TOFUTTI BRANDS INC - Quarter Report: 2023 September (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 November 14, 2023 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 Operations

(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 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 thirty-nine-week periods ended September 30, 2023 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.

On January 1, 2023, we adopted ASU 2016-13, Financial Instruments - Credit Losses (Topic 326) Measurement of Credit Losses on Financial Instruments. ASU 2016-13 replaces the previously established credit losses framework with a new accounting standard that requires management to measure an allowance for expected credit losses that is based on a broader range of reasonable and supportable information for lifetime credit loss estimates. The Company has assessed that the adoption of this standard has not had a material affect on the financial statements.

Note 3: Inventories

Inventories consist of the following:

Schedule of Inventories

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 (Loss) Per Share

Basic earnings per common share (“EPS”) applicable to common stockholders is computed by dividing earnings applicable to common stockholders by the weighted-average number of common shares outstanding.

Diluted earnings per share is computed by dividing income available to common stockholders, adjusted for the effects of the presumed issuance of potential common shares, by the number of (1) weighted average common shares outstanding, plus (2) potentially issuable shares, such as stock options. If there is a loss from operations, diluted EPS is computed in the same manner as basic EPS is computed.

TOFUTTI BRANDS INC.

Notes to Unaudited Condensed Financial Statements

(in thousands, except share and per share data)

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

Schedule of Earnings Per Share, Basic and Diluted

The following are securities excluded from weighted-average shares used to calculate diluted earnings (loss) per common share, as the result of including them to calculate diluted EPS is anti-dilutive:

Schedule of Weighted Average Numbers of Shares

Note 6: 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. Such grants can be, but are not limited to, options, stock appreciation rights, restricted stock, performance grants, stock bonuses, and any other type of award that is consistent with the purposes of the 2014 Plan. Employees and officers of the Company are eligible to receive incentive stock options while corporate directors are only eligible to receive non-qualified options.

The 2014 Plan made 250,000 shares of common stock available for awards. The 2014 Plan permits performance-based 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.” 0 and 250,000 stock options were issued in 2023 and 2022, respectively, and 250,000 non-qualified options were outstanding as of September 30, 2023. The exercise price of all options granted is $0.95 per share, the market price at the close of business on the date of the grant. 83,333 of the options vested at the grant date in 2022, 83,333 options will vest in December 2023, and 83,334 options will vest in December 2024. In the event of a sale of the Company at any time prior to December 22, 2024, all remaining unvested options shall vest immediately. All of the outstanding options will expire on December 22, 2027.

TOFUTTI BRANDS INC.

Notes to Unaudited Condensed Financial Statements

(in thousands, except share and per share data)

The following is a summary of stock option activity from July 1, 2023 to September 30, 2023:

Schedule of Stock Option Activity

The following table summarizes information about stock options outstanding at September 30, 2023:

Schedule of Information about Stock Options

The fair value of each option award is estimated on the date of grant using the Black-Scholes option-pricing formula. Expected volatilities and risk-free interest rates are based upon the expected life of the grant. The interest rates used are the U.S. Treasury yield curve in effect at the time of the grant.

During the fiscal year ended December 31, 2022, 250,000 options were granted, with 83,333 of the options vesting at the grant date, 83,333 options vesting in December 2023, and 83,334 options vesting in December 2024. At the date of grant, expected volatility was 82.65%, a risk-free rate of 3.79%, 0% expected dividends, and an expected term of five years.

As of September 30, 2023, the intrinsic value of the options outstanding and exercisable options was $0, and there was $52 of total unrecognized compensation cost. Total stock-based compensation for the thirteen weeks ended September 30, 2023 was $14,000, which is recorded in general and administrative expenses on the statement of operations.

The outstanding 250,000 options will expire on December 22, 2027 if not exercised by that date.

Note 7: Notes Payable

Small Business Administration (SBA) Loan

On May 2, 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 $165 as of January 2, 2021 and the loan was scheduled to expire on May 2, 2022. On January 12, 2022, the Company was informed by the SBA that the entire amount of the loan had been forgiven free of taxation. The Company recorded forgiveness of debt income of $165 in the thirty-nine weeks ended October 1, 2022 as SBA loan forgiveness on the unaudited condensed statement of operations.

