TOFUTTI BRANDS INC - Quarter Report: 2020 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)

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

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 13, 2020 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.

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)

Note 1:   Liquidity and Capital Resources

At June 27, 2020, Tofutti Brands, Inc. (“Tofutti” or the “Company”) had approximately $1,134 in cash compared to $514 at December 28, 2019. Net cash provided by operating activities was $455 for the twenty-six weeks ended June 27, 2020 compared to $364 provided by operating activities for the twenty-six weeks ended June 29, 2019. Cash provided by operating activities for the twenty-six weeks ended June 27, 2020 was primarily a result of the Company’s operating profit and a decrease in accounts receivable. Net cash provided by financing activities was $165 for the twenty-six weeks ended June 27, 2020 compared to $0 provided by financing activities for the twenty-six weeks ended June 29, 2019. Net cash provided by financing activities was due to the Company’s receipt of a loan under the Paycheck Protection Program (the “PPP”) under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). Net cash used in investing activities was $0 for the twenty-six weeks ended at June 27, 2020 compared to $29 used in investing activities for the twenty-six weeks ended June 29, 2019.

The Company historically has primarily financed operations and met capital requirements 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. The original loan was convertible into shares of 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 first entered into. Effective January 10, 2020, the loan was extended until December 31, 2022 and is convertible into the Company’s common stock at a conversion price of $1.77 per share, the closing price of the common stock on the OTCQB on the date the extension of the promissory note was entered into. See Note 10.

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, the inability to make sales calls due to travel restrictions imposed by governmental agencies in response to the spread of COVID-19 and other factors beyond the Company’s control. The Company’s ability to promote sales through promotional activities has also been constrained as many supermarkets are understaffed and unable to change pricing for items in stock, resulting in the cancelation of many sales promotional discounts for the foreseeable future. Trade food shows and sales conferences, major events used to introduce and sell the Company’s products, have been postponed indefinitely.

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. In addition, the continued spread of COVID-19 and the resulting economic downturn could materially and adversely affect the Company’s business and results of operations. 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 BRANDS INC.

Notes to Condensed Financial Statements

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

Small Business Administration Loan (SBA Loan)

On May 4, 2020, the Company was granted a loan from the Valley National Bank in the aggregate amount of $165, pursuant to the PPP under the CARES Act. The term of the loan is two years, with monthly payments due the first day of each month, beginning December 1, 2020. Interest accrues at 1% per year, effective on the date of initial disbursement. In addition, a portion of the loan may be forgiven under provisions under the CARES Act based on payments for payroll, rent and utilities during the period subsequent to obtaining the loan.

Note 2:   Description of Business

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.

Note 3:   Basis of Presentation

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 results of operations for the thirteen week and twenty-six periods ended June 27, 2020 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.

Note 4:   New and Recently Adopted Accounting Standards

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326) Measurement of Credit Losses on Financial Instruments. The amendments in this Update require a new topic to be added (Topic 326) to the Accounting Standards Codification (“ASC”) and removes the thresholds that entities apply to measure credit losses on financial instruments measured at amortized cost, such as loans, trade receivables, reinsurance recoverables, and off-balance-sheet credit exposures, and held-to-maturity securities. Under current U.S. GAAP, entities generally recognize credit losses when it is probable that the loss has been incurred. The guidance under ASU 2016-13 will remove all current recognition thresholds and will require entities under the new current expected credit loss (“CECL”) model to recognize an allowance for credit losses for the difference between the amortized cost basis of a financial instrument and the amount of amortized cost that an entity expects to collect over the instrument’s contractual life. The new CECL model is based upon expected losses rather than incurred losses. Additionally, the credit loss recognition guidance for available-for-sale securities is amended and will require that credit losses on such debt securities should be recognized as an allowance for credit losses rather than a direct write-down of amortized cost balance. The ASU is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. We are currently evaluating the effect that this new guidance will have on our financial statements and related disclosures.

TOFUTTI BRANDS INC.

Notes to Condensed Financial Statements

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

Note 5:   Inventories

The composition of inventories is as follows:

Note 6:   Income Taxes

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. The Company accounts for penalties or interest related to uncertain tax positions as part of its provision for income taxes.

