NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(dollars
in thousands)
Note
1 – Summary of Significant Accounting Policies:
The
unaudited Condensed Consolidated Financial Statements of Bridgford Foods Corporation (the “Company”, “we”, “our”,
“us”) for the twelve and twenty-four weeks ended April 15, 2022 and April 16, 2021 have been prepared in accordance with
U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form
10-Q and Article 8 of Regulation S-X, and include all adjustments considered necessary by management for a fair presentation of the interim
periods. This Report should be read in conjunction with the Annual Report on Form 10-K for the fiscal year ended October 29, 2021 (the
“Annual Report”). Due to seasonality and other factors, interim results are not necessarily indicative of the results for
the full year. Recent accounting pronouncements and their effect on the Company are discussed in Management’s Discussion and Analysis
of Financial Condition and Results of Operations in this Report.
We
have considered the impact of federal, state, and local government actions related to the COVID-19 pandemic on our Consolidated Financial
Statements. The business disruptions associated with the pandemic had a significant negative impact on our Consolidated Financial Statements
for the fiscal year ended October 29, 2021 and minimal impact during the twelve and twenty-four weeks ended April 15, 2022. We expect
these events to have future business impacts, the extent of which is uncertain and largely subject to whether the severity worsens. These
impacts could include but may not be limited to risks and uncertainty related to shifts in demand between sales channels, market volatility,
constraints in our supply chain, our ability to operate production facilities and worker availability. These unknowns may subject the
Company to future risks related to long-lived asset impairments, increased reserves for uncollectible accounts, price and availability
of ingredients and raw materials used in our products and adjustments to reflect the market value of our inventory.
The
October 29, 2021, balance sheet amounts within these interim Condensed Consolidated Financial Statements were derived from the audited
fiscal year 2021 financial statements included in the Annual Report.
The
preparation of Condensed Consolidated Financial Statements in conformity with accounting principles generally accepted in the United
States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported
revenues and expenses during the reporting periods. Some of the estimates needed to be made by management include the allowance for doubtful
accounts, promotional and returns allowances, inventory reserves, the estimated useful lives of property, plant and equipment, and the
valuation allowance for the Company’s deferred tax assets. Actual results could materially differ from these estimates. Amounts
estimated related to liabilities for self-insured workers’ compensation, employee healthcare and pension benefits are especially
subject to inherent uncertainties and these estimated liabilities may ultimately settle at amounts which vary from our current estimates.
Market conditions and the volatility in stock markets may cause significant changes in the measurement of our pension fund liabilities
and the performance of our life insurance policies in future periods.
Financial
instruments that subject the Company to credit risk consist primarily of cash and cash equivalents, accounts receivable, accounts payable,
accrued payroll, and notes payable. The carrying amount of these instruments approximate fair market value due to their short-term maturity
or market interest rates. At times, the Company had accounts held with nationally recognized financial institutions in excess of the
Federal Deposit Insurance Corporation insurance coverage limit. As of April 15, 2022, the Company did not have a book overdraft. When
applicable, book overdrafts are recorded as a liability in accounts payable on the Condensed Consolidated Balance Sheet. The Company
has not experienced any losses in these accounts and believes it is not exposed to any significant credit risk with regard to its cash
and cash equivalents. The Company grants payment terms to a significant number of customers that are diversified over a wide geographic
area. The Company monitors the payment histories of its customers and maintains an allowance for doubtful accounts which is reviewed
for adequacy on a quarterly basis. The Company does not require collateral from its customers.
Comprehensive
income or loss
Comprehensive
income or loss consists of net income and additional minimum pension liability adjustments. There were no differences between net income
(loss) and comprehensive income (loss) during the twelve and twenty-four weeks ended April 15, 2022, or April 16, 2021.
Customer
Concentration > 20% of AR or >10% of Sales
The
table below shows customers that accounted for more than 20% of consolidated accounts receivable (“AR”) or 10% of consolidated
sales for the twenty-four weeks ended April 15, 2022, and April 16, 2021, respectively.
