TOFUTTI BRANDS INC [TOFB] Filings

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

Commission file number: 1-9009

Tofutti Brands Inc.

(Exact Name of Registrant as Specified in Its Charter)

50 Jackson Drive, Cranford, New Jersey 07016

(Address of Principal Executive Offices)

(908) 272-2400

(Registrant’s Telephone Number, including area code)

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

N/A

(Former Name, Former Address and Former Fiscal Year,

if Changed Since Last Report)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐ No ☒

As of August 15, 2024 the Registrant had 5,153,706 shares of Common Stock, par value $0.01, outstanding.

TOFUTTI BRANDS INC.

INDEX

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

TOFUTTI BRANDS INC.

Condensed Balance Sheets

(in thousands, except share and per share figures)

See accompanying notes to unaudited condensed financial statements.

TOFUTTI BRANDS, INC.

Unaudited Condensed Statements of Operations

(in thousands, except per share figures)

See accompanying notes to unaudited condensed financial statements.

TOFUTTI BRANDS, INC.

Unaudited Condensed Statements of Changes in Stockholders’ Equity

(in thousands)

See accompanying notes to unaudited condensed financial statements.

TOFUTTI BRANDS INC.

Unaudited Condensed Statements of Cash Flows

(in thousands)

See accompanying notes to unaudited condensed financial statements.

TOFUTTI BRANDS INC.

Notes to Unaudited Condensed Financial Statements

(in thousands, except share and per share data)

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. Management closely monitors outstanding balances during the year and allocates an allowance account if appropriate. The Company estimates and records a provision for its expected credit losses related to its financial instruments, including its trade receivables and contract assets. The Company considers historical collection rates, the current financial status of its customers, macroeconomic factors, and other industry-specific factors when evaluating for current expected credit losses. Forward-looking information is also considered in the evaluation of current expected credit losses. However, because of the short time to the expected receipt of accounts receivable, the Company believes that the carrying value, net of expected losses, approximates fair value and therefore, relies more on historical and current analysis of such financial instruments.

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

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 December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740) – Improvements to Income Tax Disclosures (ASU 2023-09). ASU 2023-09 requires that an entity, on an annual basis, disclose additional income tax information, primarily related to the rate reconciliation and income taxes paid. The amendment in the ASU is intended to enhance the transparency and decision usefulness of income tax disclosures. The ASU’s amendments are effective for annual periods beginning after December 15, 2024. The Company is currently evaluating the impact that adoption of ASU 2023-09 will have on its financial statements.

Results of Operations

Thirteen Weeks Ended June 29, 2024 Compared with Thirteen Weeks Ended July 1, 2023

Net sales for the thirteen weeks ended June 29, 2024 decreased by $436,000, or 16%, to $2,283,000, from net sales of $2,719,000 for the thirteen weeks ended July 1, 2023. Sales of our vegan cheese products decreased to $1,926,000 in the thirteen weeks ended June 29, 2024 from $2,283,000 in the thirteen weeks ended July 1, 2023. Sales of our frozen dessert products decreased to $357,000 in the thirteen weeks ended June 29, 2024 from $436,000 for the thirteen weeks ended July 1, 2023. The decrease in frozen dessert product sales was due to a decrease in sales of our frozen dessert pints. The decrease in the sales of our vegan cheese products was due to continued introduction of competitive products in the vegan cheese category and a decline of our export cheese business.

Our gross profit was $667,000 for both the thirteen weeks ended June 29, 2024 and the thirteen weeks ended July 1, 2023. Our gross profit percentage increased to 29% for the thirteen weeks ending June 29, 2024 compared to 25% for the thirteen weeks ending July 1, 2023. Our gross profit dollars and gross profit percentage were positively impacted by a decrease in our sales promotion and allowance expenses to $249,000 in the second quarter of this year as compared to $273,000 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 2024.

