TOFB Tofutti Brands Inc (QB)

The following is management’s discussion and analysis of certain significant factors which have affected our financial position and operating results during the periods included in the accompanying financial statements.

The discussion and analysis which follows in this Quarterly Report and in other reports and documents and in oral statements made on our behalf by our management and others may contain trend analysis and other forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 which reflect our current views with respect to future events and financial results. These include statements regarding our earnings, projected growth and forecasts, and similar matters which are not historical facts. We remind stockholders that forward-looking statements are merely predictions and therefore are inherently subject to uncertainties and other factors which could cause the actual future events or results to differ materially from those described in the forward-looking statements. These uncertainties and other factors include, among other things, business conditions in the food industry and general economic conditions, both domestic and international; lower than expected customer orders; competitive factors; changes in product mix or distribution channels; and resource constraints encountered in developing new products. The forward-looking statements contained in this Quarterly Report and made elsewhere by or on our behalf should be considered in light of these factors.

Critical Accounting Policies

Our financial statements have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these unaudited condensed financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The policies discussed below are considered by management to be critical to an understanding of our financial statements because their application places the most significant demands on management’s judgment, with financial reporting results relying on estimation about the effect of matters that are inherently uncertain. Specific risks for these critical accounting policies are described in the following paragraphs. For all of these policies, management cautions that future events rarely develop exactly as forecast, and the best estimates routinely require adjustment.

Revenue Recognition. We primarily sell vegan and dairy-free soy-based cheeses, frozen desserts and other food products. We recognize revenue when control over the products transfers to our customers, deemed to be the performance obligation, which generally occurs when the product is shipped or picked up from one of our distribution locations by the customer. We account for product shipping, handling and insurance as fulfillment activities with revenues for these activities recorded within net revenue and costs recorded within cost of sales. Revenues are recorded net of trade and sales incentives and estimated product returns. Known or expected pricing or revenue adjustments, such as trade discounts, rebates or returns, are estimated at the time of sale. We base these estimates of expected amounts principally on historical utilization and redemption rates. Estimates that affect revenue, such as trade incentives and product returns, are monitored and adjusted each period until the incentives or product returns are realized.

Key sales terms, such as pricing and quantities ordered, are established on a frequent basis such that most customer arrangements and related incentives have a one year or shorter duration. As such, we do not capitalize contract inception costs and we capitalize product fulfillment costs in accordance with U.S. GAAP and our inventory policies. We generally do not have any unbilled receivables at the end of a period.

Accounts Receivable. The majority of our accounts 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

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

An outbreak of infectious respiratory illness caused by a novel coronavirus known as COVID-19 was first detected in China in December 2019 and has now spread globally. This outbreak has resulted in travel restrictions, closed international borders, enhanced health screenings at ports of entry and elsewhere, disruption of and delays in healthcare service preparation and delivery, prolonged quarantines, cancellations, supply chain disruptions, and lower consumer demand, layoffs, defaults and other significant economic impacts, as well as general concern and uncertainty. The impact of this outbreak has adversely affected the economies of many nations and the entire global economy and may impact our Company in ways that cannot necessarily be foreseen. Other infectious illness outbreaks that may arise in the future could have similar impacts. Public health crises caused by the outbreak may exacerbate other pre-existing political, social and economic risks in certain countries or globally.

The current severity of the pandemic and the uncertainty regarding the length of its effects could have negative consequences for our company. To date, the effects of the pandemic have not materially affected our Company’s operations. All of our co-packing facilities are currently operating normally and the pandemic has not constrained any of our production requirements. We continue to be able to schedule trucks for delivery and a large majority of our customers are still operating and ordering our products as before.

Most of our administrative functions are being performed remotely. A small crew maintains the office for those functions that cannot be handled remotely. Our ability to collect money, pay bills, handle customer and consumer communications, schedule production, and order ingredients necessary for our production has not been impacted. To date, the pandemic has had minimal impact on our sales. The majority of our sales relate to retail products sold in supermarkets. Supermarket sales in general have seen a substantial surge in business due to the pandemic, as consumers stock up on all products that they would normally purchase. The only negative effect to our business to date has been with respect to our food service sales to retail outlets, such as restaurants and small food shops, which account for a small part of our total business and with respect to our inability to regain our level of export sales to foreign jurisdictions. Our marketing efforts have also been constrained due to social distancing restrictions and other current government rules and regulations that preclude face to face sales meeting, attendance at trade shows and the initiation of new promotions.

To date we have not experienced a significant change in the timeliness of payments of our invoices and our cash position remains stable with approximately $2,446,000 of cash as of April 3, 2021.

Depending on the length and severity of the pandemic, COVID-19 may ultimately have a significant impact on our operations and ability to maintain our current level of operations without a further infusion of capital, which may not be available to us.

