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 receivable 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, prolonged quarantines, order cancellations, supply chain disruptions, increased costs for raw materials, and lower consumer demand, and other significant economic impacts, as well as general concern and uncertainty.

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 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 has increased substantially due to short-term supply issues related to COVID-19. 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. Additionally, our freight costs have increased due to a driver shortage caused by COVID-19. Our ability to collect money, pay bills, handle customer and consumer communications, schedule production, and order ingredients necessary for our production has not been materially impacted. However, due to the future uncertainty of potential cost increases affecting various aspects of our operations, we have initiated a series of sales price increases commencing in the fourth quarter of this year to help offset these cost increases.

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 of approximately $3,009,000 as of October 2, 2021 has improved since our fiscal year end

Results of Operations

Thirteen Weeks Ended October 2, 2021 Compared with Thirteen Weeks Ended September 26, 2020

Net sales for the thirteen weeks ended October 2, 2021 were $3,356,000, an increase of $204,000, or 6%, from net sales of $3,152,000 for the thirteen weeks ended September 26, 2020. The increase is mainly attributable to increases in sales in our vegan cheese categories and frozen desserts. Sales of vegan cheese products increased by $161,000 to $2,816,000 in the 2021 period from $2,655,000 in the 2020 period. Frozen dessert sales increased by $43,000 to $540,000 in the thirteen weeks ended October 2, 2021 from $497,000 for the thirteen weeks ended September 26, 2020.

Our gross profit decreased to $818,000 in the thirteen weeks ended October 2, 2021 from $1,033,000 in the thirteen weeks ended October 2, 2021. Our gross profit percentage was 24% for the thirteen weeks ending October 2, 2021 compared to 33% for the thirteen weeks ending September 26, 2020. Sudden cost increases due to COVID-related supply chain issues for ingredients used in the production of our products have negatively impacted our gross profit. We anticipate these ingredient cost increases will continue for the balance of the year and at least into the first half of 2022.

Our gross profit percentage was also negatively impacted by an increase in freight expense, which is a component of cost of sales. Freight expense, a significant part of our cost of sales, increased by $39,000, or 16%, to $277,000 for the thirteen weeks ended October 2, 2021 compared with $238,000 for the thirteen weeks ended September 26, 2020. As a percentage of sales, freight expense was 8% percent for both the thirteen weeks ended October 2, 2021 and the thirteen weeks ended September 26, 2020. Our freight expense was negatively impacted by a significant increase in freight rates caused by a shortage of drivers due to COVID-19, increased fuel costs, and the continued implementation of the 2019 Electronic Logging Device rules and regulations, or ELD, which limit the number of hours a truck driver can drive in a 24-hour period for over the road carriers. We expect this increase in freight expense to continue for the balance of 2021 and into 2022.

Selling expenses decreased by $1,000 to $282,000 for the thirteen weeks ended October 2, 2021 from $283,000 for the thirteen weeks ended September 26, 2020. We anticipate that our selling expenses will remain at the same level for the remainder of 2021.

Marketing expenses were $38,000 for both the thirteen weeks ended October 2, 2021 and the thirteen weeks ended September 26, 2020. We anticipate that our marketing expenses will remain at the same level for the remainder of fiscal 2021.

Research and development costs decreased by $26,000, or 52%, to $24,000 for the thirteen weeks ended October 2, 2021 from $50,000 for the thirteen weeks ended September 26, 2020, primarily due to decreases in payroll expense of $7,000, lab costs and supplies expense of $6,000, and professional fees and outside services expense of $5,000. 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 significantly lower for the remainder of fiscal 2021.

General and administrative expenses decreased by $80,000, or 19%, to $331,000 for the thirteen weeks ended October 2, 2021 from $411,000 for the thirteen weeks ended September 26, 2020. The decrease in general and administrative expenses was due to a decrease in payroll expense of $122,000, public relations expense of $8,000, equipment rental of $6,000, and general insurance expense of $11,000, which were partially offset by increases in professional fees and outside services expense of $34,000, IT expense of $7,000, and a one-time loss on the sale of equipment of $36,000. The decrease in payroll expense was due to the elimination of Mr. Mintz’s salary at the start of the second quarter. The increase in IT expenses was due to an upgrade of our ransomware protection systems.

Income tax expense increased by $9,000 of 36%, to $16,000 for the thirteen weeks ended October 2, 2021 from $25,000 for the thirteen weeks ended September 26, 2020 resulting from the lower pre-tax income during this period compared to prior year.