Note 8: 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 share and per share data)

Revenues by geographical region are as follows:

Schedule of Disaggregation Revenue 

Approximately 91% of the Americas’ revenue for the thirteen weeks ended September 30, 2023 is attributable to sales in the United States compared with 94% of the Americas’ revenue for the thirteen weeks ended October 1, 2022. For the thirty-nine week period ended September 30, 2023 approximately 91% of the Americas’ revenue is attributable to sales in the United States compared to 94% for the thirty-nine week period ended October 1, 2022. All of the Company’s assets are located in the United States.

Net sales by major product category:

Note 9: 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 October 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 $23 and $21 for the thirteen weeks ended September 30, 2023 and October 1, 2022, and $69 and $61 for the thirty-nine weeks ended September 30, 2023 and October 1, 2022, respectively. 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 $85 for the thirteen weeks ended September 30, 2023 and $72 for the thirteen weeks ended October 1, 2022, and $246 and $262 for the thirty-nine weeks ended September 30, 2023 and October 1, 2022, respectively. The Company rents copiers under finance leases. The Company currently has one copier under a finance lease with a start date of June 1, 2022. Payments for copiers amounted to $0 and $7 for the thirteen weeks ended September 30, 2023 and October 1, 2022, respectively and $6 and $5 for the thirty-nine weeks ended September 30, 2023 and October 1, 2022, respectively.

Under Topic 842, operating lease expense is generally recognized evenly over the term of the lease. The standard requires a lessee to record a right-of-use asset and a corresponding lease liability at the inception of the lease. The current portion of lease liabilities is included in accrued expenses on the condensed balance sheets.

TOFUTTI BRANDS INC.

Notes to Unaudited Condensed Financial Statements

(in thousands, except share and per share data)

Under Topic 842, finance lease cost includes amortization, which is recognized on a straight-line basis over the expected life of the leased asset, and interest expense, which is recognized following an effective interest rate method. The Company has a finance lease consisting of a copier lease with a term of four years. The standard requires a lessee to record a right-of-use asset and a corresponding lease liability at the inception of the lease.

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. At the time of adoption of Topic 842, the Company used the incremental borrowing rate 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 

ROU lease asset and lease liability for our finance lease were recorded in the balance sheet as follows:

Schedule of ROU Lease Assets and Liabilities for Finance Leases

Future lease payments included in the measurement of lease liabilities on the balance sheet as of September 30, 2023 are as follows:

Schedule of Future Lease Payments

TOFUTTI BRANDS INC.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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 Estimates

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 vegan and dairy-free soy-based cheeses and frozen desserts. 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 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 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 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. The adoption of ASU 2016-13 did not have a material impact on our unaudited condensed consolidated financial statements.

Results of Operations

Thirteen Weeks Ended September 30, 2023 Compared with Thirteen Weeks Ended October 1, 2022

Net sales for the thirteen weeks ended September 30, 2023 decreased by $381,000, or 13%, to $2,515,000, from net sales of $2,896,000 for the thirteen weeks ended October 1, 2022. Sales of our vegan cheese products decreased to $2,110,000 in the thirteen weeks ended September 30, 2023 from $2,344,000 in the thirteen weeks ended October 1, 2022. Sales of our frozen dessert products, decreased to $406,000 in the thirteen weeks ended September 30, 2023 from $562,000 for the thirteen weeks ended October 1, 2022. The decrease in frozen dessert product sales was due to a decrease in sales of our frozen dessert pints. The decrease in sales of our vegan cheese products was due to the continuing introduction of competitive vegan cheese products which negatively impacts the rate of turnover of our vegan cheese products on store shelves.

