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)
| |
Thirteen and thirty-nine weeks ended October 2, 2021 | |
| |
Common Stock | | |
Additional Paid-in Capital | | |
Retained Earnings | | |
Total | |
| |
| | |
| | |
| | |
| |
January 2, 2021 | |
$ | 52 | | |
$ | 207 | | |
$ | 4,165 | | |
$ | 4,424 | |
Net income | |
| — | | |
| — | | |
| 80 | | |
| 80 | |
April 3, 2021 | |
$ | 52 | | |
$ | 207 | | |
$ | 4,245 | | |
$ | 4,504 | |
| |
| | | |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | |
Net income | |
| — | | |
| — | | |
| 28 | | |
| 28 | |
July 3, 2021 | |
$ | 52 | | |
$ | 207 | | |
$ | 4,273 | | |
$ | 4,532 | |
| |
| | | |
| | | |
| | | |
| | |
Beginning balance | |
$ | 52 | | |
$ | 207 | | |
$ | 4,273 | | |
$ | 4,532 | |
Net income | |
| — | | |
| — | | |
| 120 | | |
| 120 | |
Net income (loss) | |
| — | | |
| — | | |
| 120 | | |
| 120 | |
October 2, 2021 | |
$ | 52 | | |
$ | 207 | | |
$ | 4,393 | | |
$ | 4,652 | |
Ending balance | |
$ | 52 | | |
$ | 207 | | |
$ | 4,393 | | |
$ | 4,652 | |
See
accompanying notes to unaudited condensed financial statements.
TOFUTTI
BRANDS INC.
Unaudited
Condensed Statements of Cash Flows
(in
thousands)
See
accompanying notes to unaudited condensed financial statements.
TOFUTTI
BRANDS INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
(In thousands, except for share and per share data)
Note
1: Basis of Presentation
The
accompanying unaudited condensed financial information, in the opinion of management, reflects all adjustments (which include only normally
recurring adjustments) necessary to present fairly the Company’s financial position, operating results and cash flows for the periods
presented. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been condensed or omitted pursuant to the rules and regulations of
the Securities and Exchange Commission. The results of operations for the thirteen-week and thirty-nine-week period ended October 1,
2022 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.
In
June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326) Measurement of Credit Losses on Financial Instruments.
The amendments in this Update require a new topic to be added (Topic 326) to the Accounting Standards Codification (“ASC”)
and removes the thresholds that entities apply to measure credit losses on financial instruments measured at amortized cost, such as
loans, trade receivables, reinsurance recoverables, and off-balance-sheet credit exposures, and held-to-maturity securities. Under current
U.S. GAAP, entities generally recognize credit losses when it is probable that the loss has been incurred. The guidance under ASU 2016-13
will remove all current recognition thresholds and will require entities under the new current expected credit loss (“CECL”)
model to recognize an allowance for credit losses for the difference between the amortized cost basis of a financial instrument and the
amount of amortized cost that an entity expects to collect over the instrument’s contractual life. The new CECL model is based
upon expected losses rather than incurred losses. Additionally, the credit loss recognition guidance for available-for-sale securities
is amended and will require that credit losses on such debt securities should be recognized as an allowance for credit losses rather
than a direct write-down of amortized cost balance. The ASU is effective for fiscal years beginning after December 15, 2022, including
interim periods within those fiscal years. We are currently evaluating the effect that this new guidance will have on our financial statements
and related disclosures.
Note
3: Inventories
Inventories
consist of the following:
Schedule of Inventories
| |
October 1, 2022 | | |
January 1, 2022 | |
Finished products | |
$ | 1,443 | | |
$ | 1,218 | |
Raw materials and packaging | |
| 1,251 | | |
| 656 | |
Inventories,
net | |
$ | 2,694 | | |
$ | 1,874 | |
TOFUTTI
BRANDS INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
(In thousands, except for share and per share data)
Note
4: Income Taxes
Income
taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective
tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years
in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the enactment date. The Company accounts for penalties or interest
related to uncertain tax positions as part of its provision for income taxes.
During
the thirteen and thirty-nine weeks ended October 1, 2022, the Company recognized an income tax benefit of $69 and $127, respectively,
as a result of the losses recognized in each period that were not covered by the Company’s valuation allowance.
