Note 6: Equipment

Equipment consists of the following:

Schedule of Equipment

TOFUTTI BRANDS INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

(In thousands, except for share and per share data)

Depreciation expense for the thirteen and thirty-nine weeks ended October 2, 2021 was $2 and $7, respectively. Depreciation expense for the thirteen and thirty-nine weeks ended September 26, 2020 was $3 and $8, respectively.

During September 2021, the Company sold manufacturing equipment with a cost of $102 and accumulated depreciation of $15 for total proceeds of $50. The $37 loss on this sale has been presented as a component of general and administrative expenses on the condensed statements of income for the thirteen and thirty-nine weeks ended October 2, 2021.

Note 7:6: 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 Company intends to rely on a combination of multi-year performance awards, options and other stock-based awards for these purposes.

The 2014 Plan made 250,000shares 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 20202022 or 2021 and no options were outstanding as of OctoberJuly 2, 20212022 and September 26, 2020.January 1, 2022.

Note 8:7: Notes Payable

Small Business Administration (SBA) Loan

On May 4,2, 2020 the Company received from the SBA a loan of $165 from the Paycheck Protection Program at an interest rate of 1%1%. The Company has applied for loan forgiveness and is awaiting the results. Interest and payments have beenwere deferred until the SBA completes its review of the forgiveness application.March 4, 2021 The current portion of the loan was $165 as of OctoberJanuary 2, 2021 and the loan will expirewould have expired on May 4,2, 2022. On January 12, 2022,. No demand for repayment the Company was informed by the SBA that the entire amount of the loan hashad been madeforgiven free of taxation. The Company recorded forgiveness of debt income of $165 in the twenty-six weeks ended July 2, 2022 as SBA loan forgiveness on the unaudited condensed statement of November 12, 2021.operations.

Related Party

On January 6, 2016, David Mintz, the Company’s former Chairman and Chief Executive who passed away in February 2021,Officer, provided the Company with a loan of $500 with an annual interest rate of 5% payable on a quarterly basis.. The loan which was originally set to expire onextended until December 31, 20172021 and was, extended to December 31, 2022 effective January 10, 2020. The original loan was convertible into shares of the Company’s common stock at a conversion price of $4.01 per share, the closing price of its common stock on the NYSE MKT on the date the promissory note was first entered into. The extended loan is, at the option of the holder, convertible into the Company’s common stock at a conversion price of $1.77 per share, the closing price of the Company’s common stock on the date of the extension of the promissory note. No other terms of the loan were modified.share. Interest expense incurred to the related party was $725 and $19 for both fiscal years ended January 1, 2022 and January 2, 2021. On December 22, 2021, the thirteen and thirty-nine week periods ended October 2, 2021 andentire loan of $6500 andplus accrued interest of $1925 forwas paid by the thirteen and thirty-nine week periods ended September 26, 2020, respectively.Company to Mr. Mintz’s estate.

TOFUTTI BRANDS, INC.

NOTES TO FINANCIAL STATEMENTS

(In thousands, except for share and per share data)

Schedule of Related Party Notes Payable

Note 9:8: 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 Revenues by Geographical RegionRevenue 

TOFUTTI BRANDS INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
(In thousands, except for share and per share data)

Approximately 92%94% of the Americas’ revenue in 20212022 and 20202021 is attributable to sales in the United States in both the thirteen and thirty-ninetwenty-six week periods. 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 

Note 10:9: Leases

The Company isCompany’s facilities are located in a one-story facility in Cranford, New Jersey. The 6,200square 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 $20 for the thirteen weeks ended OctoberJuly 2, 20212022 and $13 for the thirteen weeks ended September 26, 2020.July 3, 2021. Rent expense was $6040 for the thirty-ninetwenty-six weeks ended OctoberJuly 2, 20212022 and $51for the thirty-nine weeks ended September 26, 2020.July 3, 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 $115 96for the thirteen weeks ended OctoberJuly 2, 20212022 and $116137 for the thirteen weeks ended September 26, 2020 and $364or the thirty-nine weeks ended October 2,July 3, 2021 and $343 191for the thirty-ninetwenty-six weeks ended September 26, 2020.July 2, 2022 and $249

TOFUTTI BRANDS, INC.

NOTES TO FINANCIAL STATEMENTS

(In thousands, except for share and per share data)the twenty-six weeks ended July 3, 2021.

Under Topic 842, operating lease expense is generally recognized evenly over the term of the lease. The Company has operating leases primarily consistingstandard requires a lessee to record a right-of-use asset and a corresponding lease liability at the inception of one facility and office equipment with remainingthe lease. The current portion of lease terms of approximately two to four years. The Company does not have the option to terminate the leases early.

