Tofutti Brands Inc 10-Q for FY2023 Q2
Tofutti Brands Inc (TOFB)
About this 10-Q
Tofutti Brands Inc filed this 10-Q on August 15, 2023, covering the quarter ended July 1, 2023 (FY2023 Q2).
Headline figures
Quarter ended July 1, 2023, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $2.72M
- down 8.7% from $2.98M a year earlier
- Net loss
- $318K
- compared with a net loss of $208K a year earlier
- Diluted EPS
- -$0.06
- compared with -$0.04 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
| Quarterly
report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended |
| Transition report pursuant to Section 13 or 15(d) of the Exchange Act for the transition period from ☐ to ☐ |
Commission
file number:
(Exact Name of Registrant as Specified in Its Charter)
| (State of Incorporation) | (I.R.S. Employer Identification No.) |
(Address of Principal Executive Offices)
(Registrant’s Telephone Number, including area code)
Securities registered pursuant to Section 12(g) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| None |
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.
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).
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.
| Large accelerated filer ☐ | Accelerated filer ☐ | |
| Smaller
reporting company |
Emerging
growth company |
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
☐
As of August 15, 2023 the Registrant had shares of Common Stock, par value $0.01, outstanding.
TOFUTTI BRANDS INC.
INDEX
| 2 |
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
TOFUTTI BRANDS INC.
Unaudited Condensed Balance Sheets
(in thousands, except share and per share figures)
| July 1, 2023 | December 31, 2022 | |||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable, net of allowance for doubtful accounts and sales promotions of $ | ||||||||
| Inventories | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total current assets | ||||||||
| Operating lease right-of-use assets | ||||||||
| Finance lease right-of-use asset | ||||||||
| Deferred tax assets | ||||||||
| Other assets | ||||||||
| Total assets | $ | $ | ||||||
| Liabilities and Stockholders’ Equity | ||||||||
| Current liabilities: | ||||||||
| Income taxes payable | ||||||||
| Accounts payable | ||||||||
| Accrued expenses | ||||||||
| Finance lease liability, current portion | ||||||||
| Total current liabilities | ||||||||
| Financing lease liabilities, long-term | ||||||||
| Operating lease liabilities | ||||||||
| Total liabilities | ||||||||
| Stockholders’ equity: | ||||||||
| Preferred stock - par value $ per share; authorized shares, issued and outstanding | ||||||||
| Common stock - par value $ per share; authorized shares, shares issued and outstanding | ||||||||
| Additional paid-in capital | ||||||||
| Retained earnings | ||||||||
| Total stockholders’ equity | ||||||||
| Total liabilities and stockholders’ equity | $ | $ | ||||||
See accompanying notes to unaudited condensed financial statements.
| 3 |
TOFUTTI BRANDS, INC.
Unaudited Condensed Statements of Operations
(in thousands, except per share figures)
| Thirteen weeks ended July 1, 2023 | Thirteen weeks ended July 2, 2022 | Twenty-six weeks ended July 1, 2023 | Twenty-six weeks ended July 2, 2022 | |||||||||||||
| Net sales | $ | $ | $ | $ | ||||||||||||
| Cost of sales | ||||||||||||||||
| Gross profit | ||||||||||||||||
| Operating expenses: | ||||||||||||||||
| Selling and warehouse | ||||||||||||||||
| Marketing | ||||||||||||||||
| Research and development | ||||||||||||||||
| General and administrative | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Loss from operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other income: | ||||||||||||||||
| SBA loan forgiveness | ||||||||||||||||
| Loss before interest expense and income taxes | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Interest expense | ||||||||||||||||
| Loss before income tax | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Income tax expense (benefit) | ( | ) | ( | ) | ||||||||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Weighted average common shares outstanding: | ||||||||||||||||
| Basic | ||||||||||||||||
| Diluted | ||||||||||||||||
| Loss per common share: | ||||||||||||||||
| Basic | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Diluted | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
See accompanying notes to unaudited condensed financial statements.
| 4 |
TOFUTTI BRANDS, INC.