Note
5: Earnings (Loss) Per Share
Fully
diluted earnings (loss) per common share have been computed by dividing earnings by the weighted average number of common shares outstanding,
which would account for a potential 282,486 shares to be issued upon conversion of a convertible note as of October 2, 2021. The convertible
note for 282,486 shares was included in the calculation of fully diluted earnings for the thirteen and thirty-nine weeks ended October
2, 2021. The note was repaid in full on December 22, 2021. No dilutive shares were issuable in either the thirteen or thirty-nine
week periods ended October 1, 2022.
The
following table sets forth the computation of basic and diluted earnings per share:
Schedule of Earnings Per Share, Basic and Diluted
| |
Thirteen weeks ended October 1, 2022 | | |
Thirteen weeks ended October 2, 2021 | | |
Thirty-nine weeks ended October 1, 2022 | | |
Thirty-nine weeks ended October 2, 2021 | |
Net income (loss), numerator, basic computation | |
$ | (192 | ) | |
$ | 120 | | |
$ | (195 | ) | |
$ | 228 | |
Interest expense | |
| — | | |
| 7 | | |
| — | | |
| — | |
Net income (loss), numerator, diluted computation | |
$ | (192 | ) | |
$ | 127 | | |
$ | (195 | ) | |
$ | 228 | |
| |
| | | |
| | | |
| | | |
| | |
Weighted average shares - denominator basic computation | |
| 5,154 | | |
| 5,154 | | |
| 5,154 | | |
| 5,154 | |
Effect of convertible note | |
| — | | |
| 282 | | |
| — | | |
| — | |
Weighted average shares, as adjusted - denominator diluted computation | |
| 5,154 | | |
| 5,436 | | |
| 5,154 | | |
| 5,154 | |
Earnings (loss) per common share - basic | |
$ | (0.04 | ) | |
$ | 0.02 | | |
$ | (0.04 | ) | |
$ | 0.04 | |
Earnings (loss) per common share - diluted | |
$ | (0.04 | ) | |
$ | 0.02 | | |
$ | (0.04 | ) | |
$ | 0.04 | |
TOFUTTI
BRANDS INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
(In thousands, except for share and per share data)
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.
The
2014 Plan made 250,000 shares of common stock available for awards. The 2014 Plan also permits performance-based 2014 awards paid under
it to be tax deductible under Section 162(m) of the Internal Revenue Code of 1986, as amended, as “performance-based compensation.”
No stock options were issued in 2022 or 2021 and no options were outstanding as of October 1, 2022 and January 1, 2022.
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.
Related
Party
On
January 6, 2016, David Mintz, the Company’s former Chairman and Chief Executive Officer, provided the Company with a loan of $500.
The loan was extended until December 31, 2021 and was, at the option of the holder, convertible into the Company’s common stock
at a conversion price of $1.77 per share. Interest expense incurred to the related party was $25 for both fiscal years ended January
1, 2022 and January 2, 2021. On December 22, 2021, the entire loan of $500 plus accrued interest of $25 was paid by the Company to Mr.
Mintz’s estate.
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 Revenue
| |
Thirteen weeks ended October 1, 2022 | | |
Thirteen weeks ended October 2, 2021 | | |
Thirty-nine weeks ended October 1, 2022 | | |
Thirty-nine weeks ended October 2, 2021 | |
Revenues by geography: | |
| | | |
| | | |
| | | |
| | |
Americas | |
$ | 2,688 | | |
$ | 3,221 | | |
$ | 8,753 | | |
$ | 8,968 | |
Europe | |
| 40 | | |
| 105 | | |
| 149 | | |
| 164 | |
Asia Pacific and Africa | |
| 53 | | |
| — | | |
| 53 | | |
| 130 | |
Middle East | |
| 115 | | |
| 30 | | |
| 383 | | |
| 271 | |
Revenues | |
$ | 2,896 | | |
$ | 3,356 | | |
$ | 9,338 | | |
$ | 9,533 | |
TOFUTTI
BRANDS INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
(In thousands, except for share and per share data)
Approximately
94% of the Americas’ revenue in both the thirteen and thirty-nine week periods in 2022 and 2021 is attributable to sales in the
United States. All of the Company’s assets are located in the United States.
