TOFUTTI BRANDS INC - Quarter Report: 2019 June (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

Commission file number: 1-9009

Tofutti Brands Inc.

(Exact Name of Registrant as Specified in Its Charter)

50 Jackson Drive, Cranford, New Jersey 07016

(Address of Principal Executive Offices)

(908) 272-2400

(Registrant’s Telephone Number, including area code)

N/A

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes [X] No [  ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes [X] No [  ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. [  ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes [  ] No [X]

As of August 9, 2019 the Registrant had 5,153,706 shares of Common Stock, par value $0.01, outstanding.

TOFUTTI BRANDS INC.

INDEX

PART I - FINANCIAL INFORMATION

TOFUTTI BRANDS INC.

Condensed Balance Sheets

(in thousands, except share and per share figures)

See accompanying notes to condensed financial statements.

*Derived from audited financial information.

TOFUTTI BRANDS, INC.

Condensed Statements of Operations

(Unaudited)

(in thousands, except per share figures)

See accompanying notes to condensed financial statements.

TOFUTTI BRANDS, INC.

Condensed Statements of Changes in Stockholders’ Equity

(Unaudited)

(in thousands)

TOFUTTI BRANDS INC.

Condensed Statements of Cash Flows

(Unaudited)

(in thousands)

See accompanying notes to condensed financial statements.

TOFUTTI BRANDS INC.

Notes to Condensed Financial Statements

(In thousands, except for share and per share data)

At June 29, 2019, Tofutti Brands, Inc. (“Tofutti” or the “Company”) had approximately $893 in cash compared to $558 at December 29, 2018. Net cash provided by operating activities was $364 for the twenty-six weeks ended June 29, 2019 compared to $867 used in operating activities for the twenty-six weeks ended June 30, 2018. Cash provided by operating activities for the twenty-six weeks ended June 29, 2019 was primarily a result of a decrease in accounts receivable, increases in accounts payable and accrued expenses, which was partially offset by an increase in inventory and the net loss. Net cash used in investing activities was $29 for the twenty-six weeks ended at June 29, 2019 compared to $0 used in investing activities for the twenty-six weeks ended June 30, 2018. Net cash used in financing activities was $0 for the twenty-six weeks ended at June 29, 2019 compared to $10 used in financing activities for the twenty-six weeks ended June 30, 2018.

The Company has historically financed operations and met capital requirements primarily through positive cash flow from operations. However, due to net losses and cash used in operations in prior years in order to provide the Company with additional working capital, on January 6, 2016, David Mintz, the Company’s Chairman and Chief Executive, provided it with a loan of $500. Commencing March 31, 2016, interest of 5% is payable on a quarterly basis without compounding. The loan may be prepaid in whole or in part at any time without premium or penalty. The loan is convertible into the Company’s common stock at a conversion price of $4.01 per share, the closing price of its common stock on the NYSE MKT on the date the promissory note was entered into. In any event of default, as defined in the promissory note, without any action on the part of Mr. Mintz, the interest rate will increase to 12% per annum and the entire principal and interest balance under the loan, and all of the Company’s other obligations under the loan, will be immediately due and payable, and Mr. Mintz will be entitled to seek and institute any and all remedies available to him. Initially due December 31, 2017, the loan has been extended until December 31, 2020.

The Company’s ability to introduce successful new products may be adversely affected by a number of factors, such as unforeseen cost and expenses, economic environment, increased competition, and other factors beyond the Company’s control. Management cannot provide assurance that the Company will operate profitably in the future, or that it will not require significant additional financing in order to accomplish or exceed the objectives of its business plan. Consequently, the Company’s historical operating results cannot be relied on to be an indicator of future performance, and management cannot predict whether the Company will obtain or sustain positive operating cash flow or generate net income in the future.

Tofutti is engaged in one business segment, the development, production and marketing of non-dairy frozen desserts and other food products.