Unaudited Condensed Statements of Changes in Stockholders’ Equity
(in thousands)
Common Stock | Additional Paid-in Capital | Retained Earnings | Total | |||||||||||||
| Thirteen and twenty-six weeks ended July 1, 2023 | ||||||||||||||||
Common Stock | Additional Paid-in Capital | Retained Earnings | Total | |||||||||||||
| December 31, 2022 | $ | |||||||||||||||
| Stock-based compensation | ||||||||||||||||
| Net loss | ( | ) | ( | ) | ||||||||||||
| April 1, 2023 | $ | |||||||||||||||
| Stock-based compensation | ||||||||||||||||
| Net loss | ( | ) | ( | ) | ||||||||||||
| July 1, 2023 | $ | |||||||||||||||
| Thirteen and twenty-six weeks ended July 2, 2022 | ||||||||||||||||
Common Stock | Additional Paid-in Capital | Retained Earnings | Total | |||||||||||||
| January 1, 2022 | $ | $ | $ | $ | ||||||||||||
| Net income | ||||||||||||||||
| April 2, 2022 | $ | $ | $ | $ | ||||||||||||
| Net loss | ( | ) | ( | ) | ||||||||||||
| July 2, 2022 | $ | $ | $ | $ | ||||||||||||
See accompanying notes to unaudited condensed financial statements.
| 5 |
TOFUTTI BRANDS INC.
Unaudited Condensed Statements of Cash Flows
(in thousands)
Twenty-six weeks ended | Twenty-six weeks ended | |||||||
| 1-Jul-23 | 2-Jul-22 | |||||||
| Cash used in operating activities, net | $ | ( | ) | $ | ( | ) | ||
| Cash used in financing activities, net | ( | ) | ||||||
| Net decrease in cash | $ | ( | ) | $ | ( | ) | ||
| Cash at beginning of period | ||||||||
| Cash at end of period | $ | $ | ||||||
See accompanying notes to unaudited condensed financial statements.
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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 twenty-six-week period ended July 1, 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 31st.
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
| July 1, 2023 | December 31, 2022 | |||||||
| Finished products | $ | $ | ||||||
| Raw materials and packaging | ||||||||
| Inventories, net | $ | $ | ||||||
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.
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. If there is a loss from operations, diluted EPS is computed in the same manner as basic EPS is computed.
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TOFUTTI BRANDS INC.
Notes to Unaudited Condensed Financial Statements
(in thousands, except share and per share data)
Schedule of Earnings Per Share, Basic and Diluted
Thirteen weeks ended July 1, 2023 | Thirteen weeks ended July 2, 2022 | Twenty-six weeks ended July 1, 2023 | Twenty-six weeks ended July 2, 2022 | |||||||||||||
| Loss, numerator, basic computation | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Net loss, numerator, diluted computation | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Weighted average shares - denominator basic computation | ||||||||||||||||
| Weighted average shares, as adjusted - denominator diluted computation | ||||||||||||||||
| Loss per common share - basic | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Loss per common share - diluted | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
Schedule of Weighted Average Numbers of Shares
Thirteen weeks Ended July 1, 2023 | Thirteen weeks Ended July 2, 2022 | |||||||
| Shares subject to outstanding common stock options | ||||||||
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 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.” and stock options were issued in 2023 and 2022, respectively, and non-qualified options were outstanding as of July 1, 2023. The exercise price of all options granted in 2022 is $ per share, the market price at the close of business on the date of the grant. of the options vested at the respective grant date, will vest in December 2023, and 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 options expire on December 22, 2027.
The following is a summary of stock option activity from April 1, 2023 to July 1, 2023:
Schedule of Stock Option Activity
| NON-QUALIFIED OPTIONS | ||||||||
| Shares | Weighted Average Exercise Price ($) | |||||||
| Outstanding at April 1, 2023 and December 31, 2022 | ||||||||
| Granted | ||||||||
| Exercised | ||||||||
| Outstanding at July 1, 2023 | ||||||||
| Exercisable at July 1, 2023 | ||||||||
| 8 |
TOFUTTI BRANDS INC.