Net
sales by major product category:
Summary of Net Sales by Major Product Category
| |
Thirteen weeks ended October 1, 2022 | | |
Thirteen weeks ended October 2, 2021 | | |
Thirty-nine Weeks ended October 1, 2022 | | |
Thirty-nine Weeks ended October 2, 2021 | |
Frozen desserts and foods | |
$ | 562 | | |
$ | 540 | | |
$ | 1,562 | | |
$ | 1,500 | |
Cheeses | |
| 2,334 | | |
| 2,816 | | |
| 7,776 | | |
| 8,033 | |
Net
sales | |
$ | 2,896 | | |
$ | 3,356 | | |
$ | 9,338 | | |
$ | 9,533 | |
Note
9: Leases
The
Company’s facilities are located in a one-story facility in Cranford, New Jersey. The square foot facility houses its administrative
offices, a warehouse, walk-in freezer and refrigerator, and a product development laboratory and test kitchen. The Company’s original
lease agreement expired on July 1, 1999, but it continues to occupy the premises on a monthly basis. Any changes by either the landlord
or the Company remains subject to a six-month notification period. The Company currently has no plans to enter into a long-term lease
agreement for the facility. Rent expense was $21 for the thirteen weeks ended October 1, 2022 and October 2, 2021. Rent expense was $61
for the thirty-nine weeks ended October 1, 2022 and October 2, 2021. 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 $72 for the thirteen weeks ended October 1, 2022 and $115 for the thirteen weeks ended October 2, 2021 and $263 for the thirty-nine
weeks ended October 1, 2022 and $364 for the thirty-nine weeks ended October 2, 2021.
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.
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.
TOFUTTI
BRANDS INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
(In thousands, except for share and per share data)
ROU
lease assets and lease liabilities for our operating leases were recorded in the balance sheet as follows:
Schedule of ROU lease Assets and Liabilities For Operating Leases
| |
As of | | |
As of | |
| |
October 1, 2022 | | |
January 1, 2022 | |
Operating lease right-of-use assets | |
$ | 119 | | |
$ | 203 | |
| |
| | | |
| | |
Current portion of lease liabilities | |
| 123 | | |
| 123 | |
Operating lease liabilities, net of current portion | |
| 5 | | |
| 95 | |
Total lease liability | |
$ | 128 | | |
$ | 218 | |
| |
| | | |
| | |
Weighted average remaining lease term (in years) | |
| 2.3 | | |
| 3.0 | |
Weighted average discount rate | |
| 5.5 | % | |
| 5.5 | % |
Future
lease payments included in the measurement of lease liabilities on the balance sheet as of October 1, 2022 are as follows:
Schedule
of Future Lease Payments
| |
As of | |
| |
October 1, 2022 | |
2022 (remaining) | |
$ | 24 | |
2023 | |
| 110 | |
Total future minimum lease payments | |
| 134 | |
Less: Present value adjustment | |
| 6 | |
Total | |
$ | 128 | |
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, frozen desserts and other food products. We recognize revenue
when control over the products transfers to our customers, deemed to be the performance obligation, which generally occurs when the product
is shipped or picked up from one of our distribution locations by the customer. We account for product shipping, handling and insurance
as fulfillment activities with revenues for these activities recorded within net revenue and costs recorded within cost of sales. Revenues
are recorded net of trade and sales incentives and estimated product returns. Known or expected pricing or revenue adjustments, such
as trade discounts, rebates or returns, are estimated at the time of sale. We base these estimates of expected amounts principally on
historical utilization and redemption rates. Estimates that affect revenue, such as trade incentives and product returns, are monitored
and adjusted each period until the incentives or product returns are realized.
Key
sales terms, such as pricing and quantities ordered, are established on a frequent basis such that most customer arrangements and related
incentives have a one year or shorter duration. As such, we do not capitalize contract inception costs and we capitalize product fulfillment
costs in accordance with U.S. GAAP and our inventory policies. We generally do not have any unbilled receivables at the end of a period.
