TOFUTTI BRANDS INC - Quarter Report: 2021 July (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 ☒   No ☐

Indicate by check mark whether the registrant has submitted electronically 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 ☒ 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 ☒

As of August 16, 2021, the Registrant had 5,153,706 shares of Common Stock, par value $0.01, outstanding.

TOFUTTI BRANDS INC.

INDEX

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

TOFUTTI BRANDS INC.

Unaudited Condensed Balance Sheets

(in thousands, except share and per share figures)

See accompanying notes to unaudited condensed financial statements.

TOFUTTI BRANDS, INC.

Unaudited Condensed Statements of Income

(in thousands, except per share figures)

See accompanying notes to unaudited condensed financial statements.

TOFUTTI BRANDS, INC.

Unaudited Condensed Statements of Changes in Stockholders’ Equity

(in thousands)

See accompanying notes to unaudited condensed financial statements.

TOFUTTI BRANDS INC.

Unaudited Condensed Statements of Cash Flows

(in thousands)

See accompanying notes to unaudited condensed financial statements.

TOFUTTI BRANDS INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

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

Note 1: Basis of Presentation

The accompanying unaudited condensed financial information, 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 week periods ended July 3, 2021 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 2: Recently Issued Accounting Standards

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 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.

Note 3: Inventories

Inventories consist of the following:

Schedule of Inventories

TOFUTTI BRANDS INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

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

Note 4: 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 5: Earnings Per Share

Basic net income per share is calculated using the weighted average number of common shares outstanding during the periods. Diluted earnings per share is calculated by dividing earnings by the weighted number of common shares outstanding, which would account for a potential 282,486 shares to be issued upon conversion and have been included for the periods ended July 3, 2021.

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

Schedule of Earnings Per Share, Basic and Diluted

Note 6: Equipment

Equipment consists of the following:

Schedule of Equipment

Depreciation expense for the thirteen and twenty-six weeks ended July 3, 2021 and the thirteen and twenty-six weeks ended June 27, 2020 was $3 and $5, respectively.

TOFUTTI BRANDS INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

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

Note 7: 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.” No stock options were issued in 2020 or 2021 and no options were outstanding as of July 3, 2021.

Note 8: Notes Payable

Small Business Administration (SBA) Loan

On May 4, 2020 the Company received from the SBA a loan of $165 from the Paycheck Protection Program at an interest rate of 1%. Interest and payments were deferred until March 4, 2021. The current portion of the loan was $128 as of July 3, 2021 and the loan will expire on May 4, 2022. No demand for repayment of the loan has been made as of August 17, 2021. The Company has applied for loan forgiveness and is awaiting the results. There has been no further communication from the SBA on the status.

Related Party

On January 6, 2016, David Mintz, the Company’s former Chairman and Chief Executive, who passed away in February 2021, provided the Company with a loan of $500 with an annual interest rate of 5% payable on a quarterly basis. The loan, which was originally set to expire on December 31, 2017 was 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, at the option of the holder, 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. Interest expense incurred to the related party was $6,000 and $12,000 for the thirteen and twenty-six week periods ended July 3, 2021 and $6,000 and $13,000 for the thirteen and twenty-six week periods ended June 27, 2020, respectively.

Schedule of Related Party Notes Payable

Note 9: Revenue

Performance obligations relating to the delivery of food products are satisfied when the goods are shipped to the customer and net of all applicable discounts, as follows: Payment term discounts, off-invoice allowance, manufacturer chargeback, freight allowance, spoilage discounts, and product returns.

TOFUTTI BRANDS INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

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

Revenues by geographical region are as follows:

Schedule of Revenues by Geographical Region

Net sales by major product category:

Summary of Net Sales by Major Product Category

Note 10: Leases

The Company is 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 $20 for the thirteen weeks ended July 3, 2021 and $19 for the thirteen weeks ended June 27, 2020. Rent expense was $40 for the twenty-six weeks ended July 3, 2021 and $38 for the twenty-six weeks ended June 27, 2020. 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 $137 for the thirteen weeks ended July 3, 2021 and $113 for the thirteen weeks ended June 27, 2020 and $249 or the twenty-six weeks ended July 3, 2021 and $227 for the twenty-six weeks ended June 27, 2020.