Notes to Unaudited Condensed Financial Statements
(in thousands, except share and per share data)
Schedule of Information About Stock Options
Range of Exercise Prices ($) | Number Outstanding | Weighted Average Remaining Life (in years) | Weighted Average Exercise Price($) | Number Exercisable | ||||||||||||||
| $ | $ | |||||||||||||||||
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, options were granted, with of the options vesting at the respective grant date, vesting in December 2023, and vesting in December 2024. At the date of grant, expected volatility was %, a risk-free rate of %, % expected dividends, and an expected term of .
As of July 1, 2023, the intrinsic value of the options outstanding and exercisable options was $ and $, respectively, and there was $ of total unrecognized compensation cost. Total stock-based compensation for the thirteen weeks ended July 1, 2023 was $, which is recorded in general and administrative expenses on the statement of operations.
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 $
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.
Revenues by geographical region are as follows:
Schedule of Disaggregation Revenue
Thirteen weeks ended July 1, 2023 | Thirteen weeks ended July 2, 2022 | Twenty-six weeks ended July 1, 2023 | Twenty-six weeks ended July 2, 2022 | |||||||||||||
| Revenues by geography: | ||||||||||||||||
| Americas | $ | $ | $ | $ | ||||||||||||
| Europe | ||||||||||||||||
| Asia Pacific and Africa | ||||||||||||||||
| Middle East | ||||||||||||||||
| Revenues | $ | $ | $ | $ | ||||||||||||
Approximately
| 9 |
TOFUTTI BRANDS INC.
Notes to Unaudited Condensed Financial Statements
(in thousands, except share and per share data)
Thirteen weeks ended July 1, 2023 | Thirteen weeks ended July 2, 2022 | Twenty-six Weeks ended July 1, 2023 | Twenty-six Weeks ended July 2, 2022 | |||||||||||||
| Frozen desserts | $ | $ | $ | $ | ||||||||||||
| Cheeses | ||||||||||||||||
| Revenues | $ | $ | $ | $ | ||||||||||||
Note 9: Leases
The
Company’s facilities are located in a one-story facility in Cranford, New Jersey. The
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.
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
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
| As of | As of | |||||||
| July 1, 2023 | December 31, 2022 | |||||||
| Operating lease right-of-use assets | $ | $ | ||||||
| Current portion of lease liabilities | ||||||||
| Operating lease liabilities, net of current portion | ||||||||
| Total lease liability | $ | $ | ||||||
| Weighted average remaining lease term (in years) | ||||||||
| Weighted average discount rate | % | % | ||||||
| 10 |
TOFUTTI BRANDS INC.
Notes to Unaudited Condensed Financial Statements
(in thousands, except share and per share data)
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
| As of | As of | |||||||
| July 1, 2023 | December 31, 2022 | |||||||
| Finance lease right-of-use asset | $ | $ | ||||||
| Current portion of lease liabilities | ||||||||
| Finance lease liabilities, net of current portion | ||||||||
| Total lease liabilities | $ | $ | ||||||
| Weighted average remaining lease term (in years) | ||||||||
| Weighted average discount rate | % | % | ||||||
Future lease payments included in the measurement of lease liabilities on the balance sheet as of July 1, 2023 are as follows:
Schedule of Future Lease Payments
Operating lease liabilities | Finance lease liability | Total | ||||||||||
| 2023 (remainder of year) | $ | $ | $ | |||||||||
| 2024 | ||||||||||||
| 2025 | ||||||||||||
| 2026 | ||||||||||||
| Total future minimum lease payments | ||||||||||||
| Present value adjustment | ( | ) | ( | ) | ( | ) | ||||||
| Total | $ | $ | $ | |||||||||
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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.
| 12 |
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.
Our ability to handle customer and consumer communications, schedule production, and order ingredients necessary for our production has not been materially impacted. Nor have we experienced a significant change in the timeliness of payments of our invoices. Our cash position is $764,000 as of August 10, 2023 as compared to our fiscal year end December 31, 2022 balance of $1,072,000.
