|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark one)
THE SECURITIES EXCHANGE ACT OF 1934
For
the quarterly period ended
OR
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ____
Commission
file number:
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of | (I.R.S. Employer | |
| incorporation or organization) | identification number) |
| (Address of principal executive offices) | (Zip code) |
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule
405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ☐ | Accelerated filer ☐ | |
| Smaller
reporting company | ||
| Emerging
growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐
As of August 19, 2022, the registrant had shares of common stock outstanding.
BRIDGFORD FOODS CORPORATION
FORM 10-Q QUARTERLY REPORT
INDEX
References to “Bridgford Foods” or the “Company” contained in this Quarterly Report on Form 10-Q (this “Report”) refer to Bridgford Foods Corporation.
Items 1 and 2 through 5 of Part II have been omitted because they are not applicable with respect to the Company and/or the current reporting period.
| 2 of 29 |
Part I. Financial Information
Item 1. a.
BRIDGFORD FOODS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
| July 8, 2022 | October 29, 2021 | |||||||
| (unaudited) | ||||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Restricted cash | ||||||||
| Accounts receivable, less allowance for doubtful accounts of $ | ||||||||
| Inventories, net | ||||||||
| Refundable income taxes | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total current assets | ||||||||
| Property, plant and equipment, net of accumulated depreciation and amortization of $ | ||||||||
| Other non-current assets | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued payroll, advertising, and other expenses | ||||||||
| Income taxes payable | ||||||||
| Current notes payable - equipment | ||||||||
| Other current liabilities | ||||||||
| Total current liabilities | ||||||||
| Long-term notes payable - equipment | ||||||||
| Deferred income taxes, net | ||||||||
| Other non-current liabilities | ||||||||
| Total liabilities | ||||||||
| Contingencies and commitments (Note 3) | ||||||||
| Shareholders’ equity: | ||||||||
| Preferred stock, without par value; authorized – shares; issued and outstanding – | ||||||||
| Common stock, $ par value; authorized – shares; issued and outstanding – and shares, respectively | ||||||||
| Capital in excess of par value | ||||||||
| Retained earnings | ||||||||
| Accumulated other comprehensive loss | ( | ) | ( | ) | ||||
| Total shareholders’ equity | ||||||||
| Total liabilities and shareholders’ equity | $ | $ | ||||||
See accompanying notes to Condensed Consolidated Financial Statements.
| 3 of 29 |
Item 1. b.
BRIDGFORD FOODS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except share and per share amounts)
| 12 weeks ended | 36 weeks ended | |||||||||||||||
| July 8, 2022 | July 9, 2021 | July 8, 2022 | July 9, 2021 | |||||||||||||
| Net sales | $ | $ | $ | $ | ||||||||||||
| Cost of products sold | ||||||||||||||||
| Gross margin | ||||||||||||||||
| Selling, general and administrative expenses | ||||||||||||||||
| Gain on sale of property, plant, and equipment | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Operating income (loss) | ( | ) | ( | ) | ||||||||||||
| Other income (expense) | ||||||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Cash surrender value (loss) gain | ( | ) | ( | ) | ||||||||||||
| Total other income (expense) | ( | ) | ( | ) | ( | ) | ||||||||||
| Income (loss) before taxes | ( | ) | ( | ) | ||||||||||||
| Provision for (benefit on) income taxes | ( | ) | ( | ) | ||||||||||||
| Net income (loss) | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
| Basic earnings (loss) per share | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
| Shares used to compute basic earnings (loss) per share | ||||||||||||||||
See accompanying notes to Condensed Consolidated Financial Statements.
| 4 of 29 |
Item 1. c.
BRIDGFORD FOODS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
36 weeks ended July 9, 2021, and July 8, 2022
(unaudited)
(in thousands)
| Shares | Amount | Capital in excess of par value | Retained earnings | Accumulated other comprehensive loss | Total shareholders’ equity | |||||||||||||||||||
| Balance, October 30, 2020 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||||||
| Balance, July 9, 2021 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||
| Shares | Amount | Capital in excess of par value | Retained earnings | Accumulated other comprehensive loss | Total shareholders’ equity | |||||||||||||||||||
| Balance, October 29, 2021 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||
| Net income | - | |||||||||||||||||||||||
| Balance, July 8, 2022 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||
BRIDGFORD FOODS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
12 weeks ended July 9, 2021, and July 8, 2022
(unaudited)
(in thousands)
| Shares | Amount | Capital in excess of par value | Retained earnings | Accumulated other comprehensive loss | Total shareholders’ equity | |||||||||||||||||||
| Balance, April 16, 2021 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||||||
| Balance, July 9, 2021 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||
| Shares | Amount | Capital in excess of par value | Retained earnings | Accumulated other comprehensive loss | Total shareholders’ equity | |||||||||||||||||||
| Balance, April 15, 2022 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||
| Net income | - | |||||||||||||||||||||||
| Balance, July 8, 2022 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||
See accompanying notes to Condensed Consolidated Financial Statements.
| 5 of 29 |
Item 1. d.
BRIDGFORD FOODS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
| 36 weeks ended | ||||||||
| July 8, 2022 | July 9, 2021 | |||||||
| Cash flows from operating activities: | ||||||||
| Net income (loss) | $ | $ | ( | ) | ||||
| Adjustments to reconcile net income (loss) to net cash used in operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Provision for losses on accounts receivable | ||||||||
| Increase in promotional allowances | ||||||||
| Gain on sale of property, plant, and equipment | ( | ) | ( | ) | ||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable, net | ( | ) | ( | ) | ||||
| Inventories, net | ( | ) | ( | ) | ||||
| Prepaid expenses and other current assets | ( | ) | ||||||
| Refundable income taxes | ||||||||
| Other non-current assets | ( | ) | ||||||
| Accounts payable | ( | ) | ||||||
| Accrued payroll, advertising, and other expenses | ||||||||
| Other current liabilities | ( | ) | ||||||
| Income taxes payable | ||||||||
| Other non-current liabilities | ( | ) | ( | ) | ||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| Cash flows from investing activities: | ||||||||
| Proceeds from sale of property, plant, and equipment | ||||||||
| Additions to property, plant, and equipment | ( | ) | ( | ) | ||||
| Net cash provided by (used in) investing activities | ( | ) | ||||||
| Cash flows from financing activities: | ||||||||
| Payment of lease and right of use obligations | ( | ) | ( | ) | ||||
| Proceeds from borrowings under revolving credit facilities | ||||||||
| Repayment of borrowings under revolving credit facilities | ( | ) | ||||||
| Proceeds from bank borrowings | ||||||||
| Repayments of bank borrowings | ( | ) | ( | ) | ||||
| Net cash (used in) provided by financing activities | ( | ) | ||||||
| Net increase (decrease) in cash and cash equivalents and restricted cash | ( | ) | ||||||
| Cash and cash equivalents and restricted cash at beginning of period | ||||||||
| Cash and cash equivalents and restricted cash at end of period | $ | $ | ||||||
| Supplemental disclosure of cash flow information: | ||||||||
| Cash paid for income taxes | $ | $ | ||||||
| Cash paid for interest | $ | $ | ||||||
See accompanying notes to Condensed Consolidated Financial Statements.
| 6 of 29 |
Item 1. e.
BRIDGFORD FOODS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(dollars in thousands)
Note 1 – Summary of Significant Accounting Policies:
The unaudited Condensed Consolidated Financial Statements of Bridgford Foods Corporation (the “Company”, “we”, “our”, “us”) for the twelve and thirty-six weeks ended July 8, 2022 and July 9, 2021 have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X, and include all adjustments considered necessary by management for a fair presentation of the interim periods. This Report should be read in conjunction with the Annual Report on Form 10-K for the fiscal year ended October 29, 2021 (the “Annual Report”). Due to seasonality and other factors, interim results are not necessarily indicative of the results for the full year. Recent accounting pronouncements and their effect on the Company are discussed in Management’s Discussion and Analysis of Financial Condition and Results of Operations in this Report.
We have considered the impact of federal, state, and local government actions related to the COVID-19 pandemic on our Consolidated Financial Statements. The business disruptions associated with the pandemic had a significant negative impact on our Consolidated Financial Statements for the fiscal year ended October 29, 2021, and minimal impact during the twelve and thirty-six weeks ended July 8, 2022. We expect these events to have future business impacts, the extent of which is uncertain and largely subject to whether the severity worsens. These impacts could include but may not be limited to risks and uncertainty related to shifts in demand between sales channels, market volatility, constraints in our supply chain, our ability to operate production facilities and worker availability. These unknowns may subject the Company to future risks related to long-lived asset impairments, increased reserves for uncollectible accounts, price and availability of ingredients and raw materials used in our products and adjustments to reflect the market value of our inventory.
The October 29, 2021, balance sheet amounts within these interim Condensed Consolidated Financial Statements were derived from the audited fiscal year 2021 financial statements included in the Annual Report.
The preparation of Condensed Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported revenues and expenses during the reporting periods. Some of the estimates needed to be made by management include the allowance for doubtful accounts, promotional and returns allowances, inventory reserves, the estimated useful lives of property, plant and equipment, and the valuation allowance for the Company’s deferred tax assets. Actual results could materially differ from these estimates. Amounts estimated related to liabilities for self-insured workers’ compensation, employee healthcare and pension benefits are especially subject to inherent uncertainties and these estimated liabilities may ultimately settle at amounts which vary from our current estimates. Market conditions and the volatility in stock markets may cause significant changes in the measurement of our pension fund liabilities and the performance of our life insurance policies in future periods.
