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 16,November 15, 2022 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.

Unaudited Condensed Balance Sheets

(in thousands, except share and per share figures)

See accompanying notes to unaudited condensed financial statements.

TOFUTTI BRANDS, INC.

Unaudited Condensed Statements of Operations

(in thousands, except per share figures)

See accompanying notes to unaudited condensed financial statements.

TOFUTTI BRANDS, INC.

Unaudited Condensed Statements of Changes in Stockholders’ Equity

(in thousands)

See accompanying notes to unaudited condensed financial statements.

TOFUTTI BRANDS INC.

Unaudited Condensed Statements of Cash Flows

(in thousands)

See accompanying notes to unaudited condensed financial statements.

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

Note 1: Basis of Presentation

The accompanying unaudited condensed financial information, in the opinion of management, reflects all adjustments (which include only normally recurring adjustments) necessary to present fairly the Company’s financial position, operating results and cash flows for the periods presented. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. The results of operations for the thirteen-week and twenty-six-weekthirty-nine-week period ended July 2,October 1, 2022 are not necessarily indicative of the results to be expected for the full year or any other period.

The Company’s fiscal year is either a fifty-two or fifty-three-week period which ends on the Saturday closest to December 31^st.

Note 2: Recently Issued Accounting Standards

The Company considers the applicability and impact of all Accounting Standard Updates (“ASUs”). ASUs not discussed below were assessed and determined to be either not applicable or are expected to have minimal impact on the Company’s balance sheets or statements of operations.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326) Measurement of Credit Losses on Financial Instruments. The amendments in this Update require a new topic to be added (Topic 326) to the Accounting Standards Codification (“ASC”) and removes the thresholds that entities apply to measure credit losses on financial instruments measured at amortized cost, such as loans, trade receivables, reinsurance recoverables, and off-balance-sheet credit exposures, and held-to-maturity securities. Under current U.S. GAAP, entities generally recognize credit losses when it is probable that the loss has been incurred. The guidance under ASU 2016-13 will remove all current recognition thresholds and will require entities under the new current expected credit loss (“CECL”) model to recognize an allowance for credit losses for the difference between the amortized cost basis of a financial instrument and the amount of amortized cost that an entity expects to collect over the instrument’s contractual life. The new CECL model is based upon expected losses rather than incurred losses. Additionally, the credit loss recognition guidance for available-for-sale securities is amended and will require that credit losses on such debt securities should be recognized as an allowance for credit losses rather than a direct write-down of amortized cost balance. The ASU is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. We are currently evaluating the effect that this new guidance will have on our financial statements and related disclosures.

Note 3: Inventories

Inventories consist of the following:

Schedule of Inventories 

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

Note 4: Income Taxes

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The Company accounts for penalties or interest related to uncertain tax positions as part of its provision for income taxes.

During the thirteen and thirty-nine weeks ended October 1, 2022, the Company recognized an income tax benefit of $69 and $127, respectively, as a result of the losses recognized in each period that were not covered by the Company’s valuation allowance.

Note 5: Earnings (Loss) Per Share

Fully diluted earnings (loss) per common share have been computed by dividing earnings by the weighted average number of common shares outstanding, which would account for a potential 282,486 shares to be issued upon conversion of a convertible note as of July 3,October 2, 2021. The convertible note for 282,486 shares was included in the calculation of fully diluted earnings for the thirteen and twenty-sixthirty-nine weeks ended July 3,October 2, 2021. The note was repaid in full on December 22, 2021. There are noNo dilutive shares were issuable in either the thirteen or twenty-sixthirty-nine week periods ended July 2, 2022 .October 1, 2022.

The following table sets forth the computation of basic and diluted earnings per share:

Schedule of Earnings Per Share, Basic and Diluted 

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

Note 6: Share Based Compensation

On June 10, 2014, the shareholders of the Company approved the 2014 Equity Incentive Plan (the “2014 Plan”). The 2014 Plan provides for grants of various types of awards that are designed to attract and retain highly qualified personnel who will contribute to the success of the Company and to provide incentives to participants in the 2014 Plan that are linked directly to increases in shareholder value which will therefore inure to the benefit of all shareholders of the Company.

The 2014 Plan made 250,000 shares of common stock available for awards. The 2014 Plan also permits performance-based 2014 awards paid under it to be tax deductible under Section 162(m) of the Internal Revenue Code of 1986, as amended, as “performance-based compensation.” No stock options were issued in 2022 or 2021 and no options were outstanding as of July 2,October 1, 2022 and January 1, 2022.