The Company reports on operating segments in accordance with standards for public companies to report information about operating segments and geographic distribution of sales in financial statements. While the Company has multiple products and or product groups, its goal is to focus on non-dairy foods. The Company’s chief operating decision maker tracks revenue by product groups, but does not track more granular operating results by product group as many of the ingredients are similar among these groups. As a result, the Company has determined that it has only one operating segment, which is the development, production and marketing of soy-based, non-dairy frozen desserts, frozen food products and soy-based cheese products.

TOFUTTI BRANDS INC.

Notes to Condensed Financial Statements

(In thousands, except for share and per share data)

The accompanying financial information is unaudited, but, in the opinion of management, reflects all adjustments (which include only normally recurring adjustments) necessary to present fairly the Company’s financial position, operating results and cash flows for the periods presented. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. The condensed balance sheet amounts as of December 29, 2018 are derived from our audited financial statements for the year ended December 29, 2018. The financial information should be read in conjunction with the audited financial statements and notes thereto for the year ended December 29, 2018 included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission. The results of operations for the thirteen and twenty-six week periods ended June 29, 2019 are not necessarily indicative of the results to be expected for the full year or any other period.

The Company’s fiscal year is either a fifty-two or fifty-three week period which ends on the Saturday closest to December 31^st.

The Company considers the applicability and impact of all Accounting Standard Updates (“ASUs”). ASUs not discussed below were assessed and determined to be either not applicable or are expected to have minimal impact on the Company’s balance sheets or statements of operations.

In February 2016, the FASB established Topic 842, Leases, by issuing ASU 2016-02, which requires lessees to recognize leases on-balance sheet and disclose key information about leasing arrangements. Topic 842 was subsequently amended by ASU 2018-01, Land Easement Practical Expedient for Transition to Topic 842; ASU 2018-10, Codification Improvements to Topic 842, Leases; and ASU 2018-11, Targeted Improvements. The new standard establishes a right-of-use model (ROU) that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with an initial term longer than 12 months. Leases are classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement.

The Company adopted the new standard on December 30, 2018, the first day of fiscal 2019. The Company used the modified retrospective transition approach with the effective date as the date of initial application. Consequently, financial information will not be updated, and the disclosures required under the new standard will not be provided for dates and periods before December 30, 2018.

The new standard provides several optional practical expedients in transition. The Company elected the ‘package of practical expedients’, which permits us not to reassess under the new standard the prior conclusions about lease identification, lease classification and initial direct costs.

TOFUTTI BRANDS INC.

Notes to Condensed Financial Statements

(In thousands, except for share and per share data)

The adoption of the standard resulted in a material effect on the Company’s financial statements with a balance sheet recognition of additional lease assets of approximately $346 and lease liabilities of approximately $362 upon adoption.

The new standard also provides practical expedients for an entity’s ongoing accounting. The Company currently has elected the short-term lease recognition exemption for all leases that qualify. This means, for those leases that qualify, the Company will not recognize ROU assets or lease liabilities, and this includes not recognizing ROU assets or lease liabilities for existing short-term leases of those assets in separate lease and non-lease components for all the Company’s leases.

The composition of inventories is as follows:

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

Basic earnings (loss) per common share has been computed by dividing net income (loss) by the weighted average number of common shares outstanding. Diluted earnings (loss) per common share for the periods ended June 29, 2019 and June 30, 2018 have been computed by dividing net income (loss) by the weighted average number of common shares outstanding and common stock equivalents, which include options and convertible notes outstanding during the same period. Not included in the calculation for June 29, 2019 and June 30, 2018 were 80,000 non-qualified options granted to directors and a convertible note payable, as a consequence of their anti-dilutive effect.

TOFUTTI BRANDS INC.

Notes to Condensed Financial Statements

(In thousands, except for share and per share data)

The following table sets forth the computation of basic and diluted (loss) earnings per share:

Fixed assets consist of the following:

Depreciation expense for the thirteen and twenty-six weeks ended June 29, 2019 was $0 and $0, respectively. Depreciation expense for the thirteen and twenty-six weeks ended June 30, 2018 was $1 and $3, respectively.