Financial instruments that subject the Company to credit risk consist primarily of cash and cash equivalents, accounts receivable, accounts payable, accrued payroll, and notes payable. The carrying amount of these instruments approximate fair market value due to their short-term maturity or market interest rates. At times, the Company had accounts held with nationally recognized financial institutions in excess of the Federal Deposit Insurance Corporation insurance coverage limit. As of July 8, 2022, the Company did not have a book overdraft. When applicable, book overdrafts are recorded as a liability in accounts payable on the Condensed Consolidated Balance Sheet. The Company has not experienced any losses in these accounts and believes it is not exposed to any significant credit risk with regard to its cash and cash equivalents. The Company grants payment terms to a significant number of customers that are diversified over a wide geographic area. The Company monitors the payment histories of its customers and maintains an allowance for doubtful accounts which is reviewed for adequacy on a quarterly basis. The Company does not require collateral from its customers.
Comprehensive income or loss
Comprehensive income or loss consists of net income and additional minimum pension liability adjustments. There were no differences between net income (loss) and comprehensive income (loss) during the twelve and thirty-six weeks ended July 8, 2022, or July 9, 2021.
Customer Concentration 20% of AR or 10% of Sales
The table below shows customers that accounted for more than 20% of consolidated accounts receivable (“AR”) or 10% of consolidated sales for the thirty-six weeks ended July 8, 2022, and July 9, 2021, respectively.
| Walmart (1) | Dollar General | |||||||||||||||
| Sales | AR | Sales | AR | |||||||||||||
| July 8, 2022 | % | % | % | % | ||||||||||||
| July 9, 2021 | % | % | % | % | ||||||||||||
| (1) |
| 7 of 29 |
The table below shows customers that accounted for more than 20% of consolidated accounts receivable or 10% of consolidated sales for the twelve weeks ended July 8, 2022, and July 9, 2021, respectively.
| Walmart (1) | Dollar General | |||||||||||||||
| Sales | AR | Sales | AR | |||||||||||||
| July 8, 2022 | % | % | % | % | ||||||||||||
| July 9, 2021 | % | % | % | % | ||||||||||||
| (1) |
Revenue recognition
Revenues are recognized in accordance with Accounting Standards Codification (“ASC”) Topic 606 – Contracts with Customers upon passage of title to the customer, typically upon product pick-up, shipment, or delivery to customers. Products are delivered to customers primarily through our own long-haul fleet, common carrier, or through a Company-owned direct store delivery system.
The Company recognizes revenue for the sale of the product at the point in time when our performance obligation has been satisfied and control of the product has transferred to our customer, which generally occurs upon shipment, pickup or delivery to a customer based on terms of the sale. Contracts with customers are typically short-term in nature with completion of a single performance obligation. Product is sold to foodservice, retail, institutional and other distribution channels. Shipping and handling that occurs after the customer has obtained control of the product is recorded as a fulfillment cost rather than an additional performance obligation. Costs paid to third party brokers to obtain contracts are recognized as part of selling expenses. Other sundry items in context of the contract are also recognized as selling expense. Any taxes collected on behalf of the government are excluded from net revenue.
We
record revenue at the transaction price which is measured as the amount of consideration we anticipate receiving in exchange for providing
product to our customers. Revenue is recognized as the net amount estimated to be received after deducting estimated or known amounts
including variable consideration for discounts, trade allowances, consumer incentives, coupons, volume-based incentives, cooperative
advertising, product returns and other such programs. Promotional allowances, including customer incentive and trade promotion activities,
are recorded as a reduction to sales based on amounts estimated being due to customers, based primarily on historical utilization and
redemption rates. Estimates are reviewed regularly until incentives or product returns are realized and the result of any such adjustments
are known. Promotional allowances deducted from sales for the twelve weeks ended July 8, 2022, and July 9, 2021, were $
Leases
Leases
are recognized in accordance with Accounting Standards Codification 842 and Accounting Standards Update (“ASU”) 2016-02
Leases (“ASC 842”) which requires a lessee to recognize assets and liabilities with lease terms of more than
ROU lease assets are recorded within property, plant and equipment, net of accumulated depreciation and amortization. The Company’s leases of long-haul trucks used in its Frozen Food Products segment qualify as finance leases. Finance lease liabilities are recorded under other liabilities, the consolidated balance sheets reflecting both the current and long-term obligation. The classification as a finance or operating lease determines whether the recognition, measurement and presentation of expenses and cash flows are considered operating or financing.
| 8 of 29 |
Subsequent events
Management has evaluated events subsequent to July 8, 2022, through the date that the accompanying Condensed Consolidated Financial Statements were filed with the Securities and Exchange Commission for transactions and other events which may require adjustments of and/or disclosure in such financial statements.
Based on Management’s review, no other material events were identified that require adjustment to the financial statements or additional disclosure except as disclosed in Note 7 - Subsequent Events.
Basic earnings per share are calculated based on the weighted average number of shares outstanding for all periods presented. No stock options, warrants, or other potentially dilutive convertible securities were outstanding as of July 8, 2022, or July 9, 2021.
Note 2 – Inventories, net:
Inventories are comprised of the following at the respective period ends:
| July 8, 2022 | October 29, 2021 | |||||||
| Meat, ingredients, and supplies | $ | $ | ||||||
| Work in progress | ||||||||
| Finished goods | ||||||||
| $ | $ | |||||||
Inventories
are valued at the lower of cost (which approximates actual cost on a first-in, first-out basis) or net realizable value. Inventories
include the cost of raw materials, labor, and manufacturing overhead. We regularly review inventory quantities on hand and write down
any excess or obsolete inventories to net realizable value. An inventory reserve is created when potentially slow-moving or obsolete
inventories are identified in order to reflect the appropriate inventory value. Changes in economic conditions, production requirements,
and lower than expected customer demand could result in additional obsolete or slow-moving inventory that cannot be sold or must be sold
at reduced prices and could result in additional reserve provisions. We reduced our net realizable value reserve by $
Note 3 – Contingencies and Commitments:
The Company leases warehouse and/or office facilities throughout the United States through month-to-month rental agreements. In the case of month-to-month lease or rental agreements with terms of 12 months or less, the Company made an accounting policy election to not recognize lease assets and liabilities and record them on a straight-line basis over the lease term. For further information regarding our lease accounting policy, please refer to Note 1 – Summary of Significant Accounting Policies — Leases.
The
Company performed a detailed analysis and determined that the only indication of a long-term lease in addition to transportation leases
for long-haul trucks was the warehouse lease with Hogshed Ventures, LLC. A right-of-use asset and corresponding liability for warehouse
storage space was recorded for $
This
lease does not provide an implicit rate and we estimated our incremental interest rate to be approximately
| 9 of 29 |
The following is a schedule by years of future minimum lease payments for transportation leases and right-of-use assets:
| Fiscal Year | Financing Obligations | |||
| 2022 | $ | |||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| Later Years | ||||
| Total Minimum Lease Payments(a) | $ | |||
| Less: Amount representing executory costs | ( | ) | ||
| Less: Amount representing interest(b) | ( | ) | ||
| Present value of future minimum lease payments(c) | $ | |||
| (a) | |
| (b) | |
| (c) |
The Company is involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters is not expected to have a material adverse effect on the Company’s consolidated financial position or results of operations.
Most flour purchases are made at market price with contracts. However, the Company may purchase bulk flour at current market prices under short-term (30 - 120 days) fixed price contracts during the normal course of business. Under these arrangements, the Company is obligated to purchase specific quantities at fixed prices, within the specified contract period. These contracts provide for potential price increases if agreed quantities are not purchased within the specified contract period. The contracts are not material. These contracts are typically settled within a month’s time and no significant contracts remain open at the close of the quarterly or annual reporting period. No significant contracts remained unfulfilled on July 8, 2022. The Company does not participate in the commodity futures market or hedging to limit commodity exposure.
Note 4 – Segment Information:
The
Company has
We evaluate each segment’s performance based on revenues and operating income. Selling, general and administrative (“SGA”) expenses include corporate accounting, information systems, human resource management and marketing, which are managed at the corporate level. These activities are allocated to each operating segment based on revenues and/or actual usage. Assets managed at the corporate level are not attributable to each operating segment and thus have been included as “other” in the accompanying segment information.
| 10 of 29 |
The following segment information is presented for the twelve weeks ended July 8, 2022, and July 9, 2021, respectively.
| Segment Information | ||||||||||||||||
| Twelve weeks Ended July 8, 2022 | Frozen Food Products | Snack Food Products | Other | Totals | ||||||||||||
| Sales | $ | $ | $ | $ | ||||||||||||
| Cost of products sold | ||||||||||||||||
| Gross margin | ||||||||||||||||
| SGA | ||||||||||||||||
| Gain on sale of property, plant, and equipment | ( | ) | ( | ) | ( | ) | ||||||||||
| Operating (loss) income | ( | ) | ||||||||||||||
| Total assets | $ | $ | $ | $ | ||||||||||||
| Additions to PPE | $ | $ | $ | $ | ||||||||||||
| Twelve weeks Ended July 9, 2021 | Frozen Food Products | Snack Food Products | Other | Totals | ||||||||||||
| Sales | $ | $ | $ | $ | ||||||||||||
| Cost of products sold | ||||||||||||||||
| Gross margin | ||||||||||||||||
| SGA | ||||||||||||||||
| Gain on sale of property, plant, and equipment | ( | ) | ( | ) | ( | ) | ||||||||||
| Operating loss | ( | ) | ( | ) | ( | ) | ||||||||||
| Total assets | $ | $ | $ | $ | ||||||||||||
| Additions to PPE | $ | $ | $ | $ | ||||||||||||
The following segment information is presented for the thirty-six weeks ended July 8, 2022, and July 9, 2021, respectively.
| Thirty-six weeks Ended July 8, 2022 | Frozen Food Products | Snack Food Products | Other | Totals | ||||||||||||
| Sales | $ | $ | $ | $ | ||||||||||||
| Cost of products sold | ||||||||||||||||
| Gross margin | ||||||||||||||||
| SGA | ||||||||||||||||
| Gain on sale of property, plant, and equipment | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Operating (loss) income | ( | ) | ||||||||||||||
| Total assets | $ | $ | $ | $ | ||||||||||||
| Additions to PPE | $ | $ | $ | $ | ||||||||||||
| Thirty-six weeks Ended July 9, 2021 | Frozen Food Products | Snack Food Products | Other | Totals | ||||||||||||
| Sales | $ | $ | $ | $ | ||||||||||||
| Cost of products sold | ||||||||||||||||
| Gross margin | ||||||||||||||||
| SGA | ||||||||||||||||
| Gain on sale of property, plant, and equipment | ( | ) | ( | ) | ( | ) | ||||||||||
| Operating loss | ( | ) | ( | ) | ( | ) | ||||||||||
| Total assets | $ | $ | $ | $ | ||||||||||||
| Additions to PPE | $ | $ | $ | $ | ||||||||||||
| 11 of 29 |
The following information further disaggregates our sales to customers by major distribution channel and customer type for the twelve weeks and thirty-six weeks ended July 8, 2022, and July 9, 2021, respectively.
