UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
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THE SECURITIES EXCHANGE ACT OF 1934
For
the quarterly period ended
OR
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ____
Commission
file number:
(Exact name of registrant as specified in its charter)
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Securities registered pursuant to Section 12(b) of the Act:
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Indicate
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has been subject to such filing requirements for the past 90 days.
Indicate
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| Large accelerated filer ☐ | Accelerated filer ☐ |
| Smaller reporting company | |
| Emerging growth company |
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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.
Items 1 and 2 through 5 of Part II have been omitted because they are not applicable with respect to the Company and/or the current reporting period.
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Part I. Financial Information
Item 1. a.
BRIDGFORD FOODS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
| January 20, 2023 | October 28, 2022 | |||||||
| (unaudited) | ||||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable, less allowance for doubtful accounts of $ | ||||||||
| Inventories, net | ||||||||
| Refundable income taxes | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total current assets | ||||||||
| Property, plant and equipment, net of accumulated depreciation and amortization of $ | ||||||||
| Other non-current assets | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued payroll, advertising, and other expenses | ||||||||
| Income taxes payable | ||||||||
| Current notes payable - equipment | ||||||||
| Current right-of-use leases payable | ||||||||
| Other current liabilities | ||||||||
| Total current liabilities | ||||||||
| Long-term notes payable - equipment | ||||||||
| Deferred income taxes, net | ||||||||
| Long-term right-of-use leases payable | ||||||||
| Other non-current liabilities | ||||||||
| Total liabilities | ||||||||
| Contingencies and commitments (Note 3) | ||||||||
| Shareholders’ equity: | ||||||||
| Preferred stock, without par value; authorized – shares; issued and outstanding – | ||||||||
| Common stock, $ par value; authorized – shares; issued and outstanding – and shares, respectively | ||||||||
| Capital in excess of par value | ||||||||
| Retained earnings | ||||||||
| Accumulated other comprehensive loss | ( | ) | ( | ) | ||||
| Total shareholders’ equity | ||||||||
| Total liabilities and shareholders’ equity | $ | $ | ||||||
See accompanying notes to Condensed Consolidated Financial Statements.
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Item 1. b.
BRIDGFORD FOODS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except share and per share amounts)
| 12 weeks ended | ||||||||
| January 20, 2023 | January 21, 2022 | |||||||
| Net sales | $ | $ | ||||||
| Cost of products sold | ||||||||
| Gross margin | ||||||||
| Selling, general and administrative expenses | ||||||||
| Gain on sale of property, plant, and equipment | ( | ) | ( | ) | ||||
| Operating income | ||||||||
| Other income (expense) | ||||||||
| Interest expense | ( | ) | ( | ) | ||||
| Cash surrender value (loss) gain | ( | ) | ||||||
| Total other expense | ( | ) | ( | ) | ||||
| Income before taxes | ||||||||
| Provision for income taxes | ||||||||
| Net income | $ | $ | ||||||
| Basic earnings per share | $ | $ | ||||||
| Shares used to compute basic earnings per share | ||||||||
See accompanying notes to Condensed Consolidated Financial Statements.
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Item 1. c.
BRIDGFORD FOODS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
12 weeks ended January 20, 2023
(unaudited)
(in thousands)
| Shares | Amount | Capital in excess of par value | Retained earnings | Accumulated other comprehensive loss | Total shareholders’ equity | |||||||||||||||||||
| Balance, October 28, 2022 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||
| Net income | - | |||||||||||||||||||||||
| Balance, January 20, 2023 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||
BRIDGFORD FOODS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
12 weeks ended January 21, 2022
(unaudited)
(in thousands)
| Shares | Amount | Capital in excess of par value | Retained earnings | Accumulated other comprehensive loss | Total shareholders’ equity | |||||||||||||||||||
| Balance, October 29, 2021 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||
| Net income | - | |||||||||||||||||||||||
| Balance, January 21, 2022 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||
See accompanying notes to Condensed Consolidated Financial Statements.
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Item 1. d.
