash provided by financing
activities - 165,000
Net increase in cash and cash
equivalents $ 610,000 $ 620,000
16
Net cash provided by operating activities was $610,000 for the twenty-six weeks
ended July 3, 2021 compared to $455,000 for the twenty-six weeks ended June 27,
2020. Net cash provided by operating activities for the twenty-six weeks ended
July 3, 2021 was primarily a result of a result of our net income of $108,000
and a decrease in accounts receivable of $639,000, which was partially offset by
a decrease in current liabilities of $95,000. Net cash provided by financing
activities was $0 for the twenty-six weeks ended July 3, 2021 compared to
$165,000 for the twenty-six weeks ended June 27, 2020. Net cash provided by
financing activities for the twenty-six weeks ended June 27, 2020 was a result
of a loan pursuant to the Paycheck Protection Program under the CARES Act.
We believe our existing working capital and cash on hand at July 3, 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 increases
in certain ingredient costs 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.
Off-balance Sheet Arrangements
None.
Contractual Obligations
We had no material contractual obligations as of July 3, 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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