Results of Operations
Thirteen Weeks Ended July 1, 2023 Compared with Thirteen Weeks Ended July 2, 2022
Net sales for the thirteen weeks ended July 1, 2023 decreased by $260,000, or 9%, to $2,719,000, from net sales of $2,979,000 for the thirteen weeks ended July 2, 2022. Sales of our vegan cheese products decreased to $2,344,000 in the thirteen weeks ended July 1, 2023 from $2,497,000 in the thirteen weeks ended July 2, 2022. Sales of our frozen dessert products, decreased to $436,000 in the thirteen weeks ended July 1, 2023 from $453,000 for the thirteen weeks ended July 2, 2022. The decrease in frozen dessert product sales was due to a decrease in sales of our frozen dessert pints. Sales of our cheese products decreased to $2,283,000 for the thirteen weeks ended July 1, 2023 from $2,526,000 for the thirteen weeks ended July 2, 2022.
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Our gross profit increased to $667,000 for the thirteen weeks ended July 1, 2023 from $525,000 for the thirteen weeks ended July 2, 2022. Our gross profit percentage was 25% for the thirteen weeks ending July 1, 2023 compared to 18% for the thirteen weeks ending July 2, 2022. Our gross profit dollars and gross profit percentage were positively impacted by a decrease in our sales promotion and allowance expenses to $336,000 in the second quarter of this year as compared to $403,000 in the second quarter of the prior fiscal year. We anticipate that our gross profit dollars and gross profit percentage will remain consistent for the balance of 2023.
Freight expense, a significant part of our cost of sales, decreased by $153,000, or 47%, to $173,000 for the thirteen weeks ended July 1, 2023 compared with $324,000 for the thirteen weeks ended July 2, 2022. Freight expense was 6% of sales for the thirteen weeks ended July 1, 2023 compared to 11% of sales for the thirteen weeks ended July 2, 2022. The decrease in freight expenses was primarily due to the decrease in sales and the significant reduction in fuel costs. The decrease in freight expense was also a significant reason for the increase in gross profit dollars and percentage. We anticipate that our freight expense will continue at a lower rate for the balance of 2022.
Selling expenses increased slightly by $11,000, or 4%, to $320,000 for the thirteen weeks ended July 1, 2023 from $309,000 for the thirteen weeks ended July 2, 2022. The increase was due decreases in commission expense of $44,000, outside warehouse rental of $10,000 and travel and entertainment and auto expense of $12,000, which were offset in great measure by increases in meetings and conventions expense of $56,000, sample shipping costs of $9,000 and payroll expense of $8,000. The significant increase in meetings and convention expense this quarter was due to management’s decision to re-engage with distributor and national trade shows following the COVID-19 pandemic. We anticipate that this expense will significantly increase in 2023 compared to 2022. The decrease in commission expense is due to the decrease in sales for the thirteen-weeks ended July 1, 2023 compared with the thirteen-weeks ended July 2, 2022.
Marketing expenses decreased by $22,000, or 20%, to $89,000 for the thirteen weeks ended July 1, 2023 from $111,000 for the thirteen weeks ended July 2, 2022. The decrease was primarily due to a decrease in artwork and plates expense of $53,000, which was partially offset by an increase in promotion expense of $30,000. The decrease in artwork and plate expense was due to the fact that the expenses for a complete redesign of all the Company’s packaging took place in 2022 and did not carry through to the current year. We anticipate that our marketing expenses for the balance of the year will be lower than the corresponding periods in fiscal year 2022.
Product development costs, which consist principally of salary expenses and laboratory costs, increased by $14,000, or 33%, to $56,000 for the thirteen weeks ended July 1, 2023 from $42,000 for the thirteen weeks ended July 2, 2022. The increase was primarily due to an increase in professional fees and outside services expense of $5,000 and depreciation expense of $5,000. We anticipate our product development costs to continue at a slightly higher level than the corresponding 2022 periods as we have begun limited research and development work.
General and administrative expenses increased by $34,000, or 10%, to $383,000 for the thirteen weeks ended July 1, 2023 from $349,000 for the thirteen weeks ended July 2, 2022, primarily due to increases in public relations expense of $20,000 and non-cash stock option 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.