BRIDGFORD FOODS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
| 12 weeks ended | ||||||||
| January 20, 2023 | January 21, 2022 | |||||||
| Cash flows from operating activities: | ||||||||
| Net income | $ | $ | ||||||
| Adjustments to reconcile net income to net cash used in operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Provision for losses (recovery on) accounts receivable | ( | ) | ||||||
| Increase in promotional allowances | ||||||||
| Gain on sale of property, plant, and equipment | ( | ) | ( | ) | ||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable, net | ( | ) | ||||||
| Inventories, net | ( | ) | ||||||
| Prepaid expenses and other current assets | ( | ) | ( | ) | ||||
| Refundable income taxes | ( | ) | ||||||
| Other non-current assets | ( | ) | ||||||
| Accounts payable | ( | ) | ||||||
| Accrued payroll, advertising, and other expenses | ( | ) | ( | ) | ||||
| Other current liabilities | ( | ) | ||||||
| Other non-current liabilities | ( | ) | ( | ) | ||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| Cash flows from investing activities: | ||||||||
| Proceeds from sale of property, plant, and equipment | ||||||||
| Additions to property, plant, and equipment | ( | ) | ( | ) | ||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| Cash flows from financing activities: | ||||||||
| Payment of lease and right-of-use obligations | ( | ) | ( | ) | ||||
| Proceeds from borrowings under revolving credit facilities | ||||||||
| Repayments of bank borrowings | ( | ) | ( | ) | ||||
| Net cash (used in) provided by financing activities | ( | ) | ||||||
| Net (decrease) increase in cash and cash equivalents and restricted cash | ( | ) | ||||||
| Cash and cash equivalents and restricted cash at beginning of period | ||||||||
| Cash and cash equivalents and restricted cash at end of period | $ | $ | ||||||
| Supplemental disclosure of cash flow information: | ||||||||
| Cash paid for income taxes | $ | $ | ||||||
| Cash paid for interest | $ | $ | ||||||
See accompanying notes to Condensed Consolidated Financial Statements.
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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 January 20, 2023 and January 21, 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 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 weeks ended January 20, 2023. We expect these events to have future business impacts, the extent of which is uncertain and largely subject to whether the pandemic severity worsens. These impacts could include but may not be limited to risks and uncertainty related to shifts in demand between sales channels, market volatility, constraints in our supply chain, our ability to operate production facilities and worker availability. These unknowns may subject the Company to future risks related to long-lived asset impairments, increased reserves for uncollectible accounts, price and availability of ingredients and raw materials used in our products and adjustments to reflect the market value of our inventory.
The October 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 Annual Report.
The preparation of Condensed Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported revenues and expenses during the reporting periods. Some of the estimates needed to be made by management include the allowance for doubtful accounts, promotional and returns allowances, inventory reserves, the estimated useful lives of property, plant and equipment, and the valuation allowance for the Company’s deferred tax assets. Actual results could materially differ from these estimates. Amounts estimated related to liabilities for self-insured workers’ compensation, employee healthcare and pension benefits are especially subject to inherent uncertainties and these estimated liabilities may ultimately settle at amounts which vary from our current estimates. Market conditions and the volatility in stock markets may cause significant changes in the measurement of our pension fund liabilities and the performance of our life insurance policies in future periods.
Financial instruments that subject the Company to credit risk consist primarily of cash and cash equivalents, accounts receivable, accounts payable, accrued payroll, and notes payable. The carrying amount of these instruments approximate fair market value due to their short-term maturity or market interest rates. 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 (loss) and comprehensive income (loss) during each of the twelve weeks ended January 20, 2023, or January 21, 2022.
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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 twelve weeks ended January 20, 2023, and January 21, 2022, respectively.