Note 7:   Earnings (Loss) Per Share

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 27, 2020 and June 29, 2019 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 note outstanding during the same period. Not included in the calculation of diluted earnings (loss) per common share for the twenty-six week period ended June 27, 2020 and the thirteen and twenty-six weeks periods ended June 29, 2019 were the shares issuable upon conversion of a convertible note payable and the shares issuable upon exercise of 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 earnings (loss) per share:

Note 8:   Fixed Assets

Fixed assets consist of the following:

Depreciation expense for the thirteen and twenty-six weeks ended June 27, 2020 was $3 and $5, respectively. Depreciation expense for the thirteen and twenty-six weeks ended June 29, 2019 was $0 and $0, respectively.

Note 9:   Share Based Compensation

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 27, 2020, the Company had issued 80,000 non-qualified stock option awards under the 2014 Plan, all of which have expired.

TOFUTTI BRANDS INC.

Notes to Condensed Financial Statements

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

Note 10: Notes Payable

Related Party

On January 6, 2016, David Mintz, the Company’s Chairman and Chief Executive, provided the Company with a loan of $500. The loan, which was originally set to expire on December 31, 2017, has been extended to December 31, 2022 effective January 10, 2020. The original loan was convertible into shares of 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 first entered into. The extended loan is convertible into the Company’s common stock at a conversion price of $1.77 per share, the closing price of the Company’s common stock on the date of the extension of the promissory note. 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. 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.

SBA Note Payable

On May 4, 2020, the Company was granted a $165 loan from the Valley National Bank, pursuant to the PPP under the Cares Act. The term of the loan is two years, with monthly payments due the first day of each month December 1, 2020. Interest accrues at 1% per year, effective on the date of initial disbursement. In addition, a portion of the loan may be forgiven under provisions under the CARES Act based on payments for payroll, rent and utilities during the period subsequent to obtaining the loan.

The Company elected to account for the loan in accordance with ASC 470. The Company recognized the entire loan amount as a liability on the balance sheet, with interest accrued and expensed over the term of the loan. The loan will remain a liability until either the Company has been legally released from being the primary obligor under the liability (the loan is forgiven), or the Company pays the lender and is relieved of its obligation for the liability.

TOFUTTI BRANDS INC.

Notes to Condensed Financial Statements

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

Note 11: Revenues

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 92% of the Americas revenue in 2020 and 93% of the Americas revenue in 2019 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.

Net sales by major product category:

Timing of revenue recognition (in thousands):

TOFUTTI BRANDS INC.

Notes to Condensed Financial Statements

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

Note 12: Leases

The Company’s facilities are located in a one-story facility in Cranford, New Jersey. The 6,200 square foot facility houses its administrative offices, a warehouse, walk-in freezer and refrigerator, and a product development laboratory and test kitchen. The Company’s original lease agreement expired on July 1, 1999, but it continues to occupy the premises on a monthly basis. Any changes by either the landlord or the Company remains subject to a six month notification period. The Company currently has no plans to enter into a long-term lease agreement for the facility. Rent expense was $19 for the thirteen weeks ended June 27, 2020 and $13 for the thirteen weeks ended June 29, 2019. Rent expense was $38 for the twenty-six weeks ended June 27, 2020 and $40 for the twenty-six weeks ended June 29, 2019. The Company’s management believes that the Cranford facility will continue to satisfy its space requirements for the foreseeable future and that if necessary, such space can be replaced without a significant impact to the business. The Company rents warehouse storage space at various outside facilities. Outside warehouse expenses were $113 for the thirteen weeks ended June 27, 2020 and $96 for the thirteen weeks ended June 29, 2019.

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.

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.

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

TOFUTTI BRANDS INC.

Notes to Condensed Financial Statements

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

Future lease payments included in the measurement of lease liabilities on the balance sheet as of June 27, 2020, 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: Revenue. 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.

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. Depreciation is 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

Our 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 our balance sheets or statements of operations.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326) Measurement of Credit Losses on Financial Instruments. The amendments in this Update require a new topic to be added (Topic 326) to the Accounting Standards Codification (“ASC”) and removes the thresholds that entities apply to measure credit losses on financial instruments measured at amortized cost, such as loans, trade receivables, reinsurance recoverables, and off-balance-sheet credit exposures, and held-to-maturity securities. Under current U.S. GAAP, entities generally recognize credit losses when it is probable that the loss has been incurred. The guidance under ASU 2016-13 will remove all current recognition thresholds and will require entities under the new current expected credit loss (“CECL”) model to recognize an allowance for credit losses for the difference between the amortized cost basis of a financial instrument and the amount of amortized cost that an entity expects to collect over the instrument’s contractual life. The new CECL model is based upon expected losses rather than incurred losses. The ASU is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. We are currently evaluating the effect that this new guidance will have on our financial statements and related disclosures.