Income tax expense was $136,000 for the thirteen weeks ended July 1, 2023 and $78,000 for the thirteen weeks ended July 2, 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.
| 14 |
Twenty Six Weeks Ended July 1, 2023 Compared with Twenty Six Weeks Ended July 2, 2022
Net sales for the twenty-six weeks ended July 1, 2023 decreased by $1,234,000, or 19%, to $5,208,000, from net sales of $6,442,000 for the twenty-six weeks ended July 2, 2022. Sales of our vegan cheese products decreased to $4,382,000 in the twenty-six weeks ended July 1, 2023 from $5,442,000 for the twenty-six weeks ended July 2, 2022. Sales of our frozen dessert products decreased to $826,000 for the twenty-six weeks ended July 1, 2023 from $1,000,000 for the twenty-six weeks ended July 2, 2022. The significant reduction in sales for the current twenty-six week period was primarily due to the $971,000 decrease in sales in the first quarter of fiscal 2023.
Our gross profit decreased to $1,273,000 for the twenty-six weeks ended July 1, 2023 from $1,382,000 for the twenty-six weeks ended July 2, 2022, while our gross profit percentage was 24% for the twenty-six weeks ending July 1, 2023 compared to 21% for the twenty-six weeks ending July 2, 2022. The decrease in gross profit was due to the reduction in sales. The increase in our gross profit percentage was due to a $235,000 decrease in sales promotion and allowance expense to $525,000 in fiscal 2023, from $760,000 in fiscal 2022.
Freight expense, a significant part of our cost of sales, decreased by $258,000, or 40%, to $385,000 for the twenty-six weeks ended July 1, 2023 compared with $643,000 for the twenty-six weeks July 2, 2022. Freight expense was 6% of sales for the twenty-six weeks ended July 1, 2023 compared to 10% of sales for the twenty-six weeks ended July 2, 2022. The decrease in freight expenses was due primarily to the decrease in sales and the significant reduction in fuel costs. The decrease in the freight expense percentage was also a significant reason for the increase in gross profit percentage for the fiscal 2023 period.
Selling expenses increased by $19,000, or 3%, to $592,000 for the twenty-six weeks ended July 1, 2023 from $573,000 for the twenty-six weeks ended July 2, 2022. The increase was primarily attributable to an increase in meetings and convention expense of $100,000, payroll expense of $13,000 and sample shipping costs of $15,000, which were partially offset by decreases in bad debt expense of $15,000, outside warehouse rental expense of $30,000 and commission expense of $65,000. The significant increase in meetings and convention expense was due to managements decision to re-engage with distribution and national trade shows following the COVID-19 pandemic. We anticipate that this expense will significantly increase in 2023 compared to 2022. The decrease in commission expense is due to the decrease in sales for the twenty-six weeks ended July 1, 2023 compared with the twenty-six weeks ended July 2, 2022.
Marketing expenses decreased by $83,000, or 31%, to $184,000 for the twenty-six weeks ended July 1, 2023 from $267,000 for the twenty-six weeks ended July 2, 2022. The decrease was primarily due to decreases in artwork and plates expense of $66,000, promotions expense of $19,000 and advertising expense of $14,000, which were partially offset by an increase in point of sale material expense of $14,000. We anticipate our marketing expenses in fiscal 2023 will be lower than those in fiscal 2022.
Product development costs, which consist principally of salary expenses and laboratory costs, were $83,000 for the twenty-six weeks ended July 1, 2023 and $82,000 for the twenty-six weeks ended July 2, 2022.
General and administrative expenses remained unchanged at $693,000 for both the twenty-six weeks ended July 1, 2023 and for the twenty-six weeks ended July 2, 2022. In 2023 we incurred increases in payroll expense of $13,000 and non-cash stock option expense of $33,000, which were partially offset by a decrease in professional fees and outside services expense of $22,000, general insurance expense of $8,000 and equipment rental expense of $6,000. We anticipate that general and administrative expenses for the balance of fiscal 2023 will approximate those of fiscal 2022.
