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Item
2.
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Management’s
Discussion and Analysis of Financial Condition and Results of Operations
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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.
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.
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.
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.
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 $165,000,
pursuant to the Paycheck Protection Program under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”),
which was enacted on March 27, 2020. The term of the loan is two years, with monthly payments due the first day of each month, beginning
seven months from the date of initial disbursement, or December 1, 2020, whichever is earlier. Interest accrues at 1% per year, effective
on the date of initial disbursement. In addition, a portion of the loan may be forgiven under provisions under the CARES Act based on
payments for payroll, rent and utilities during the period subsequent to obtaining the loan. The Company has applied for loan
forgiveness and is awaiting the results. There has been no further communication from the SBA on the status.
The
following table summarizes our cash flows for the periods presented:
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Twenty-Six
Weeks
ended
July 3, 2021
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Twenty-Six
Weeks
ended
June 27, 2020
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Net
cash provided by operating activities
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$
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610,000
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$
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455,000
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Net
cash provided by financing activities
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—
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165,000
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Net
increase in cash and cash equivalents
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$
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610,000
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$
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620,000
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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.