On June 10, 2014, the shareholders of the Company approved the 2014 Equity Incentive Plan (the “2014 Plan”). The 2014 Plan provides for grants of various types of awards that are designed to attract and retain highly qualified personnel who will contribute to the success of the Company and to provide incentives to participants in the 2014 Plan that are linked directly to increases in shareholder value which will therefore inure to the benefit of all shareholders of the Company. The Company intends to rely on a combination of multi-year performance awards, options and other stock-based awards for these purposes.

The 2014 Plan made 250,000 shares of common stock available for awards. The 2014 Plan also permits performance-based 2014 awards paid under it to be tax deductible under Section 162(m) of the Internal Revenue Code of 1986, as amended, as “performance-based compensation.” As of June 29, 2019, the Company has issued 80,000 non-qualified stock option awards under the 2014 Plan.

TOFUTTI BRANDS INC.

Notes to Condensed Financial Statements

(In thousands, except for share and per share data)

Related Party

On January 6, 2016, David Mintz, the Company’s Chairman and Chief Executive, provided it with a loan of $500. The loan, which was originally set to expire on December 31, 2017 has been extended to December 31, 2020. No other terms of the loan were modified. Commencing March 31, 2016, interest of 5% is payable on a quarterly basis without compounding. The loan may be prepaid in whole or in part at any time without premium or penalty. The loan is convertible into the Company’s common stock at a conversion price of $4.01 per share, the closing price of the Company’s common stock on the date the promissory note was entered into, at the option of the holder. In any event of default, as defined in the promissory note, without any action on the part of Mr. Mintz, the interest rate will increase to 12% per annum and the entire principal and interest balance under the loan, and all of the Company’s other obligations under the loan, will be immediately due and payable, and Mr. Mintz will be entitled to seek and institute any and all remedies available to him.

Revenue relating to the delivery of products is recognized at a point in time based on actual products and quantity shipped, which can vary from purchase order to purchase order, and net of all applicable discounts, as follows: Payment term discounts, off-invoice allowance, manufacturer chargeback, freight allowance, spoilage discounts, and product returns.

Revenues by geographical region are as follows:

Approximately 93% of the Americas revenue in 2019 and 91% of the Americas revenue in 2018 is attributable to sales in the United States in both the thirteen and twenty-six week periods. All of the Company’s assets are located in the United States.

TOFUTTI BRANDS INC.

Notes to Condensed Financial Statements

(In thousands, except for share and per share data)

Net sales by major product category:

Timing of revenue recognition (in thousands):

Under Topic 842, operating lease expense is generally recognized evenly over the term of the lease. The Company has operating leases primarily consisting of facilities with remaining lease terms of approximately two to four years. The Company does not have the option to terminate the leases early.

The Company’s facilities are located in a one-story facility in Cranford, New Jersey. The 6,200 square foot facility houses the Company’s administrative offices, a warehouse, walk-in freezer and refrigerator, and a product development laboratory and test kitchen. The lease agreement expired in 1999, but the Company continues to occupy the premises under the terms of that agreement, subject to a six-month notification period from the Company and the landlord with respect to any changes. The Company currently has no plans to enter into a long-term lease agreement for the facility. Rent expense was $40 and $40 for the six months ended June 29, 2019 and June 30, 2018, respectively. Management believes that the Cranford facility will continue to satisfy the Company’s space requirements for the foreseeable future. The Company rents warehouse storage space at various outside facilities. Outside warehouse expenses amounted to $210 and $231 for the three months ended June 29, 2019 and June 30, 2018, respectively.

Leases with an initial term of twelve months or less are not recorded on the balance sheet. For lease agreements entered into or reassessed after the adoption of Topic 842, the Company has combined the lease and non-lease components in determining the lease liabilities and ROU assets.

The Company’s lease agreements generally do not provide an implicit borrowing rate; therefore, an internal incremental borrowing rate is determined based on information available at lease commencement date for purposes of determining the present value of lease payments. The Company used the incremental borrowing rate on December 29, 2018 of 5.5% for all leases that commenced prior to that date.

TOFUTTI BRANDS INC.