Twelve weeks Ended July 8, 2022
| Distribution Channel | Retail (a) | Foodservice (b) | Totals | |||||||||
| Direct store delivery | $ | $ | $ | |||||||||
| Direct customer warehouse | ||||||||||||
| Total Snack Food Products | ||||||||||||
| Distributors | ||||||||||||
| Total Frozen Food Products | ||||||||||||
| Totals | $ | $ | $ | |||||||||
Twelve weeks Ended July 9, 2021
| Distribution Channel | Retail (a) | Foodservice (b) | Totals | |||||||||
| Direct store delivery | $ | $ | $ | |||||||||
| Direct customer warehouse | ||||||||||||
| Total Snack Food Products | ||||||||||||
| Distributors | ||||||||||||
| Total Frozen Food Products | ||||||||||||
| Totals | $ | $ | $ | |||||||||
| (a) | |
| (b) |
Thirty-six weeks Ended July 8, 2022
Distribution Channel | Retail (a) | Foodservice (b) | Totals | |||||||||
| Direct store delivery | $ | $ | $ | |||||||||
| Direct customer warehouse | ||||||||||||
| Total Snack Food Products | ||||||||||||
| Distributors | ||||||||||||
| Total Frozen Food Products | ||||||||||||
| Totals | $ | $ | $ | |||||||||
Thirty-six weeks Ended July 9, 2021
Distribution Channel | Retail (a) | Foodservice (b) | Totals | |||||||||
| Direct store delivery | $ | $ | $ | |||||||||
| Direct customer warehouse | ||||||||||||
| Total Snack Food Products | ||||||||||||
| Distributors | ||||||||||||
| Total Frozen Food Products | ||||||||||||
| Totals | $ | $ | $ | |||||||||
| (a) | |
| (b) |
| 12 of 29 |
Note 5 – Income Taxes:
The
Company’s effective tax rate was
As
of July 8, 2022, the Company has a federal NOL carry forward of approximately $
Our federal income tax returns are open to audit under the statute of limitations for the fiscal years 2018 through 2020. We are subject to income tax in California and various other state taxing jurisdictions. Our state income tax returns are open to audit under the statute of limitations for the fiscal years 2017 through 2020.
Note 6 – Equipment Notes Payable and Financial Arrangements:
Revolving Credit Facility
We
maintain a revolving line of credit with Wells Fargo Bank, N.A. that extends to
Equipment Notes Payable
On
December 26, 2018, we entered into a master collateral loan and security agreement with Wells Fargo Bank, N.A. (the “Original Wells
Fargo Loan Agreement”) for up to $
Bridge Loan
On
August 30, 2021, we entered into a loan commitment note for a bridge loan of up to $
| 13 of 29 |
The following table reflects major components of our line of credit and borrowing agreements as of July 8, 2022, and October 29, 2021, respectively.
| July 8, 2022 | October 29, 2021 | |||||||
| Revolving credit facility | $ | $ | ||||||
| Equipment notes: | ||||||||
| SOFR plus | ||||||||
| Total debt | ||||||||
| Less current debt | ( | ) | ( | ) | ||||
| Total long-term debt | $ | $ | ||||||
Loan Covenants
The Wells Fargo Loan Agreements collectively contain various affirmative and negative covenants that limit the use of funds and define other provisions of the loan. The main financial covenants are listed below:
| ● | Total Liabilities divided by Tangible Net Worth not greater than 2.5 to 1.0 at each fiscal quarter, | |
| ● | Quick Ratio not less than 0.85 to 1.0 at each fiscal quarter end, | |
| ● | Net Income After Taxes not less than $500 on a quarterly basis, and | |
| ● | Capital
Expenditures less than $ |
As of July 8, 2022, the Company was in compliance with all covenants under the Wells Fargo Loan Agreements.
Note 7 – Subsequent Events:
On
July 19, 2022, the Company received a $
Note 8 – Gain on Sale of Property, Plant and Equipment:
On
June 1, 2022, Bridgford Food Processing Corporation and CRG Acquisition, LLC (“CRG”), completed the real estate
transaction (the “Sale Transaction”) set forth in the CRG Purchase Agreement. Pursuant to the terms of the CRG Purchase Agreement, CRG acquired a parcel of land
from the Company including an approximate
In
connection with the closing of the Sale Transaction, the Company paid an aggregate of $
| 14 of 29 |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
(dollars in thousands)
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements included within in this Report, and the information and documents incorporated by reference with this Report, constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements are intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact included in this Report or incorporated by reference into this Report are forward-looking statements. These statements include, among other things, any predictions of earnings, revenues, expenses or other financial items; plans or expectations with respect to our business strategy; statements concerning industry trends; statements regarding anticipated demand for our products, or the products of our competitors; statements relating to manufacturing forecasts; statements relating to forecasts of our liquidity position or available cash resources; statements regarding the anticipated impact of the global novel coronavirus (“COVID-19”) pandemic; statements regarding operational challenges, including as a result of global supply chain disruptions and labor shortages; statements regarding inflationary pressures and the resulting impact on our results of operations; statements regarding new regulations related to federal income tax and the impact on our financial statements and cash flow; statements regarding the impact of the adoption of recent accounting pronouncements on our business; and statements relating to the assumptions underlying any of the foregoing. Throughout this Report, we have attempted to identify forward-looking statements by using words such as “may,” “believe,” “will,” “could,” “project,” “anticipate,” “expect,” “estimate,” “should,” “continue,” “potential,” “plan,” “forecasts,” “goal,” “seek,” “intend,” other forms of these words or similar words or expressions or the negative thereof (although not all forward-looking statements contain these words).
Such forward-looking statements involve known and unknown risks, uncertainties, and other factors which may cause our actual results, performance, or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the following: general economic and business conditions; the impact of the COVID-19 pandemic on our production facilities, supply chain, consumer demand, and cost of products sold, the impact of competitive products and pricing; success of operating initiatives; development and operating costs; advertising and promotional efforts; adverse publicity; acceptance of new product offerings; consumer trial and frequency; changes in business strategy or development plans; availability, terms and deployment of capital; availability of qualified personnel; commodity, labor, and employee benefit costs; changes in, or failure to comply with, government regulations; weather conditions; construction schedules; and other factors referenced in this Report as well as in our other filings with the Securities and Exchange Commission (the “SEC”). In addition, actual results may differ as a result of additional risks and uncertainties of which we are currently unaware or which we do not currently view as material to our business. We have based our forward-looking statements on our current expectations and projections about trends affecting our business and industry and other future events. Although we do not make forward-looking statements unless we believe we have a reasonable basis for doing so, we cannot guarantee their accuracy. Assumptions relating to budgeting, marketing, and other management decisions are subjective in many respects and thus susceptible to interpretations and periodic revisions based on actual experience and business developments, the impact of which may cause us to alter our marketing, capital expenditure or other budgets, which may in turn affect our business, financial position, results of operations and cash flows. The reader is therefore cautioned not to place undue reliance on forward-looking statements contained herein and to consider other risks detailed more fully in our Annual Report on Form 10-K for the fiscal year ended October 29, 2021 (the “Annual Report”) as well as our other filings with the SEC with the understanding that our future results may be materially different from what we currently expect. The forward-looking statements we make speak only as of the date on which they are made. We expressly disclaim any intent or obligation to update any forward-looking statements after the date hereof to conform such statements to actual results or to changes in our opinions or expectations. If we do update or correct any forward-looking statements, readers should not conclude that we will make additional updates or corrections.
COVID-19
We are monitoring and responding to the evolving nature of state and local government actions related to the COVID-19 pandemic and its impact on each of our production plant locations and our customer base. We coordinate with our local managers for the primary purpose of maintaining the health and safety of our team members, ensuring our ability to operate our processing facilities, and maintaining the liquidity of our business. We continue to experience multiple challenges related to the pandemic. These challenges may continue to increase our operating costs and negatively impact our sales volumes.
During the third quarter of fiscal year 2022, the Frozen Food Products segment has continued to see a lessening of pandemic related restrictions on food service venues. In our Frozen Food Products segment, the recent sales volume increases in foodservice have been sufficient to offset the losses in retail and as a result, we experienced increased unit sales volume during fiscal year 2022 to date in this segment. Our Snack Food Products segment has experienced continued commodity cost increases caused in part by supply and demand constraints related to reopening the economy from pandemic restrictions. The cost of significant meat commodities increased approximately $2,186 and the cost of purchased flour increased approximately $508 during the third twelve weeks of fiscal year 2022 compared to the same period in fiscal year 2021.
| 15 of 29 |
● Team Members – The health and safety of our team members is our top priority. To protect our team members, we have implemented safety measures recommended by the Centers for Disease Control and Prevention and the Occupational Safety and Health Administration in our facilities and have implemented social distancing, temperature checks of team members, increased efforts to deep clean and sanitize facilities, the use of protective face coverings in certain environments, and making protective face coverings and other protective equipment available to team members. We encourage team members who feel sick to stay at home and provide relaxed attendance policies in some instances. We continue to explore and implement additional ways to promote social distancing in our production facilities by creating additional breakroom space and allowing extra time between shifts to reduce interaction of team members, as well as erecting dividers between workstations or increasing the space between workers on the production floor.
