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 spread
globally. This outbreak 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, 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 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 $1,365,000 as of November 8, 2022
as compared to our fiscal year end January 1, 2022 balance of $1,698,000
Results of Operations
Thirteen Weeks Ended October 1, 2022 Compared with Thirteen Weeks Ended October
2, 2021
Net sales for the thirteen weeks ended October 1, 2022 decreased by $460,000, or
14%, to $2,896,000, from net sales of $3,356,000 for the thirteen weeks ended
October 2, 2021. Sales of our vegan cheese products decreased to $2,334,000 in
the thirteen weeks ended October 1, 2022 from $2,816,000 in the thirteen weeks
ended October 2, 2021, due to the timing of cheese promotions that occurred last
year. Sales of our frozen dessert and frozen food products, which consist
primarily of frozen dessert products, increased slightly to $562,000 in the
thirteen weeks ended October 1, 2022 from $540,000 for the thirteen weeks ended
October 2, 2021.
Our gross profit decreased significantly to $427,000 for the thirteen weeks
ended October 1, 2022 from $818,000 for the thirteen weeks ended October 2,
2021, due partially to the reduction in sales. Our gross profit percentage was
15% for the thirteen weeks ending October 1, 2022 compared to 24% for the
thirteen weeks ending October 2, 2021. The decrease in both our gross profit and
gross profit percentage were primarily caused by the substantial increases in
the costs for certain ingredients, especially soybean oil. 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. 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. While the costs of some of these key ingredients have recently started
to decline, we anticipate that our gross margin and gross margin percentage will
continue to be negatively impacted into fiscal year 2023.
Freight out expense, a significant part of our cost of sales, decreased by
$59,000, or 20%, to $218,000 for the thirteen weeks ended October 1, 2022
compared with $277,000 for the thirteen weeks October 2, 2021. Freight out
expense was 8% of sales for the thirteen weeks ended October 1, 2022 compared to
8% of sales for the thirteen weeks ended October 2, 2021. While actual freight
expense declined for the current quarter, it was due to more customers picking
up their orders due to the additional pickup allowances we offer. The
availability of trucks is still limited and the actual cost of shipping is still
at the same high cost from the first half of 2022.
Selling expenses decreased by $21,000, or 7%, to $261,000 for the thirteen weeks
ended October 1, 2022 from $282,000 for the thirteen weeks ended October 2,
2021. The decrease was due to decreases in outside warehouse rental expense of
$40,000 and commission expense of $13,000, which were partially offset by
increases in meeting and convention expense of $22,000 and messenger expense of
$5,000.
Marketing expenses increased by $65,000, or 171%, to $103,000 for the thirteen
weeks ended October 1, 2022 from $38,000 for the thirteen weeks ended October 2,
2021. The increase was primarily due to increases in point of sale materials
expense of $24,000 and advertising expenses of $12,000, and an increase in
promotion expenses of $21,000. We anticipate that our marketing expenses for the
balance of the year will be higher that the corresponding period in fiscal year
2021.
Product development costs, which consist principally of salary expenses and
laboratory costs, increased slightly by $2,000, or 8%, to $26,000 for the
thirteen weeks ended October 1, 2022 from $24,000 for the thirteen weeks ended
October 2, 2021. We anticipate our product development costs for the balance of
the year will continue at a similar level as those for the 2021 period.
14
General and administrative expenses decreased by $33,000, or 9%, to $298,000 for
the thirteen weeks ended October 1, 2022 from $331,000 for the thirteen weeks
ended October 2, 2021, primarily due to a decrease in professional fees and
outside services expense of $33,000, a decrease in loss incurred on the sale of
assets of $36,000, and a decrease on franchise tax expenses of $7,000, which
were partially offset by increases in payroll expense of $24,000, and general
insurance expense of $15,000. We anticipate our general and administrative
expense for the remaining period in 2022 will approximate the same level as in
the corresponding 2021 period.
Income tax benefit was $69,000 for the thirteen weeks ended October 1, 2022 and
income tax expense was $16,000 for the thirteen weeks ended October 2, 2021. The
income tax benefit resulted from the lower taxable income during the thirteen
weeks ended October 1, 2022 compared to the thirteen weeks ended October 2,
2021.
Thirty-Nine Weeks Ended October 1, 2022 Compared with Thirty-Nine Weeks Ended
October 2, 2021
Net sales for the thirty-nine weeks ended October 1, 2022 decreased by $195,000,
or 2%, to $9,338,000, from net sales of $9,533,000 for the thirty-nine weeks
ended October 2, 2021. Sales of our vegan cheese products decreased by $257,000
to $7,776,000 in the thirty-nine weeks ended October 1, 2022 from $8,033,000 in
the thirty-nine weeks ended October 2, 2021. Sales of our frozen dessert and
frozen food products, which consist primarily of frozen dessert products,
increased to $1,562,000 in the thirty-nine weeks ended October 1, 2022 from
$1,500,000 for the thirty-nine weeks ended October 2, 2021.
