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BRIDGFORD FOODS CORP - Quarter Report: 2023 April (Form 10-Q)

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark one)

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended April 14, 2023

 

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ______ to ____

 

Commission file number: 000-02396

 

 

BRIDGFORD FOODS CORPORATION

(Exact name of registrant as specified in its charter)

 

Texas   95-1778176
(State or other jurisdiction of   (I.R.S. Employer
incorporation or organization)   identification number)
     
1707 S. Good-Latimer Expressway   75226
(Address of principal executive offices)   (Zip code)

 

(714) 526-5533

(Registrant’s telephone number, including area code)

 

N/A

(Former name, former address and former fiscal year, if changed since last report)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class   Trading Symbol(s)   Name of each exchange on which registered
Common Stock   BRID   Nasdaq Global Market

 

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. Yes ☒ No ☐

 

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). Yes ☒ No ☐

 

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 ☐
Non-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 ☐ No

 

As of May 26, 2023, the registrant had 9,076,832 shares of common stock outstanding.

 

 

 

  

 

 

BRIDGFORD FOODS CORPORATION

FORM 10-Q QUARTERLY REPORT

 

INDEX

 

References to “Bridgford Foods”, “Company”, “we”, “us” or “our” contained in this Quarterly Report on Form 10-Q (this “Report”) refer to Bridgford Foods Corporation.

 

    Page
Part I. Financial Information   3
     
Item 1. Financial Statements   3
     
a. Condensed Consolidated Balance Sheets as of April 14, 2023 (unaudited) and October 28, 2022   3
     
b. Condensed Consolidated Statements of Operations for the twelve and twenty-four weeks ended April 14, 2023 (unaudited) and April 15, 2022 (unaudited)   4
     
c. Condensed Consolidated Statements of Shareholders’ Equity for the twelve and twenty-four weeks ended April 14, 2023 (unaudited) and April 15, 2022 (unaudited)   5
     
d. Condensed Consolidated Statements of Cash Flows for the twenty-four weeks ended April 14, 2023 (unaudited) and April 15, 2022 (unaudited)   6
     
e. Notes to Condensed Consolidated Financial Statements (unaudited)   7
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations   15
     
Item 3. Quantitative and Qualitative Disclosures about Market Risk   25
     
Item 4. Controls and Procedures   25
     
Part II. Other Information   26
     
Item 1. Legal Proceedings   26
     
Item 1A. Risk Factors   26
     
Item 6. Exhibits   27
     
Signatures   28

 

Items 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 28 

 

 

Part I. Financial Information

 

Item 1. a.

 

BRIDGFORD FOODS CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share amounts)

 

   April 14, 2023   October 28, 2022 
   (unaudited)     
ASSETS          
           
Current assets:          
           
Cash and cash equivalents  $15,751   $16,333 
Accounts receivable, less allowance for doubtful accounts of $361 and $177, respectively, and promotional allowances of $3,838 and $2,771, respectively   29,498    34,541 
Inventories, net   39,954    40,533 
Refundable income taxes   1,730    1,201 
Prepaid expenses and other current assets   2,322    321 
Total current assets   89,255    92,929 
           
Property, plant and equipment, net of accumulated depreciation and amortization of $72,300 and $70,968, respectively   69,775    71,830 
Other non-current assets   11,829    11,589 
Total assets  $170,859   $176,348 
           
LIABILITIES AND SHAREHOLDERS’ EQUITY          
           
Current liabilities:          
           
Accounts payable  $10,763   $13,658 
Accrued payroll, advertising, and other expenses   6,368    6,799 
Income taxes payable   224    224 
Current notes payable - equipment   1,023    1,089 
Current right-of-use leases payable   1,288    1,054 
Other current liabilities   1,669    4,029 
Total current liabilities   21,335    26,853 
           
Long-term notes payable - equipment   3,400    3,824 
Deferred income taxes, net   8,972    8,972 
Long-term right-of-use leases payable   3,096    3,420 
Other non-current liabilities   6,650    6,954 
Total liabilities   43,453    50,023 
           
Contingencies and commitments (Note 3)   -    - 
           
Shareholders’ equity:          
Preferred stock, without par value; authorized – 1,000,000 shares; issued and outstanding – none   -    - 
Common stock, $1.00 par value; authorized – 20,000,000 shares; issued and outstanding – 9,076,832 and 9,076,832 shares, respectively   9,134    9,134 
Capital in excess of par value   8,298    8,298 
Retained earnings   120,399    119,318 
Accumulated other comprehensive loss   (10,425)   (10,425)
Total shareholders’ equity   127,406    126,325 
Total liabilities and shareholders’ equity  $170,859   $176,348 

 

See accompanying notes to Condensed Consolidated Financial Statements.

 

 3 of 28 

 

 

Item 1. b.

 

BRIDGFORD FOODS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

(in thousands, except share and per share amounts)

 

   April 14, 2023   April 15, 2022   April 14, 2023   April 15, 2022 
   12 weeks ended   24 weeks ended 
   April 14, 2023   April 15, 2022   April 14, 2023   April 15, 2022 
                 
Net sales  $55,510   $59,986   $117,132   $124,072 
Cost of products sold   40,053    43,304    84,609    90,997 
                     
Gross margin   15,457    16,682    32,523    33,075 
                     
Selling, general and administrative expenses   14,941    15,178    30,735    29,909 
Loss (gain) on sale of property, plant, and equipment   232    -    160    (18)
Operating income   284    1,504    1,628    3,184 
                     
Other income (expense)                    
Interest expense   (100)   (318)   (225)   (615)
Cash surrender value gain (loss)   129    10    240    (1,000)
Total other income (expense)   29    (308)   15    (1,615)
                     
Income before taxes   313    1,196    1,643    1,569 
Provision for income taxes   164    391    562    457 
                     
Net income  $149   $805   $1,081   $1,112 
                     
Basic earnings per share  $0.02   $0.09   $0.12   $0.12 
                     
Shares used to compute basic earnings per share   9,076,832    9,076,832    9,076,832    9,076,832 

 

See accompanying notes to Condensed Consolidated Financial Statements.

 

 4 of 28 

 

 

Item 1. c.