● Customers and Production – The most significant impact from business shutdowns relates to channel shifts and lower production in our Frozen Food Products segment. We are committed to doing our best to ensure the continuity of our business and the availability of our products to customers. Since the second quarter of fiscal 2021, we have continued to see a shift in demand from our retail to our foodservice sales channels as schools and in-dining restaurants reopened across the country. Our production capabilities, including our large scale and geographic proximities, allow us to adapt some of our facilities to the changing demand by shifting certain amounts of production from retail to foodservice. In addition, our production facilities have experienced varying levels of production impacts, including reduced volumes and worker absenteeism, and we may continue to experience these impacts.
● Supply Chain – Our supply chain has stayed largely intact. Although we have experienced some minor disruptions, these events have not significantly impacted our production to date. We have experienced volatility in commodity inputs, in part due to impacts caused by COVID-19 related business disruptions, and we expect this volatility to continue, which may impact our future input costs. Commodity costs increased approximately $13,001 during the first thirty-six weeks of fiscal year 2022 compared to the same period in fiscal year 2021.
● Insurance and CARES Act – Although we maintain insurance policies for various risks, we believe most COVID-19 impacts will not be covered by these policies. On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) was enacted in response to the COVID-19 pandemic. The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferral of the employer portion of social security payments, and expanded income tax net operating loss carryback provisions. While we continue to examine the potential impacts of these actions, we anticipate new regulations related to federal income tax will have a significant impact on our financial statements and cash flow. Late in the second quarter of fiscal 2020 we began implementing the deferral of the employer portion of social security payments and intend to continue this deferral for the duration of its availability which will have a favorable impact on short-term liquidity. The remaining deferral amount as of July 8, 2022, is approximately $758 due on December 31, 2022.
● Liquidity – Operations used $4,988 in operating cash flows during the thirty-six-weeks ended July 8, 2022. We received $55,388 in net proceeds on June 1, 2022, from the closing of the sale of real property located at 170 N. Green Street in Chicago pursuant to the terms of the Purchase and Sale Agreement dated March 16, 2020, as amended, between Bridgford Food Processing Corporation and CRG Acquisition, LLC (“the CRG Purchase Agreement”). On December 1, 2021, we expanded the maximum borrowing under our revolving line of credit with Wells Fargo Bank, N.A. to $25,000 from $15,000. The credit limit returned to $15,000 on June 15, 2022 for the balance of the term to March 1, 2023. The line of credit was paid off on June 7, 2022, using $18,000 in proceeds from the sale of 170 N. Green Street. As of July 8, 2022, we had approximately $59,958 of net working capital and $15,000 available under our revolving line of credit with Wells Fargo Bank, N.A. We entered into a bridge loan with Wells Fargo Bank, N.A. on August 30, 2021, for up to $25,000 of which we used $18,653 to pay off and prepay the existing equipment loans as they came out of the lock out period and could be prepaid. We prepaid and terminated the bridge loan on June 2, 2022, using $18,653 in proceeds from the sale of 170 N. Green Street. As of July 8, 2022, we have $995 of current debt remaining on equipment loans. Refer to Note 6 – Equipment Notes Payable and Financial Arrangements of the Notes to the Condensed Consolidated Financial Statements included within this Report for further information. Commodity price volatility or increases could adversely impact our business, financial condition including liquidity, and results of operations. Despite higher commodity costs, we may not be able to increase our product prices in a timely manner or sufficiently to offset increased commodity costs due to consumer price sensitivity, pricing in relation to competitors and the reluctance of retailers to accept the price increase. We received $2,205 from a life insurance receivable during the second quarter of fiscal 2022. Higher product prices could potentially lower demand for our product and decrease volume. Management believes there are various options available to generate additional liquidity to repay debt or fund operations such as mortgaging real estate, should that be necessary. Our ability to increase liquidity will depend upon, among other things, our business plans, performance of operating divisions, economic conditions of capital markets, or circumstances related to the COVID-19 global pandemic. If we are unable to increase liquidity through mortgaging real estate, or generate positive cash flow necessary to fund operations, we may not be able to compete successfully, which could negatively impact our business, operations, and financial condition. Combined with the cash expected to be generated from the Company’s operations and income tax refunds due of $5,524 of which $5,117 in income tax refunds were received on July 19, 2022, we anticipate that we will maintain sufficient liquidity to operate our business for at least the next twelve months. We will continue to monitor the impact of COVID-19 on our liquidity and, if necessary, take action to preserve liquidity and ensure that our business can operate during these uncertain times.
| 16 of 29 |
Critical Accounting Policies and Management Estimates
The preparation of Condensed Consolidated Financial Statements in conformity with generally accepted accounting principles in the United States of America requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported revenues and expenses during the respective reporting periods. Some of the estimates needed to be made by management include the allowance for doubtful accounts, promotional and returns allowances, inventory reserves, the estimated useful lives of property and equipment, and the valuation allowance for the Company’s deferred tax assets. Actual results could materially differ from these estimates. We determine the amounts to record based on historical experience and various other assumptions that we view as reasonable under the circumstances and consider all relevant available information. The results of this analysis form the basis for our conclusion as to the value of assets and liabilities that are not readily available from other independent sources. Amounts estimated related to liabilities for self-insured workers’ compensation, employee healthcare and pension benefits are especially subject to inherent uncertainties and these estimated liabilities may ultimately settle at amounts which vary from our current estimates.
Current accounting principles require that our pension benefit obligation be measured using an internal rate of return (“IRR”) analysis to be included in the discount rate selection process. The IRR calculation for the Retirement Plan for Employees of Bridgford Foods Corporation is measured annually and based on the Citigroup Pension Discount Rate. The Citigroup Pension Discount Rate as of July 31, 2022, was 4.13% as compared to 2.77% as of October 31, 2021. The discount rate applied can significantly affect the value of the projected benefit obligation as well as the net periodic benefit cost.
Our credit risk is diversified across a broad range of customers and geographic regions. Losses due to credit risk have recently been immaterial. The provision for doubtful accounts receivable is based on historical trends and current collection risk. We have significant receivables with a couple of large, well-known customers which, although historically secure, could be subject to material risk should these customers’ operations suddenly deteriorate. We monitor these customers closely to minimize the risk of loss.
Customer Concentration 20% of AR or 10% of Sales
The table below shows customers that accounted for more than 20% of consolidated accounts receivable (“AR”) or 10% of consolidated sales for the thirty-six weeks ended July 8, 2022, and July 9, 2021, respectively.
| Walmart (1) | Dollar General | |||||||||||||||
| Sales | AR | Sales | AR | |||||||||||||
| July 8, 2022 | 30.8 | % | 19.8 | % | 18.2 | % | 32.3 | % | ||||||||
| July 9, 2021 | 37.3 | % | 5.7 | % | 14.7 | % | 45.7 | % | ||||||||
| (1) | Walmart accounts receivable represented a higher percentage of sales as of July 8, 2022, due to terminating the accelerated payments on outstanding accounts receivable on July 1, 2022. |
The table below shows customers that accounted for more than 20% of consolidated accounts receivable or 10% of consolidated sales for the twelve weeks ended July 8, 2022, and July 9, 2021, respectively.
| Walmart (1) | Dollar General | |||||||||||||||
| Sales | AR | Sales | AR | |||||||||||||
| July 8, 2022 | 29.4 | % | 19.8 | % | 19.2 | % | 32.3 | % | ||||||||
| July 9, 2021 | 36.7 | % | 5.7 | % | 16.1 | % | 45.7 | % | ||||||||
| (1) | Walmart accounts receivable represented a higher percentage of sales as of July 8, 2022, due to terminating the accelerated payments on outstanding accounts receivable on July 1, 2022. |
Revenues are recognized in accordance with ASC 606 – Contracts with Customers upon passage of title to the customer, typically upon product pick-up, shipment, or delivery to customers. Products are delivered to customers primarily through our own long-haul fleet or through a Company owned direct store delivery system.
We record the cash surrender or contract value for life insurance policies as an adjustment of premiums paid in determining the expense or income to be recognized under the contract for the period.
We provide tax reserves for federal, state, local and international exposures relating to audit results, tax planning initiatives and compliance responsibilities. The development of these reserves requires judgments about tax issues, potential outcomes, and timing, and is a subjective estimate. Although the outcome of these tax audits is uncertain, in management’s opinion adequate provisions for income taxes have been made for potential liabilities, if any, resulting from these reviews. Actual outcomes may differ materially from these estimates.
| 17 of 29 |
We assess the recoverability of our long-lived assets on a quarterly basis or whenever adverse events or changes in circumstances or business climate indicate that expected undiscounted future cash flows related to such long-lived assets may not be sufficient to support the net book value of such assets. If undiscounted cash flows are not sufficient to support the recorded assets, we recognize an impairment to reduce the carrying value of the applicable long-lived assets to their estimated fair value.
We participate in “multiemployer” pension plans administered by labor unions on behalf of their employees. We pay monthly contributions to union trust funds, a portion of which is used to fund pension benefit obligations to plan participants. The contribution amount may change depending upon the ability of participating companies to fund these pension liabilities as well as the actual and expected returns on pension plan assets. Should we withdraw from the union and cease participation in a union plan, federal law could impose a penalty for additional contributions to the plan. The penalty would be recorded as an expense in the consolidated statement of operations. The ultimate amount of the withdrawal liability is dependent upon several factors including the funded status of the plan and contributions made by other participating companies.