Notes to Condensed Financial Statements

(In thousands, except for share and per share data)

ROU lease assets and lease liabilities for our operating leases were recorded in the condensed balance sheet as follows:

Future lease payments included in the measurement of lease liabilities on the condensed balance sheet as of June 29, 2019, for the following five fiscal years and thereafter are as follows:

TOFUTTI BRANDS INC.

The following is management’s discussion and analysis of certain significant factors which have affected our financial position and operating results during the periods included in the accompanying financial statements.

The discussion and analysis which follows in this Quarterly Report and in other reports and documents and in oral statements made on our behalf by our management and others may contain trend analysis and other forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 which reflect our current views with respect to future events and financial results. These include statements regarding our earnings, projected growth and forecasts, and similar matters which are not historical facts. We remind stockholders that forward-looking statements are merely predictions and therefore are inherently subject to uncertainties and other factors which could cause the actual future events or results to differ materially from those described in the forward-looking statements. These uncertainties and other factors include, among other things, business conditions in the food industry and general economic conditions, both domestic and international; lower than expected customer orders; competitive factors; changes in product mix or distribution channels; and resource constraints encountered in developing new products. The forward-looking statements contained in this Quarterly Report and made elsewhere by or on our behalf should be considered in light of these factors.

Critical Accounting Policies

Our financial statements have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The policies discussed below are considered by management to be critical to an understanding of our financial statements because their application places the most significant demands on management’s judgment, with financial reporting results relying on estimation about the effect of matters that are inherently uncertain. Specific risks for these critical accounting policies are described in the following paragraphs. For all of these policies, management cautions that future events rarely develop exactly as forecast, and the best estimates routinely require adjustment.

Revenue Recognition. We primarily sell non-dairy soy-based frozen desserts, cheeses and other food products as detailed in Note 11 Revenues. We recognize revenue when control over the products transfers to our customers, which generally occurs upon delivery or shipment of the products. We account for product shipping, handling and insurance as fulfillment activities with revenues for these activities recorded within net revenue and costs recorded within cost of sales. Revenues are recorded net of trade and sales incentives and estimated product returns. Known or expected pricing or revenue adjustments, such as trade discounts, rebates or returns, are estimated at the time of sale. We base these estimates of expected amounts principally on historical utilization and redemption rates. Estimates that affect revenue, such as trade incentives and product returns, are monitored and adjusted each period until the incentives or product returns are realized.

Key sales terms, such as pricing and quantities ordered, are established on a frequent basis such that most customer arrangements and related incentives have a one year or shorter duration. As such, we do not capitalize contract inception costs and we capitalize product fulfillment costs in accordance with U.S. GAAP and our inventory policies. We generally do not have any unbilled receivables at the end of a period.

Accounts Receivable. The majority of our accounts receivables are due from distributors (domestic and international) and retailers. Credit is extended based on evaluation of a customers’ financial condition and, generally, collateral is not required. Accounts receivable are most often due within 30 to 90 days and are stated at amounts due from customers net of an allowance for doubtful accounts. Accounts outstanding longer than the contractual payment terms are considered past due. We determine whether an allowance is necessary by considering a number of factors, including the length of time trade accounts receivable are past due, our previous loss history, the customer’s current ability to pay its obligation, and the condition of the general economy and the industry as a whole. We write off accounts receivable when they become uncollectible, and payments subsequently received on such receivables are credited to the bad debt expense account. We do not accrue interest on accounts receivable past due.

Deferred Revenue and Costs. Deferred revenue represents amounts from sales of our products that have been billed and shipped, but for which the transactions have not met our revenue recognition criteria. The cost of the related products have been recorded as deferred costs on our balance sheet.

Inventory. Inventory is stated at lower of cost or market determined by first in first out (FIFO) method. Inventories in excess of future demand are written down and charged to the provision for inventories. At the point of which loss is recognized, a new, lower cost basis for that inventory is established and subsequent changes in facts and circumstances do not result in the restoration or increase in the newly established cost basis.