 

BRIDGFORD FOODS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

24 weeks ended April 15, 2022, and April 14, 2023

(unaudited)

(in thousands)

 

   Shares   Amount  

Capital in

excess of

par value
   Retained earnings  

Accumulated

other

comprehensive

loss

  

Total

shareholders’

equity

 
Balance, October 29, 2021   9,076   $9,134   $8,298   $74,252   $(16,706)  $74,978 
Net income   -    -    -    1,112    -    1,112 
Balance, April 15, 2022   9,076   $9,134   $8,298   $75,364   $(16,706)  $76,090 

 

   Shares   Amount  

Capital in

excess of

par value
   Retained earnings  

Accumulated

other

comprehensive

loss

  

Total

shareholders’

equity

 
Balance, October 28, 2022   9,076   $9,134   $8,298   $119,318   $(10,425)  $126,325 
Net income   -    -    -    1,081    -    1,081 
Balance, April 14, 2023   9,076   $9,134   $8,298   $120,399   $(10,425)  $127,406 

 

BRIDGFORD FOODS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

12 weeks ended April 15, 2022, and April 14, 2023

(unaudited)

(in thousands)

 

   Shares   Amount  

Capital in

excess of

par value

  

Retained

earnings

  

Accumulated

other

comprehensive

loss

  

Total

shareholders’

equity

 
Balance, January 21, 2022   9,076   $9,134   $8,298   $74,559   $(16,706)  $75,285 
Net income   -    -    -    805    -    805 
Balance, April 15, 2022   9,076   $9,134   $8,298   $75,364   $(16,706)  $76,090 

 

   Shares   Amount  

Capital in

excess of

par value

  

Retained

earnings

  

Accumulated

other

comprehensive

loss

  

Total

shareholders’

equity

 
Balance, January 20, 2023   9,076   $9,134   $8,298   $120,250   $(10,425)  $127,257 
Net income   -    -    -    149    -    149 
Balance, April 14, 2023   9,076   $9,134   $8,298   $120,399   $(10,425)  $127,406 

 

See accompanying notes to Condensed Consolidated Financial Statements.

 

 5 of 28 

 

 

Item 1. d.

 

BRIDGFORD FOODS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(in thousands)

 

   April 14, 2023   April 15, 2022 
   24 weeks ended 
   April 14, 2023   April 15, 2022 
Cash flows from operating activities:          
           
Net income  $1,081   $1,112 
           
Adjustments to reconcile net income to net cash provided by operating activities:          
           
Depreciation and amortization   3,027    3,158 
Provision for losses (recovery on) accounts receivable   195    (10)
Increase in promotional allowances   1,067    2,278 
Loss (gain) on sale of property, plant, and equipment   160    (18)
           
Changes in operating assets and liabilities:          
           
Accounts receivable, net   3,781    (2,438)
Inventories, net   579    (4,164)
Prepaid expenses and other current assets   (2,001)   1,330 
Refundable income taxes   (529)   425 
Other non-current assets   (240)   1,000 
Accounts payable   (2,895)   (159)
Accrued payroll, advertising, and other expenses   (1,485)   (743)
Other current liabilities   (1,193)   1,774 
Other non-current liabilities   (250)   (1,272)
           
Net cash provided by operating activities   1,297    2,273 
           
Cash flows from investing activities:          
Proceeds from sale of property, plant, and equipment   161    18 
Additions to property, plant, and equipment   (1,293)   (629)
           
Net cash used in investing activities   (1,132)   (611)
           
Cash flows from financing activities:          
Payment of lease and right-of-use obligations   (255)   (151)
Proceeds from borrowings under revolving credit facilities   -    6,000 
Repayments of bank borrowings   (492)   (1,028)
           
Net cash (used in) provided by financing activities   (747)   4,821 
           
Net (decrease) increase in cash and cash equivalents and restricted cash   (582)   6,483 
           
Cash and cash equivalents and restricted cash at beginning of period   16,333    375 
           
Cash and cash equivalents at end of period  $15,751   $6,858 
           
Supplemental disclosure of cash flow information:          
           
Cash paid for income taxes  $1,094   $37 
Cash paid for interest  $225   $615 

 

See accompanying notes to Condensed Consolidated Financial Statements.

 

 6 of 28 

 

 

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 weeks ended April 14, 2023 and April 15, 2022 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 Company’s Annual Report on Form 10-K for the fiscal year ended October 28, 2022 (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, if any, 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 Condensed Consolidated Financial Statements. The business disruptions associated with the pandemic had a minimal impact on our Consolidated Financial Statements for the fiscal year ended October 28, 2022, and during the twelve and twenty-four weeks ended April 14, 2023.  Disruptions from the pandemic 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. The long-term impacts of COVID-19 are unknown and dependent upon future developments including COVID-19 variants and resurgences as well as actions taken by federal, state and local government officials.

 

The federal Public Health Emergency for COVID-19, declared under Section 319 of the Public Health Service Act expired at the end of the day on May 11, 2023.

 

The October 28, 2022, balance sheet amounts within these interim Condensed Consolidated Financial Statements were derived from the audited fiscal year 2022 financial statements included in the Company’s annual report of Form 10-K for the fiscal year ended October 28, 2022.

 

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. The Company has accounts with nationally recognized financial institutions in excess of the Federal Deposit Insurance Corporation insurance coverage limit. 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 and comprehensive income during each of the twelve and twenty-four weeks ended April 14, 2023, or April 15, 2022.

 

 7 of 28 

 

 

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 twenty-four weeks ended April 14, 2023, and April 15, 2022, respectively.

 

Schedule of Customer Concentration

   Walmart (1)   Dollar General 
   Sales   AR   Sales   AR 
April 14, 2023   30.4%   27.3%   16.2%   27.1%
April 15, 2022   31.4%   4.4%   17.7%   38.1%

 

(1)

Walmart AR represented a higher percentage of consolidated AR as of April 14, 2023, 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 April 14, 2023, and April 15, 2022, respectively.

 

   Walmart (1)   Dollar General 
   Sales   AR   Sales   AR 
April 14, 2023   30.8%   27.3%   20.1%   27.1%
April 15, 2022   30.5%   4.4%   19.6%   38.1%

 

(1) Walmart AR represented a higher percentage of consolidated AR as of April 14, 2023, due to terminating the accelerated payments on outstanding accounts receivable on July 1, 2022.

 

Revenue recognition

 

Revenues are recognized in accordance with Accounting Standards Codification (“ASC”) Topic 606 – Revenue from 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 products 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 April 14, 2023 and April 15, 2022, were $4,520 and $3,862, respectively. Promotional allowances deducted from sales for the twenty-four weeks ended April 14, 2023, and April 15, 2022, were $8,384 and $7,366, respectively.