Leases with an initial term of twelve months or less are not recordedliabilities is included in accrued expenses on the condensed balance sheet. For lease agreements entered into or reassessed after the adoption of Topic 842, the Company has combined the lease and non-lease components in determining the lease liabilities and right-of-use, or ROU, assets.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. TheAt the time of adoption of Topic 842, the Company used the incremental borrowing rate on December 29, 2018 of 5.5%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 Leaselease Assets and Liabilities forFor Operating Leases 

Future lease payments included in the measurement of lease liabilities on the balance sheet as of OctoberJuly 2, 20212022 are as follows:

Schedule of Future Minimum Rental CommitmentsLease Payments

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 PoliciesEstimates

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 receivablereceivables 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 an 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 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. Additionally,However, our freight costs have increased substantially due to a driver shortage caused by COVID-19. 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 to our customers which will become effective during the fourth quarter of the current year.

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,Nor have 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 ourinvoices. Our cash position of approximately $3,009,000is $1,283,292 as of October 2, 2021 has improved sinceAugust 8, 2022 as compared to our fiscal year end January 1, 2022 balance of $1,698,000

Results of Operations

Thirteen Weeks Ended OctoberJuly 2, 20212022 Compared with Thirteen Weeks Ended September 26, 2020July 3, 2021

Net sales for the thirteen weeks ended OctoberJuly 2, 2021 were $3,356,000, an increase of $204,000,2022 decreased by $48,000, or 6%2%, to $2,979,000, from net sales of $3,152,000$3,027,000 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.July 3, 2021. Sales of our vegan cheese products increased by $161,000slightly 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$2,526,000 in the thirteen weeks ended OctoberJuly 2, 20212022 from $497,000$2,497,000 in the thirteen weeks ended July 3, 2021. Sales of our frozen dessert and frozen food products, which consist primarily of frozen dessert products, decreased to $453,000 in the thirteen weeks ended July 2, 2022 from $530,000 for the thirteen weeks ended September 26, 2020.July 3, 2021. We anticipate an increase in sales dollars over the balance of the current fiscal year as the price increases we implemented take effect.

Our gross profit decreased significantly to $818,000 in$525,000 for the thirteen weeks ended OctoberJuly 2, 20212022 from $1,033,000 in$758,000 for the thirteen weeks ended October 2,July 3, 2021. Our gross profit percentage was 24%18% for the thirteen weeks ending OctoberJuly 2, 20212022 compared to 33%25% for the thirteen weeks ending September 26, 2020. SuddenJuly 3, 2021. The decrease in both our gross profit and gross profit percentage were caused by the substantial increases in certain ingredients and freight expense. These substantial cost increases were due primarily to COVID-relatedthe 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 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.

spreadable cheese products. Our gross profit dollars and gross profit percentage waswere also negatively impacted by an increase in freight expense, which is a componentour sales promotion and allowance expenses to $403,000 in the second quarter of costthis year as compared to $336,000 in the second quarter of sales. prior fiscal year. We anticipate that our gross profit dollars and gross profit percentage will continue to be negatively affected for the balance of fiscal year 2022.

Freight out expense, a significant part of our cost of sales, increased by $39,000,$53,000, or 16%20%, to $277,000$324,000 for the thirteen weeks ended OctoberJuly 2, 20212022 compared with $238,000$271,000 for the thirteen weeks July 3, 2021. Freight out expense was 11% of sales for the thirteen weeks ended September 26, 2020. As a percentageJuly 2, 2022 compared to 9% of sales freight expense was 8% percent for both the thirteen weeks ended October 2, 2021July 3, 2021. The increase in freight out expenses was primarily due to the increases in shipping costs due to the large increase in the cost of fuel and the unavailability of trucks and drivers. We anticipate that our freight out expense will continue at the current higher rate for the balance of 2022.

Selling expenses increased slightly by $6,000, or 2%, to $309,000 for the thirteen weeks ended September 26, 2020. Our freightJuly 2, 2022 from $303,000 for the thirteen weeks ended July 3, 2021. The increase was due to an increase in meetings and conventions of $20,000, commissions expense of $20,000, and travel, entertainment and auto expense of $12,000 which were partially offset by a decrease in outside warehouse rental expense of $41,000. We anticipate that our selling expenses will remain unchanged for the remainder of 2022.