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

TOFUTTI BRANDS INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

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

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 right-of-use, or 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:

Schedule of ROU Lease Assets and Liabilities for Operating Leases

Future lease payments included in the measurement of lease liabilities on the balance sheet as of July 3, 2021 are as follows:

Schedule of Future Minimum Rental Commitments

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 unaudited condensed 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 vegan and dairy-free soy-based cheeses, frozen desserts and other food products. We recognize revenue when control over the products transfers to our customers, deemed to be the performance obligation, which generally occurs when the product is shipped or picked up from one of our distribution locations by the customer. 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 receivable 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 and reserve for sales promotions. 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 net realizable value 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.

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 one to three 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 right of use 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 Developments

On February 24, 2021 David Mintz, our founder, Chief Executive Officer and Chairman of the Board of Directors, passed away. Steven Kass, Chief Financial Officer, was appointed interim CEO by our Board of Directors and was confirmed as permanent CEO by the Board on April 27, 2021.

An outbreak of infectious respiratory illness caused by a novel coronavirus known as COVID-19 was first detected in China in December 2019 and has now spread globally. This 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 affected certain aspects of our operations. All of our co-packing facilities are currently operating normally 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. The cost of certain key ingredients has increased substantially due to short-term supply issues related to COVID-19. Additionally, our freight costs have increased due to a driver shortage caused by COVID-19. 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. The only negative effect to our business to date has been with respect to our food service sales to retail outlets, such as restaurants and small food shops, which account for a small part of our total business and with respect to our inability to regain our level of export sales to foreign jurisdictions. Our marketing efforts have also been constrained 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 of approximately $2,069,000 as of July 3, 2021 has improved since our fiscal year end

Results of Operations

Thirteen Weeks Ended July 3, 2021 Compared with Thirteen Weeks Ended June 27, 2020

Net sales for the thirteen weeks ended July 3, 2021 were $3,027,000, a decrease of $216,000, or 7%, from net sales of $3,243,000 for the thirteen weeks ended June 27, 2020. The decrease is mainly attributable to decreases in sales in our frozen desserts, frozen foods and vegan cheese categories. Sales of vegan cheese products decreased slightly to $2,497,000 in the 2021 period from $2,547,000 in the 2020 period due to manufacturing delays at our co-packing facility for vegan cheese slices, which have since been resolved. Frozen dessert and frozen food products sales decreased by $166,000 to $530,000 in the thirteen weeks ended July 3, 2021 from $696,000 for the thirteen weeks ended June 27, 2020. The decrease in frozen dessert sales was due to the discontinuance of our Yours Truly cones and Marry Me bars in the second quarter of 2021 due to the two products’ declining sales.

Our gross profit decreased to $758,000 in the thirteen weeks ended July 3, 2021 from $1,015,000 in the thirteen weeks ended July 3, 2021. Our gross profit percentage was 25% for the thirteen weeks ending July 3, 2021 compared to 31% for the thirteen weeks ending June 27, 2020. Our gross profit percentage was negatively impacted by our export cheese business accounting for a larger portion of our total vegan cheese business than in the same period last year. The gross profit on our vegan cheese export sales is significantly less than on our vegan cheese domestic sales. Sales allowances during the 2021 second quarter were $30,000 higher than in the 2020 second quarter. Additionally, sudden cost increases for ingredients due to COVID-related issues negatively impacted our gross profit. We anticipate these ingredient cost increases to continue for the balance of the year.

Our gross profit percentage was also negatively impacted by an increase in freight expense, which is a component of cost of sales. Freight expense, a significant part of our cost of sales, increased by $42,000, or 19%, to $271,000 for the thirteen weeks ended July 3, 2021 compared with $229,000 for the thirteen weeks ended June 27, 2020. As a percentage of sales, freight expense was 9% percent for the thirteen weeks ended July 3, 2021 compared to 7% percent for the thirteen weeks ended June 27, 2020. Our freight expense was negatively impacted by a significant increase in freight rates caused by a shortage of drivers due to COVID-19 and the continued implementation of the 2019 Electronic Logging Device rules and regulations, or ELD, which limit the number of hours a truck driver can drive in a 24-hour period for over the road carriers. We expect this increase in freight expense to continue for the balance of 2021.