| Walmart (1) | Dollar General | |||||||||||||||
| Sales | AR | Sales | AR | |||||||||||||
| January 20, 2023 | % | % | % | % | ||||||||||||
| January 21, 2022 | % | % | % | % | ||||||||||||
| (1) |
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
product to our customers. Revenue is recognized as the net amount estimated to be received after deducting estimated or known amounts
including variable consideration for discounts, trade allowances, consumer incentives, coupons, volume-based incentives, cooperative
advertising, product returns and other such programs. Promotional allowances, including customer incentive and trade promotion activities,
are recorded as a reduction to sales based on amounts estimated being due to customers, based primarily on historical utilization and
redemption rates. Estimates are reviewed regularly until incentives or product returns are realized and the result of any such adjustments
are known. Promotional allowances deducted from sales for the twelve weeks ended January 20, 2023, and January 21, 2022, were $
Leases
Leases
are recognized in accordance with ASC 842 and Accounting Standards Update (“ASU”) 2016-02 Leases (“ASC 842”)
which requires a lessee to recognize assets and liabilities with lease terms of more than
ROU lease assets are recorded within property, plant and equipment, net of accumulated depreciation and amortization. The Company 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 January 20, 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 February 27, 2023, the Company modified the lease with Hogshed Ventures, LLC by extending the lease a year after the lease expires on June 30, 2023. The effective date of the lease modification occurred when both the lessee and the lessor approved such modification. The lease modification terms are still being worked out.
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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 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 January 20, 2023, or January 21, 2022.
Note 2 – Inventories, net:
Inventories are comprised of the following at the respective period ends:
| January 20, 2023 | October 28, 2022 | |||||||
| Meat, ingredients, and supplies | $ | $ | ||||||
| Work in progress | ||||||||
| Finished goods | ||||||||
| $ | $ | |||||||
Inventories
are valued at the lower of cost (which approximates actual cost on a first-in, first-out basis) or net realizable value. Inventories
include the cost of raw materials, labor, and manufacturing overhead. We regularly review inventory quantities on hand and write down
any 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
$
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 performed a detailed analysis and determined that the only indication of a long-term lease in addition to transportation leases for long-haul trucks was the warehouse lease with Hogshed Ventures, LLC and Racine Partners 4333 LLC.
The
Company’s five-year term lease with Racine Partners 4333 LLC, was effective June 1, 2022. A right-of-use asset of $
A
right-of-use asset and corresponding liability for warehouse storage space was recorded for $
The
lease with Hogshed Ventures, LLC does not provide an implicit rate and we estimated our incremental interest rate to be approximately
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The following is a schedule by years of future minimum lease payments for transportation leases and right-of-use assets:
| Fiscal Year | Financing Obligations | |||
| 2023 | $ | |||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| Later Years | ||||
| Total Minimum Lease Payments(a) | $ | |||
| Less: Amount representing executory costs | ( | ) | ||
| Less: Amount representing interest(b) | ( | ) | ||
| Present value of future minimum lease payments(c) | $ | |||
| (a) | |
| (b) | |
| (c) |
The Company is involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters is not expected to have a material adverse effect on the Company’s consolidated financial position or results of operations.
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. 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
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 January 20, 2023, and January 21, 2022, respectively.
| Segment Information | ||||||||||||||||
| Twelve weeks Ended January 20, 2023 | Frozen Food Products | Snack Food Products | Other | Totals | ||||||||||||
| Sales | $ | $ | $ | $ | ||||||||||||
| Cost of products sold | ||||||||||||||||
| Gross margin | ||||||||||||||||
| SG&A | ||||||||||||||||
| Gain on sale of property, plant, and equipment | ( | ) | ( | ) | ||||||||||||
| Operating income | ||||||||||||||||
| Total assets | $ | $ | $ | $ | ||||||||||||
| Additions to PP&E | $ | $ | $ | $ | ||||||||||||
| Twelve weeks Ended January 21, 2022 | Frozen Food Products | Snack Food Products | Other | Totals | ||||||||||||
| Sales | $ | $ | $ | $ | ||||||||||||
| Cost of products sold | ||||||||||||||||
| Gross margin | ||||||||||||||||
| SG&A | ||||||||||||||||
| Gain on sale of property, plant, and equipment | ( | ) | ( | ) | ||||||||||||
| Operating income | ||||||||||||||||
| Total assets | $ | $ | $ | $ | ||||||||||||
| Additions to PP&E | $ | $ | $ | $ | ||||||||||||
The following information further disaggregates our sales to customers by major distribution channel and customer type for the twelve weeks ended January 20, 2023, and January 21, 2022, respectively.