 

Leases

 

Leases are recognized in accordance with ASC 842 Leases (“ASC 842”) which requires a lessee to recognize assets and liabilities with lease terms of more than twelve months. We lease or rent property for such operations as storing inventory and equipment. We analyze our agreements to evaluate whether or not a lease exists by determining what assets exist for which we control usage for a period of time in exchange for consideration. In the event a lease exists, we classify it as a finance or operating lease and record a right-of-use (“ROU”) asset and the corresponding lease liability at the inception of the lease. In the case of month-to-month lease or rental agreements with terms of twelve months or less, we made an accounting policy election to not recognize lease assets and liabilities and record them on a straight-line basis over the lease term. The storage units rented on a month-to-month basis for use by our Snack Food Product segment direct store delivery route system are not costly to relocate and contain no significant leasehold improvements or degree of integration over leased assets. Orders can be fulfilled by another route storage unit interchangeably. No specialized assets exist in the rental storage units. Market price is paid for storage units. No guarantee of debt is made.

 

 8 of 28 

 

 

ROU lease assets are recorded within property, plant and equipment, net of accumulated depreciation and amortization. The Company leases warehouse space from time to time that is recorded as ROU lease assets and corresponding lease liabilities. 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.

 

Subsequent events

 

Management has evaluated events subsequent to April 14, 2023, 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.

 

On April 17, 2023, the Company leased one box truck for a market value of $27 and that lease term is two years.

 

Based on Management’s review, no other material events were identified that require adjustment to the financial statements or additional disclosure.

 

Basic earnings per share

 

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 April 14, 2023, or April 15, 2022.

 

Note 2 – Inventories, net:

 

Inventories are comprised of the following at the respective period ends:

 

Schedule of Inventories

   April 14, 2023   October 28, 2022 
Meat, ingredients, and supplies  $11,756   $10,242 
Work in progress   3,679    2,432 
Finished goods   24,519    27,859 
Inventories, net  $39,954   $40,533 

 

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 estimated excess, obsolete inventories, or impaired balances 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 maintain a net realizable reserve of $258 as of April 14, 2023, and $131 as of October 28, 2022, on products in inventory after determining that the market value on some meat products could not cover the costs associated with completion and sale of the product.

 

Note 3 – Contingencies and Commitments:

 

The Company generally 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 leases three long-haul trucks received during fiscal year 2019. The six-year leases for these trucks expire in fiscal year 2025. Amortization of equipment as a finance lease was $39 during the twenty-four weeks ended April 14, 2023. The Company leased one box truck for a market value of $27 on April 17, 2023, and that lease term is two years. Please refer to Note 1 - Summary of Significant Accounting Policies - Subsequent events.

 

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 were the warehouse leases with Hogshed Ventures, LLC and Racine Partners 4333 LLC.

 

The Company’s five-year term lease with Racine Partners 4333 LLC, was effective June 1, 2022. An ROU asset of $3,782 and corresponding liability for warehouse storage space of $3,823 as of April 14, 2023, was recorded for Racine Partners 4333 LLC for 43rd Street in Chicago, Illinois. This lease does not provide an implicit rate and we estimated our incremental interest rate to be approximately 3.68%. We used our estimated incremental borrowing rate and other information available at the lease commencement date in determining the present value of the lease payments.

 

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A ROU asset and corresponding liability for warehouse storage space was recorded for $559 for Hogshed Ventures, LLC for 40th Street in Chicago, Illinois, as of April 14, 2023. We lease this space under a non-cancelable operating lease. This lease does not have significant rent escalation holidays, concessions, leasehold improvement incentives or other build-out clauses. Further, this lease does not contain contingent rent provisions. This lease was set to terminate on June 30, 2023, but was extended one year on March 1, 2023 and as a result will terminate on June 30, 2024. This lease includes both lease (e.g., fixed rent) and non-lease components (e.g., real estate taxes, insurance, common-area, and other maintenance costs). The non-lease components are deemed to be executory costs and are included in the minimum lease payments used to determine the present value of the operating lease obligation and related ROU asset.

 

The lease with Hogshed Ventures, LLC does not provide an implicit rate and we estimated our incremental interest rate to be approximately 1.6% for the lease expiring June 30, 2023 and 5.49% for the extended lease expiring June 30, 2024. We used our estimated incremental borrowing rate and other information available at the lease commencement date in determining the present value of the lease payments.

 

The following is a schedule by years of future minimum lease payments for transportation leases and ROU assets:

 

Schedule of Future Minimum Lease Payments

Fiscal Year  Financing
Obligations
 
2023  $1,378 
2024   681 
2025   932 
2026   991 
Later Years   604 
Total Minimum Lease Payments(a)  $4,586 
Less: Amount representing executory costs   (27)
Less: Amount representing interest(b)   (2)
Present value of future minimum lease payments(c)  $4,557 

 

(a) Minimum payments exclude contingent rentals based on actual mileage and adjustments of rental payments based on the Consumer Price Index.
(b) Amount necessary to reduce net minimum lease payments to present value calculated at the Company’s incremental borrowing rate at the inception of the leases.
(c) Reflected in Part I. Financial Information, Item 1. a. of the Condensed Consolidated Balance Sheets as current and noncurrent obligations are capital leases of $90 and $83 under Other current liabilities and Other non-current liabilities, respectively, and right-of-use leases payable of $1,288 and $3,096 are disclosed as line items Current right-of-use leases payable and Long-term ROU leases payable, respectively, as of April 14, 2023.

 

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.

 

We purchase large quantities of pork, beef, and flour. These ingredients are generally available from a number of different suppliers although the availability of these ingredients is subject to seasonal variation. We build ingredient inventories to take advantage of downward trends in seasonal prices or anticipated supply limitations.

 

We purchase bulk flour under short-term fixed price contracts at current market prices. The contracts are usually effective for and settle within three months or less at a fixed price and quantity. We monitor and manage our ingredient costs to help negate volatile daily swings in market prices when possible. We do not participate in the commodity futures market or hedging to limit commodity exposure.

 

Note 4 – Segment Information:

 

The Company has two reportable operating segments: Frozen Food Products (the processing and distribution of frozen food products) and Snack Food Products (the processing and distribution of meat and other convenience foods).

 

We evaluate each segment’s performance based on revenues and operating income. Selling, general and administrative (“SG&A”) 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.

 

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The following segment information is presented for the twelve weeks ended April 14, 2023, and April 15, 2022, respectively.