Selling expenses increased by $12,000, or 4%, to $303,000 for the thirteen weeks ended July 3, 2021 from $291,000 for the thirteen weeks ended June 27, 2020. This increase was principally due to increases in outside warehouse rental expense of $24,000, bad debt expense of $10,000, and travel, entertainment and auto expense of $6,000, which were partly offset by decreases in payroll expense of $7,000 and commission expense of $20,000. We anticipate that our selling expenses will remain at the same level for the remainder of 2021.

Marketing expenses increased by $19,000, or 40%, to $66,000 for the thirteen weeks ended July 3, 2021 from $47,000 for the thirteen weeks ended June 27, 2020, due primarily to an increase in advertising expense of $17,000. We anticipate that our marketing expenses will remain at the same level for the remainder of fiscal 2021.

Research and development costs, which consist principally of salary expenses and laboratory costs, decreased by $18,000, or 33%, to $36,000 for the thirteen weeks ended July 3, 2021 from $54,000 for the thirteen weeks ended June 27, 2020, primarily due to decreases in payroll expense of $9,000 and lab costs and supplies expense of $6,000. Because we do not anticipate that our research and development department will resume operations at the pre-COVID level in 2021, we expect that product development costs will remain significantly lower for the remainder of fiscal 2021.

General and administrative expenses decreased by $88,000, or 21%, to $319,000 for the thirteen weeks ended July 3, 2021 from $407,000 for the thirteen weeks ended June 27, 2020. The decrease in general and administrative expenses was due to a decrease in payroll expense of $138,000, which was partially offset by increases in professional fees and outside services expense of $40,000 and IT expense of $10,000. The decrease in payroll expense was due to the elimination of Mr. Mintz’s salary at the start of the second quarter. The increase in professional fees and outside services expense was due to a one-time fee charged by our former accountants. The increase in IT expenses was due to an upgrade of our ransomware protection systems.

There was de-minimus income tax expense for the thirteen weeks ended July 3, 2021.

Twenty-Six Weeks Ended July 3, 2021 Compared with Twenty-Six Weeks Ended June 27, 2020

Net sales for the twenty-six weeks ended July 3, 2021 were $6,177,000, a decrease of $292,000, or 5%, from net sales of $6,469,000 for the twenty-six weeks ended June 27, 2020. Sales of vegan cheese products decreased to $5,217,000 in the 2021 period from $5,361,000 in the 2020 period. Sales of our frozen dessert and frozen food products decreased to $960,000 for the twenty-six weeks ended July 3, 2021 from $1,108,000 for the twenty-six weeks ended June 27, 2020. The decrease in our sales for the 2021 twenty-six week period was mostly due to the decrease in frozen dessert sales resulting from the discontinuance of our Yours Truly cones and Marry Me bars in the 2021 period due to the two products’ declining sales.

Our gross profit decreased to $1,759,000 in the twenty-six weeks ended July 3, 2021 from $2,011,000 in the twenty-six week period ended June 27, 2020. Our gross profit percentage was 28% for the twenty-six weeks ended July 3, 2021 compared to 31% for the twenty-six weeks ended June 27, 2020. Freight expense increased by $25,000, or 5%, to $498,000 for the twenty-six weeks ended July 3, 2021 compared with $473,000 for the twenty-six weeks ended June 27, 2020. As a percentage of sales, freight expense was 8% percent for the twenty-six weeks ended July 3, 2021 compared to 7% percent for the twenty-six weeks ended June 27, 2020.