Twelve weeks Ended January 20, 2023
| Distribution Channel | Retail (a) | Foodservice (b) | Totals | |||||||||
| Direct store delivery | $ | $ | $ | |||||||||
| Direct customer warehouse | ||||||||||||
| Total Snack Food Products | ||||||||||||
| Distributors | ||||||||||||
| Total Frozen Food Products | ||||||||||||
| Totals | $ | $ | $ | |||||||||
Twelve weeks Ended January 21, 2022
| Distribution Channel | Retail (a) | Foodservice (b) | Totals | |||||||||
| Direct store delivery | $ | $ | $ | |||||||||
| Direct customer warehouse | ||||||||||||
| Total Snack Food Products | ||||||||||||
| Distributors | ||||||||||||
| Total Frozen Food Products | ||||||||||||
| Totals | $ | $ | $ | |||||||||
| (a) | |
| (b) |
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Note 5 – Income Taxes:
The
Company’s effective tax rate was
As
of January 20, 2023, the Company has a federal NOL carry forward of approximately $
Our federal income tax returns are open to audit under the statute of limitations for the fiscal years 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
Equipment Notes Payable
On
December 26, 2018, we entered into a master collateral loan and security agreement with Wells Fargo Bank, N.A. (the “Original Wells
Fargo Loan Agreement”) for up to $
Bridge Loan
On
August 30, 2021, we entered into a loan commitment note for a bridge loan of up to $
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The following table reflects major components of our revolving line of credit and borrowing agreements as of January 20, 2023, and October 28, 2022, respectively.
| January 20, 2023 | October 28, 2022 | |||||||
| Revolving credit facility | $ | $ | ||||||
| Equipment notes: | ||||||||
| SOFR plus | ||||||||
| Total debt | ||||||||
| Less current debt | ( | ) | ( | ) | ||||
| Total long-term debt | $ | $ | ||||||
Loan Covenants
The Wells Fargo Loan Agreements collectively contain various affirmative and negative covenants that limit the use of funds and define other provisions of the loan. 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 $ |
As of January 20, 2023 and October 28, 2022, the Company was in compliance with all 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 the anticipated impact of the global novel coronavirus (“COVID-19”) pandemic; statements regarding operational challenges, including as a result of global supply chain disruptions and labor shortages; statements regarding inflationary pressures and the resulting impact on our results of operations; statements regarding new regulations related to federal income tax and the impact on our financial statements and cash flow; statements regarding the impact of the adoption of recent accounting pronouncements on our business; and statements relating to the assumptions underlying any of the foregoing. Throughout this Report, we have attempted to identify forward-looking statements by using words such as “may,” “believe,” “will,” “could,” “project,” “anticipate,” “expect,” “estimate,” “should,” “continue,” “potential,” “plan,” “forecasts,” “goal,” “seek,” “intend,” other forms of these words or similar words or expressions or the negative thereof (although not all forward-looking statements contain these words).
Such forward-looking statements involve known and unknown risks, uncertainties, and other factors which may cause our actual results, performance, or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the following: general economic and business conditions; the impact of the COVID-19 pandemic on our production facilities, supply chain, consumer demand, and cost of products sold, the impact of competitive products and pricing; macroeconomic conditions, including global financial pressures, inflation, market volatility, and recessionary concerns; success of operating initiatives; development and operating costs; advertising and promotional efforts; adverse publicity; acceptance of new product offerings; consumer trial and frequency; changes in business strategy or development plans; availability, terms and deployment of capital; availability of qualified personnel; commodity, labor, and employee benefit costs; changes in, or failure to comply with, government regulations; weather conditions; construction schedules; and other factors referenced in this Report as well as in our other filings with the Securities and Exchange Commission (the “SEC”). In addition, actual results may differ as a result of additional risks and uncertainties of which we are currently unaware or which we do not currently view as material to our business. We have based our forward-looking statements on our current expectations and projections about trends affecting our business and industry and other future events. Although we do not make forward-looking statements unless we believe we have a reasonable basis for doing so, we cannot guarantee their accuracy. Assumptions relating to budgeting, marketing, and other management decisions are subjective in many respects and thus susceptible to interpretations and periodic revisions based on actual experience and business developments, the impact of which may cause us to alter our marketing, capital expenditure or other budgets, which may in turn affect our business, financial position, results of operations and cash flows. The reader is therefore cautioned not to place undue reliance on forward-looking statements contained herein and to consider other risks detailed more fully in our Annual Report on Form 10-K for the fiscal year ended October 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 are continuing to monitor and respond to the evolving nature of state and local government actions related to the COVID-19 pandemic and its impact on each of our production plant locations and our customer base. We coordinate with our local managers for the primary purpose of maintaining the health and safety of our team members, ensuring our ability to operate our processing facilities, and maintaining the liquidity of our business.