Schedule of Segment Reporting Information, by Segment 

Twelve weeks Ended April 14, 2023  Frozen Food Products   Snack Food Products   Other   Totals 
Segment Information
Twelve weeks Ended April 14, 2023  Frozen Food Products   Snack Food Products   Other   Totals 
Sales  $11,904   $43,606   $-   $55,510 
Cost of products sold   9,478    30,575    -    40,053 
Gross margin   2,426    13,031    -    15,457 
SG&A   3,244    11,697    -    14,941 
Loss on sale of property, plant, and equipment   30    202    -    232 
Operating (loss) income   (848)   1,132    -    284 
                     
Total assets  $15,046   $124,247   $31,566   $170,859 
Additions to PP&E  $164   $870   $-   $1,034 

 

Twelve weeks Ended April 15, 2022  Frozen Food Products   Snack Food Products   Other   Totals 
Sales  $12,477   $47,509   $-   $59,986 
Cost of products sold   8,649    34,655    -    43,304 
Gross margin   3,828    12,854    -    16,682 
SG&A   3,286    11,892    -    15,178 
Gain on sale of property, plant, and equipment   -    -    -    - 
Operating income   542    962    -    1,504 
                     
Total assets  $14,484   $121,521   $26,318   $162,323 
Additions to PP&E  $(54)  $303   $-   $249 

 

The following segment information is presented for the twenty-four weeks ended April 14, 2023, and April 15, 2022, respectively.

 

Twenty-four weeks Ended April 14, 2023  Frozen Food Products   Snack Food Products   Other   Totals 
Sales  $26,303   $90,829   $-   $117,132 
Cost of products sold   20,223    64,386    -    84,609 
Gross margin   6,080    26,443    -    32,523 
SG&A   6,888    23,847    -    30,735 
Loss on sale of property, plant, and equipment   30    130    -    160 
Operating (loss) income   (838)   2,466    -    1,628 
                     
Total assets  $15,046   $124,247   $31,566   $170,859 
Additions to PP&E  $378   $915   $-   $1,293 

 

Twenty-four weeks Ended April 15, 2022  Frozen Food Products   Snack Food Products   Other   Totals 
Sales  $24,843   $99,229   $-   $124,072 
Cost of products sold   17,500    73,497    -    90,997 
Gross margin   7,343    25,732    -    33,075 
SG&A   6,373    23,536    -    29,909 
Gain on sale of property, plant, and equipment   -    (18)   -    (18)
Operating income   970    2,214    -    3,184 
                     
Total assets  $14,484   $121,521   $26,318   $162,323 
Additions to PP&E  $6   $623   $-   $629 

 

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The following information further disaggregates our sales to customers by major distribution channel and customer type for the twelve weeks ended April 14, 2023, and April 15, 2022, respectively.

Schedule of Disaggregates Our Sales to Customers 

Twelve weeks Ended April 14, 2023

 

Distribution Channel  Retail (a)   Foodservice (b)   Totals 
Direct store delivery  $29,053   $-   $29,053 
Direct customer warehouse   14,553    -    14,553 
Total Snack Food Products   43,606    -    43,606 
                
Distributors   1,276    10,628    11,904 
Total Frozen Food Products   1,276    10,628    11,904 
                
Totals  $44,882   $10,628   $55,510 

 

Twelve weeks Ended April 15, 2022

 

Distribution Channel  Retail (a)   Foodservice (b)   Totals 
Direct store delivery  $31,065   $-   $31,065 
Direct customer warehouse   16,444    -    16,444 
Total Snack Food Products   47,509    -    47,509 
                
Distributors   1,576    10,901    12,477 
Total Frozen Food Products   1,576    10,901    12,477 
                
Totals  $49,085   $10,901   $59,986 

 

(a) Includes sales to food retailers, such as grocery retailers, warehouse club stores, and internet-based retailers.
(b) Includes sales to foodservice distributors, restaurant operators, hotel chains and noncommercial foodservice establishments such as schools, convenience stores, healthcare facilities and the military.

 

Twenty-four weeks Ended April 14, 2023

 

Distribution Channel

  Retail (a)     Foodservice (b)     Totals  
Direct store delivery   $ 63,099     $ -     $ 63,099  
Direct customer warehouse     27,730       -       27,730  
Total Snack Food Products     90,829       -       90,829  
                         
Distributors     4,483       21,820       26,303  
Total Frozen Food Products     4,483       21,820       26,303  
                         
Totals   $ 95,312     $ 21,820     $ 117,132  

 

Twenty-four weeks Ended April 15, 2022

 

Distribution Channel

  Retail (a)     Foodservice (b)     Totals  
Direct store delivery   $ 67,694     $ -     $ 67,694  
Direct customer warehouse     31,535       -       31,535  
Total Snack Food Products     99,229       -       99,229  
                         
Distributors     4,515       20,328       24,843  
Total Frozen Food Products     4,515       20,328       24,843  
                         
Totals   $ 103,744     $ 20,328     $ 124,072  

 

(a) Includes sales to food retailers, such as grocery retailers, warehouse club stores, and internet-based retailers.
(b) Includes sales to foodservice distributors, restaurant operators, hotel chains and noncommercial foodservice establishments such as schools, convenience stores, healthcare facilities and the military.

 

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Note 5 – Income Taxes:

 

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was enacted in response to the COVID-19 pandemic. The CARES Act, among other things, permits net operating loss (“NOL”) carryovers and carrybacks to offset 100% of taxable income for taxable years beginning before January 1, 2021. In addition, the CARES Act allows NOLs incurred in taxable years beginning after December 31, 2017, and before January 1, 2021, to be carried back to each of the five preceding taxable years to generate a refund of previously paid income taxes. The Company has filed a federal income tax return for tax year 2018 and 2019 (fiscal year 2019 and 2020) and carried back a taxable loss of $34,405 to tax years 2013 (fiscal 2014), 2014 (fiscal year 2015), 2015 (fiscal year 2016), 2016 (fiscal year 2017) and 2018 (fiscal year 2019).

 

On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was signed into law. Among other significant changes, the Tax Act reduced the corporate federal income tax rate from 35% to 21%. The carryback of NOLs from tax years 2018 and 2019 under the CARES Act to pre-Tax Act years generated an income tax benefit due to the differential in income tax rates which was recorded in fiscal year 2020.

 

The Company’s effective tax rate was 34.2% and 29.1% for the second quarter of fiscal 2023 and 2022, respectively. The effective tax rate for the second quarter of fiscal 2023 reflects the impact of $562 of tax expense.

 

As of April 14, 2023, the Company has a federal NOL carry forward of approximately $0 and state NOL carry forwards of approximately $4,600.

 

Our federal income tax returns are open to audit under the statute of limitations for the fiscal years 2019 through 2021. We are subject to income tax in Texas and various other state taxing jurisdictions. Our state income tax returns are open to audit under the statute of limitations for the fiscal years 2018 through 2021.