Accounts
Receivable. The majority of our accounts 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
Developments
An
outbreak of an infectious respiratory illness caused by a novel coronavirus known as COVID-19 was first detected in China in December
2019 and spread globally. This outbreak resulted in travel restrictions, closed international borders, enhanced health screenings at
ports of entry and elsewhere, prolonged quarantines, order cancellations, supply chain disruptions, increased costs for raw materials,
lower consumer demand, and other significant economic impacts, as well as general concern and uncertainty.
The
severity of the pandemic and the future uncertainty regarding the length of its effects could have negative consequences for our company.
To date, the effects of the pandemic have negatively affected certain aspects of our operations. All of our co-packing facilities are
currently operating normally, and the pandemic has not constrained any of our production requirements. The cost of certain key ingredients
and packaging has increased substantially due to short-term supply issues related to COVID-19. Additionally, we are currently experiencing
longer lead times in receiving certain ingredients and packaging. We anticipate that these longer lead times will persist for the balance
of 2022. We continue to be able to schedule trucks for delivery and a large majority of our customers are still operating and ordering
our products as before. However, our freight costs have increased substantially due to a driver shortage caused by COVID-19 and a significant
increase in fuel costs. Fuel costs have continued to increase substantially due to record high petroleum costs caused by the current
unsettled world political situation. In response to these cost increases and the potential for additional cost increases affecting various
aspects of our operations, we initiated a series of sales price increases commencing in the fourth quarter of 2021 and continuing into
the first quarter of 2022 to help offset these cost increases. As these costs have either continued to increase, or have remained at
their high historic levels, we have been forced to implement further price increases which will become effective during the fourth quarter
of the current year.
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 $1,365,000 as of November 8, 2022 as compared to our fiscal year end January 1, 2022 balance of $1,698,000
Results
of Operations
Thirteen
Weeks Ended October 1, 2022 Compared with Thirteen Weeks Ended October 2, 2021
Net
sales for the thirteen weeks ended October 1, 2022 decreased by $460,000, or 14%, to $2,896,000, from net sales of $3,356,000 for the
thirteen weeks ended October 2, 2021. Sales of our vegan cheese products decreased to $2,334,000 in the thirteen weeks ended October
1, 2022 from $2,816,000 in the thirteen weeks ended October 2, 2021, due to the timing of cheese promotions that occurred last
year. Sales of our frozen dessert and frozen food products, which consist primarily of frozen dessert products, increased
slightly to $562,000 in the thirteen weeks ended October 1, 2022 from $540,000 for the thirteen weeks ended October 2, 2021.
Our
gross profit decreased significantly to $427,000 for the thirteen weeks ended October 1, 2022 from $818,000 for the thirteen weeks
ended October 2, 2021, due partially to the reduction in sales. Our gross profit percentage was 15% for the thirteen weeks ending
October 1, 2022 compared to 24% for the thirteen weeks ending October 2, 2021. The decrease in both our gross profit and gross
profit percentage were primarily caused by the substantial increases in the costs for certain ingredients, especially soybean oil. These substantial cost
increases were due primarily to the lingering supply chain issues caused by the Covid-19 pandemic and the record high cost of
petroleum. The high cost of petroleum has also directly impacted the costs of certain ingredients and packaging such as the plastic
packaging we use for our spreadable cheese products. While the costs of some of these key ingredients have recently started
to decline, we anticipate that our gross margin and gross margin percentage will continue to be negatively impacted into fiscal year 2023.
Freight
out expense, a significant part of our cost of sales, decreased by $59,000, or 20%, to $218,000 for the thirteen weeks ended October
1, 2022 compared with $277,000 for the thirteen weeks October 2, 2021. Freight out expense was 8% of sales for the thirteen weeks ended
October 1, 2022 compared to 8% of sales for the thirteen weeks ended October 2, 2021. While actual freight expense declined for the current
quarter, it was due to more customers picking up their orders due to the additional pickup allowances we offer. The availability of trucks
is still limited and the actual cost of shipping is still at the same high cost from the first half of 2022.