We are subject to the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act (collectively, the “PPACA”). Requirements of the law include the removal of the lifetime limits on active and retiree medical coverage, expanding dependent coverage to age 26 and the elimination of pre-existing conditions that may impact other postretirement benefits costs. The PPACA law also includes a potential excise tax on the value of benefits that exceed a pre-defined limit. Fortunately, this potential tax has been indefinitely deferred and we do not see significant financial exposure from the so called “Cadillac Tax”. Finally, the PPACA includes provisions that require employers to offer health benefits to all full-time employees (defined as 30 hours per week). The health coverage must meet minimum standards for the actuarial value of the benefits offered and employee affordability. We believe that the current administration seems more likely to enhance the scope and coverage associated with PPACA than to repeal or significantly change this law. The recent legislative packages related to pandemic relief included some minor provisions that will impact health benefits in the future. These changes most prominently focus on the impact of surprise balance bills from out-of-network providers. When these changes become law in 2022, the Bridgford Foods benefit plan will be modified accordingly. At this point in time, we believe that our current plans meet the existing requirements. We will continue to assess the accounting implications of the PPACA and its impact on our financial position and results of operations as more legislative and interpretive guidance becomes available. The potential future effects and cost of complying with the provisions of the PPACA are not determinable at this time.
Overview of Reporting Segments
We operate in two business segments – the processing and distribution of frozen food products (the Frozen Food Products segment), and the processing and distribution of snack food products (the Snack Food Products segment). For information regarding the separate financial performance of the business segments refer to Note 4 — Segment Information of the Notes to the Condensed Consolidated Financial Statements included in this Report. We manufacture and distribute an extensive line of food products, including biscuits, bread dough items, roll dough items, dry sausage products and beef jerky.
Frozen Food Products Segment
Our Frozen Food Products segment primarily manufactures and distributes biscuits, bread dough items, roll dough items and shelf stable sandwiches. All items within this segment are considered similar products and have been aggregated at this level. Our frozen food business covers the United States. Products produced by the Frozen Food Products segment are generally supplied to food service and retail distributors who take title to the product upon shipment receipt through company leased long-haul vehicles. In addition to regional sales managers, we maintain a network of independent food service and retail brokers covering most of the United States. Brokers are compensated on a commission basis. We believe that our broker relationships, in close cooperation with our regional sales managers, are a valuable asset providing significant new product and customer opportunities. Regional sales managers perform several significant functions for us, including identifying and developing new business opportunities and providing customer service and support to our distributors and end purchasers through the effective use of our broker network.
Snack Food Products Segment
Our Snack Food Products segment primarily distributes products manufactured by us. All items within this segment are considered similar products and have been aggregated at this level. The dry sausage division includes products such as jerky, meat snacks, sausage, and pepperoni products. Our Snack Food Products segment sells approximately 170 different items through a direct store delivery network serving approximately 19,000 supermarkets, mass merchandise and convenience retail stores located in 49 states. These customers are comprised of large retail chains and smaller “independent” operators.
Products produced or distributed by the Snack Food Products segment are supplied to customers through either direct-store-delivery or direct delivery to customer warehouses. Product delivered using the Company-owned fleet direct to the store is considered a direct-store-delivery. In this case, we provide the service of setting up and maintaining the display and stocking our products. Products delivered to customer warehouses are distributed to the retail store and stocked by the customer where it is then resold to the end consumer.
| 18 of 29 |
Results of Operations for the Twelve Weeks Ended July 8, 2022, and July 9, 2021
Net Sales-Consolidated
Net sales increased by $2,981 (5.3%) to $59,519 in the third twelve-week period of the 2022 fiscal year compared to the same twelve-week period in fiscal year 2021. The changes in net sales were comprised as follows:
| Impact on Net Sales-Consolidated | % | $ | ||||||
| Selling price per pound | 10.8 | 6,505 | ||||||
| Unit sales volume in pounds | -4.8 | (2,904 | ) | |||||
| Returns activity | -0.3 | (186 | ) | |||||
| Promotional activity | -0.4 | (434 | ) | |||||
| Increase in net sales | 5.3 | 2,981 | ||||||
Net Sales-Frozen Food Products Segment
Net sales in the Frozen Food Products segment increased by $3,392 (40.8%) to $11,713 in the third twelve-week period of the 2022 fiscal year compared to the same twelve-week period in fiscal year 2021. The changes in net sales were comprised as follows:
| Impact on Net Sales-Frozen Food Products | % | $ | ||||||
| Selling price per pound | 10.1 | 934 | ||||||
| Unit sales volume in pounds | 33.3 | 3,070 | ||||||
| Returns activity | 0.6 | 47 | ||||||
| Promotional activity | -3.2 | (659 | ) | |||||
| Increase in net sales | 40.8 | 3,392 | ||||||
The increase in net sales for the twelve-week period ended July 8, 2022, primarily relates to higher unit sales volume in pounds due to the ongoing reopening of the economy from COVID-19 pandemic related restrictions and to a lesser extent higher selling prices per pound implemented during July 2021 and May 2022. Other institutional Frozen Food Products sales, including sheet dough and rolls, increased 41% by volume and retail sales volume decreased by 3%. Demand is gradually returning in the foodservice sales channel as schools and in-dining restaurants are starting to reopen across the country after experiencing closures in response to the COVID-19 pandemic. Returns activity decreased compared to the same twelve-week period in the 2021 fiscal year. Promotional activity was higher as a percentage of sales.
Net Sales-Snack Food Products Segment
Net sales in the Snack Food Products segment decreased by $411 (0.9%) to $47,806 in the third twelve-week period of the 2022 fiscal year compared to the same twelve-week period in fiscal year 2021. The changes in net sales were comprised as follows:
| Impact on Net Sales-Snack Food Products | % | $ | ||||||
| Selling price per pound | 11.0 | 5,571 | ||||||
| Unit sales volume in pounds | -11.8 | (5,974 | ) | |||||
| Returns activity | -0.5 | (233 | ) | |||||
| Promotional activity | 0.4 | 225 | ||||||
| Decrease in net sales | -0.9 | (411 | ) | |||||
Net sales of Snack Food Products decreased partially due to lower unit sales volume in pounds through our direct store delivery distribution channel partially offset by higher selling prices per pound during the third quarter of fiscal year 2022. We believe demand decreased primarily due to inflationary pressures on consumer spending habits. The weighted average selling price per pound increased compared to the same twelve-week period in the prior fiscal year due to selling price increases and reductions in packaging size. Returns activity was higher compared to the same twelve-week period in the 2021 fiscal year. Promotional offers decreased as a percentage of sales due to higher sales to high-volume, low-promotion customers.
Cost of Products Sold and Gross Margin-Consolidated
Cost of products sold decreased by $2,029 (4.6%) to $42,498 in the third twelve-week period of the 2022 fiscal year compared to the same twelve-week period in fiscal year 2021. The gross margin increased from 21.2% to 28.6% during the third twelve-weeks of fiscal year 2022.
| Change in Cost of Products Sold by Segment | $ | % | Commodity $ Increase | |||||||||
| Frozen Food Products Segment | 2,894 | 6.5 | 508 | |||||||||
| Snack Food Products Segment | (4,923 | ) | -11.1 | 2,186 | ||||||||
| Total | (2,029 | ) | -4.6 | 2,694 | ||||||||
| 19 of 29 |
Cost of Products Sold-Frozen Food Products Segment
Cost of products sold in the Frozen Food Products segment increased by $2,894 (49.4%) to $8,752 in the third twelve-week period of the 2022 fiscal year compared to the same twelve-week period in fiscal year 2021. The cost of purchased flour increased approximately $508 in the third twelve-week period of fiscal year 2022 compared to the same twelve-week period in fiscal year 2021. Increased unit sales volume and gross overhead including hourly wages and benefits has increased as a result of labor shortages and continued upward pressures on wages as a result of inflation. In our Frozen Food Products segment, the volume increases in foodservice were not enough to mitigate an increase in overhead per case of product.
Cost of Products Sold-Snack Food Products Segment
Cost of products sold in the Snack Food Products segment decreased by $4,923 (12.7%) to $33,746 in the third twelve-week period of the 2022 fiscal year compared to the same twelve-week period in fiscal year 2021 due to lower cost for production materials and lower sales volume in our direct store delivery distribution channel. The cost of significant meat commodities increased approximately $2,186 in the third twelve-week period of fiscal year 2022 compared to the same period in fiscal year 2021. We reduced our net realizable value reserve of $55 during the twelve weeks ended July 8, 2022, to recognize inventory sold through on products already reserved in inventory as of year-end October 29, 2021. We maintain a net realizable reserve of $139 on products as of July 8, 2022, after determining that the market value on some meat products could not cover the costs associated with completion and sale of the product.
Selling, General and Administrative Expenses-Consolidated
Selling, general and administrative expenses (“SGA”) increased by $1,076 (7.6%) to $15,220 in the third twelve-week period of fiscal year 2022 compared to the same twelve-week period in the prior fiscal year. The table below summarizes the significant expense increases (decreases) included in this category:
| 12 Weeks Ended | Expense | |||||||||||
| July 8, 2022 | July 9, 2021 | Increase (Decrease) | ||||||||||
| Wages and bonus | $ | 6,245 | $ | 5,762 | $ | 483 | ||||||
| Product advertising | 2,488 | 2,210 | 278 | |||||||||
| Fuel | 666 | 400 | 266 | |||||||||
| Pension (income) expense | (71 | ) | 191 | (262 | ) | |||||||
| Provision for bad debt | 111 | (50 | ) | 161 | ||||||||
| Other SGA | 5,781 | 5,631 | 150 | |||||||||
| Total - SGA | $ | 15,220 | $ | 14,144 | $ | 1,076 | ||||||
Higher sales commissions resulted in higher wages and bonus expenses in the third twelve weeks of the 2022 fiscal year compared to the same period in the prior year. Costs for product advertising increased mainly as a result of higher payments under brand licensing agreements in the Snack Food Products segment during the third twelve-week period of fiscal 2022. The increase in fuel expense was driven by per gallon fuel price increases compared to the prior year as a result of higher cost trends in petroleum markets. The decrease in pension expense was a result of an increase in pension plan assets caused by performance of the underlying markets that support them as well as higher pension discount rates resulting in lower liabilities. The increase in the provision for bad debt expense was mainly the result of estimated losses on older balances. None of the changes individually or as a group of expenses in “Other SGA” were significant enough to merit separate disclosure. The major components comprising the increase of “Other SGA” expenses were higher storage fees, travel expenses, utilities, vehicle repairs and other taxes.