Selling expenses increased by $29,000, or 5%, to $627,000 for the twenty-six weeks ended July 3, 2021 from $598,000 for the twenty-six weeks ended June 27, 2020. This increase was due principally to increases in outside warehouse rental expense of $22,000, bad debt expense of $10,000, and commission expense of $5,000, which were partly offset by a decrease in payroll expense of $7,000.

Marketing expenses decreased by $37,000, or 22%, to $135,000 for the twenty-six weeks ended July 3, 2021 from $172,000 for the twenty-six weeks ended June 27, 2020, due to a decrease in promotion expense of $54,000, which was partially offset by an increase in advertising expense of $21,000.

Research and development costs, which consist principally of salary expenses and laboratory costs, decreased by $69,000, or 48%, to $75,000 for the twenty-six weeks ended July 3, 2021 from $144,000 for the twenty-six weeks ended June 27, 2020, due primarily to decreases in payroll expense of $37,000, equipment repair expense of $14,000 and professional fees and outside services expense of $13,000.

General and administrative expenses decreased by $52,000, or 6%, to $766,000 for the twenty-six weeks ended July 3, 2021 from $818,000 for the twenty-six weeks ended June 27, 2020. This decrease was a result of decreases in payroll expense of $136,000, which was partially offset by increases in professional fees and outside services expense of $65,000 and IT expense of $16,000. The decrease in payroll expense was due to the elimination of Mr. Mintz’s salary at the start of the second quarter. The increase in professional fees and outside services expense was due to a one-time fee charged by our former accountants. The increase in IT expenses was due to an upgrade of our ransomware protection systems

Income tax expense was $36,000 for the twenty-six weeks ended July 3, 2021 compared to $76,000 for the twenty-six weeks ended June 27, 2020.

Liquidity and Capital Resources

As of July 3, 2021, we had approximately $2,069,000 in cash and our working capital was approximately $4,691,000, compared with approximately $1,459,000 in cash and working capital of $4,639,000 at January 2, 2021.

Small Business Administration Loan

On May 4, 2020, we were granted a loan (the “Loan”) from Valley National Bank in the aggregate amount of approximately $165,000, pursuant to the Paycheck Protection Program under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), which was enacted on March 27, 2020. The term of the loan is two years, with monthly payments due the first day of each month, beginning seven months from the date of initial disbursement, or December 1, 2020, whichever is earlier. 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 has applied for loan forgiveness and is awaiting the results. There has been no further communication from the SBA on the status.

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

Net cash provided by operating activities was $610,000 for the twenty-six weeks ended July 3, 2021 compared to $455,000 for the twenty-six weeks ended June 27, 2020. Net cash provided by operating activities for the twenty-six weeks ended July 3, 2021 was primarily a result of a result of our net income of $108,000 and a decrease in accounts receivable of $639,000, which was partially offset by a decrease in current liabilities of $95,000. Net cash provided by financing activities was $0 for the twenty-six weeks ended July 3, 2021 compared to $165,000 for the twenty-six weeks ended June 27, 2020. Net cash provided by financing activities for the twenty-six weeks ended June 27, 2020 was a result of a loan pursuant to the Paycheck Protection Program under the CARES Act.

We believe our existing working capital and cash on hand at July 3, 2021, 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, other than the COVID related increases in certain ingredient costs and freight expenses. There can be no assurance, however, that our operating results will not be materially 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

We had no material contractual obligations as of July 3, 2021.

Recently Issued Accounting Standards

See Note 2 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 July 3, 2021, our Company’s chief executive and 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 and financial officer concluded that our disclosure controls and procedures were not effective as July 3, 2021.

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 ensure 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 interim 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.

On February 24, 2021 David Mintz, our founder, Chief Executive Officer and Chairman of the Board of Directors, passed away. Steven Kass, Chief Financial Officer, was appointed interim CEO by our Board of Directors and was confirmed as permanent CEO by the Board on April 27, 2021.

Based on the evaluation under the frameworks described above, Mr. Kass, our chief executive and chief financial officer, has concluded that our internal control over financial reporting was ineffective as of July 3, 2021 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 four persons at July 3, 2021. As of the date of this filing we employ five people.

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 January 2, 2021.

None.

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 17, 2021