Selling
expenses decreased by $21,000, or 7%, to $261,000 for the thirteen weeks ended October 1, 2022 from $282,000 for the thirteen weeks
ended October 2, 2021. The decrease was due to decreases in outside warehouse rental expense of $40,000 and commission expense of
$13,000, which were partially offset by increases in meeting and convention expense of $22,000 and messenger expense of
$5,000.
Marketing
expenses increased by $65,000, or 171%, to $103,000 for the thirteen weeks ended October 1, 2022 from $38,000 for the thirteen weeks
ended October 2, 2021. The increase was primarily due to increases in point of sale materials expense of $24,000 and advertising
expenses of $12,000, and an increase in promotion expenses of $21,000. We anticipate that
our marketing expenses for the balance of the year will be higher that the corresponding period in fiscal year 2021.
Product
development costs, which consist principally of salary expenses and laboratory costs, increased slightly by $2,000, or 8%, to $26,000
for the thirteen weeks ended October 1, 2022 from $24,000 for the thirteen weeks ended October 2, 2021. We anticipate our product development
costs for the balance of the year will continue at a similar level as those for the 2021 period.
General
and administrative expenses decreased by $33,000, or 9%, to $298,000 for the thirteen weeks ended October 1, 2022 from $331,000 for
the thirteen weeks ended October 2, 2021, primarily due to a decrease in professional fees and outside services expense of $33,000,
a decrease in loss incurred on the sale of assets of $36,000, and a decrease on franchise tax expenses of $7,000, which were partially
offset by increases in payroll expense of $24,000, and general insurance expense of $15,000. We anticipate our general and
administrative expense for the remaining period in 2022 will approximate the same level as in the corresponding 2021
period.
Income
tax benefit was $69,000 for the thirteen weeks ended October 1, 2022 and income tax expense was $16,000 for the thirteen weeks ended
October 2, 2021. The income tax benefit resulted from the lower taxable income during the thirteen weeks ended October 1, 2022 compared to the thirteen weeks
ended October 2, 2021.
Thirty-Nine
Weeks Ended October 1, 2022 Compared with Thirty-Nine Weeks Ended October 2, 2021
Net
sales for the thirty-nine weeks ended October 1, 2022 decreased by $195,000, or 2%, to $9,338,000, from net sales of $9,533,000 for the
thirty-nine weeks ended October 2, 2021. Sales of our vegan cheese products decreased by $257,000 to $7,776,000 in the thirty-nine weeks
ended October 1, 2022 from $8,033,000 in the thirty-nine weeks ended October 2, 2021. Sales of our frozen dessert and frozen food products,
which consist primarily of frozen dessert products, increased to $1,562,000 in the thirty-nine weeks ended October 1, 2022 from $1,500,000
for the thirty-nine weeks ended October 2, 2021.
Our
gross profit decreased to $1,812,000 in the thirty-nine weeks ended October 1, 2022 from $2,577,000 in the thirty-nine weeks ended October
2, 2021. Our gross profit percentage was 19% for the thirty-nine weeks ending October 1, 2022 compared to 27% for the thirty-nine weeks
ending October 2, 2021. The decrease in both our gross profit and gross profit percentage were caused by the substantial increases in
certain ingredients and freight expenses. These substantial cost increases were due primarily to the lingering supply chain issues caused
by the Covid-19 pandemic and the record high cost of petroleum. Besides causing substantial increases in our freight expenses, the high
cost of petroleum has also directly impacted the costs of certain ingredients and packaging such as the plastic packaging we use for
our spreadable cheese products.
Freight
out expense, a significant part of our cost of sales, increased by $86,000, or 11%, to $861,000 for the thirty-nine weeks ended October
1, 2022 compared with $775,000 for the thirty-nine weeks October 2, 2021. Freight out expense was 9% of sales for the thirty-nine weeks
ended October 1, 2022 compared to 8% of sales for the thirty-nine weeks ended October 2, 2021. The increase in freight out expenses was
due to the increases in shipping costs due to the large increase in the cost of fuel and the unavailability of trucks.
Selling
expenses decreased by $75,000, or 8%, to $834,000 for the thirty-nine weeks ended October 1, 2022 from $909,000 for the thirty-nine weeks
ended October 2, 2021. This decrease was primarily attributable to decreases in payroll expense of $22,000, outside warehouse rental
expense of $98,000, and commission expense of $15,000, which were offset by increases in meetings and convention expenses of $42,000 and
travel, entertainment, and auto expenses of $20,000.