Fixed Assets. Fixed assets consist of frozen dessert manufacturing equipment that has been installed at our new co-packer’s frozen dessert manufacturing facilities. During fiscal 2018 and the first quarter of 2019, we spent $150,000 on equipment to be used at our new co-packer’s frozen dessert facility. We anticipate that this equipment will begin being used in connection with the production of frozen stick novelty items in the third quarter of 2019. Depreciation will be provided by charges to income using the straight-line method over the useful life of ten years.

Leases. Under Topic 842, operating lease expense is generally recognized evenly over the term of the lease. We have operating leases primarily consisting of facilities with remaining lease terms of approximately two to four years. Leases with an initial term of twelve months or less are not recorded on the balance sheet. For lease agreements entered into or reassessed after the adoption of Topic 842, we have combined the lease and non-lease components in determining the lease liabilities and ROU assets.

Income Taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is recorded if there is uncertainty as to the realization of deferred tax assets. We will recognize a tax benefit in the financial statements for an uncertain tax position only if management’s assessment is that the position is “more likely than not” (i.e., a likelihood greater than 50 percent) to be allowed by the tax jurisdiction based solely on the technical merits of the position. The term “tax position” refers to a position in a previously filed tax return or a position expected to be taken in a future tax return that is reflected in measuring current or deferred income tax assets and liabilities for financial reporting purposes.

Recent accounting pronouncements

In February 2016, the FASB established Topic 842, Leases, by issuing ASU 2016-02, which requires lessees to recognize leases on-balance sheet and disclose key information about leasing arrangements. Topic 842 was subsequently amended by ASU 2018-01, Land Easement Practical Expedient for Transition to Topic 842; ASU 2018-10, Codification Improvements to Topic 842, Leases; and ASU 2018-11, Targeted Improvements. The new standard establishes a right-of-use model (ROU) that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. Leases are classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement.

We adopted the new standard on December 30, 2018, the first day of fiscal 2019. We used the modified retrospective transition approach with the effective date as the date of initial application. Consequently, financial information will not be updated, and the disclosures required under the new standard will not be provided for dates and periods before December 30, 2018.

The new standard provides several optional practical expedients in transition. We elected the ‘package of practical expedients’, which permits us not to reassess under the new standard the prior conclusions about lease identification, lease classification and initial direct costs.

The adoption of the standard resulted in a material effect on our financial statements with a balance sheet recognition of additional lease assets of approximately $346,000 and lease liabilities of approximately $362,000 upon adoption.

The new standard also provides practical expedients for an entity’s ongoing accounting. We currently have elected the short-term lease recognition exemption for all leases that qualify. This means, for those leases that qualify, we will not recognize ROU assets or lease liabilities, and this includes not recognizing ROU assets or lease liabilities for existing short-term leases of those assets in separate lease and non-lease components for all our leases.

Results of Operations

Thirteen Weeks Ended June 29, 2019 Compared with Thirteen Weeks Ended June 30, 2018

Net sales for the thirteen weeks ended June 29, 2019 were $3,143,000, a decrease of $300,000, or 9%, from net sales of $3,443,000 for the thirteen weeks ended June 30, 2018. The decrease is attributable to a decline in sales in both the frozen dessert and frozen food category and the vegan cheese product category. Frozen dessert and frozen food products sales decreased by $133,000 to $569,000 in the thirteen weeks ended June 29, 2019 from $702,000 for the thirteen weeks ended June 30, 2018. Frozen dessert sales were negatively impacted by the unavailability of certain frozen novelties that our former manufacturing plant had produced for us. We anticipate these novelties will become available in the third and fourth quarters of this year. Sales of vegan cheese products decreased to $2,574,000 in the 2019 period from $2,741,000 in the 2018 period due to a decrease in our export cheese business. Our export vegan cheese sales were negatively impacted by new customs requirements in Israel, which impacted all imports into that country. The new regulations have significantly increased the time it takes to get shipments cleared through customs in Israel as government officials implement the new requirements. We anticipate that we will still face these issues in the third quarter, but they should be resolved during the fourth quarter.