Note 7: Notes Payable

Small Business Administration (SBA) Loan

On May 2, 2020, the Company received from the SBA a loan of $165 from the Paycheck Protection Program at an interest rate of 1%. Interest and payments were deferred until March 4, 2021 The current portion of the loan was $165 as of January 2, 2021 and the loan would have expiredwas scheduled to expire on May 2, 2022. On January 12, 2022, the Company was informed by the SBA that the entire amount of the loan had been forgiven free of taxation. The Company recorded forgiveness of debt income of $165 in the twenty-sixthirty-nine weeks ended July 2,October 1, 2022 as SBA loan forgiveness on the unaudited condensed statement of operations.

Related Party

On January 6, 2016, David Mintz, the Company’s former Chairman and Chief Executive Officer, provided the Company with a loan of $500. The loan was extended until December 31, 2021 and was, at the option of the holder, convertible into the Company’s common stock at a conversion price of $1.77per share. Interest expense incurred to the related party was $25 for both fiscal years ended January 1, 2022 and January 2, 2021. On December 22, 2021, the entire loan of $500 plus accrued interest of $25 was paid by the Company to Mr. Mintz’s estate.

Note 8: Revenue

Performance obligations relating to the delivery of food products are satisfied when the goods are shipped to the customer and net of all applicable discounts, as follows: Payment term discounts, off-invoice allowance, manufacturer chargeback, freight allowance, spoilage discounts, and product returns.

Revenues by geographical region are as follows:

Schedule of Revenue 

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

Approximately 94% of the Americas’ revenue in both the thirteen and thirty-nine week periods in 2022 and 2021 is attributable to sales in the United States in both the thirteen and twenty-six week periods.States. All of the Company’s assets are located in the United States.

Net sales by major product category:

Summary of Net Sales by Major Product Category 

Note 9: Leases

The Company’s facilities are located in a one-story facility in Cranford, New Jersey. The 6,200 square foot facility houses its administrative offices, a warehouse, walk-in freezer and refrigerator, and a product development laboratory and test kitchen. The Company’s original lease agreement expired on July 1, 1999, but it continues to occupy the premises on a monthly basis. Any changes by either the landlord or the Company remains subject to a six-month notification period. The Company currently has no plans to enter into a long-term lease agreement for the facility. Rent expense was $2021 for the thirteen weeks ended July 2,October 1, 2022 and July 3,October 2, 2021. Rent expense was $4061 for the twenty-sixthirty-nine weeks ended July 2,October 1, 2022 and July 3,October 2, 2021. The Company’s management believes that the Cranford facility will continue to satisfy its space requirements for the foreseeable future and that if necessary, such space can be replaced without a significant impact to the business. The Company rents warehouse storage space at various outside facilities. Outside warehouse expenses were $9672 for the thirteen weeks ended July 2,October 1, 2022 and $137115 for the thirteen weeks ended July 3,October 2, 2021 and $191263 for the twenty-sixthirty-nine weeks ended July 2,October 1, 2022 and $249364 for the twenty-sixthirty-nine weeks ended July 3,October 2, 2021.

Under Topic 842, operating lease expense is generally recognized evenly over the term of the lease. The standard requires a lessee to record a right-of-use asset and a corresponding lease liability at the inception of the lease. The current portion of lease liabilities is included in accrued expenses on the condensed balance sheets.

The Company’s lease agreements generally do not provide an implicit borrowing rate; therefore, an internal incremental borrowing rate is determined based on information available at lease commencement date for purposes of determining the present value of lease payments. At the time of adoption of Topic 842, the Company used the incremental borrowing rate of 5.5% for all leases that commenced prior to that date.

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

ROU lease assets and lease liabilities for our operating leases were recorded in the balance sheet as follows:

Schedule of ROU lease Assets and Liabilities For Operating Leases  

Future lease payments included in the measurement of lease liabilities on the balance sheet as of July 2,October 1, 2022 are as follows:

Schedule of Future Lease 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 Estimates

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

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

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

Accounts Receivable. The majority of our accounts receivables are due from distributors (domestic and international) and retailers. Credit is extended based on evaluation of a customers’ financial condition and, generally, collateral is not required. Accounts receivable are most often due within 30 to 90 days and are stated at amounts due from customers net of an allowance for doubtful accounts and reserve for sales promotions. Accounts outstanding longer than the contractual payment terms are considered past due. We determine whether an allowance is necessary by considering a number of factors, including the length of time trade accounts receivable are past due, our previous loss history, the customer’s current ability to pay its obligation, and the condition of the general economy and the industry as a whole. We write-off accounts receivable when they become uncollectible, and payments subsequently received on such receivables are credited to the bad debt expense account. We do not accrue interest on accounts receivable past due.