We continue to experience minor challenges related to the pandemic. These challenges may continue to increase our operating costs and negatively impact our sales volumes. The health and safety of our team members is our top priority. To protect our team members, as needed, we have implemented safety measures recommended by the Centers for Disease Control and Prevention and the Occupational Safety and Health Administration in our facilities and have implemented social distancing, temperature checks of team members, increased efforts to deep clean and sanitize facilities, the use of protective face coverings in certain environments, and making protective face coverings and other protective equipment available to team members. The long-term impacts of COVID-19 are unknown and dependent upon future developments including the duration and spread of the pandemic, COVID-19 variants and resurgences as well as actions taken by federal, state and local government officials.
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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 January 31, 2023, was 4.69% 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 twelve weeks ended January 20, 2023, and January 21, 2022, respectively.
| Walmart (1) | Dollar General | |||||||||||||||
| Sales | AR | Sales | AR | |||||||||||||
| January 20, 2023 | 30.8 | % | 35.2 | % | 13.0 | % | 24.0 | % | ||||||||
| January 21, 2022 | 32.1 | % | 5.4 | % | 15.8 | % | 40.6 | % | ||||||||
| (1) | Walmart AR represented a higher percentage of consolidated AR as of January 20, 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 or through a Company owned direct store delivery system.
We record the cash surrender or contract value for life insurance policies as an adjustment of premiums paid in determining the expense or income to be recognized under the contract for the period.
We provide tax reserves for federal, state, local and international exposures relating to audit results, tax planning initiatives and compliance responsibilities. The development of these reserves requires judgments about tax issues, potential outcomes, and timing, and is a subjective estimate. Although the outcome of these tax audits is uncertain, in management’s opinion adequate provisions for income taxes have been made for potential liabilities, if any, resulting from these reviews. Actual outcomes may differ materially from these estimates.
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.
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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 heath care plans as they exist in 2023 are complaint 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 product and customer opportunities. Regional sales managers perform several significant functions for us, including identifying and developing new business opportunities and providing customer service and support to our distributors and end purchasers through the effective use of our broker network.
Snack Food Products Segment
Our Snack Food Products segment primarily distributes products manufactured by us. All items within this segment are considered similar products and have been aggregated at this level. The dry sausage division includes products such as jerky, meat snacks, sausage, and pepperoni products. Our Snack Food Products segment sells approximately 170 different items through a direct store delivery network and customer-owned distribution centers serving approximately 19,000 supermarkets, mass merchandise and convenience retail stores located in 49 states. These customers are comprised of large retail chains and smaller “independent” operators.
Products produced or distributed by the Snack Food Products segment are supplied to customers through either direct-store-delivery or direct delivery to customer warehouses. Product delivered using the Company-owned fleet direct to the store is considered a direct-store-delivery. In this case, we provide the service of setting up and maintaining the display and stocking our products. Products delivered to customer warehouses are distributed to the retail store and stocked by the customer where it is then resold to the end consumer.