Our gross profit increased to $786,000 for the thirteen weeks ended September 30, 2023 from $427,000 for the thirteen weeks ended October 1, 2022. Our gross profit percentage was 31% for the thirteen weeks ending September 30, 2023 compared to 15% for the thirteen weeks ending October 1, 2022. Our gross profit dollars and gross profit percentage were positively impacted by a significant reduction of cost during the current quarter of certain key ingredients, mainly palm oil, as compared to the third quarter of last year. Our gross profit dollars and gross profit percentage were also positively impacted by a decrease in our sales promotion and allowance expenses to $205,000 in the third quarter of this year as compared to $238,000 in the third quarter of the prior fiscal year.

Freight expense, a significant part of our cost of sales, increased slightly by $8,000, or 4%, to $226,000 for the thirteen weeks ended September 30, 2023 compared with $218,000 for the thirteen weeks ended October 1, 2022. Freight expense was 9% of sales for the thirteen weeks ended September 30, 2023 compared to 8% of sales for the thirteen weeks ended October 1, 2022. The increase in our freight expense percentage in the current quarter was due to increases in the cost of fuel.

Selling expenses decreased by $51,000, or 20%, to $210,000 for the thirteen weeks ended September 30, 2023 from $261,000 for the thirteen weeks ended October 1, 2022. The decrease was due primarily to a decrease in commission expense of $29,000, meetings and convention expense of $13,000, and bad debt expense of $15,000, which was partially offset by an increase in outside warehouse rental expense of $12,000. The decrease in commission expense was due to the decrease in sales for the current quarter. We anticipate selling expenses will continue at a lower level for the balance of the year.

Marketing expenses were unchanged for both thirteen week periods at $103,000. Decreases in point of sale material expense of $19,000 and artwork and plate expense of $6,000 were offset by an increase in advertising expense of $25,000.

Product development costs, which consist principally of salary expenses and laboratory costs, increased slightly by $2,000, or 8%, to $28,000 for the thirteen weeks ended September 30, 2023 from $26,000 for the thirteen weeks ended October 1, 2022.

General and administrative expenses increased by $34,000, or 11%, to $332,000 for the thirteen weeks ended September 30, 2023 from $298,000 for the thirteen weeks ended October 1, 2022, primarily due to increases in public relations expense of $5,000, non-cash stock option expense of $13,000, and IT expense of $13,000. We anticipate our general and administrative expenses for the remaining periods in 2023 will approximate the same levels as in the corresponding 2022 periods, with the exception of the non-cash stock options expense.

Income tax expense was $1,000 for the thirteen weeks ended September 30, 2023 compared with an income tax benefit of $69,000 for the thirteen weeks ended October 1, 2022. The Company is in a year-to-date loss position. Therefore, the Company has reserved against the valuation in prior periods, and as such has determined that the adjusted effective tax rate is 0% for the quarter ended September 30, 2023.

Thirty-Nine Weeks Ended September 30, 2023 Compared with Thirty Nine Weeks Ended October 1, 2022

Net sales for the thirty-nine weeks ended September 30, 2023 decreased by $1,614,000, or 17%, to $7,724,000, from net sales of $9,338,000 for the thirty-nine weeks ended October 1, 2022. Sales of our vegan cheese products decreased to $6,492,000 in the thirty-nine weeks ended September 30, 2023 from $7,776,000 for the thirty-nine weeks ended October 1, 2022. Sales of our frozen dessert products decreased to $1,232,000 for the thirty-nine weeks ended September 30, 2023 from $1,512,000 for the thirty-nine weeks ended October 1, 2022. The decrease in sales of our vegan cheese products was due to the continued introduction of competitive vegan cheese products which negatively impacts the rate of turnover of our vegan cheese products on store shelves. The decrease in frozen dessert sales was due to a decrease in sales of our frozen dessert pints.

Our gross profit increased to $2,059,000 for the thirty-nine weeks ended September 30, 2023 from $1,812,000 for the thirty-nine weeks ended October 1, 2022, while our gross profit percentage was 27% for the thirty-nine weeks ending September 30, 2023 compared to 19% for the thirty-nine weeks ending October 1, 2022. The increase in our gross profit percentage was due to a $230,000 decrease in sales promotion and allowance expense to $768,000 in fiscal 2023, from $998,000 in fiscal 2022. Our sales promotion and allowance expense is directly correlated to our sales volume.