Marketing expenses increased by $45,000, or 68%, to $111,000 for the thirteen weeks ended July 2, 2022 from $66,000 for the thirteen weeks ended July 3, 2021. The increase was primarily due to increases in artwork and plates expense of $54,000, advertising expense of $3,000, marketing materials of $6,000  and promotion expense of $17,000. The increase in artwork and plate expense was negatively impacted by a significant increase in freight rates caused by a shortage of drivers due to COVID-19, increased fuel costs, anda complete redesign of all 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.Company’s packaging. We expect this increase in freight expense to continueanticipate that our marketing expenses for the balance of the year will be higher that the corresponding periods in fiscal year 2021.

Product development costs, which consist principally of salary expenses and laboratory costs, increased slightly by $6,000, or 17%, to $42,000 for the thirteen weeks ended July 2, 2022 from $36,000 for the thirteen weeks ended July 3, 2021. We anticipate our product development costs to continue at a slightly lower level than the corresponding 2021 periods

General and into 2022.administrative expenses increased by $30,000, or 9%, to $349,000 for the thirteen weeks ended July 2, 2022 from $319,000 for the thirteen weeks ended July 3, 2021, primarily due to increases in payroll expense of 47,000, and public relations expense of $15,000, which were partially offset by decreases in IT expense of $13,000 and travel, entertainment, and auto expense of $9,000. We anticipate our general and administrative expense for the remaining periods in 2022 will approximate the same levels as in the corresponding 2021 periods.

Income tax benefit was $78,000 for the thirteen weeks ended July 2, 2022 and $0 for the thirteen weeks ended July 3, 2021 resulting from the lower taxable income during the thirteen weeks ended July 2, 2022 compared to the thirteen weeks ended July 3, 2021.

Twenty Six Weeks Ended July 2, 2022 Compared with Twenty Six Weeks Ended July 3, 2021

Net sales for the twenty-six weeks ended July 2, 2022 increased by $265,000, or 4%, to $6,442,000, from net sales of $6,177,000 for the twenty-six weeks ended July 3, 2021. Sales of our vegan cheese products increased to $5,442,000 in the twenty-six weeks ended July 2, 2022 from $5,217,000 in the twenty-six weeks ended July 3, 2021. Sales of our frozen dessert and frozen food products, which consist primarily of frozen dessert products, increased to $1,000,000 in the twenty-six weeks ended July 2, 2022 from $960,000 for the twenty-six weeks ended July 3, 2021.

Our gross profit decreased to $1,382,000 in the twenty-six weeks ended July 2, 2022 from $1,759,000 in the twenty-six weeks ended July 3, 2021. Our gross profit percentage was 21% for the twenty-six weeks ending July 2, 2022 compared to 28% for the twenty-six weeks ending July 3, 2021. The decrease in both our gross profit and gross profit percentage were caused by the substantial increases in certain ingredients and freight expense. 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 product.

Freight out expense, a significant part of our cost of sales, increased by $145,000, or 29%, to $643,000 for the twenty-six weeks ended July 2, 2022 compared with $498,000 for the twenty-six weeks July 3, 2021. Freight out expense was 10% of sales for the twenty-six weeks ended July 2, 2022 compared to 8% of sales for the twenty-six weeks ended July 3, 2021. The increase in freight out expenses was due to the increase in sales, but primarily 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 $1,000$54,000, or 9%, to $282,000$573,000 for the thirteentwenty-six weeks ended OctoberJuly 2, 20212022 from $283,000$627,000 for the thirteentwenty-six weeks ended September 26, 2020. We anticipate that our selling expenses will remain at the same level for the remainderJuly 3, 2021. This decrease was primarily attributable to decreases in payroll expense of 2021.$24,000 and outside warehouse rental expense of $59,000, which were offset by increases in meetings and convention expense of $20,000 and travel, entertainment, and auto expense of $18,000.

Marketing expenses were $38,000increased by $132,000, or 98%, to $267,000 for both the thirteentwenty-six weeks ended OctoberJuly 2, 2021 and2022 from $135,000 for the thirteentwenty-six weeks ended September 26, 2020. We anticipate that our marketing expenses will remain at the same level for the remainderJuly 3, 2021. The increase was primarily due to increases in promotions expense of fiscal 2021.$38,000, artwork and plates expense of $13,000, and advertising expense of $3,000.

Research andProduct development costs, decreasedwhich consist principally of salary expenses and laboratory costs, increased by $26,000,$7,000, or 52%9%, to $24,000$82,000 for the thirteentwenty-six weeks ended OctoberJuly 2, 20212022 from $50,000$75,000 for the thirteentwenty-six weeks ended September 26, 2020,July 3, 2021, primarily due to decreasesthe increase 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$22,000 which was partially offset by a decrease in lab costs 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 remaindersupplies of fiscal 2021.$9,000.