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Results of Operations for the Twelve Weeks Ended January 20, 2023, and January 21, 2022
Net Sales-Consolidated
Net sales decreased by $2,464 (3.8%) to $61,622 in the first 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 | 3.0 | 2,019 | ||||||
| Unit sales volume in pounds | -5.0 | (3,360 | ) | |||||
| Returns activity | -1.4 | (840 | ) | |||||
| Promotional activity | -0.4 | (283 | ) | |||||
| Decrease in net sales | -3.8 | (2,464 | ) | |||||
Net Sales-Frozen Food Products Segment
Net sales in the Frozen Food Products segment increased by $2,033 (16.4%) to $14,399 in the first 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 | 7.4 | 1,035 | ||||||
| Unit sales volume in pounds | 9.9 | 1,379 | ||||||
| Returns activity | -0.1 | (13 | ) | |||||
| Promotional activity | -0.8 | (368 | ) | |||||
| Increase in net sales | 16.4 | 2,033 | ||||||
The increase in net sales for the twelve-week period ended January 20, 2023, primarily relates to higher unit sales volume in pounds and to a lesser extent 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 20% and retail dollar sales volume increased by 10%. Returns activity increased 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 $4,497 (8.7%) to $47,223 in the first 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 | 1.8 | 985 | ||||||
| Unit sales volume in pounds | -8.8 | (4,740 | ) | |||||
| Returns activity | -1.7 | (828 | ) | |||||
| Promotional activity | 0.0 | 86 | ||||||
| Decrease in net sales | -8.7 | (4,497 | ) | |||||
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 first 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 offers remained the same as a percentage of sales.
Cost of Products Sold and Gross Margin-Consolidated
Cost of products sold decreased by $3,137 (6.6%) to $44,556 in the first twelve-week period of the 2023 fiscal year compared to the same twelve-week period in fiscal year 2022. The gross margin increased from 25.6% to 28.0% during the first twelve-weeks of fiscal year 2023.
| Change in Cost of Products Sold by Segment | $ | % | Commodity $ Increase (Decrease) | |||||||||
| Frozen Food Products Segment | 1,893 | 4.0 | 139 | |||||||||
| Snack Food Products Segment | (5,030 | ) | -10.6 | (4,307 | ) | |||||||
| Total | (3,137 | ) | -6.6 | (4,168 | ) | |||||||
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Cost of Products Sold-Frozen Food Products Segment
Cost of products sold in the Frozen Food Products segment increased by $1,893 (21.4%) to $10,744 in the first 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 $139 in the first twelve-week period of fiscal year 2023 compared to the same twelve-week period in fiscal year 2022. Increased unit sales volume in pounds and gross overhead including hourly wages and benefits has increased as a result of continued upward pressures on wages as a result of inflation. In our Frozen Food Products segment, the volume increases in foodservice were not enough to mitigate an increase in overhead per case of product.
Cost of Products Sold-Snack Food Products Segment
Cost of products sold in the Snack Food Products segment decreased by $5,030 (12.9%) to $33,812 in the first 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 $4,306 in the first twelve-week period of fiscal year 2023 compared to the same period in fiscal year 2022. We increased our net realizable value reserve of $5 during the twelve weeks ended January 20, 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 $137 on products as of January 20, 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”) increased by $1,063 (7.2%) to $15,794 in the first 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 | |||||||||||
| January 20, 2023 | January 21, 2022 | Increase (Decrease) | ||||||||||
| Provision for bad debt | $ | 307 | $ | (81 | ) | $ | 388 | |||||
| Outside storage | 353 | 121 | 232 | |||||||||
| Wages and bonus | 6,782 | 6,598 | 184 | |||||||||
| Pension expense | 36 | 190 | (154 | ) | ||||||||
| Other SG&A | 8,316 | 7,903 | 413 | |||||||||
| Total - SG&A | $ | 15,794 | $ | 14,731 | $ | 1,063 | ||||||
The increase in the provision for bad debt expense was mainly the result of estimated losses on older balances. Outside storage increased primarily as a result of the need for additional warehouse capacity to store product. Higher sales commissions resulted in higher wages and bonus expenses in the first twelve weeks of the 2023 fiscal year compared to the same period in the prior year. The decrease in pension expense was a result of an increase in pension plan assets caused by performance of the underlying markets that support them as well as higher pension discount rates resulting in lower liabilities. 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, workers’ compensation cost, healthcare expense and insurance expense.
Selling, General and Administrative Expenses-Frozen Food Products Segment
SG&A expenses in the Frozen Food Products segment increased by $558 (18.1%) to $3,644 in the first twelve-week period of fiscal year 2023 compared to the same twelve-week period in the prior fiscal year. The overall increase in SG&A expenses was due to higher wages and bonuses, provision for bad debt and product advertising.