Recent Developments

The COVID-19 outbreak has resulted in travel restrictions, closed international borders, enhanced health screenings at ports of entry and elsewhere, disruption of and delays in healthcare service preparation and delivery, prolonged quarantines, cancellations, supply chain disruptions, and lower consumer demand, layoffs, defaults and other significant economic impacts, as well as general concern and uncertainty.

The current severity of the pandemic and the uncertainty regarding the length of its effects could have negative consequences for our company. To date, the effects of the pandemic have not materially affected our company’s operations. All of our co-packing facilities are currently operating as normal and the pandemic has not constrained any of our production requirements. We continue to be able to schedule trucks for delivery and a large majority of our customers are still operating and ordering our products as before.

Most of our administrative functions are being performed remotely. A small crew maintains the office for those functions that cannot be handled remotely. Our ability to collect money, pay bills, handle customer and consumer communications, schedule production, and order ingredients necessary for our production has not been impacted.

To date, the pandemic has had minimal impact on our sales. The majority of our sales relate to retail products sold in supermarkets. Supermarket sales in general have seen a substantial surge in business due to the pandemic, as consumers stock up on all products that they would normally purchase. We experienced a slight decline in sales at the beginning of the imposition of restrictions to mitigate the spread of COVID-19 and experienced a decline with respect to food service sales to retail outlets, such as restaurants and small food shops, which account for a small part of our total business. In the second quarter of 2020 we were able to increase our sales compared to the second quarter of 2019 as a result of increased sales of our frozen dessert and food products. We expect that any potential decline in our sales will be offset in whole or in part by a similar decline in sales and marketing expenses due to social distancing restrictions and other current government rules and regulations that preclude face to face sales meeting, attendance at trade shows and the initiation of new promotions.

To date we have not experienced a significant change in the timeliness of payments of our invoices and our cash position remains stable with approximately $1,134,000 of cash and cash equivalents as of June 27, 2020.

Results of Operations

Thirteen Weeks Ended June 27, 2020 Compared with Thirteen Weeks Ended June 29, 2019

Net sales for the thirteen weeks ended June 27, 2020 were $3,243,000, an increase of $100,000, or 3%, from net sales of $3,143,000 for the thirteen weeks ended June 29, 2019. The increase is attributable to an increase in sales in our frozen dessert and foods category. Sales of vegan cheese products decreased slightly to $2,547,000 in the 2020 period from $2,574,000 in the 2019 period due to a decrease in our export cheese business. Frozen dessert and frozen food products sales increased by $127,000 to $696,000 in the thirteen weeks ended June 27, 2020 from $569,000 for the thirteen weeks ended June 29, 2019. Sales of both our vegan cheese product line and our frozen dessert products were negatively impacted, particularly in our export business, by the restrictions imposed due to the COVID-19 coronavirus. Our export vegan cheese product sales were also negatively impacted by the bankruptcy of our UK distributor at the end of 2019 due to the economic downturn in the UK brought about by the uncertainties of Brexit. We are in the process of finding a suitable replacement.

Our gross profit increased to $1,015,000 in the thirteen weeks ended June 27, 2020 from $860,000 in the thirteen weeks ended June 29, 2019. Our gross profit percentage was 31% for the thirteen weeks ending June 27, 2020 compared to 27% for the thirteen weeks ending June 29, 2019.

Our gross profit percentage was positively impacted by a decrease in freight out expense, which is a component of cost of sales. Freight out expense, a significant part of our cost of sales, decreased by $45,000, or 16%, to $229,000 for the thirteen weeks ended June 27, 2020 compared with $274,000 for the thirteen weeks ended June 29, 2019. As a percentage of sales, freight out expense was 7% percent for the thirteen weeks ended June 27, 2020 compared to 9% percent for the thirteen weeks ended June 29, 2019. Our gross profit and gross profit percentage were also positively impacted by a decrease in sales discounts and allowances of $81,000, or 21%, to $305,000 for the thirteen weeks ended June 27, 2020 from $386,000 for the thirteen weeks ended June 29, 2019. This decrease in sales discounts and allowances was due primarily due to the cancellation of many sales promotional discounts due to the COVID-19 pandemic and accounted for a 2% increase in our gross profit percentage.