Selling, General and Administrative Expenses-Frozen Food Products Segment
SGA expenses in the Frozen Food Products segment increased by $769 (28.7%) to $3,451 in the third twelve-week period of fiscal year 2022 compared to the same twelve-week period in the prior fiscal year. The overall increase in SGA expenses was due to higher wages and bonuses, broker commission costs and fuel, partially offset by lower pension expense.
Selling, General and Administrative Expenses-Snack Food Products Segment
SGA expenses in the Snack Food Products segment increased by $307 (2.7%) to $11,769 in the third twelve-week period of fiscal year 2022 compared to the same twelve-week period in the prior fiscal year. Most of the increase was due to higher wages and bonuses, fuel, product advertising, increased fees paid under brand licensing agreements and higher fleet vehicle repairs and maintenance partially offset by lower pension expense.
| 20 of 29 |
Income Taxes-Consolidated
Income tax for the twelve weeks ended July 8, 2022, and July 9, 2021, respectively, was as follows:
| July 8, 2022 | July 9, 2021 | |||||||
| Provision for income taxes | $ | 16,886 | $ | (527 | ) | |||
| Effective tax rate | 29.0 | % | 27.2 | % | ||||
We recorded a provision for income taxes of $16,886 for the twelve-week period ended July 8, 2022, related to federal and state taxes, based on the Company’s expected annual effective tax rate. The effective tax rate for the third quarter of fiscal 2022 reflects the impact of $16,427 of tax expense related to tax on the gain on the sale of a land parcel in Chicago, Illinois, discussed in Note 5. – Income Taxes of the Notes to the Condensed Consolidated Financial Statements included in this Report. The effective income tax rate differed from the applicable mixed statutory rate of approximately 26.4% due to non-deductible meals and entertainment, non-taxable gains and losses on life insurance policies, and state income taxes.
Results of Operations for the Thirty-Six Weeks Ended July 8, 2022, and July 9, 2021
Net Sales-Consolidated
Net sales increased by $21,883 (13.5%) to $183,591 in the thirty-six-week period ended July 8, 2022, compared to the same period in fiscal year 2021. The changes in net sales were comprised as follows:
| Impact on Net Sales-Consolidated | % | $ | ||||||
| Selling price per pound | 11.8 | 20,425 | ||||||
| Unit sales volume in pounds | 2.1 | 3,590 | ||||||
| Returns activity | -0.2 | (542 | ) | |||||
| Promotional activity | -0.2 | (1,590 | ) | |||||
| Increase in net sales | 13.5 | 21,883 | ||||||
Net Sales-Frozen Food Products Segment
Net sales in the Frozen Food Products segment increased by $10,118 (38.3%) to $36,556 in the thirty-six-week period ended July 8, 2022, compared to the same thirty-six-week period in fiscal year 2021. The changes in net sales were comprised as follows:
| Impact on Net Sales-Frozen Food Products | % | $ | ||||||
| Selling price per pound | 8.0 | 2,369 | ||||||
| Unit sales volume in pounds | 31.4 | 9,338 | ||||||
| Returns activity | 0.2 | 44 | ||||||
| Promotional activity | -1.3 | (1,633 | ) | |||||
| Increase in net sales | 38.3 | 10,118 | ||||||
The increase in net sales for the thirty-six-week period ended July 8, 2022, primarily relates to higher unit sales volume in pounds coupled with a higher selling price per pound. The increase in net sales was primarily driven by a significant increase in volume to institutional customers and an increase in selling prices due to price increases implemented during the fourth quarter of fiscal 2021 and second quarter of fiscal 2022. Other institutional Frozen Food Products sales, including sheet dough and rolls, increased 48% by volume and retail sales volume decreased 4%. Demand has shifted from retail to foodservice sales channels as schools and in-dining restaurants have started to reopen in response to the lifting of restrictions caused by the COVID-19 pandemic. Returns activity decreased compared to the same thirty-six-week period in the 2021 fiscal year. Promotional activity was higher as a percentage of sales due to increased sales to high-promotion customers.
Net Sales-Snack Food Products Segment
Net sales in the Snack Food Products segment increased by $11,765 (8.7%) to $147,035 in the thirty-six-week period ended July 8, 2022, compared to the same thirty-six-week period in fiscal year 2021. The changes in net sales were comprised as follows:
| Impact on Net Sales-Snack Food Products | % | $ | ||||||
| Selling price per pound | 12.6 | 18,055 | ||||||
| Unit sales volume in pounds | -4.0 | (5,748 | ) | |||||
| Returns activity | -0.3 | (587 | ) | |||||
| Promotional activity | 0.4 | 45 | ||||||
| Increase in net sales | 8.7 | 11,765 | ||||||
| 21 of 29 |
Net sales of Snack Food Products increased due to higher average selling prices per pound compared to the same thirty-six week period in the prior fiscal year. Price increases were implemented in response to record high meat commodity input costs. Unit sales volume in pounds through our direct store delivery distribution channel decreased due to lower demand caused by inflationary pressures on consumer spending habits. Returns activity was higher compared to the same thirty-six-week period in the 2021 fiscal year. Promotional offers decreased due to lower sales to high-volume, high-promotion customers.
Cost of Products Sold and Gross Margin-Consolidated
Cost of products sold increased by $8,936 (7.2%) to $133,495 in the thirty-six-week period ended July 8, 2022, year compared to the same thirty-six-week period in fiscal year 2021. The gross margin increased from 23.0% to 27.3% during the 2022 period.
| Change in Cost of Products Sold by Segment | $ | % | Commodity $ Increase | |||||||||
| Frozen Food Products Segment | 7,557 | 6.1 | 1,234 | |||||||||
| Snack Food Products Segment | 1,379 | 1.1 | 11,767 | |||||||||
| Total | 8,936 | 7.2 | 13,001 | |||||||||
Cost of Products Sold-Frozen Food Products Segment
Cost of products sold in the Frozen Food Products segment increased by $7,557 (40.4%) to $26,252 in the thirty-six-week period of the 2022 fiscal year compared to the same thirty-six-week period in fiscal year 2021. Higher commodity costs, increased volume and changes in product mix were the primary contributing factors to this increase. The cost of purchased flour increased approximately $1,234 in the thirty-six-week period of fiscal year 2022 compared to the same thirty-six-week period in fiscal year 2021. In our Frozen Food Products segment, the volume increases in foodservice coupled with inflationary pressures on cost have increased the cost of productions materials, direct production labor and gross overhead.
Cost of Products Sold-Snack Food Products Segment
Cost of products sold in the Snack Food Products segment increased by $1,379 (1.3%) to $107,243 in the thirty-six-week period of the 2022 fiscal year compared to the same thirty-six-week period in fiscal year 2021 due to a substantial increase in sales volume. Meat commodity costs purchased at high prices during the fourth quarter of fiscal year 2021 and into the first two quarters of fiscal year 2022 added to the increase in cost of products sold through the third quarter of fiscal year 2022. Higher depreciation on processing equipment impacted the cost of products sold. The cost of significant meat commodities increased approximately $11,767 in the thirty-six-week period of fiscal year 2022 compared to the same period in fiscal year 2021. As a result, a net realizable value reserve of $139 was recorded after determining that the market value on some meat products was less than the costs associated with completion and sale of the product.
Selling, General and Administrative Expenses-Consolidated
Selling, general and administrative expenses increased by $4,104 (10.0%) to $45,129 in the thirty-six-week period ended July 8, 2022, compared to the same thirty-six-week period in the prior fiscal year. The table below summarizes the significant expense increases (decreases) included in this category:
| 36 Weeks Ended | Expense | |||||||||||
| July 8, 2022 | July 9, 2021 | Increase (Decrease) | ||||||||||
| Wages and bonus | $ | 19,348 | $ | 17,255 | $ | 2,093 | ||||||
| Pension (income) expense | (247 | ) | 574 | (821 | ) | |||||||
| Product advertising | 6,153 | 5,384 | 769 | |||||||||
| Fuel | 1,711 | 1,123 | 588 | |||||||||
| Vehicle repairs and maintenance | 938 | 649 | 289 | |||||||||
| Storage unit rent | 1,608 | 1,338 | 270 | |||||||||
| Other SGA | 15,618 | 14,702 | 916 | |||||||||
| Total - SGA | $ | 45,129 | $ | 41,025 | $ | 4,104 | ||||||
Higher sales commissions resulted in higher wages and bonus expenses in the thirty-six weeks of the 2022 fiscal year compared to the same period in the prior year. The decrease in pension expense was a result of an increase in pension plan assets caused by performance of the underlying markets that support them as well as higher pension discount rates resulting in lower liability. Costs for product advertising increased mainly as a result of higher payments under brand licensing agreements in the Snack Food Products segment during the thirty-six weeks ended July 8, 2022. The increase in fuel expense was driven by per gallon fuel price increases compared to the prior year as a result of higher cost trends in petroleum markets. Repairs and maintenance on vehicles have increased compared to the prior year period mainly due to an aging fleet. Rent for storage units that house inventory increased due to inflationary price pressure. None of the changes individually or as a group of expenses in “Other SGA” were significant enough to merit separate disclosure. The major components comprising the increase of “Other SGA” expenses were higher display rack cost, travel expense, healthcare expense and insurance premiums partially offset by lower telephone expense.
| 22 of 29 |
Selling, General and Administrative Expenses-Frozen Food Products Segment
SGA expenses in the Frozen Food Products segment increased by $1,727 (21.3%) to $9,824 in the thirty-six-week period of fiscal year 2022 compared to the same thirty-six-week period in the prior fiscal year. The overall increase in SGA expenses was due to higher sales volume and corresponding increased wages and bonus and product advertising partially offset by lower pension expense.