Schedule
of Customer Concentration
| | |
Walmart (1) | | |
Dollar General | |
| | |
Sales | | |
AR | | |
Sales | | |
AR | |
| April 15, 2022 | |
| 31.4 | % | |
| 4.4 | % | |
| 17.7 | % | |
| 38.1 | % |
| April 16, 2021 | |
| 37.6 | % | |
| 5.7 | % | |
| 14.0 | % | |
| 13.5 | % |
| (1) |
Walmart
accounts receivable represented a lower percentage of sales as of April 15, 2022, due to accelerated payments on outstanding accounts
receivable. |
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 15, 2022, and April 16, 2021, respectively.
| | |
Walmart (1) | | |
Dollar General | |
| | |
Sales | | |
AR | | |
Sales | | |
AR | |
| April 15, 2022 | |
| 30.5 | % | |
| 4.4 | % | |
| 19.6 | % | |
| 38.1 | % |
| April 16, 2021 | |
| 38.7 | % | |
| 5.7 | % | |
| 14.2 | % | |
| 13.5 | % |
| (1) |
Walmart
accounts receivable represented a lower percentage of sales as of April 15, 2022, due to accelerated payments on outstanding accounts
receivable. |
Revenue
recognition
Revenues
are recognized in accordance with Accounting Standards Codification (“ASC”) Topic 606 – Contracts with Customers
upon passage of title to the customer, typically upon product pick-up, shipment, or delivery to customers. Products are delivered
to customers primarily through our own long-haul fleet, common carrier, or through a Company-owned direct store delivery system.
The
Company recognizes revenue for the sale of the product at the point in time when our performance obligation has been satisfied and control
of the product has transferred to our customer, which generally occurs upon shipment, pickup or delivery to a customer based on terms
of the sale. Contracts with customers are typically short-term in nature with completion of a single performance obligation. Product
is sold to foodservice, retail, institutional and other distribution channels. Shipping and handling that occurs after the customer has
obtained control of the product is recorded as a fulfillment cost rather than an additional performance obligation. Costs paid to third
party brokers to obtain contracts are recognized as part of selling expenses. Other sundry items in context of the contract are also
recognized as selling expense. Any taxes collected on behalf of the government are excluded from net revenue.
We
record revenue at the transaction price which is measured as the amount of consideration we anticipate receiving in exchange for providing
product to our customers. Revenue is recognized as the net amount estimated to be received after deducting estimated or known amounts
including variable consideration for discounts, trade allowances, consumer incentives, coupons, volume-based incentives, cooperative
advertising, product returns and other such programs. Promotional allowances, including customer incentive and trade promotion activities,
are recorded as a reduction to sales based on amounts estimated being due to customers, based primarily on historical utilization and
redemption rates. Estimates are reviewed regularly until incentives or product returns are realized and the result of any such adjustments
are known. Promotional allowances deducted from sales for the twelve weeks ended April 15, 2022, and April 16, 2021 were $3,862 and $3,191,
respectively. Promotional allowances deducted from sales for the twenty-four weeks ended April 15, 2022, and April 16, 2021 were $7,366
and $6,273, respectively.
Leases
Leases
are recognized in accordance with Accounting Standards Update (“ASU”) 2016-02 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.
Finance
and ROU lease assets are recorded within property, plant and equipment, net of accumulated depreciation and amortization. The Company’s
leases of long-haul trucks used in its Frozen Food Products segment qualify as finance leases. Finance lease liabilities are recorded
under other liabilities, the consolidated balance sheets reflecting both the current and long-term obligation. The classification as
a finance or operating lease determines whether the recognition, measurement and presentation of expenses and cash flows are considered
operating or financing.
Financial
statement reclassification
Certain
financial statement reclassifications have been recorded in 2021 to conform to the current year presentation of operating income and
income before taxes.
Subsequent
events
Management
has evaluated events subsequent to April 15, 2022, through the date that the accompanying Condensed Consolidated Financial Statements
were filed with the Securities and Exchange Commission for transactions and other events which may require adjustments of and/or disclosure
in such financial statements.
For
further information regarding subsequent events, please refer to Note 7 – Subsequent Events.
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 15, 2022, or April 16, 2021.
Note
2 – Inventories, net
Inventories
are comprised of the following at the respective period ends:
Schedule
of Inventories
| | |
April 15, 2022 | | |
October 29, 2021 | |
| Meat, ingredients, and supplies | |
$ | 9,868 | | |
$ | 7,278 | |
| Work in progress | |
| 3,229 | | |
| 2,911 | |
| Finished goods | |
| 27,838 | | |
| 26,582 | |
| Inventories,
net | |
$ | 40,935 | | |
$ | 36,771 | |
Inventories
are valued at the lower of cost (which approximates actual cost on a first-in, first-out basis) or net realizable value. Inventories
include the cost of raw materials, labor, and manufacturing overhead. We regularly review inventory quantities on hand and write down
any excess or obsolete inventories to net realizable value. An inventory reserve is created when potentially slow-moving or obsolete
inventories are identified in order to reflect the appropriate inventory value. Changes in economic conditions, production requirements,
and lower than expected customer demand could result in additional obsolete or slow-moving inventory that cannot be sold or must be sold
at reduced prices and could result in additional reserve provisions. We reduced our net realizable value reserve by $2,159 during the
twenty-four weeks ended April 15, 2022, to recognize inventory sell through of products already reserved in inventory as of year-end
October 29, 2021. We maintain a net realizable reserve of $194 as of April 15, 2022, and $2,353 as of October 29, 2021, 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 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 2025. Amortization
of equipment as a finance lease was $37 during the twenty-four weeks ended April 15, 2022. The Company leased one long-haul truck for
$40 received during fiscal year 2021, and that lease term is two years.