Selling expenses decreased by $30,000, or 9%, to $291,000 for the thirteen weeks ended June 27, 2020 from $321,000 for the thirteen weeks ended June 29, 2019. This decrease was principally due to decreases in payroll expense of $20,000, travel, entertainment and auto expense of $13,000, bad debt expense of $10,000, and outside messenger expense of $7,000, which were partly offset by an increase in outside warehouse rental expense of $16,000. We anticipate that our selling expenses will remain at the same level for the remainder of 2020.

Marketing expenses decreased by $46,000, or 49%, to $47,000 for the thirteen weeks ended June 27, 2020 from $93,000 for the thirteen weeks ended June 29, 2019, due primarily to a decrease in promotion expense of $43,000. The decrease in promotion expense was due to the cancellation of several promotional activities due to the COVID-19 pandemic. We anticipate that our marketing expenses will remain at the same level for the remainder of fiscal 2020.

Research and development costs, which consist principally of salary expenses and laboratory costs, decreased by $45,000 or 45%, to $54,000 for the thirteen weeks ended June 27, 2020 from $99,000 for the thirteen weeks ended June 29, 2019, primarily due to decreases in payroll expense of $15,000, lab costs and supplies expense of $9,000, uniform rental expense $7,000, and outside professional fees and outside service expense of $15,000. Due to the COVID-19 pandemic, our R&D lab was shut down in the 2020 period. We anticipate that our research and development expenses will remain at the same level for the remainder of fiscal 2020.

General and administrative expenses increased slightly by $5,000 to $407,000 for the thirteen weeks ended June 27, 2020 from $402,000 for the thirteen weeks ended June 29, 2019. We anticipate that general and administrative expenses will remain at the same level for the remainder of fiscal 2020.

Income tax expense of $69,000 for the thirteen weeks ended June 27, 2020 was primarily related to deferred tax expense as a result of stock options expiring during the period. There was no income tax for the thirteen weeks ended June 29, 2019.

Twenty-Six Weeks Ended June 27, 2020 Compared with Twenty-Six Weeks Ended June 29, 2019

Net sales for the twenty-six weeks ended June 27, 2020 were $6,469,000, a decrease of $175,000, or 3%, from net sales of $6,644,000 for the twenty-six weeks ended June 29, 2019. Sales of vegan cheese products decreased to $5,361,000 in the 2020 period from $5,552,000 in the 2019 period. Sales of our frozen dessert and frozen food products increased slightly to $1,108,000 for the twenty-six weeks ended June 27, 2020 from $1,092,000 for the twenty-six weeks ended June 29, 2019.

Our export vegan cheese product sales were negatively impacted by the bankruptcy of our UK distributor at the end of 2019 due to the economic downturn in the UK brought about by the uncertainties of Brexit. We are in the process of finding a suitable replacement.

Our gross profit increased to $2,011,000 in the twenty-six week period ended June 27, 2020 from $1,843,000 in the twenty-six week period ended June 29, 2019. Our gross profit percentage was 31% for the twenty-six weeks ended June 27, 2020 compared to 28% for the twenty-six week period ended June 29, 2019. The increase in our gross profit percentage in the 2020 period was primarily due to a decrease in frozen dessert costs, which were negatively impacted in 2019 by start-up costs at a new production facility.

Selling expenses decreased by $120,000, or 17%, to $598,000 for the twenty-six weeks ended June 27, 2020 from $718,000 for the twenty-six weeks ended June 29, 2019. This decrease was due to decreases in payroll expense of $36,000, commissions expense of $49,000, travel, entertainment and auto expense of $20,000 and bad debt expense of $10,000, which were partially offset by an increase in outside warehouse rental expense of $17,000.

Marketing expenses decreased slightly by $5,000, or 3%, to $172,000 for the twenty-six weeks ended June 27, 2020 from $177,000 for the twenty-six weeks ended June 29, 2019, due to a decrease in promotion expense of $14,000 and public relations expense of $3,000, which were partially offset by an increase in advertising expense of $14,000. 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 $13,000, or 8%, to $144,000 for the twenty-six weeks ended June 27, 2020 from $157,000 for the twenty-six weeks ended June 29, 2019, due primarily to decreases in professional fees and outside services expense of $10,000, payroll expense of $5,000, and lab costs and supplies expense of $9,000, which were partially offset by an increase in equipment repair expense of $13,000.

General and administrative expenses increased slightly by $7,000, or 1%, to $818,000 for the twenty-six weeks ended June 27, 2020 from $811,000 for the twenty-six weeks ended June 29, 2019. This increase was a result of increases in professional fees expense of $40,000 and general insurance expense of $18,000, which were partially offset by decreases in payroll expense of $7,000, public relations expense of $14,000, and IT expense of $25,000.