 

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 August 31, 2023. As of year-end October 28, 2022, 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 secured overnight financing rate (“SOFR”) 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 at October 28, 2022, in the accompanying condensed consolidated balance sheets. On December 1, 2021, Wells Fargo Bank, N.A. expanded our line of credit to $25,000 through June 15, 2022, upon which time the credit limit returned to $15,000 for the balance of the term. 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, $2,000 on December 16, 2021, and $2,000 on January 24, 2022, for a combined total of $18,000. The outstanding balance under the revolving line of credit was paid off on June 7, 2022, using $18,000 in proceeds from the gain on 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 on the following page.

 

Bridge Loan

 

On August 30, 2021, we entered into a loan commitment note for a bridge loan of up to $25,000 to obtain capital to pay off the existing equipment loans as they come out of the lock out period and may be prepaid. The outstanding principal balances of the bridge loan became due and payable in full one Federal Reserve business day after the closing of the real estate transactions contemplated under the Purchase and Sale Agreement dated March 16, 2020, as amended, between Bridgford Food Processing Corporation and CRG Acquisition, LLC (the “CRG Purchase Agreement”). We prepaid $18,653 in equipment loans 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 gain on the sale of a land parcel in Chicago pursuant to the CRG Purchase Agreement.

 

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The following table reflects major components of our revolving line of credit and borrowing agreements as of April 14, 2023, and October 28, 2022, respectively.

Schedule of Line of Credit and Borrowing Agreements 

   April 14, 2023   October 28, 2022 
         
Revolving credit facility  $-   $- 
Equipment notes:          
3.68% note due 04/16/27, out of lockout 04/17/22   4,423    4,913 
SOFR plus 2.00% bridge loan due 08/31/23   -    - 
Total debt   4,423    4,913 
Less current debt   (1,023)   (1,089)
Total long-term debt  $3,400   $3,824 

 

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. Material 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 April 14, 2023, the Company was in violation of the net income after taxes covenant which was subsequently waived (per letter dated May 23, 2023). As of April 14, 2023 and October 28, 2022, the Company was in compliance with all other covenants under the Wells Fargo Loan Agreements.

 

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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 (the “Securities Act”), 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 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; statements regarding the anticipated impact of the global novel coronavirus (“COVID-19”) pandemic; 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; macroeconomic conditions, including global financial pressures, inflation, market volatility, and recessionary concerns; success of operating initiatives; development and operating costs; trends impacting the purchasing behavior of our customers and consumers; 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; including the effects of climate change and changes in the regulatory environment and consumer demand to mitigate these effects; construction schedules; 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; 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 28, 2022 (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 have considered the impact of federal, state, and local government actions related to the COVID-19 pandemic on our Condensed Consolidated Financial Statements. The business disruptions associated with the pandemic had a minimal impact on our Consolidated Financial Statements for the fiscal year ended October 28, 2022, and during the twelve and twenty-four weeks ended April 14, 2023.  Disruptions from the pandemic 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. The long-term impacts of COVID-19 are unknown and dependent upon future developments including COVID-19 variants and resurgences as well as actions taken by federal, state and local government officials.

 

The federal Public Health Emergency for COVID-19, declared under Section 319 of the Public Health Service Act expired at the end of the day on May 11, 2023.

 

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Critical Accounting Policies and Management Estimates

 

The preparation of our 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 April 30, 2023, was 4.76% as compared to 5.51% as of October 28, 2022. 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 twenty-four weeks ended April 14, 2023, and April 15, 2022, respectively.

 

   Walmart (1)   Dollar General 
   Sales   AR   Sales   AR 
April 14, 2023   30.4%   27.3%   16.2%   27.1%
April 15, 2022   31.4%   4.4%   17.7%   38.1%

 

(1) Walmart AR represented a higher percentage of consolidated AR as of April 14, 2023, 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 (“AR”) or 10% of consolidated sales for the twelve weeks ended April 14, 2023, and April 15, 2022, respectively.

 

   Walmart (1)   Dollar General 
   Sales   AR   Sales   AR 
April 14, 2023   30.8%   27.3%   20.1%   27.1%
April 15, 2022   30.5%   4.4%   19.6%   38.1%

 

(1) Walmart AR represented a higher percentage of consolidated AR as of April 14, 2023, due to terminating the accelerated payments on outstanding accounts receivable on July 1, 2022.

 

Revenues are recognized in accordance with ASC 606 – Revenue from 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.

 

Concentration Risk

 

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.

 

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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. 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. Our health care plans as they exist in 2023 are compliant with all applicable regulations that exist currently. As we look to the future, we anticipate that future legislative action will impact the plans offered to active and retired participants. As we have done in the past, our executive team will continue to assess the accounting implications of the PPACA and potential future legislation to determine the impact on our financial position and results of operations. The potential future effects and cost of complying with the legislative changes is not determinable currently.

 

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. We leverage relationships with regional sales managers, and 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 products 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 and customer-owned distribution centers serving approximately 19,000 supermarkets, mass merchandise and convenience retail stores located in 50 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. Products 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.

 

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Results of Operations for the Twelve Weeks Ended April 14, 2023, and April 15, 2022

 

Net Sales-Consolidated

 

Net sales decreased by $4,476 (7.5%) to $55,510 in the second twelve-week period of the 2023 fiscal year compared to the same twelve-week period in fiscal year 2022. The changes in net sales were comprised as follows:

 

Impact on Net Sales-Consolidated  %   $ 
Selling price per pound   2.1    1,339 
Unit sales volume in pounds   -7.7    (4,983)
Returns activity   -0.4    (142)
Promotional activity   -1.5    (690)
Decrease in net sales   -7.5    (4,476)

 

Net Sales-Frozen Food Products Segment

 

Net sales in the Frozen Food Products segment decreased by $573 (4.6%) to $11,904 in the second twelve-week period of the 2023 fiscal year compared to the same twelve-week period in fiscal year 2022. The changes in net sales were comprised as follows:

 

Impact on Net Sales-Frozen Food Products  %   $ 
Selling price per pound   6.7    957 
Unit sales volume in pounds   -8.8    (1,262)
Returns activity   0.0    2 
Promotional activity   -2.5    (270)
Decrease in net sales   -4.6    (573)

 

The decrease in net sales for the twelve-week period ended April 14, 2023, primarily relates to lower unit sales volume in pounds partially offset by higher selling prices per pound implemented during July 2021 and May 2022. Other institutional Frozen Food Products dollar sales, including sheet dough and rolls, increased 6% and retail dollar sales volume decreased by 16%. We believe demand decreased due to impacts of an inflationary environment on consumer spending habits. Returns activity remained unchanged compared to the same twelve-week period in the 2022 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 $3,903 (8.2%) to $43,606 in the second twelve-week period of the 2023 fiscal year compared to the same twelve-week period in fiscal year 2022. The changes in net sales were comprised as follows:

 

Impact on Net Sales-Snack Food Products  %   $ 
Selling price per pound   0.8    382 
Unit sales volume in pounds   -7.3    (3,721)
Returns activity   -0.5    (145)
Promotional activity   -1.2    (419)
Decrease in net sales   -8.2    (3,903)

 

Net sales of Snack Food Products decreased due to lower unit sales volume in pounds through our direct store delivery distribution channel and was partially offset by higher selling prices per pound during the second quarter of fiscal year 2023. 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 changes in product mix. Returns activity was higher compared to the same twelve-week period in the 2022 fiscal year. Promotional activity increased as a percentage of sales.