The
Company performed a detailed analysis and determined that the only indication of a long-term lease in addition to transportation leases
for long-haul trucks was the warehouse lease with Hogshed Ventures, LLC. A right-of-use asset and corresponding liability for warehouse
storage space was recorded for $494 for Hogshed Ventures, LLC for 40th Street in Chicago, Illinois, as of April 15, 2022. 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 terminates on June
30, 2023. 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 right-of-use asset.
This
lease does not provide an implicit rate and we estimated our incremental interest rate to be approximately 1.6%. 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 right-of-use assets:
Schedule of Future Minimum Lease Payments
| Fiscal Year | |
Financing
Obligations | |
| 2022 | |
$ | 338 | |
| 2023 | |
| 381 | |
| 2024 | |
| 101 | |
| 2025 | |
| 70 | |
| Later Years | |
| - | |
| Total Minimum Lease Payments(a) | |
$ | 890 | |
| Less: Amount representing executory costs | |
| (48 | ) |
| Less: Amount representing interest(b) | |
| (6 | ) |
| Present value of future minimum lease payments(c) | |
$ | 836 | |
| (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 under
capital leases of $164 and $178, and right-of-use assets of $383 and $111, respectively as of April 15, 2022. |
The
Company is involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, the
ultimate disposition of these matters is not expected to have a material adverse effect on the Company’s consolidated financial
position or results of operations.
Most
flour purchases are made at market price with contracts. However, the Company may purchase bulk flour at current market prices under
short-term (30 - 120 days) fixed price contracts during the normal course of business. Under these arrangements, the Company is obligated
to purchase specific quantities at fixed prices, within the specified contract period. These contracts provide for potential price increases
if agreed quantities are not purchased within the specified contract period. The contracts are not material. These contracts are typically
settled within a month’s time and no significant contracts remain open at the close of the quarterly or annual reporting period.
No significant contracts remained unfulfilled on April 15, 2022. The Company does 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.
The
following segment information is presented for the twelve weeks ended April 15, 2022, and April 16, 2021, respectively.
Schedule of Segment Reporting Information, by Segment
| | |
|
| | |
|
| | |
|
| | |
|
| |
| Segment Information |
| 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 | |
| Operating income | |
| 542 | | |
| 962 | | |
| - | | |
| 1,504 | |
| | |
| | | |
| | | |
| | | |
| | |
| Total assets | |
$ | 14,484 | | |
$ | 121,521 | | |
$ | 26,318 | | |
$ | 162,323 | |
| Additions to PP&E | |
$ | (54 | ) | |
$ | 303 | | |
$ | - | | |
$ | 249 | |
| Twelve weeks Ended April 16, 2021 | |
|
Frozen Food Products | | |
|
Snack Food Products | | |
|
Other | | |
|
Totals | |
| Sales | |
$ | 8,854 | | |
$ | 41,623 | | |
$ | - | | |
$ | 50,477 | |
| Cost of products sold | |
| 6,399 | | |
| 33,491 | | |
| - | | |
| 39,890 | |
| Gross margin | |
| 2,455 | | |
| 8,132 | | |
| - | | |
| 10,587 | |
| SG&A | |
| 2,607 | | |
| 10,299 | | |
| - | | |
| 12,906 | |
| Gain on sale of property, plant, and equipment | |
| 6 | | |
| (14 | ) | |
| - | | |
| (8 | ) |
| Operating loss | |
| (158 | ) | |
| (2,153 | ) | |
| - | | |
| (2,311 | ) |
| | |
| | | |
| | | |
| | | |
| | |
| Total assets | |
$ | 10,559 | | |
$ | 115,409 | | |
$ | 26,611 | | |
$ | 152,579 | |
| Additions to PP&E | |
$ | 51 | | |
$ | 2,556 | | |
$ | - | | |
$ | 2,607 | |
The
following segment information is presented for the twenty-four weeks ended April 15, 2022, and April 16, 2021, respectively.