Selling, General and Administrative Expenses-Snack Food Products Segment
SGA expenses in the Snack Food Products segment increased by $2,377 (7.2%) to $35,305 in the thirty-six-week period of fiscal year 2022 compared to the same thirty-six-week period in the prior fiscal year. Most of the increase was due to higher sales volume and corresponding increased wages and bonus and product advertising.
Income Taxes-Consolidated
Income tax for the thirty-six weeks ended July 8, 2022 and July 9, 2021, respectively, was as follows:
| July 8, 2022 | July 9, 2021 | |||||||
| Provision for (benefit on) income taxes | $ | 17,343 | $ | (669 | ) | |||
| Effective tax rate | 29.0 | % | 28.0 | % | ||||
We recorded a tax provision of $17,343 for the thirty-six-week period ended July 8, 2022, related to federal and state taxes, based on the Company’s expected annual effective tax rate. The effective tax rate for the third quarter of fiscal 2022 reflects the impact of $16,427 of tax expense related to tax on the gain on the sale of a land parcel in Chicago, Illinois, discussed in Note 5. – Income Taxes of the Notes to the Condensed Consolidated Financial Statements included within this Report. The effective income tax rate differed from the applicable mixed statutory rate of approximately 26.4% due to non-deductible meals and entertainment, non-taxable gains and losses on life insurance policies and state income taxes.
Liquidity and Capital Resources
The principal source of our operating cash flow is cash receipts from the sale of our products, net of costs to manufacture, store, market and deliver such products. We normally fund our operations from cash balances and cash flow generated from operations. We received $60,000 in proceeds on June 1, 2022, from the closing of the sale of real property located at 170 N. Green Street in Chicago pursuant to the terms of the CRG Purchase Agreement. We borrowed $2,000 under our line of credit with Wells Fargo Bank, N.A. on December 2, 2020, $2,000 on April 27, 2021, $2,000 on July 1, 2021, $3,000 on July 19, 2021, $3,000 on October 15, 2021, $2,000 on November 1, 2021, $2,000 on December 16, 2021, and $2,000 on January 24, 2022, for a combined total of $18,000. The line of credit was paid off on June 7, 2022, using $18,000 in proceeds from the sale of real property at 170 N. Green Street. The revolving line of credit continues in effect per its terms to March 1, 2023. We entered into a bridge loan with Wells Fargo Bank, N.A. on August 30, 2021, for up to $25,000, of which we used $18,653 to pay off a portion of our existing equipment loans as they came out of the lock out period and could be prepaid. We prepaid and terminated the bridge loan on June 2, 2022, using $18,653 in proceeds from the sale of real property at 170 N. Green Street. As of July 8, 2022, we had $995 of current debt on equipment loans, $59,958 of net working capital and $15,000 available under our revolving line of credit with Wells Fargo Bank, N.A. Refer to Note 6 – Equipment Notes Payable and Financial Arrangements of the Notes to the Condensed Consolidated Financial Statements included within this Report for further information.
Despite higher commodity costs, we may not be able to increase our product prices in a timely manner or sufficiently to offset increased commodity costs due to consumer price sensitivity, pricing in relation to competitors and the reluctance of retailers to accept the price increase. Higher product prices could potentially lower demand for our product and decrease volume. Management believes there are various options available to generate additional liquidity to repay debt or fund operations such as mortgaging real estate, should that be necessary. Our ability to increase liquidity will depend upon, among other things, our business plans, the performance of operating divisions and economic conditions of capital markets, or circumstances related to the COVID-19 global pandemic. If we are unable to increase liquidity through mortgaging real estate, or generate positive cash flow necessary to fund operations, we may not be able to compete successfully, which could negatively impact our business, operations, and financial condition. Combined with the cash expected to be generated from the Company’s operations and income tax refunds due of $5,799, of which $5,117 in income tax refunds were received on July 19, 2022, we anticipate that we will maintain sufficient liquidity to operate our business for at least the next twelve months. We will continue to monitor the impact of COVID-19 on our liquidity and, if necessary, take action to preserve liquidity and ensure that our business can operate during these uncertain times.
| 23 of 29 |
Cash flows from operating activities for the thirty-six weeks ended:
| July 8, 2022 | July 9, 2021 | |||||||
| Net income (loss) | $ | 42,410 | $ | (1,719 | ) | |||
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | ||||||||
| Depreciation | 4,588 | 4,425 | ||||||
| Provision for losses on accounts receivable | 100 | 46 | ||||||
| Increase in promotional allowances | 207 | 742 | ||||||
| Gain on sale of property, plant, and equipment | (57,663 | ) | (378 | ) | ||||
| Changes in operating working capital | 5,370 | (3,687 | ) | |||||
| Net cash (used in) provided by operating activities | $ | (4,988 | ) | $ | (571 | ) | ||
For the thirty-six weeks ended July 8, 2022, net cash used in operating activities was $4,988, $4,417 more cash used than during the same period in fiscal year 2021. The net increase in cash used by operating activities primarily relates to a gain on sale of property, plant and equipment of $57,663, an increase in accounts receivable of $7,012 and an increase in inventory of $5,251 partially offset by net income of $42,410. During the thirty-six-week period ended July 8, 2022, we did not contribute towards our defined benefit pension plan. Plan funding strategies may be adjusted depending upon economic conditions, investment options, tax deductibility, or recent legislative changes in funding requirements.
Our cash conversion cycle (defined as days of inventory and trade receivables less days of trade payables outstanding) was equal to 80 days for the thirty-six-week period ended July 8, 2022. The cash conversion cycle was 98 days for the thirty-six-week period ended July 9, 2021. The decrease in the cash conversion cycle was mainly due to lower days payable in accounts payable and to a lesser extent increased average days in inventory. We have discontinued accelerating payments on outstanding accounts receivable from Walmart as of July 1, 2022.
For the thirty-six weeks ended July 9, 2021, net cash used in operating activities was $571 and primarily relates to an increase in inventories of $5,221, a net loss of $1,719 and an increase in other non-current assets of $2,001 partially offset by receipt of refundable income taxes from the IRS of $3,407. During the thirty-six-week period ended July 9, 2021, we did not contribute towards our defined benefit pension plan.
Cash flows from investing activities for the thirty-six weeks ended:
| July 8, 2022 | July 9, 2021 | |||||||
| Proceeds from sale of property, plant, and equipment | $ | 60,034 | $ | 128 | ||||
| Additions to property, plant, and equipment | (3,112 | ) | (6,842 | ) | ||||
| Net cash provided by (used in) investing activities | $ | 56,922 | $ | (6,714 | ) | |||
Expenditures for property, plant and equipment include the acquisition of equipment, upgrading of facilities to maintain operating efficiency and investments in cost effective technologies to lower costs. In general, we capitalize the cost of additions and improvements and expense the cost for repairs and maintenance. We received $60,000 in proceeds on June 1, 2022, from the closing of the real estate transaction for the property located at 170 N. Green Street in Chicago, pursuant to the terms of the CRG Purchase Agreement. We may also capitalize costs related to improvements that extend the life, increase the capacity, or improve the efficiency of existing machinery and equipment. Specifically, capitalization of upgrades of facilities to maintain operating efficiency include acquisitions of machinery and equipment used on packaging lines and refrigeration equipment used to process food products.
The table below highlights additions to property, plant and equipment for the thirty-six weeks ended:
| July 8, 2022 | July 9, 2021 | |||||||
| Changes in projects in process | $ | 2,349 | $ | 4,244 | ||||
| Building improvements | - | 8 | ||||||
| Direct store delivery and sales vehicles | 437 | 1,223 | ||||||
| Packaging lines | 159 | - | ||||||
| Temperature control | 7 | - | ||||||
| Processing equipment | 134 | 1,296 | ||||||
| Furniture and fixtures | 26 | 71 | ||||||
| Additions to property, plant, and equipment | $ | 3,112 | $ | 6,842 | ||||
| 24 of 29 |
Cash flows from financing activities for the thirty-six weeks ended:
| July 8, 2022 | July 9, 2021 | |||||||
| Payment of lease and right of use obligations | $ | (288 | ) | $ | (319 | ) | ||
| Proceeds from bank borrowings | - | 6,000 | ||||||
| Repayments of bank borrowings | (31,912 | ) | (3,223 | ) | ||||
| Net cash (used in) provided by financing activities | $ | (32,200 | ) | $ | 2,458 | |||
Our stock repurchase program was approved by our Board of Directors in November 1999 and was expanded in June 2005. Under the stock repurchase program, we are authorized, at the discretion of management and our Board of Directors, to purchase up to an aggregate of 2,000,000 shares of our common stock on the open market. As of July 8, 2022, 120,113 shares remained authorized for repurchase under the program.
Revolving Credit Facility
We maintain a revolving line of credit with Wells Fargo Bank, N.A. that extends through March 1, 2023. As of year-end October 29, 2021, under the terms of this line of credit, we could borrow up to $15,000 at an interest rate equal to the bank’s prime rate or LIBOR plus 2.0%. The line of credit has an unused commitment fee of 0.25% of the available loan amount. The line of credit is presented under non-current liabilities in the consolidated balance sheets. On December 1, 2021, Wells Fargo Bank, N.A. expanded our line of credit to $25,000 through June 15, 2022, at which time the credit limit returned to $15,000 for the balance of the term. Under the terms of this line of credit, we may borrow up to $15,000 at an interest rate equal to the bank’s prime rate or secured overnight financing rate (“SOFR”) plus 2.0%. The former benchmark interest rate of LIBOR for our line of credit has been transitioned to SOFR which could impact the cost of credit and alter the value of debt and loans. We borrowed $2,000 under this line of credit on December 2, 2020, $2,000 on April 27, 2021, $2,000 on July 1, 2021, $3,000 on July 19, 2021, $3,000 on October 15, 2021, $2,000 on November 1, 2021, and $2,000 on December 26, 2021, and $2,000 on January 24, 2022, for a combined total of $18,000. The revolving line of credit with Wells Fargo Bank, N.A. was paid off on June 7, 2022, using $18,000 in proceeds from the sale of a land parcel in Chicago.