Income tax expense was $146,000 for the twenty-six weeks ended July 1, 2023 and $58,000 for the thirteen weeks ended July 2, 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 July 1, 2023, we had approximately $576,000 in cash and our working capital was approximately $3,382,000, compared with approximately $1,072,000 in cash and working capital of $3,625,000 at December 31, 2022.
| 15 |
The following table summarizes our cash flows for the periods presented:
Twenty-six weeks ended | Twenty-six weeks ended | |||||||
| 1-Jul-23 | 2-Jul-22 | |||||||
| Cash used in operating activities, net | $ | (485 | ) | $ | (522 | ) | ||
| Cash used in financing activities, net | (4 | ) | — | |||||
| Net decrease in cash | $ | (489 | ) | $ | (522 | ) | ||
Net cash used in operating activities for the thirteen weeks ended July 1, 2023 was $489,000 compared to $522,000 used in operating activities for the thirteen weeks ended July 2, 2022. Net cash used in operating activities for the twenty-six weeks ended July 1, 2023 was primarily a result of a net loss of $293,000 and the decrease in current liabilities of $766,000, which were partially offset by the decrease in accounts receivable of $458,000.
We believe our existing cash on hand at July 1, 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, such as freight expense, 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 July 1, 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.
| 16 |
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures. As of July 2, 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 July 2, 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 July 2, 2022 because of the following material weaknesses in internal controls over financial reporting:
| ● | A continuing lack of sufficient resources and an insufficient level of monitoring and oversight, which may restrict our ability to gather, analyze and report information relative to the financial statements, including but not limited to accounting estimates, reserves, allowances, and income tax matters, in a timely manner. | |
| ● | The limited size of the accounting department makes it impracticable to achieve an optimum separation of duties and monitoring of internal controls. |
To date, we have been unable to remediate these weaknesses, which stem from our small workforce of five persons at July 1, 2023.
| 17 |
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
| 31.1 | Certification by Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended. | |
| 31.2 | Certification by Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended. | |
| 32.1 | Certification by Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
| 32.2 | Certification by Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
| 101.INS | Inline XBRL Instance Document | |
| 101.SCH | Inline XBRL Schema Document | |
| 101.CAL | Inline XBRL Calculation Linkbase Document | |
| 101.DEF | Inline XBRL Definition Linkbase Document | |
| 101.LAB | Inline XBRL Labels Linkbase Document | |
| 101.PRE | Inline XBRL Presentation Linkbase Document | |
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). |
| 18 |
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.
| TOFUTTI BRANDS INC. | |
| (Registrant) | |
| /s/ Steven Kass | |
| Steven Kass | |
| Chief Executive Officer | |
| Chief Accounting and Financial Officer | |
| Date: August 15, 2023 |
| 19 |
Exhibit 31.1
CERTIFICATION PURSUANT TO
SECTION 302(a) OF THE SARBANES-OXLEY ACT OF 2002
I, Steven Kass, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Tofutti Brands Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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; and
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
| Date: August 15, 2023 | |
| /s/ Steven Kass | |
| Steven Kass | |
| Chief Executive Officer |
* The originally executed copy of this Certification will be maintained at the Company’s offices and will be made available for inspection upon request.
Exhibit 31.2
CERTIFICATION PURSUANT TO
SECTION 302(a) OF THE SARBANES-OXLEY ACT OF 2002
I, Steven Kass, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Tofutti Brands Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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; and
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
| Date: August 15, 2023 | |
| /s/ Steven Kass | |
| Steven Kass | |
| Chief Financial Officer |
* The originally executed copy of this Certification will be maintained at the Company’s offices and will be made available for inspection upon request.
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Tofutti Brands Inc. (the “Company”) on Form 10-Q for the period ending July 2, 2022 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Steven Kass, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.
| /s/ Steven Kass | |
| Steven Kass | |
| Chief Executive Officer | |
| Date: August 15, 2023 |
* The originally executed copy of this Certification will be maintained at the Company’s offices and will be made available for inspection upon request.
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Tofutti Brands Inc. (the “Company”) on Form 10-Q for the period ending July 2, 2022 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Steven Kass, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.
| /s/ Steven Kass | |
| Steven Kass | |
| Chief Financial Officer | |
| Date: August 15, 2023 |
* The originally executed copy of this Certification will be maintained at the Company’s offices and will be made available for inspection upon request.