Income tax expense was $76,000 for the twenty-six weeks ended June 27, 2020 compared to $6,000 for the twenty-six weeks ended June 29, 2019. The increase in income tax expense in the 2020 period was primarily related to deferred tax expense as a result of stock options expiring during the period. The income tax expense for the twenty-six weeks ended June 29, 2019 was for state minimum taxes.

Liquidity and Capital Resources

As of June 27, 2020, we had approximately $1,134,000 in cash and cash equivalents and our working capital was approximately $4,203,000, compared with approximately $514,000 in cash and cash equivalents and working capital of $3,840,000 at December 28, 2019. Our current and quick acid test ratios were 7.0 and 4.0, respectively, as of June 27, 2020 compared with 8.1 and 4.5, respectively, as of December 28, 2019.

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 has been extended until December 31, 2022. 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 our common stock at a conversion price of $1.77 per share at the option of the holder, the closing price of our common stock on the OTCQB on the date the extension of the promissory note was entered into.

On May 4, 2020, we were granted a $165,000 loan by the Valley National Bank, pursuant to the Paycheck Protection Program under the CARES Act. The term of the loan is two years, with monthly payments due the first day of each month beginning December 1, 2020. Interest accrues at 1% per year, effective on the date of initial disbursement. In addition, a portion of the loan may be forgiven under provisions under the CARES Act based on payments for payroll, rent and utilities during the period subsequent to obtaining the loan.

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

Net cash provided by operating activities was $455,000 for the twenty-six weeks ended June 27, 2020 compared to $364,000 provided by operating activities for the twenty-six weeks ended June 29, 2019. Net cash provided by operating activities for the twenty-six weeks ended June 27, 2020 was primarily a result of the company’s operating profit and a decrease in accounts receivable. Net cash provided by financing activities was $165,000 for the twenty-six weeks ended June 27, 2020 compared to $0 provided by financing activities for the twenty-six weeks ended June 29, 2019. Net cash provided by financing activities for the twenty-six weeks ended June 27, 2020 was a result of a loan from the Valley National Bank, pursuant to the Paycheck Protection Program under the CARES Act. Net cash used in investing activities was $0 for the twenty-six weeks ended June 27, 2020 compared to $29,000 used in investing activities for the twenty-six weeks ended June 29, 2019.

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 during the preceding two years. There can be no assurance, however, that our operating results will not be affected by inflation in the future. Our business is subject to minimal seasonal variations with slightly increased sales historically in the second and third quarters of the fiscal year. We expect to continue to experience slightly higher sales in the second and third quarters, and slightly lower sales in the fourth and first quarters, as a result of reduced sales of nondairy frozen desserts during those periods.

Off-balance Sheet Arrangements

None.

Contractual Obligations

As of June 27, 2020, 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 27, 2020, 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 Securities and Exchange Act of 1934, as amended (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 27, 2020.

Disclosure Controls and Internal Controls. As provided in Rule 13a-14 of the General Rules and Regulations under the Exchange Act, 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 Exchange Act, as amended, 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 was ineffective as of June 27, 2020 because of the following material weaknesses in internal controls over financial reporting:

To date, we have been unable to remediate these weaknesses, which stem from our small workforce of seven persons at June 27, 2020.

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.

Other than the following, 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 28, 2019.

If we do not qualify for retention or forgiveness of the Paycheck Protection Program loan, our financial condition may be adversely affected.

On May 4, 2020, we entered into a loan agreement with Valley National Bank as the lender under the Paycheck Protection Program (the “PPP”) of the CARES Act administered by Small Business Administration (the “SBA”), and subsequently received a loan in the amount of approximately $165,000 (the “PPP Loan”) to help sustain our employee payroll costs, rent, and utilities. We made good faith certifications of our necessity for the PPP Loan and believe that we are in full compliance with the terms and conditions outlined in the CARES Act. However, as a consequence of post-PPP Loan rulemaking by the SBA, shifting regulatory guidance and/or other factors, we may be required to repay the PPP Loan before its expected maturity date. In addition, we hope to obtain forgiveness of all or a portion of the PPP Loan, as allowed under the CARES Act. As there is still substantial uncertainty about PPP forgiveness qualifications, we make no representations that we will qualify for forgiveness of all or part of the PPP Loan. Due to the incomplete and changing regulations around the PPP, new pronouncements may also change our current compliance status under the law, and any potential allowable forgiveness of the PPP Loan amount.

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.