Our gross profit decreased to $860,000 in the thirteen weeks ended June 29, 2019 from $1,014,000 in the thirteen weeks ended June 30, 2018 due to the reduction in sales and a lower gross profit percentage in the 2019 period. Our gross profit percentage was 27% for the thirteen weeks ending June 29, 2019 compared to 29% for the thirteen weeks ending June 30, 2018.

Our gross profit percentage was negatively impacted by an increase in freight out expense, which is a component of cost of sales. Freight out expense, a significant part of our cost of sales, increased by $15,000, or 6%, to $274,000 for the thirteen weeks ended June 29, 2019 compared with $259,000 for the thirteen weeks ended June 30, 2018. As a percentage of sales, freight out expense was 9% percent for the thirteen weeks ended June 29, 2019 compared to 8% percent for the thirteen weeks ended June 30, 2018. Our gross profit and gross profit percentage were also negatively impacted by an increase in sales discounts and allowances of $33,000, or 9%, to $386,000 for the thirteen weeks ended June 29, 2019 from $353,000 for the thirteen weeks ended June 30, 2018. This increase in sales discounts and allowances accounted for a 1% decrease in our gross profit percentage. We believe that sales discounts and allowances are a necessary tool for us to remain competitive with comparable products.

Selling expenses decreased by $27,000, or 8%, to $321,000 for the thirteen weeks ended June 29, 2019 from $348,000 for the thirteen weeks ended June 30, 2018. This decrease was principally due to decreases in travel, entertainment and auto expense of $11,000, outside warehouse rental expense of $10,000, and commission expense of $6,000, which were partly offset by an increase in payroll expense of $4,000 and messenger costs of $6,000. We anticipate that our selling expenses will remain at the same level for the balance of 2019.

Marketing expenses increased by $37,000, or 66%, to $93,000 for the thirteen weeks ended June 29, 2019 from $56,000 for the thirteen weeks ended June 30, 2018, due to an increase in promotion expense of $58,000, which was partially offset by decreases in advertising expense of $19,000 and artwork and plate expense of $3,000. The increase in promotion expense was due to certain promotional expenses coming due in the second quarter this year compared to last year.

Research and development costs, which consist principally of salary expenses and laboratory costs, decreased by $9,000 or 8%, to $99,000 for the thirteen weeks ended June 29, 2019 from $108,000 for the thirteen weeks ended June 30, 2018, primarily due to decreases in payroll expense of $5,000 and lab costs and supplies expense of $8,000. We anticipate that research and development expenses will remain at the same level for the remainder of fiscal 2019.

General and administrative expenses decreased slightly by $4,000 to $402,000 for the thirteen weeks ended June 29, 2019 from $406,000 for the thirteen weeks ended June 30, 2018. Increases in professional fees expense of $10,000 and IT expense of $19,000 were partially offset by a reduction in travel, entertainment and auto expense of $15,000 and building maintenance and repair expense of $15,000. We anticipate that general and administrative expenses will remain at the same level for the remainder of fiscal 2019.

There was no income tax expense for the thirteen weeks ended June 29, 2019 or the thirteen weeks ended June 30, 2018.

Twenty-Six Weeks Ended June 29, 2019 Compared with Twenty-Six Weeks Ended June 30, 2018

Net sales for the twenty-six weeks ended June 29, 2019 were $6,644,000, a decrease of $573,000, or 8%, from net sales of $7,217,000 for the twenty-six weeks ended June 30, 2018. Sales of our frozen dessert and frozen food products decreased to $1,092,000 for the twenty-six weeks ended June 29, 2019 from $1,344,000 for the twenty-six weeks ended June 30, 2018. Sales of vegan cheese products decreased to $5,552,000 in the 2019 period from $5,873,000 in the 2018 period. Sales of our frozen dessert products were negatively impacted by the unavailability of certain frozen novelties that our former manufacturing plant had produced for us. We anticipate these novelties will become available in the third and fourth quarters of this year. Sales of our vegan cheese product line decreased due to a decrease in both our export and domestic cheese business. Our export vegan cheese sales were negatively impacted by new customs requirements in Israel, which impacted all imports into that country. The new regulations have significantly increased the time it takes to get shipments cleared through customs in Israel as government officials implement the new requirements. We anticipate that we will still face these issues in the third quarter, but they should be resolved during the fourth quarter.