Selling, General and Administrative Expenses-Snack Food Products Segment
SG&A expenses in the Snack Food Products segment increased by $505 (4.3%) to $12,150 in the first twelve-week period of fiscal year 2023 compared to the same twelve-week period in the prior fiscal year. Most of the increase was due to higher wages and bonuses, provision for bad debt, workers’ compensation and product advertising, partially offset by decreased fees paid under brand licensing agreements.
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Income Taxes-Consolidated
Income tax for the twelve weeks ended January 20, 2023, and January 21, 2022, respectively, was as follows:
| January 20, 2023 | January 21, 2022 | |||||||
| Provision for income taxes | $ | 398 | $ | 66 | ||||
| Effective tax rate | 29.9 | % | 17.7 | % | ||||
We recorded a provision for income taxes of $398 for the twelve-week period ended January 20, 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 January 20, 2023, we had $1,099 of current debt on equipment loans, $67,004 of net working capital and $15,000 available under our revolving line of credit with Wells Fargo Bank, N.A. Refer to Note 6 – Equipment Notes Payable and Financial Arrangements of the Notes to the Condensed Consolidated Financial Statements included within this Report for further information.
Despite higher commodity costs, we may not be able to increase our product prices in a timely manner or sufficiently to offset increased commodity costs due to consumer price sensitivity, pricing in relation to competitors and the reluctance of retailers to accept the price increase. Higher product prices could potentially lower demand for our product and decrease volume. Management believes there are various options available to generate additional liquidity to repay debt or fund operations such as mortgaging real estate, should that be necessary. Our ability to increase liquidity will depend upon, among other things, our business plans, the performance of operating divisions and economic conditions of capital markets, or circumstances related to the COVID-19 global pandemic. If we are unable to increase liquidity through mortgaging real estate, or generate positive cash flow necessary to fund operations, we may not be able to compete successfully, which could negatively impact our business, operations, and financial condition. Combined with the cash expected to be generated from the Company’s operations and income tax refunds due of $5,799, of which $5,117 in income tax refunds were received on July 19, 2022, we anticipate that we will maintain sufficient liquidity to operate our business for at least the next twelve months. We will continue to monitor the impact of COVID-19 on our liquidity and, if necessary, take action to preserve liquidity and ensure that our business can operate during these uncertain times.
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Cash flows from operating activities for the twelve weeks ended:
| January 20, 2023 | January 21, 2022 | |||||||
| Net income | $ | 932 | $ | 307 | ||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
| Depreciation and amortization | 1,448 | 1,544 | ||||||
| Provision for (recoveries on) losses on accounts receivable | 187 | (81 | ) | |||||
| Increase in promotional allowances | 751 | 1,097 | ||||||
| Gain on sale of property, plant, and equipment | (72 | ) | (18 | ) | ||||
| Changes in operating working capital | (5,873 | ) | (4,186 | ) | ||||
| Net cash used in operating activities | $ | (2,627 | ) | $ | (1,337 | ) | ||
For the twelve weeks ended January 20, 2023, net cash used in operating activities was $2,627, $1,290 more cash used than during the same period in fiscal year 2022. The increase in net cash used by operating activities primarily relates to a decrease in accounts payable of $4,563, decrease in other current liabilities of $1,376 partially offset by net income of $932 and a decrease in inventory of $1,713. During the twelve-week period ended January 20, 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.
Our cash conversion cycle (defined as days of inventory and trade receivables less days of trade payables outstanding) was equal to 78 days for the twelve-week period ended January 20, 2023. The cash conversion cycle was 72 days for the twelve-week period ended January 21, 2022. The decrease in the cash conversion cycle was mainly due to lower days payable in accounts payable and to a lesser extent increased average days in inventory. We have discontinued accelerating payments on outstanding accounts receivable from Walmart as of July 1, 2022.
For the twelve weeks ended January 21, 2022, net cash used in operating activities was $1,337 and primarily relates to an increase in accounts receivable of $3,226, an increase in inventories of $2,462 and an increase in non-current liabilities of $1,064 partially offset by an increase in accounts payable of $1,722. During the twelve-week period ended January 21, 2022, we did not contribute towards our defined benefit pension plan.