Results of Operations

Thirteen Weeks Ended April 3, 2021 Compared with Thirteen Weeks Ended March 28, 2020

Net sales for the thirteen weeks ended April 3, 2021 decreased by $76,000, or 2%, to $3,150,000, from net sales of $3,226,000 for the thirteen weeks ended March 28, 2020. Sales of our frozen dessert and frozen food products, which consist primarily of frozen dessert products, increased slightly to $430,000 in the thirteen weeks ended April 3, 2021 from $412,000 for the thirteen weeks ended March 28, 2020. Sales of our vegan cheese products decreased to $2,720,000 in the 2021 period from $2,814,000 in the 2021 period due to a decline in vegan cheese slice product sales resulting from production delays.

Our gross profit increased slightly to $1,001,000 in the period ended April 3, 2021 from $996,000 in the period ended March 28, 2020. Our gross profit percentage was 32% for the period ending April 3, 2021 compared to 31% for the period ending March 28, 2020.

Freight out expense, a significant part of our cost of sales, decreased by $16,000, or 7%, to $227,000 for the thirteen weeks ended April 3, 2021 compared with $243,000 for the thirteen weeks March 28, 2020. Freight out expense decreased due to the slight decrease in sales. Freight out expense was 7% of sales for the thirteen weeks ended April 3, 2021 compared to 8% of sales for the thirteen weeks ended March 28, 2020. We anticipate that freight out expense will continue at the same percentage of sales over the remainder of 2021.

Selling expenses increased by $16,000, or 5%, to $323,000 for the thirteen weeks ended April 3, 2021 from $307,000 for the thirteen weeks ended March 28, 2020.

Marketing expenses decreased by $55,000, or 44%, to $70,000 for the thirteen weeks ended April 3, 2021 from $125,000 for the thirteen weeks ended March 28, 2020. The decrease was primarily due to decreases in promotions expense of $54,000 and artwork and plates expense of $6,000, which were partially offset by an increase in advertising expense of $4,000.

Research and development costs, which consist principally of salary expenses and laboratory costs, decreased by $51,000, or 43%, to $39,000 for the thirteen weeks ended April 3, 2021 from $90,000 for the thirteen weeks ended March 28, 2020, due partially to decreases in payroll expense of $28,000, equipment repair expense of $14,000, uniform rental expense of $6,000, and professional fees and services of $9,000. Because we do not anticipate that our research and development department will resume operations at the pre-COVID level in 2021, we expect that product development costs will remain constant or decline slightly for the remainder of fiscal 2021.

General and administrative expenses increased by $36,000, or 9%, to $447,000 for the thirteen weeks ended April 3, 2021 from $411,000 for the thirteen weeks ended March 28, 2020, primarily due to an increase in professional fees and outside service expense of $25,000 We anticipate that our general and administrative expenses for the remainder of 2021 will be lower than those of 2020.

Income tax expense was $36,000 for the thirteen weeks ended April 3, 2021 and $7,000 for the thirteen weeks ended March 28,2020, which is in line with the comparative effective tax rates for both fiscal periods.

Liquidity and Capital Resources

As of April 3, 2021, we had approximately $2,446,000 in cash and our working capital was approximately $4,693,000, compared with approximately $1,459,000 in cash and working capital of $4,639,000 at January 2, 2021.

Small Business Administration Loan

On May 4, 2020, we were granted a loan (the “Loan”) from Valley National Bank in the aggregate amount of approximately $165,000, pursuant to the Paycheck Protection Program under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), which was enacted on March 27, 2020. The term of the loan is two years, with monthly payments due the first day of each month, beginning seven months from the date of initial disbursement, or December 1, 2020, whichever is earlier. Interest accrues at 1% per year, effective on the date of initial disbursement. In addition, a portion of the loan may be forgiven under provisions under the CARES Act based on payments for payroll, rent and utilities during the period subsequent to obtaining the loan.

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

Net cash provided by operating activities for the thirteen weeks ended April 3, 2021 was $987,000 compared to $394,000 provided by operating activities for the thirteen weeks ended March 28, 2020. Net cash provided by operating activities for the thirteen weeks ended April 3, 2021 was primarily a result of our net income of $80,000, a decrease in accounts receivable of $777,000, and an increase in accounts payable $332,000. Accounts receivable decreased due to strong cash collection in the first quarter, while the increase in accounts payable was due to a delay in processing invoices for payment as a result of the transition to a new accounting firm and the death of David Mintz, our former Chairman and Chief Executive, who passed away in February 2021.

We believe our existing cash on hand at April 3, 2021, 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 nondairy frozen desserts during those periods.

Off-balance Sheet Arrangements

None.

Contractual Obligations

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

Recently Issued Accounting Standards

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