Our gross profit decreased to $1,843,000 in the twenty-six week period ended June 29, 2019 from $2,294,000 in the twenty-six week period ended June 30, 2018, due to the decreases in sales and our gross profit percentage. Our gross profit percentage was 28% for the twenty-six weeks ended June 29, 2019 compared to 32% for the twenty-six week period ended June 30, 2018. As a percentage of sales, freight out expense was 7% in both the 2019 and 2018 twenty-six week periods. The decrease in our gross profit percentage was primarily due to an increase in our frozen dessert product costs, which were negatively impacted by start-up costs at a new production facility in the twenty-six weeks ended June 29, 2019. Our gross profit and gross profit percentage were also negatively impacted by an increase in sales discounts and allowances of $33,000, or 5%, to $753,000 for the thirteen weeks ended June 29, 2019 from $720,000 for the thirteen weeks ended June 30, 2018.This increase in sales discounts and allowances accounted for a 1% decrease in our gross profit percentage.

Selling expenses increased by $15,000, or 2%, to $718,000 for the twenty-six weeks ended June 29, 2019 from $703,000 for the twenty-six weeks ended June 30, 2018. This increase was due to increases in payroll expense of $12,000, commissions expense of $33,000, and messenger expense of $10,000, which were partially offset by decreases in travel, entertainment and auto expense of $15,000 and outside warehouse rental expense of $21,000. The increase in commission expense was due to the hiring of an outside sales broker to handle our food service business.

Marketing expenses increased by $39,000, or 28%, to $177,000 for the twenty-six weeks ended June 29, 2019 from $138,000 for the twenty-six weeks ended June 30, 2018, due an increase in promotion expense of $41,000. The increase in promotion expense was due to certain promotional expenses coming due in the second quarter of this year compared to last year.

Research and development costs, which consist principally of salary expenses and laboratory costs, decreased by $57,000, or 27%, to $157,000 for the twenty-six weeks ended June 29, 2019 from $214,000 for the twenty-six weeks ended June 30, 2018, due primarily to decreases in professional fees and outside services expense of $12,000, payroll expense of $16,000, and lab costs and supplies expense of $27,000. Payroll expense decreased as a result of one less person in research and development.

General and administrative expenses increased slightly by $6,000, or 1%, to $811,000 for the twenty-six weeks ended June 29, 2019 from $805,000 for the twenty-six weeks ended June 30, 2018. This increase was a result of increases in payroll expense of $21,000 and IT expense of $33,000, which were partially offset by decreases in travel, entertainment and auto expense of $17,000, building maintenance and repair expense of $15,000, equipment rental expense of $9,000, and general insurance expense of $17,000.

Income tax expense was $6,000 for the twenty-six weeks ended June 29, 2019 compared to $5,000 for the twenty-six weeks ended June 30, 2018. We did not record tax loss other than minimum state taxes for the twenty-six weeks ended June 29, 2019 and June 30, 2018.

Liquidity and Capital Resources

As of June 29, 2019, we had approximately $893,000 in cash and cash equivalents and our working capital was approximately $3,737,000, compared with approximately $558,000 in cash and cash equivalents and working capital of $3,896,000 at December 29, 2018. Our current and quick acid test ratios were 5.1 and 2.8, respectively, as of June 29, 2019 compared with 7.1 and 4.2, respectively, as of December 29, 2018.

In order to provide our company with additional working capital, on January 6, 2016, David Mintz, our Chairman and Chief Executive Officer, provided our company with a loan of $500,000 which is secured by substantially all of our assets. The loan, which has been extended to December 31, 2020, bears interest of 5% and is payable on a quarterly basis without compounding. The loan may be prepaid in whole or in part at any time without premium or penalty. The loan is convertible into our common stock at a conversion price of $4.01 per share, the closing price of our common stock on the date the promissory note was entered into. In any event of default, as defined in the promissory note, without any action on the part of Mr. Mintz, the interest rate will increase to 12% per annum and the entire principal and interest balance under the loan, and all of our other obligations under the loan, will be immediately due and payable, and Mr. Mintz will be entitled to seek and institute any and all remedies available to him.