 

Cost of Products Sold and Gross Margin-Consolidated

 

Cost of products sold decreased by $3,251 (7.5%) to $40,053 in the second twelve-week period of the 2023 fiscal year compared to the same twelve-week period in fiscal year 2022. The gross margin remained the same at 27.8% during the second twelve-weeks of fiscal year 2023 compared to the same twelve-week period in fiscal year 2022.

 

Change in Cost of Products Sold by Segment  $   %   Commodity $
Increase (Decrease)
 
Frozen Food Products Segment   829    1.9    61 
Snack Food Products Segment   (4,080)   -9.4    (1,911)
Total   (3,251)   -7.5    (1,850)

 

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Cost of Products Sold-Frozen Food Products Segment

 

Cost of products sold in the Frozen Food Products segment increased by $829 (9.6%) to $9,478 in the second twelve-week period of the 2023 fiscal year compared to the same twelve-week period in fiscal year 2022. The cost of purchased flour increased approximately $61 in the second twelve-week period of fiscal year 2023 compared to the same twelve-week period in fiscal year 2022. Gross overhead increased as a result of continued upward pressures on input costs impacted by 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 $4,080 (11.8%) to $30,575 in the second twelve-week period of the 2023 fiscal year compared to the same twelve-week period in fiscal year 2022 due to lower cost for production materials and lower sales volume in our direct store delivery distribution channel. The cost of significant meat commodities decreased approximately $1,911 in the second twelve-week period of fiscal year 2023 compared to the same period in fiscal year 2022. We increased our net realizable value reserve of $122 during the twelve weeks ended April 14, 2023, to recognize inventory sold through on products already reserved in inventory as of year-end October 28, 2022. We maintain a net realizable reserve of $258 on products as of April 14, 2023, 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 (“SG&A”) decreased by $237 (1.6%) to $14,941 in the second twelve-week period of fiscal year 2023 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 
   April 14, 2023   April 15, 2022   Increase (Decrease) 
Wages and bonus  $5,994   $6,506   $(512)
Pension expense (income)   43    (367)   410 
Outside storage   466    137    329 
Healthcare expense   650    907    (257)
Provision for bad debt   (112)   71    (183)
Other SG&A   7,900    7,924    (24)
Total - SG&A  $14,941   $15,178   $(237)

 

Lower sales commissions due to lower sales volume in pounds resulted in lower wages and bonus expenses in the second twelve weeks of the 2023 fiscal year compared to the same period in the prior year. The increase in pension expense was a result of a decrease in pension plan assets caused by performance of the underlying markets that support them. Outside storage increased primarily as a result of the need for additional warehouse capacity to store products and house equipment to keep a portion of the space climate controlled. Healthcare costs have decreased due to favorable claim trends. The decrease in the provision for bad debt expense was mainly the result of recoveries of losses on older balances. None of the changes individually or as a group of expenses in “Other SG&A” were significant enough to merit separate disclosure. The major components comprising the decrease of “Other SG&A” expenses were lower postage expense and sales taxes partially offset by higher travel expense.

 

Selling, General and Administrative Expenses-Frozen Food Products Segment

 

SG&A expenses in the Frozen Food Products segment decreased by $42 (1.3%) to $3,244 in the second twelve-week period of fiscal year 2023 compared to the same twelve-week period in the prior fiscal year. The overall decrease in SG&A expenses was due to lower wages and bonuses, partially offset by higher product advertising.

 

Selling, General and Administrative Expenses-Snack Food Products Segment

 

SG&A expenses in the Snack Food Products segment decreased by $195 (1.6%) to $11,697 in the second twelve-week period of fiscal year 2023 compared to the same twelve-week period in the prior fiscal year. Most of the decrease was due to lower wages and bonuses, decreased fees paid under brand licensing agreements and lower postage expense partially offset by higher pension expense and higher outside storage fees.

 

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Income Taxes-Consolidated

 

Income tax for the twelve weeks ended April 14, 2023, and April 15, 2022, respectively, was as follows:

 

   April 14, 2023   April 15, 2022 
Provision for income taxes  $164   $391 
           
Effective tax rate   52.4%   32.7%

 

We recorded a provision for income taxes of $164 for the twelve-week period ended April 14, 2023, related to federal and state taxes, based on the Company’s expected annual effective tax rate. 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 Twenty-Four Weeks Ended April 14, 2023, and April 15, 2022

 

Net Sales-Consolidated

 

Net sales decreased by $6,940 (5.6%) to $117,132 in the twenty-four-week period ended April 14, 2023, compared to the same period in fiscal year 2022. The changes in net sales were comprised as follows:

 

Impact on Net Sales-Consolidated  %   $ 
Selling price per pound   2.0    2,683 
Unit sales volume in pounds   -5.8    (7,668)
Returns activity   -0.9    (982)
Promotional activity   -0.9    (973)
Decrease in net sales   -5.6    (6,940)

 

Net Sales-Frozen Food Products Segment

 

Net sales in the Frozen Food Products segment increased by $1,460 (5.9%) to $26,303 in the twenty-four-week period ended April 14, 2023 compared to the same twenty-four-week period in fiscal year 2022. The changes in net sales were comprised as follows:

 

Impact on Net Sales-Frozen Food Products  %   $ 
Selling price per pound   7.0    1,973 
Unit sales volume in pounds   0.5    136 
Returns activity   0.0    (11)
Promotional activity   -1.6    (638)
Increase in net sales   5.9    1,460 

 

The increase in net sales for the twenty-four-week period ended April 14, 2023 primarily relates to higher unit sales volume 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 year 2022. Other institutional Frozen Food Products sales, including sheet dough and rolls, increased 13% by volume while retail sales volume remained steady. Returns activity remained the same compared to the same twenty-four-week period in the 2022 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 $8,400 (8.5%) to $90,829 in the twenty-four-week period ended April 14, 2023, compared to the same twenty-four-week period in fiscal year 2022. The changes in net sales were comprised as follows:

 

Impact on Net Sales-Snack Food Products  %   $ 
Selling price per pound   0.7    710 
Unit sales volume in pounds   -7.5    (7,804)
Returns activity   -1.2    (971)
Promotional activity   -0.5    (335)
Decrease in net sales   -8.5    (8,400)

 

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Net sales of Snack Food Products decreased due to lower sales through our direct store delivery distribution channel during the first twenty-four weeks of fiscal year 2023. The weighted average selling price per pound increased compared to the same twenty-four-week period in the prior fiscal year due to price increases implemented in response to record high meat commodity input costs. Unit sales volume in pounds was lower as compared to the prior year comparable twenty-four-week period. We believe demand decreased primarily due to inflationary pressures on consumer spending habits. Returns activity was higher compared to the same twenty-four-week period in the 2022 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 decreased by $6,388 (7.0%) to $84,609 in the twenty-four-week period ended April 14, 2023, year compared to the same twenty-four-week period in fiscal year 2022. The gross margin increased from 26.7% to 27.8% during the 2023 period.

 

Change in Cost of Products Sold by Segment  $   %   Commodity $
Increase (Decrease)
 
Frozen Food Products Segment   2,723    3.0    200 
Snack Food Products Segment   (9,111)   -10.0    (6,218)
Total   (6,388)   -7.0    (6,018)

 

Cost of Products Sold-Frozen Food Products Segment

 

Cost of products sold in the Frozen Food Products segment increased by $2,723 (15.6%) to $20,223 in the first twenty-four-week period of the 2023 fiscal year compared to the same twenty-four-week period in fiscal year 2022. Increased volume and changes in the product mix were the primary contributing factors to this increase. The cost of purchased flour increased approximately $200 in the first twenty-four-week period of fiscal year 2023 compared to the same twenty-four-week period in fiscal year 2022. In our Frozen Food Products segment, the volume increases in foodservice 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 decreased by $9,111 (12.4%) to $64,386 in the first twenty-four-week period of the 2023 fiscal year compared to the same twenty-four-week period in fiscal year 2022 due to lower cost for production materials and lower sales volume in our direct store delivery distribution channel. The cost of significant meat commodities decreased approximately $6,218 in the twenty-four-week period of fiscal year 2023 compared to the same period in fiscal year 2022 due to lower pressure on commodity markets. We increased our net realizable value reserve of $127 during the twenty-four weeks ended April 14, 2023, to recognize inventory sold through on products already reserved in inventory as of year-end October 28, 2022. We maintain a net realizable reserve of $258 on products as of April 14, 2023, 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 increased by $826 (2.8%) to $30,735 in the twenty-four-week period ended April 14, 2023, compared to the same twenty-four-week period in the prior fiscal year. The table below summarizes the significant expense increases (decreases) included in this category:

 

   24 Weeks Ended   Expense 
   April 14, 2023   April 15, 2022   Increase (Decrease) 
Outside storage  $819   $257   $562 
Wages and bonus   12,776    13,104    (328)
Travel expenses   1,137    867    270 
Pension expense (income)   79    (176)   255 
Postage expense   270    451    (181)
Healthcare expenses   1,306    1,479    (173)
Workers’ compensation costs   449    291    158 
Other SG&A   13,899    13,636    263 
Total - SG&A  $30,735   $29,909   $826 

 

Outside storage increased primarily as a result of the need for additional warehouse capacity to store product. Lower sales commissions resulted in lower wages and bonus expenses in the first twenty-four weeks of the 2023 fiscal year compared to the same period in the prior year. Travel expense increased due to participation in food shows and in-person business meetings. Postage expense has decreased due to a focus on working with outside carriers to minimize postage expense. Healthcare costs have decreased due to favorable claim trends. The increase in pension expenses was a result of a decrease in pension plan assets caused by performance of the underlying markets that support them. Workers’ compensation costs increased due to unfavorable trends in claims experience in the current fiscal year. None of the changes individually or as a group of expenses in “Other SG&A” were significant enough to merit separate disclosure. The major components comprising the increase of “Other SG&A” expenses were higher product advertising and insurance premiums.

 

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Selling, General and Administrative Expenses-Frozen Food Products Segment

 

SG&A expenses in the Frozen Food Products segment increased by $515 (8.1%) to $6,888 in the first twenty-four-week period of fiscal year 2023 compared to the same twenty-four-week period in the prior fiscal year. The overall increase in SG&A expenses was due to higher sales volume and higher pension expenses and workers’ compensation costs.

 

Selling, General and Administrative Expenses-Snack Food Products Segment

 

SG&A expenses in the Snack Food Products segment increased by $311 (1.3%) to $23,847 in the first twenty-four-week period of fiscal year 2023 compared to the same twenty-four-week period in the prior fiscal year. Most of the increase was due to higher outside storage fees, higher pension expense and higher workers’ compensation costs.

 

Income Taxes-Consolidated

 

Income tax for the twenty-four weeks ended April 14, 2023 and April 15, 2022, respectively, was as follows:

 

   April 14, 2023   April 15, 2022 
Provision for income taxes  $562   $457 
         
Effective tax rate   34.2%   29.1%

 

We recorded a tax provision of $562 for the twenty-four-week period ended April 14, 2023, related to federal and state taxes, based on the Company’s expected annual effective tax rate. 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 approximately $60,000 in gross 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 revolving 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 August 31, 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 April 14, 2023, we had $1,023 of current debt on equipment loans, $67,920 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. With the cash expected to be generated from the Company’s operations, 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.

 

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Cash flows from operating activities for the twenty-four weeks ended:

 

   April 14, 2023   April 15, 2022 
Net income  $1,081   $1,112 
           
Adjustments to reconcile net income to net cash provided by operating activities:          
Depreciation and amortization   3,027    3,158 
Provision for (recoveries on) losses on accounts receivable   195    (10)
Increase in promotional allowances   1,067    2,278 
Loss (gain) on sale of property, plant, and equipment   160    (18)
Changes in operating working capital   (4,233)   (4,247)
Net cash provided by operating activities  $1,297   $2,273 

 

For the twenty-four weeks ended April 14, 2023, net cash provided by operating activities was $1,297, $976 less cash provided than during the same period in fiscal year 2022. The decrease in net cash provided by operating activities primarily relates to a decrease in accounts payable of $2,895, an increase in prepaid expenses and other current assets of $2,001 partially offset by lower accounts receivable of $3,781. During the twenty-four-week period ended April 14, 2023, 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.