Cash flows from investing activities for the twelve weeks ended:
| January 20, 2023 | January 21, 2022 | |||||||
| Proceeds from sale of property, plant, and equipment | $ | 72 | $ | 18 | ||||
| Additions to property, plant, and equipment | (259 | ) | (381 | ) | ||||
| Net cash used in investing activities | $ | (187 | ) | $ | (363 | ) | ||
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 twelve weeks ended:
| January 20, 2023 | January 21, 2022 | |||||||
| Changes in projects in process | $ | 58 | $ | (131 | ) | |||
| Building improvements | - | - | ||||||
| Direct store delivery and sales vehicles | 186 | 178 | ||||||
| Packaging lines | - | 159 | ||||||
| Computer software and hardware | - | 23 | ||||||
| Temperature control | - | - | ||||||
| Processing equipment | 15 | 126 | ||||||
| Furniture and fixtures | - | 26 | ||||||
| Additions to property, plant, and equipment | $ | 259 | $ | 381 | ||||
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Cash flows from financing activities for the twelve weeks ended:
| January 20, 2023 | January 21, 2022 | |||||||
| Payment of lease and right-of-use obligations | $ | (279 | ) | $ | (77 | ) | ||
| Proceeds from borrowings under revolving credit facilities | - | 4,000 | ||||||
| Repayments of bank borrowings | (248 | ) | (616 | ) | ||||
| Net cash (used in) provided by financing activities | $ | (527 | ) | $ | 3,307 | |||
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 January 20, 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 January 20, 2023, and October 28, 2022, respectively.
| January 20, 2023 | October 28, 2022 | |||||||
| Revolving credit facility | $ | - | $ | - | ||||
| Equipment notes: | ||||||||
| 3.68% note due 04/16/27, out of lockout 04/17/22 | 4,666 | 4,913 | ||||||
| SOFR plus 2.00% bridge loan due 08/31/23 | - | - | ||||||
| Total debt | 4,666 | 4,913 | ||||||
| Less current debt | (1,099 | ) | (1,089 | ) | ||||
| Total long-term debt | $ | 3,567 | $ | 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 January 20, 2023 and October 28, 2022, the Company was in compliance with all covenants under the Wells Fargo Loan Agreements.
All of our operating segments have been impacted by inflation, including higher costs for labor, freight, and specific materials. We expect this trend to continue through the remainder of fiscal year 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 twelve 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 January 20, 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 the end of the period covered by this Report 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 has been remediated as of the date of this Report.
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 January 20, 2023, that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
Part II. Other Information
Item 1A. Risk Factors
The risk factors listed in Part I “Item 1A. Risk Factors” in the Annual Report should be considered with the information provided elsewhere in this Report, which could materially adversely affect our business, financial condition, or results of operations. Except as set forth below, there have been no material changes to the risk factors as previously disclosed in the Annual Report.
We have considered the impact of federal, state, and local government actions related to the COVID-19 pandemic on our Condensed Consolidated Financial Statements. These business disruptions, in addition to any impacts already experienced, have not had a significant impact on our Condensed Consolidated Financial Statements for the twelve weeks ended January 20, 2023. There may be a future business impact, the extent of which is uncertain and largely subject to whether the severity worsens or what restrictions are implemented by the government.
These impacts could include but may not be limited to risks and uncertainty related to shifts in demand between sales channels, market volatility, constraints in our supply chain, our ability to operate production facilities and worker availability. These unknowns may subject the company to future risks related to long-lived asset impairments, increased reserves for uncollectible accounts, the price and availability of ingredients and raw materials used in our products and adjustments to reflect the market value of our inventory.
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Item 6. Exhibits
| Incorporated by Reference | ||||||||||||
| Exhibit Number | Exhibit Description | Form | File No. | Exhibit | Filing Date | Filed Herewith | ||||||
| 31.1 | Certification of Principal Executive Officer, Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | X | ||||||||||
| 31.2 | Certification of Principal Financial Officer, Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | X | ||||||||||
| 32.1* | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Principal Executive Officer). | |||||||||||
| 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). | |||||||||||
*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: March 6, 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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