The following table summarizes our cash flows for the periods presented:

Net cash provided by operating activities was $364,000 for the twenty-six weeks ended June 29, 2019 compared to $867,000 used in operating activities for the twenty-six weeks ended June 30, 2018. Net cash provided by operating activities for the twenty-six weeks ended June 29, 2019 was primarily a result of a decrease in accounts receivable and an increase in accounts payable and accrued expenses, which were partially offset by an increase in inventories. Net cash used in investing activities was $29,000 for the twenty-six weeks ended June 29, 2019 compared to $0 used in investing activities for the twenty-six weeks ended June 30, 2018. Net cash used in financing activities was $0 for the twenty-six weeks ended June 29, 2019 compared to $10,000 used in financing activities for the twenty-six weeks ended June 30, 2018.

We believe our existing cash and cash equivalents on hand at June 29, 2019, existing working capital and the cash flows expected from operations, will be sufficient to support our operating and capital requirements during the next twelve months.

Inflation and Seasonality

We do not believe that our operating results have been materially affected by inflation or seasonality during the preceding two years. There can be no assurance, however, that our operating results will not be affected by inflation or seasonality in the future.

Off-balance Sheet Arrangements

None.

Contractual Obligations

As of June 29, 2019, we did not have any material contractual obligations or commercial commitments, including obligations relating to discontinued operations.

Recently Adopted Accounting Standards

See Note 4 to the unaudited condensed financial statements included in Part I, Item 1, Financial Statements, of this Quarterly Report on Form 10-Q.

We do not believe that our exposure to market risk related to the effect of changes in interest rates, foreign currency exchange rates, commodity prices and other market risks with regard to instruments entered into for trading or for other purposes is material.

Evaluation of Disclosure Controls and Procedures. As of June 29, 2019, our company’s chief executive officer and chief financial officer conducted an evaluation regarding the effectiveness of our company’s disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Exchange Act. Based upon the evaluation of these controls and procedures, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were not effective as June 29, 2019.

Disclosure Controls and Internal Controls. As provided in Rule 13a-14 of the General Rules and Regulations under the Securities and Exchange Act of 1934, as amended, Disclosure Controls are defined as meaning controls and procedures that are designed with the objective of insuring that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, designed and reported within the time periods specified by the SEC’s rules and forms. Disclosure Controls include, within the definition under the Exchange Act, and without limitation, controls and procedures to insure that information required to be disclosed by us in our reports is accumulated and communicated to our management, including our chief executive officer and principal financial officer, as appropriate to allow timely decisions regarding disclosure. Internal Controls are procedures which are designed with the objective of providing reasonable assurance that (1) our transactions are properly authorized; (2) our assets are safeguarded against unauthorized or improper use; and (3) our transactions are properly recorded and reported, all to permit the preparation of our financial statements in conformity with generally accepted accounting principles.

Management’s Report on Internal Control Over Financial Reporting. Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed by, or under the supervision of the Chief Executive Officer and Chief Financial Officer and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management’s evaluation of internal control over financial reporting includes using the COSO framework, an integrated framework for the evaluation of internal controls issued by the Committee of Sponsoring Organizations of the Treadway Commission, to identify the risks and control objectives related to the evaluation of our control environment.

Based on their evaluation under the frameworks described above, our chief executive officer and chief financial officer have concluded that our internal control over financial reporting continued to be ineffective as of June 29, 2019 because of the following recurring material weaknesses in internal controls over financial reporting:

We continue to seek ways to remediate these weaknesses, which stem from our small workforce, which consisted of eight employees at June 29, 2019, that will not require us to hire additional personnel.

Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting during the period covered by this report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

We are not a party to any material litigation.

There have been no material changes to the Company’s “Risk Factors” set forth in its Annual Report on Form 10-K for the year ended December 29, 2018.

None.

None.

None.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.

Date: August 13, 2019