 

For the twenty-four weeks ended April 15, 2022, net cash provided by operating activities was $2,273 and primarily relates to net income of $1,112, increase in promotional allowance of $2,278, partially offset by an increase in accounts receivable of $2,438, an increase in inventories of $4,164 and an increase in non-current liabilities of $1,272. During the twenty-four-week period ended April 15, 2022, we did not contribute towards our defined benefit pension plan.

 

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 twenty-four-week period ended April 14, 2023. The cash conversion cycle was 72 days for the twenty-four-week period ended April 15, 2022. The increase in the cash conversion cycle from 72 days to 80 days was mainly due to higher days sales outstanding and to a lesser extent higher days payable in accounts payable. We have discontinued accelerating payments on outstanding accounts receivable from Walmart as of July 1, 2022.

 

Cash flows from investing activities for the twenty-four weeks ended:

 

   April 14, 2023   April 15, 2022 
Proceeds from sale of property, plant, and equipment  $161   $18 
Additions to property, plant, and equipment   (1,293)   (629)
Net cash used in investing activities  $(1,132)  $(611)

 

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 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 twenty-four weeks ended:

 

   April 14, 2023   April 15, 2022 
Changes in projects in process  $(137)  $(140)
Building improvements   -    - 
Direct store delivery and sales vehicles   514    372 
Packaging lines   564    159 
Computer software and hardware   -    23 
Quality control   103    - 
Processing equipment   66    184 
Furniture and fixtures   22    31 
Additions to property, plant, and equipment  $1,132   $629 

 

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Cash flows from financing activities for the twenty-four weeks ended:

 

   April 14, 2023   April 15, 2022 
Payment of lease and right-of-use obligations  $(255)  $(151)
Proceeds from borrowings under revolving credit facilities   -    6,000 
Repayments of bank borrowings   (492)   (1,028)
Net cash (used in) provided by financing activities  $(747)  $4,821 

 

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 April 14, 2023, 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 August 31, 2023. As of year-end October 28, 2022, 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 secured overnight financing rate (“SOFR”). 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. 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 outstanding balance under 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 to obtain capital to pay off the existing equipment loans as they come out of the lock out period and may be prepaid. The outstanding principal balances of the bridge loan became due and payable in full 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 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 revolving line of credit and borrowing agreements as of April 14, 2023, and October 28, 2022, respectively.

 

   April 14, 2023   October 28, 2022 
         
Revolving credit facility  $-   $- 
Equipment notes:          
3.68% note due 04/16/27, out of lockout 04/17/22   4,423    4,913 
SOFR plus 2.00% bridge loan due 08/31/23   -    - 
Total debt   4,423    4,913 
Less current debt   (1,023)   (1,089)
Total long-term debt  $3,400   $3,824 

 

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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. Material 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 April 14, 2023, the Company was in violation of the net income after taxes covenant which was subsequently waived (per letter dated May 23, 2023). The Company was in compliance with all other covenants under the Wells Fargo Loan Agreements as of April 14, 2023 and October 28, 2022.

 

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 2023. 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 2023. However, future volatility of general price inflation or deflation and raw material cost and availability could adversely affect our financial results.

 

Recently issued accounting pronouncements and regulations

 

There were no new accounting pronouncements issued or proposed by the FASB during the first twenty-four weeks of fiscal year 2023 and through the date of filing this report which the Company believes will have a material impact on its 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 required for smaller reporting companies.

 

Item 4. Controls and Procedures

 

Evaluation of Disclosure 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. As of April 14, 2023, based on this evaluation, the principal executive officer and principal financial officer have concluded that our disclosure controls and procedures were not effective as of fiscal year ended October 28, 2022 due to the material weakness in our internal control over financial reporting related to the Company’s failure to timely report to accounting a change in lease terms from a month-to month lease to a five-year term lease, as disclosed in our Annual Report on Form 10-K for the fiscal year ended October 28, 2022. Management has implemented remediation steps to improve our internal control over financial reporting and believes the issue will be remediated prior to the end of fiscal year 2023.

 

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.

 

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.

 

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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”.

 

Remediation

 

We began implementing a remediation plan to address the previously reported material weakness in internal control over financial reporting, described in Part II, Item 9A, “Controls and Procedures” in our Annual Report on Form 10-K for the fiscal year ended October 28, 2022. Management has implemented remediation steps to improve our internal control over financial reporting, including modifying the design of the related internal controls to include verbal communication with plant managers on a quarterly basis, and expanding notification to Operating Committee members for feedback on any additional information on new contractual arrangements for revenue, leases or other types of agreements impacting accounting. In the case of the lease misstatement, we believe the failure to notify management was a one-time oversight and not indicative of a pattern or continuing weakness in the proper functioning of the controls.

 

The material weakness will not be considered remediated until the applicable controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively. We expect that the remediation of this material weakness will be completed prior to the end of fiscal year 2023. Notwithstanding the material weakness, we believe the financial statements in this report fairly present, in all material respects, our financial position, results of operations, and cash flows for the periods presented in conformity with generally accepted accounting principles.

 

Changes in Internal Control Over Financial Reporting

 

There have been no changes in our internal controls over financial reporting other than those discussed above that occurred during the fiscal quarter ended April 14, 2023, that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

 

Part II. Other Information

 

Item 1. Legal Proceedings

 

From time to time, we are involved in various legal proceedings, disputes, and other claims arising in the ordinary course of business. Although the results of these ordinary course matters cannot be predicted with certainty, we currently believe that the final outcome of these ordinary course matters will not, individually or in the aggregate, have a material adverse effect on our business, results of operations, financial condition, or cash flows. However, regardless of the merit of the claims raised or the outcome, these ordinary course matters can have an adverse impact on us as a result of legal costs, diversion of management's time and resources, and other factors.

 

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.

 

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Item 6. Exhibits

 

        Incorporated by Reference    
Exhibit Number   Exhibit Description   Form   File No.   Exhibit   Filing Date   Filed Herewith
                         
10.1#   Consulting Agreement by and between Bridgford Foods Corporation and Raymond F. Lancy dated February 2, 2023.   8-K   000-02396   10.1   2/2/23    
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).                    
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).                    
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).                    

 

# Indicates management contract, compensatory plan or arrangement.

*Furnished herewith.

 

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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: May 26, 2023 By: /s/ Cindy Matthews-Morales
    Cindy Matthews-Morales
    Chief Financial Officer, Secretary
    (Duly Authorized Officer, Principal Financial and Accounting Officer)

 

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