Marketing
expenses increased by $197,000, or 114%, to $370,000 for the thirty-nine weeks ended October 1, 2022 from $173,000 for the thirty-nine
weeks ended October 2, 2021. The increase was primarily due to increases in promotions expense of $59,000, artwork and plate expenses
of $73,000, advertising expenses of $32,000, and point of sales material expense of $30,000. In 2022, we completed the rebranding of our product line and introduced new packaging for our products.
Product
development costs increased by $9,000, or 9%, to $108,000 for the thirty-nine weeks ended October 1, 2022 from $99,000 for the thirty-nine
weeks ended October 2, 2021, primarily due to the increase in professional fees and outside services of $28,000 which was partially offset
by a decrease in lab costs and supplies of $9,000.
General
and administrative expenses decreased by $110,000, or 10%, to $987,000 for the thirty-nine weeks ended October 1, 2022 from $1,097,000
for the thirty-nine weeks ended October 2, 2021, primarily due to decreases in payroll expense of $32,000, professional fees and outside
services expense of $48,000, loss on the sale of asset of $36,000, equipment rental expense of $19,000, and travel, auto and entertainment
expenses of $14,000, which were partially offset by an increase in public relations expense of $50,000 and an increase in general insurance
expense of $9,000. The decrease in payroll expense was due to no salary being paid to Mr. Mintz this period compared to the same period
in the prior year.
Income
tax benefit was $127,000 for the thirty-nine weeks ended October 1, 2022 and income tax expense was $52,000 for the thirty-nine weeks
ended October 2, 2021 resulting from the lower taxable income during the thirty-nine weeks ended October 1, 2022 compared to the thirty-nine
weeks ended October 2, 2021.
Liquidity
and Capital Resources
As
of October 1, 2022, we had approximately $965,000 in cash and our working capital was approximately $3,994,000, compared with approximately
$1,698,000 in cash and working capital of $4,326,000 at January 1, 2022. The decrease in cash is primarily due to the use of funds to
purchase ingredients during the period, due to management’s decision to purchase certain key ingredients in advance of production
needs to ensure an adequate supply and to prevent future production disruptions.
The
following table summarizes our cash flows for the periods presented:
| |
Thirty-nine Weeks ended October 1, 2022 | | |
Thirty-nine Weeks ended October 2, 2021 | |
Net cash (used in) provided by operating activities | |
$ | (733,000 | ) | |
$ | 1,500,000 | |
Net cash provided by investing activities | |
| — | | |
| 50,000 | |
Net increase in cash and cash equivalents | |
| (733,000 | ) | |
| 1,550,000 | |
Net
cash used in operating activities for the thirteen weeks ended October 1, 2022 was $733,000 compared to $1,500,000 provided by operating
activities for the thirteen weeks ended October 2, 2021. Net cash used in operating activities for the thirty-nine weeks ended October
1, 2022 was primarily a result of a net loss of $195,000, SBA loan forgiveness of $165,000, an increase in inventories of $820,000, deferred
taxes of $133,000 and a non-cash lease expense of $6,000, offset by a decrease in accounts receivable of $146,000, an increase in accounts
payable and accrued expenses of $385,000, and a decrease in prepaid expenses and other current assets of $42,000. The significant increase
in inventories during the period is due to management’s decision to purchase certain key ingredients in advance of production needs
to ensure an adequate supply and to prevent future production disruptions.
We
believe our existing cash on hand at October 1, 2022, existing working capital and the cash flows expected from operations, will be sufficient
to support our operating and capital requirements during the next twelve months.
Inflation
and Seasonality
We
do not believe that our operating results have been materially affected by inflation during 2020 and 2021.However, beginning in 2022,
due to substantial increases in ingredient, packaging, freight, and co-packing expenses, we are now experiencing negative effects on
our operations from inflation. While we do believe that certain of these costs and expenses will return to their previous lower levels,
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.
Off-balance
Sheet Arrangements
None.
Contractual
Obligations
We
had no material contractual obligations as of October 1, 2022.
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.