Freight expense, a significant part of our cost of sales, decreased by $250,000, or 29%, to $611,000 for the thirty-nine weeks ended September 30, 2023 compared with $861,000 for the thirty-nine weeks October 1, 2022. Freight expense was 8% of sales for the thirty-nine weeks ended September 30, 2023 compared to 9% of sales for the thirty-nine weeks ended October 1, 2022. The decrease in freight expenses was due primarily to the decrease in sales. The decrease in the freight expense percentage was also a reason for the increase in gross profit percentage for the fiscal 2023 period.

Selling expenses decreased by $32,000, or 4%, to $802,000 for the thirty-nine weeks ended September 30, 2023 from $834,000 for the thirty-nine weeks ended October 1, 2022. The decrease was primarily attributable to a decrease in commission expenses of $94,000, outside warehouse rental expense of $17,000, bad debt expense of $31,000, and travel, entertainment and auto expenses of $14,000, which were partially offset by increases in meetings and convention expense of $87,000 and sample shipping costs of $13,000. The decrease in commission expenses is due to the decrease in sales.

Marketing expenses decreased by $83,000, or 22%, to $287,000 for the thirty-nine weeks ended September 30, 2023 from $370,000 for the thirty-nine weeks ended October 1, 2022. The decrease was primarily due to decreases in artwork and plates expense of $72,000, promotions expense of $21,000 and point of sales material expense of $14,000, which were partially offset by an increase in advertisement expense of $15,000.

Research and development costs were $111,000 for the thirty-nine weeks ended September 30, 2023 and $108,000 for the thirty-nine weeks ended October 1, 2022.

General and administrative expenses were $1,018,000 for the thirty-nine weeks ended September 30, 2023, an increase of $31,000, or 3%, compared to $987,000 for the thirty-nine weeks ended October 1, 2022. The increase was due primarily to an increase in stock option expense of $47,000, payroll expense of $16,000 and IT expense of $8,000, which was partially offset by a decrease in professional fees, outside service expense of $27,000 and travel, entertainment and auto expense of $14,000.

Income tax expense was $148,000 for the thirty-nine weeks ended September 30, 2023 compared to an income tax benefit of $127,000 for the thirty-nine weeks ended October 1, 2022. The income tax expense for the current period is the result of the reduction in the deferred tax asset reflecting management’s decision on the availability of future net operating tax loss carry-forwards.

Liquidity and Capital Resources

As of November 9, 2023, we had approximately $747,000 in cash and our working capital was approximately $3,533,000, compared with approximately $1,072,000 in cash and working capital of $3,625,000 at December 31, 2022.

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

Net cash used in operating activities for the thirty-nine weeks ended September 30, 2023 was $345,000 compared to $733,000 used in operating activities for the thirty-nine ended October 1, 2022. Net cash used in operating activities for the thirty-nine weeks ended September 30, 2023 was primarily a result of our net loss of $324,000 and the decrease in current liabilities of $495,000, which were partially offset by the decrease in accounts receivable of $334,000 and the increase in inventory of $184,000.

We believe our existing cash on hand at September 30, 2023, 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

Beginning in 2022 and as of the date of this quarterly report, the Company has experienced inflation. Economic inflation has led the Company to incur substantial increases in ingredient, packaging, freight, and co-packing expenses. While we do believe that certain of these costs and expenses will return to their previous lower levels, as some have recently started to do, there is no assurance that they will do so. 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 that this pattern will continue and that we will 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 dairy free frozen desserts during those periods.

Off-balance Sheet Arrangements

None.

Contractual Obligations

We had no material contractual obligations as of September 30, 2023.

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.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures. As of October 1, 2022, 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 of October 1, 2022.

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.

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 October 1, 2022 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 five persons at September 30, 2023.

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

Item 1. Legal Proceedings

We are not a party to any material litigation.

Item 1A. Risk Factors

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 31, 2022.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Default Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

None.

Item 5. Other Information

None.

Item 6. Exhibits

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.