Freight expense, a significant part of our cost of sales, increased slightly by $6,000, or 4%, to $179,000 for the thirteen weeks ended June 29, 2024 compared with $173,000 for the thirteen weeks ended July 1, 2023. Freight expense was 8% of sales for the thirteen weeks ended June 29, 2024 compared to 6% of sales for the thirteen weeks ended July 1, 2023. We anticipate that our freight expense will continue at a higher rate for the balance of 2024.

Selling expenses decreased by $70,000, or 22%, to $250,000 for the thirteen weeks ended June 29, 2024 from $320,000 for the thirteen weeks ended July 1, 2023. The decrease was due to decreases in commission expense of $38,000, meetings and convention expense of $18,000, bad debt expense of $16,000, and sample shipping expenses of $11,000 which were partially offset by an increase in outside warehouse rental expenses of $13,000. The decrease in commission expense is due to the decrease in sales for the thirteen-weeks ended June 29,2024 compared with the thirteen-weeks ended July 1, 2023.

Marketing expenses decreased by $10,000, or 11%, to $79,000 for the thirteen weeks ended June 29, 2024 from $89,000 for the thirteen weeks ended July 1, 2023. The decrease was primarily due to decreases in artwork and plates expense of $3,000, and advertising expense $14,000, which were partially offset by an increase in promotion expense of $7,000. We anticipate that our marketing expenses for the balance of the year will be comparable to the corresponding periods in fiscal year 2023.

Product development costs, which consist principally of salary expenses and laboratory costs, decreased by $34,000, or 61%, to $22,000 for the thirteen weeks ended June 29, 2024 from $56,000 for the thirteen weeks ended July 1, 2023. The decrease was primarily due to a decrease in professional fees and outside services expense of $24,000 and lab costs and supplies expense of $7,000. We anticipate our product development costs will continue at a lower level than the corresponding 2023 periods as we have reduced our research and development work.

General and administrative expenses decreased by $41,000, or 11%, to $342,000 for the thirteen weeks ended June 29, 2024 from $383,000 for the thirteen weeks ended July 1, 2023, primarily due to decreases in public relations expense of $16,000 and professional fees and outside services expense of $43,000, which were partially offset by increases in office supplies expense of $7,000 and payroll expense of $11,000. We anticipate our general and administrative expenses for the remaining periods in 2024 will approximate the same levels as in the corresponding 2023 periods.

Income tax expense was $5,000 for the thirteen weeks ended June 29, 2024 and $136,000 for the thirteen weeks ended July 1, 2023.

Twenty Six Weeks Ended June 29, 2024 Compared with Twenty Six Weeks Ended July 1, 2023

Net sales for the twenty-six weeks ended June 29, 2024 decreased by $713,000, or 14%, to $4,495,000, from net sales of $5,208,000 for the twenty-six weeks ended July 1, 2023. Sales of our vegan cheese products decreased to $3,735,000 in the twenty-six weeks ended June 29, 2024 from $4,382,000 for the twenty-six weeks ended July 1, 2023. Sales of our frozen dessert products decreased to $764,000 for the twenty-six weeks ended June 29, 2024 from $826,000 for the twenty-six weeks ended July 1, 2023. The significant reduction in sales for the current twenty-six week period was primarily due to the decrease in our vegan cheese sales caused by increased competition in the vegan cheese category and a decline in our export cheese business.

Our gross profit decreased to $1,136,000 for the twenty-six weeks ended June 29, 2024 from $1,273,000 for the twenty-six weeks ended July 1, 2023, while our gross profit percentage was 25% for the twenty-six weeks ending June 29, 2024 compared to 24% for the twenty-six weeks ending July 1, 2023. The decrease in gross profit dollars was due to the reduction in sales. The increase in our gross profit percentage was due to a $85,000 decrease in sales promotion and allowance expense to $442,000 in fiscal 2024, from $527,000 in fiscal 2023. We anticipate that our gross margin percentage will remain unchanged or slightly increase for the balance of the fiscal year.