Our gross profit decreased to $1,812,000 in the thirty-nine weeks ended October
1, 2022 from $2,577,000 in the thirty-nine weeks ended October 2, 2021. Our
gross profit percentage was 19% for the thirty-nine weeks ending October 1, 2022
compared to 27% for the thirty-nine weeks ending October 2, 2021. The decrease
in both our gross profit and gross profit percentage were caused by the
substantial increases in certain ingredients and freight expenses. 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.
Freight out expense, a significant part of our cost of sales, increased by
$86,000, or 11%, to $861,000 for the thirty-nine weeks ended October 1, 2022
compared with $775,000 for the thirty-nine weeks October 2, 2021. Freight out
expense was 9% of sales for the thirty-nine weeks ended October 1, 2022 compared
to 8% of sales for the thirty-nine weeks ended October 2, 2021. The increase in
freight out expenses was 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 $75,000, or 8%, to $834,000 for the thirty-nine
weeks ended October 1, 2022 from $909,000 for the thirty-nine weeks ended
October 2, 2021. This decrease was primarily attributable to decreases in
payroll expense of $22,000, outside warehouse rental expense of $98,000, and
commission expense of $15,000, which were offset by increases in meetings and
convention expenses of $42,000 and travel, entertainment, and auto expenses of
$20,000.
Marketing expenses increased by $197,000, or 114%, to $370,000 for the
thirty-nine weeks ended October 1, 2022 from $173,000 for the thirty-nine weeks
ended October 2, 2021. The increase was primarily due to increases in promotions
expense of $59,000, artwork and plate expenses of $73,000, advertising expenses
of $32,000, and point of sales material expense of $30,000. In 2022, we
completed the rebranding of our product line and introduced new packaging for
our products.
Product development costs increased by $9,000, or 9%, to $108,000 for the
thirty-nine weeks ended October 1, 2022 from $99,000 for the thirty-nine weeks
ended October 2, 2021, primarily due to the increase in professional fees and
outside services of $28,000 which was partially offset by a decrease in lab
costs and supplies of $9,000.
General and administrative expenses decreased by $110,000, or 10%, to $987,000
for the thirty-nine weeks ended October 1, 2022 from $1,097,000 for the
thirty-nine weeks ended October 2, 2021, primarily due to decreases in payroll
expense of $32,000, professional fees and outside services expense of $48,000,
loss on the sale of asset of $36,000, equipment rental expense of $19,000, and
travel, auto and entertainment expenses of $14,000, which were partially offset
by an increase in public relations expense of $50,000 and an increase in general
insurance expense of $9,000. 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 $127,000 for the thirty-nine weeks ended October 1, 2022
and income tax expense was $52,000 for the thirty-nine weeks ended October 2,
2021 resulting from the lower taxable income during the thirty-nine weeks ended
October 1, 2022 compared to the thirty-nine weeks ended October 2, 2021.
15
Liquidity and Capital Resources
As of October 1, 2022, we had approximately $965,000 in cash and our working
capital was approximately $3,994,000, compared with approximately $1,698,000 in
cash and working capital of $4,326,000 at January 1, 2022. The decrease in cash
is primarily due to the use of funds to purchase ingredients during the period,
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.
The following table summarizes our cash flows for the periods presented:
Thirty-nine Thirty-nine
Weeks ended Weeks ended
October 1, 2022 October 2, 2021
Net cash (used in) provided by operating activities $ (733,000 ) $ 1,500,000
Net cash provided by investing activities
- 50,000
Net increase in cash and cash equivalents (733,000 ) 1,550,000
Net cash used in operating activities for the thirteen weeks ended October 1,
2022 was $733,000 compared to $1,500,000 provided by operating activities for
the thirteen weeks ended October 2, 2021. Net cash used in operating activities
for the thirty-nine weeks ended October 1, 2022 was primarily a result of a net
loss of $195,000, SBA loan forgiveness of $165,000, an increase in inventories
of $820,000, deferred taxes of $133,000 and a non-cash lease expense of $6,000,
offset by a decrease in accounts receivable of $146,000, an increase in accounts
payable and accrued expenses of $385,000, and a decrease in prepaid expenses and
other current assets of $42,000. 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 October 1, 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 2020 and 2021.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.
Off-balance Sheet Arrangements
None.
Contractual Obligations
We had no material contractual obligations as of October 1, 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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