| 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 | |
| Twenty-four weeks Ended April 16, 2021 | |
|
Frozen Food Products | | |
|
Snack Food Products | | |
|
Other | | |
|
Totals | |
| Sales | |
$ | 18,118 | | |
$ | 87,052 | | |
$ | - | | |
$ | 105,170 | |
| Cost of products sold | |
| 12,838 | | |
| 67,194 | | |
| - | | |
| 80,032 | |
| Gross margin | |
| 5,280 | | |
| 19,858 | | |
| - | | |
| 25,138 | |
| SG&A | |
| 5,415 | | |
| 21,466 | | |
| - | | |
| 26,881 | |
| Gain on sale of property, plant, and equipment | |
| (27 | ) | |
| (55 | ) | |
| - | | |
| (82 | ) |
| Operating loss | |
| (108 | ) | |
| (1,553 | ) | |
| - | | |
| (1,661 | ) |
| | |
| | | |
| | | |
| | | |
| | |
| Total assets | |
$ | 10,559 | | |
$ | 115,409 | | |
$ | 26,611 | | |
$ | 152,579 | |
| Additions to PP&E | |
$ | 121 | | |
$ | 5,634 | | |
$ | - | | |
$ | 5,755 | |
The
following information further disaggregates our sales to customers by major distribution channel and customer type for the twelve weeks
ended April 15, 2022, and April 16, 2021, respectively.
Schedule of Disaggregates Our Sales to Customers
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 | |
Twelve
weeks Ended April 16, 2021
| Distribution Channel | |
Retail (a) | | |
Foodservice (b) | | |
Totals | |
| Direct store delivery | |
$ | 31,482 | | |
$ | - | | |
$ | 31,482 | |
| Direct customer warehouse | |
| 10,141 | | |
| - | | |
| 10,141 | |
| Total Snack Food Products | |
| 41,623 | | |
| - | | |
| 41,623 | |
| | |
| | | |
| | | |
| | |
| Distributors | |
| 1,827 | | |
| 7,027 | | |
| 8,854 | |
| Total Frozen Food Products | |
| 1,827 | | |
| 7,027 | | |
| 8,854 | |
| | |
| | | |
| | | |
| | |
| Totals | |
$ | 43,450 | | |
$ | 7,027 | | |
$ | 50,477 | |
| (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 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 | |
Twenty-four weeks Ended April 16, 2021 Distribution Channel | |
Retail (a) | | |
Foodservice (b) | | |
Totals | |
| Direct store delivery | |
$ | 67,174 | | |
$ | - | | |
$ | 67,174 | |
| Direct customer warehouse | |
| 19,878 | | |
| - | | |
| 19,878 | |
| Total Snack Food Products | |
| 87,052 | | |
| - | | |
| 87,052 | |
| | |
| | | |
| | | |
| | |
| Distributors | |
| 4,797 | | |
| 13,321 | | |
| 18,118 | |
| Total Frozen Food Products | |
| 4,797 | | |
| 13,321 | | |
| 18,118 | |
| | |
| | | |
| | | |
| | |
| Totals | |
$ | 91,849 | | |
$ | 13,321 | | |
$ | 105,170 | |
| (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 |
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 32.7% and 23.2% for the second quarter of fiscal 2022 and 2021, respectively. The effective tax
rate for the second quarter of fiscal year 2022 was impacted by such items as non-deductible meals and entertainment, non-taxable gains
and losses on life insurance policies and state income taxes.
As
of April 15, 2022, the Company has a federal NOL carry forward of approximately $10,336 and state NOL carry forwards of approximately
$8,109.
Our
federal income tax returns are open to audit under the statute of limitations for the fiscal years 2018 through 2020. We are subject
to income tax in California and various other state taxing jurisdictions. Our state income tax returns are open to audit under the statute
of limitations for the fiscal years 2017 through 2020.
Note
6 – Equipment Notes Payable and Financial Arrangements:
Revolving
Credit Facility
We
maintain a line of credit with Wells Fargo Bank, N.A. that extends to March 1, 2023. As of year-end October 29, 2021, under the terms
of this line of credit, we could borrow up to $15,000 at an interest rate equal to the bank’s prime rate or LIBOR plus 2.0%. The
line of credit has an unused commitment fee of 0.25% of the available loan amount. The line of credit is presented under non-current
liabilities in the consolidated balance sheets. On December 1, 2021, Wells Fargo Bank, N.A. expanded our line of credit to $25,000 through
June 15, 2022, upon which the credit limit will return to $15,000 for the balance of the term. Under the terms of this expanded line
of credit, we may borrow up to $25,000 at an interest rate equal to the bank’s prime rate or secured overnight financing rate (“SOFR”)
plus 2.0%. The former benchmark interest rate of LIBOR for our line of credit has been transitioned to SOFR which could impact the cost
of credit and alter the value of debt and loans. We borrowed $2,000 under this line of credit on December 2, 2020, $2,000 on April 27,
2021, $2,000 on July 1, 2021, $3,000 on July 19, 2021, $3,000 on October 15, 2021, $2,000 on November 1, 2021, $2,000 on December 16,
2021 and $2,000 on January 24, 2022, for a combined total of $18,000 as of April 15, 2022.