Freight expense, a significant part of our cost of sales, decreased by $28,000, or 8%, to $357,000 for the twenty-six weeks ended June 29, 2024 compared with $385,000 for the twenty-six weeks July 1, 2023. Freight expense was 8% of sales for the twenty-six weeks ended June 29, 2024 and for the twenty-six weeks ended July 1, 2023.

Selling expenses decreased by $128,000, or 22%, to $464,000 for the twenty-six weeks ended June 29, 2024 from $592,000 for the twenty-six weeks ended July 1, 2023. The decrease was primarily attributable to decreases in meetings and convention expense of $44,000, commission expense of $76,000, bad debt expense of $15,000, and sample shipping expenses of $23,000, which were partially offset by an increase in outside warehouse rental expenses of $20,000 and payroll expenses of $10,000. The decrease in commission expense is due to the decrease in sales and a reduction to the commission rate we pay to our brokers from 5% to 4% for the twenty-six weeks ended June 29, 2024 compared with the twenty-six weeks ended July 1, 2023.

Marketing expenses increased by $29,000, or 16%, to $213,000 for the twenty-six weeks ended June 29, 2024 from $184,000 for the twenty-six weeks ended July 1, 2023. The increase was primarily due to increases in promotions expense of $37,000 and advertising expense of $7,000, which were partially offset by a decrease in point of sale material expense of $14,000.

Product development costs, which consist principally of salary expenses and laboratory costs, were $64,000 for the twenty-six weeks ended June 29, 2024 and $83,000 for the twenty-six weeks ended July 1, 2023. The decrease was due primarily to a decrease in professional fees and outside services expenses of $15,000 and lab costs and supplies expense of $6,000.

General and administrative expenses increased by 6%, or $38,000, to $724,000 for the twenty-six weeks ended June 29, 2024 from $686,000 for the twenty-six weeks ended July 1, 2023. This increase was primarily due to increases in payroll expense of $20,000, professional fees and outside services expense of $12,000, office supply expense of $7,000, equipment repairs expense of $5,000, and general insurance expense of $6,000, which were partially offset by decreases in public relations expense of $21,000. Our increase in payroll expense was due primarily to an increase in group insurance expense.

Income tax expense was $5,000 for the twenty-six weeks ended June 29, 2024 and $146,000 for the thirteen weeks ended July 1, 2023.

Liquidity and Capital Resources

As of June 29, 2024, we had approximately $489,000 in cash and our working capital was approximately $3,105,000, compared with approximately $837,000 in cash and working capital of $3,440,000 at December 30, 2023.

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

Net cash used in operating activities for the twenty-six weeks ended June 29, 2024 was $344,000 compared to $485,000 used in operating activities for the twenty-six weeks ended July 1, 2023. Net cash used in operating activities for the twenty-six weeks ended June 29, 2024 was primarily a result of the net loss of $335,000 and decreases in current assets other than cash of $313,000, primarily inventory, which were offset by decreases in current liabilities, primarily accounts payable and accrued expenses, of $383,000.

We believe our existing cash on hand at June 29, 2024, existing working capital and the cash flows expected from operations, will be sufficient to support our operating and capital requirements during the next twelve months.

Inflation and Seasonality

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

Off-balance Sheet Arrangements

None.

Contractual Obligations

We had no material contractual obligations as of June 29, 2024.

Recently Issued Accounting Standards

See Note 2 to the unaudited condensed financial statements included in Part I, Item 1, Financial Statements, of this Quarterly Report on Form 10-Q.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

We do not believe that our exposure to market risk related to the effect of changes in interest rates, foreign currency exchange rates, commodity prices and other market risks with regard to instruments entered into for trading or for other purposes is material.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures. As of June 29, 2024, 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 June 29, 2024.

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 June 29, 2024 because of the following material weaknesses in internal controls over financial reporting:

To date, we have been unable to remediate these weaknesses, which stem from our small workforce of five persons at June 29, 2024.

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 30, 2023.

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

None.

Item 3. Default Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

None.

Item 5. Other Information

None.

Item 6. Exhibits

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.