Thirty-nine Weeks Ended October 2, 2021 Compared with Thirty-nine Weeks Ended September 26, 2020

Net sales for the thirty-nine weeks ended October 2, 2021 were $9,533,000, a decrease of $88,000 from net sales of $9,621,000 for the thirty-nine weeks ended September 26, 2020. Sales of vegan cheese products increased slightly to $8,033,000 in the 2021 period from $8,016,000 in the 2020 period. Sales of our frozen dessert and frozen food products decreased to $1,500,000 for the thirty-nine weeks ended October 2, 2021 from $1,605,000 for the thirty-nine weeks ended September 26, 2020. The decrease in our sales for the 2021 thirty-nine-week period was mostly due to the decrease in frozen dessert sales resulting from the discontinuance of our Yours Truly cones and Marry Me bars in the 2021 period due to the two products’ declining sales.

Our gross profit decreased by $467,000 or 15% to $2,577,000 in the thirty-nine weeks ended October 2, 2021 from $3,044,000 in the thirty-nine-week period ended September 26, 2020. Our gross profit percentage was 27% for the thirty-nine weeks ended October 2, 2021 compared to 32% for the thirty-nine weeks ended September 26, 2020. Freight expense increased by $57,000, or 8%, to $775,000 for the thirty-nine weeks ended October 2, 2021 compared with $718,000 for the thirty-nine weeks ended September 26, 2020. As a percentage of sales, freight expense was 8% percent for the thirty-nine weeks ended October 2, 2021 compared to 7% percent for the thirty-nine weeks ended September 26, 2020. We anticipate our gross profit and gross profit percentage will continue to be negatively impacted for the balance of 2021 and into 2022 due to the significant ingredient cost increases caused by COVID-19 supply chain issues.

Selling expenses increased by $28,000, or 3%, to $909,000 for the thirty-nine weeks ended October 2, 2021 from $881,000 for the thirty-nine weeks ended September 26, 2020. This increase was due principally to increases in outside warehouse rental expense of $19,000 and bad debt expense of $10,000.

Marketing expenses decreased by $37,000, or 18%, to $173,000 for the thirty-nine weeks ended October 2, 2021 from $210,000 for the thirty-nine weeks ended September 26, 2020, due to a decrease in promotion expense of $49,000, which was partially offset by an increase in advertising expense of $8,000.

Research and development costs decreased by $95,000, or 49%, to $99,000 for the thirty-nine weeks ended October 2, 2021 from $194,000 for the thirty-nine weeks ended September 26, 2020, due primarily to decreases in payroll expense of $44,000, equipment repair expense of $14,000 and professional fees and outside services expense of $28,000.

General and administrative expenses decreased by $132,000, or 11%, to $1,097,000 for the thirty-nine weeks ended October 2, 2021 from $1,229,000 for the thirty-nine weeks ended September 26, 2020. This decrease was a result of decreases in payroll expense of $259,000, public relation expense of $8,000, and general insurance expense of $17,000, which were partially offset by increases in professional fees and outside services expense of $104,000 and the loss on the sale of equipment of $37,000. The decrease in payroll expense was due to the elimination of Mr. Mintz’s salary at the start of the second quarter. The increase in professional fees and outside services expense was due to a one-time fee charged by our former accountants.

Income tax expense was $52,000 for the thirty-nine weeks ended October 2, 2021 compared to $101,000 for the thirty-nine weeks ended September 26, 2020 resulting from the lower pre-tax income during this period compared to prior year.

Liquidity and Capital Resources

As of October 2, 2021, we had approximately $3,009,000 in cash and our working capital was approximately $4,886,000, 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 Company has applied for loan forgiveness and is awaiting the results.

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

Net cash provided by operating activities was $1,500,000 for the thirty-nine weeks ended October 2, 2021 compared to $720,000 for the thirty-nine weeks ended September 26, 2020. Net cash provided by operating activities for the thirty-nine weeks ended October 2, 2021 was primarily a result of a result of our net income of $228,000, a gain on sale of equipment of $37,000 a decrease in accounts receivable of $665,000, a decrease in inventory of $311,000, and an increase of accounts payable of $551,000, offset by a decrease in accrued expenses of $184,000 and income taxes payable of $115,000. Net cash provided by investing activities was $50,000 for the thirty-nine weeks ended October 2, 2021 compared to $0 for the thirty-nine weeks ended September 26, 2020. Net cash provided by investing activities for the thirty-nine weeks ended October 2, 2021 was a result of selling equipment. Net cash provided by financing activities was $0 for the thirty-nine weeks ended October 2, 2021 compared to $165,000 for the thirty-nine weeks ended September 26, 2020 as a result of a loan pursuant to the Paycheck Protection Program under the CARES Act in 2020.

We believe our existing working capital and cash on hand at October 2, 2021, 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, other than the COVID related ingredient costs increases and freight expenses. There can be no assurance, however, that our operating results will not be materially 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 October 2, 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.