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 which we plan to use to pay off the existing
equipment loans as they come out of the lock out period and may be prepaid (dates detailed in the table below). The outstanding principal
balances of the bridge loan shall be due and payable in full on the earlier of the following dates (1) August 31, 2023 or (2) one Federal
Reserve business day after the closing of the transactions contemplated under the CRG Purchase Agreement. As of April 15, 2022, we prepaid
$18,651 in equipment loans (equipment loans 4.13%, 3.98%, 3.70% and 3.29% in the table below) utilizing proceeds from the new bridge
loan. The Company evaluated the exchange under ASC 470 and determined that the exchange should be treated as a debt modification prospectively.
The Company accounted for this transaction as a debt modification and did not incur any gain or loss relating to the modification. The
debt modification did not meet the greater than ten percent test and was deemed not substantial.
The
following table reflects major components of our line of credit and borrowing agreements as of April 15, 2022 and October 29, 2021, respectively.
Schedule of Line of Credit and Borrowing Agreements
| | |
April 15, 2022 | | |
October 29, 2021 | |
| | |
| | |
| |
| Revolving credit facility | |
$ | 18,000 | | |
$ | 12,000 | |
| Equipment notes: | |
| | | |
| | |
| 3.70% note due 12/21/26, out of lockout 12/23/21 | |
| - | | |
| 2,901 | |
| 3.29% note due 03/05/27, out of lockout 03/06/22 | |
| - | | |
| 5,951 | |
| 3.68% note due 04/16/27, out of lockout 04/17/22 | |
| 5,391 | | |
| 5,888 | |
| SOFR plus 2.00% bridge loan due 08/31/23 | |
| 18,651 | | |
| 10,329 | |
| Total debt | |
| 42,042 | | |
| 37,069 | |
| Less current debt | |
| (3,446 | ) | |
| (1,065 | ) |
| Total long-term debt | |
$ | 38,596 | | |
$ | 36,004 | |
On
June 2, 2022, we prepaid our outstanding balance under the bridge loan and terminated the loan commitment note and plan to repay
the outstanding balance under our revolving credit facility, which facility continues in effect per its terms to March 1, 2023.
Refer to Note 7 - Subsequent Events for further information.
Loan
Covenants
The
Wells Fargo Loan Agreements collectively contain various affirmative and negative covenants that limit the use of funds and define other
provisions of the loan. The main financial covenants are listed below:
| |
● |
Total
Liabilities divided by Tangible Net Worth not greater than 2.5 to 1.0 at each fiscal quarter, |
| |
● |
Quick
Ratio not less than .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 15, 2022, the Company was in compliance with all covenants under the Wells Fargo Loan Agreements.
Note
7 – Subsequent Events:
On
May 16, 2022, the Company received a $575 payment of income tax receivable from the IRS.
On
June 1, 2022, Bridgford Food Processing Corporation, a California corporation and a wholly-owned subsidiary of the Company (“BFPC”),
and CRG Acquisition, LLC (“CRG”), completed the real estate transaction (the “Sale Transaction”) set forth in
the Purchase and Sale Agreement dated March 16, 2020 (as amended to date, the “CRG Purchase Agreement”). Pursuant to the
terms of the CRG Purchase Agreement, CRG acquired a parcel of land from BFPC including an approximate 156,000 square foot four-story
industrial food processing building located at 170 N. Green Street in Chicago, Illinois. The purchase price for the Sale Transaction
was $60,000, less $2,100 previously received by BFPC as non-refundable earnest money, and subject to certain closing adjustments as set
forth in the CRG Purchase Agreement. In connection with the closing of the Sale Transaction, BFPC paid an aggregate of $1,200 in broker
commissions, including $300 to KR6, Inc., an entity controlled by Keith Ross (a member of the Company’s Board of Directors). BFPC
used approximately $19,000 of the Sale Transaction proceeds to repay and terminate the bridge loan commitment note dated August 30, 2021
with Wells Fargo Bank, N.A. and plans to use approximately $18,000 of such proceeds to repay the outstanding balance under our revolving
credit facility with Wells Fargo Bank, N.A., which revolver line continues in effect per its terms to March 1, 2023.