Equipment Notes Payable
On December 26, 2018, we entered into a master collateral loan and security agreement with Wells Fargo Bank, N.A. (the “Original Wells Fargo Loan Agreement”) for up to $15,000 in equipment financing which was amended and expanded as detailed below. We subsequently entered into additional master collateral loan and security agreements with Wells Fargo Bank, N.A. on each of; April 18, 2019, December 19, 2019, March 5, 2020, and April 17, 2020 (the Original Wells Fargo Loan Agreement and the subsequent agreements collectively referred to as the “Wells Fargo Loan Agreements”). Pursuant to the Wells Fargo Loan Agreements, we owe the amounts as stated in the table below.
Bridge Loan
On August 30, 2021, we entered into a loan commitment note for a bridge loan of up to $25,000 with the plan to use the proceeds to pay off the existing equipment loans as they come out of the lock out period and may be prepaid (dates detailed in the table below). The outstanding principal balances of the bridge loan became due and payable in full on the earlier of the following dates (1) August 31, 2023, or (2) one Federal Reserve business day after the closing of the real estate transactions contemplated under the CRG Purchase Agreement. We prepaid $18,653 in equipment loans (equipment loans 4.13%, 3.98%, 3.70% and 3.29% in the table below) utilizing proceeds from the new bridge loan. The Company evaluated the exchange under ASC 470 and determined that the exchange should be treated as a debt modification prospectively. The Company accounted for this transaction as a debt modification and did not incur any gain or loss relating to the modification. The debt modification did not meet the greater than ten percent test and was deemed not substantial. We prepaid and terminated the bridge loan and related loan commitment note on June 2, 2022, using $18,653 in proceeds from the sale of a land parcel in Chicago pursuant to the CRG Purchase Agreement.
The following table reflects major components of our line of credit and borrowing agreements as of July 8, 2022, and October 29, 2021, respectively.
| July 8, 2022 | October 29, 2021 | |||||||
| Revolving credit facility | $ | - | $ | 12,000 | ||||
| Equipment notes: | ||||||||
| 3.70% note due 12/21/26, out of lockout 12/23/21 | - | 2,901 | ||||||
| 3.29% note due 03/05/27, out of lockout 03/06/22 | - | 5,951 | ||||||
| 3.68% note due 04/16/27, out of lockout 04/17/22 | 5,159 | 5,888 | ||||||
| SOFR plus 2.00% bridge loan due 08/31/23 | - | 10,329 | ||||||
| Total debt | 5,159 | 37,069 | ||||||
| Less current debt | (995 | ) | (1,065 | ) | ||||
| Total long-term debt | $ | 4,164 | $ | 36,004 | ||||
| 25 of 29 |
Loan Covenants
The Wells Fargo Loan Agreements collectively contain various affirmative and negative covenants that limit the use of funds and define other provisions of the loan. The main financial covenants are listed below:
| ● | Total Liabilities divided by Tangible Net Worth not greater than 2.5 to 1.0 at each fiscal quarter, | |
| Quick Ratio not less than 0.85 to 1.0 at each fiscal quarter end, | ||
| ● | Net Income After Taxes not less than $500 on a quarterly basis, and | |
| ● | Capital Expenditures less than $5,000. |
As of July 8, 2022, the Company was in compliance with all covenants under the Wells Fargo Loan Agreements.
All of our operating segments have been impacted by inflation, including higher costs for labor, freight, and specific materials. We expect this trend to continue through the remainder of fiscal year 2022. Management is of the opinion that the Company’s financial position and its capital resources are sufficient to provide for its operating needs and capital expenditures for the remainder of fiscal year 2022.
Recently issued accounting pronouncements and regulations
In February 2016, the FASB issued ASU 2016-02, “Leases”, which requires a lessee to recognize assets and liabilities with lease terms of more than twelve months. Both capital and operating leases are to be recognized on the balance sheet. The guidance is effective for annual reporting periods beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019, which was our first quarter of fiscal 2020. We have analyzed all lease transactions during fiscal year 2020 and 2021 and the first and second quarters of fiscal 2022. The Company elected not to reassess expired contracts or adjust comparative periods. The Company determined that no change to current accounting treatment is warranted for most transactions due to the underlying nature of our leases. In the case of month-to-month lease or rental agreements with terms of twelve months or less, the Company made an accounting policy election to not recognize lease assets and liabilities. The Company performed a detailed analysis and determined that the only significant indication of a long-term lease was its lease with Hogshed Ventures, LLC. The accounting treatment of this lease for warehouse storage included establishing a right-of-use asset and corresponding liability was recorded for the Company’s lease with Hogshed Ventures, LLC for property located at 40th Street in Chicago during the fourth quarter of fiscal 2020. The application of this pronouncement resulted in additional disclosures detailing our lease arrangements. The Company adopted this guidance during the first quarter of fiscal 2020 and it did not have a material impact on our consolidated financial statements.
Off-Balance Sheet Arrangements
We are not engaged in any “off-balance sheet arrangements” within the meaning of Item 303(b) of Regulation S-K.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Not applicable to a smaller reporting company.
Item 4. Controls and Procedures
Our management, with the participation and under the supervision of our principal executive officer and principal financial officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e) and 15d-15(e)) as of the end of the period covered by this Report. Based on this evaluation, the principal executive officer and principal financial officer have concluded that our disclosure controls and procedures are effective as of the end of the period covered by this Report in their design and operation to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to management and recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission’s rules and forms and were accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosures.
Our management, including our principal executive officer and principal financial officer, does not expect that our disclosure controls and internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control.
| 26 of 29 |
The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving our stated goals under all potential future conditions; over time, a control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
We maintain and evaluate a system of internal accounting controls, and a program of internal auditing designed to provide reasonable assurance that our assets are protected and that transactions are performed in accordance with proper authorization and are properly recorded. This system of internal accounting controls is continually reviewed and modified in response to evolving business conditions and operations and to recommendations made by the independent registered public accounting firm. On May 14, 2013, the Committee of Sponsoring Organizations of the Treadway Commission (COSO) published Internal Control-Integrated Framework (2013) (the “2013 Framework”) and related illustrative documents as an update to Internal Control-Integrated Framework (1992) (the “1992 Framework”). The Company has adopted the 2013 Framework this fiscal year and has determined that the 17 principles are present and functioning during our assessment of the effectiveness of internal controls. We have established a code of conduct. Our management believes that the accounting and internal control systems provide reasonable assurance that assets are safeguarded, and financial information is reliable.
The Audit Committee of the Board of Directors meets regularly with our financial management and counsel, and with the independent registered public accounting firm engaged by us. Internal accounting controls and the quality of financial reporting are discussed during these meetings. The Audit Committee has discussed with the independent registered public accounting firm matters required to be discussed by the auditing standards adopted or established by the Public Company Accounting Oversight Board. In addition, the Audit Committee and the independent registered public accounting firm have discussed the independent registered public accounting firm’s independence from the Company and its management, including the matters in the written disclosures required by Public Company Accounting Oversight Board Rule 3526 “Communication with Audit Committees Concerning Independence”.
There have been no changes in our internal controls over financial reporting that occurred during the fiscal quarter ended July 8, 2022, that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
Part II. Other Information
Item 1A. Risk Factors
The risk factors listed in Part I “Item 1A. Risk Factors” in the Annual Report should be considered with the information provided elsewhere in this Report, which could materially adversely affect our business, financial condition, or results of operations. Except as set forth below, there have been no material changes to the risk factors as previously disclosed in the Annual Report.
We have considered the impact of federal, state, and local government actions related to the COVID-19 pandemic on our Condensed Consolidated Financial Statements. These business disruptions, in addition to any impacts already experienced, have not had a significant impact on our Condensed Consolidated Financial Statements for the twelve weeks ended July 8, 2022. There may be a future business impact, the extent of which is uncertain and largely subject to whether the severity worsens or what restrictions are implemented by the government.
These impacts could include but may not be limited to risks and uncertainty related to shifts in demand between sales channels, market volatility, constraints in our supply chain, our ability to operate production facilities and worker availability. These unknowns may subject the company to future risks related to long-lived asset impairments, increased reserves for uncollectible accounts, the price and availability of ingredients and raw materials used in our products and adjustments to reflect the market value of our inventory.
| 27 of 29 |
Item 6. Exhibits
| Incorporated by Reference | ||||||||||||
| Exhibit Number | Exhibit Description | Form | File No. | Exhibit | Filing Date | Filed Herewith | ||||||
| 31.1 | Certification of Principal Executive Officer, Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | X | ||||||||||
| 31.2 | Certification of Principal Financial Officer, Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | X | ||||||||||
| 32.1 | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Principal Executive Officer). | X | ||||||||||
| 32.2 | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Principal Financial Officer). | X | ||||||||||
| 101.INS | Inline XBRL Instance Document. | X | ||||||||||
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document. | X | ||||||||||
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document. | X | ||||||||||
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document. | X | ||||||||||
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document. | X | ||||||||||
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document. | X | ||||||||||
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and Contained in Exhibit 101). | |||||||||||
| 28 of 29 |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.
| BRIDGFORD FOODS CORPORATION | ||
| (Registrant) | ||
| Dated: August 19, 2022 | By: | /s/ Raymond F. Lancy |
| Raymond F. Lancy | ||
| Chief Financial Officer | ||
| (Duly Authorized Officer, Principal Financial and Accounting Officer) | ||
| 29 of 29 |