Inventory. Inventory is stated at lower of cost or net realizable value determined by first in first out (FIFO) method. Inventories in excess of future demand are written down and charged to the provision for inventories. At the point of which loss is recognized, a new, lower cost basis for that inventory is established and subsequent changes in facts and circumstances do not result in the restoration or increase in the newly established cost basis.

Leases. Under Topic 842, operating lease expense is generally recognized evenly over the term of the lease. We have operating leases primarily consisting of facilities with remaining lease terms of approximately one to three years. Leases with an initial term of twelve months or less are not recorded on the balance sheet. For lease agreements entered into or reassessed after the adoption of Topic 842, we have combined the lease and non-lease components in determining the lease liabilities and right of use assets.

Income Taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is recorded if there is uncertainty as to the realization of deferred tax assets. We will recognize a tax benefit in the financial statements for an uncertain tax position only if management’s assessment is that the position is “more likely than not” (i.e., a likelihood greater than 50 percent) to be allowed by the tax jurisdiction based solely on the technical merits of the position. The term “tax position” refers to a position in a previously filed tax return or a position expected to be taken in a future tax return that is reflected in measuring current or deferred income tax assets and liabilities for financial reporting purposes.

Recent Developments

An outbreak of an infectious respiratory illness caused by a novel coronavirus known as COVID-19 was first detected in China in December 2019 and 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 severity of the pandemic and the future uncertainty regarding the length of its effects could have negative consequences for our company. To date, the effects of the pandemic have negatively affected certain aspects of our operations. All of our co-packing facilities are currently operating normally, and the pandemic has not constrained any of our production requirements. The cost of certain key ingredients and packaging has increased substantially due to short-term supply issues related to COVID-19. Additionally, we are currently experiencing longer lead times in receiving certain ingredients and packaging. We anticipate that these longer lead times will persist for the balance of 2022. We continue to be able to schedule trucks for delivery and a large majority of our customers are still operating and ordering our products as before. However, our freight costs have increased substantially due to a driver shortage caused by COVID-19 and a significant increase in fuel costs. Fuel costs have continued to increase substantially due to record high petroleum costs caused by the current unsettled world political situation. In response to these cost increases and the potential for additional cost increases affecting various aspects of our operations, we initiated a series of sales price increases commencing in the fourth quarter of 2021 and continuing into the first quarter of 2022 to help offset these cost increases. As these costs have either continued to increase, or have remained at their high historic levels, we have been forced to implement further price increases to our customers which will become effective during the fourth quarter of the current year.

Our ability to handle customer and consumer communications, schedule production, and order ingredients necessary for our production has not been materially impacted. Nor have we experienced a significant change in the timeliness of payments of our invoices. Our cash position is $1,283,292$1,365,000 as of AugustNovember 8, 2022 as compared to our fiscal year end January 1, 2022 balance of $1,698,000

Results of Operations

Thirteen Weeks Ended July 2,October 1, 2022 Compared with Thirteen Weeks Ended July 3,October 2, 2021

Net sales for the thirteen weeks ended July 2,October 1, 2022 decreased by $48,000,$460,000, or 2%14%, to $2,979,000,$2,896,000, from net sales of $3,027,000$3,356,000 for the thirteen weeks ended July 3,October 2, 2021. Sales of our vegan cheese products increased slightlydecreased to $2,526,000$2,334,000 in the thirteen weeks ended July 2,October 1, 2022 from $2,497,000$2,816,000 in the thirteen weeks ended July 3,October 2, 2021, due to the timing of cheese promotions that occurred last year. Sales of our frozen dessert and frozen food products, which consist primarily of frozen dessert products, increased slightly to $562,000 in the thirteen weeks ended October 1, 2022 from $540,000 for the thirteen weeks ended October 2, 2021.

Our gross profit decreased significantly to $427,000 for the thirteen weeks ended October 1, 2022 from $818,000 for the thirteen weeks ended October 2, 2021, due partially to the reduction in sales. Our gross profit percentage was 15% for the thirteen weeks ending October 1, 2022 compared to 24% for the thirteen weeks ending October 2, 2021. The decrease in both our gross profit and gross profit percentage were primarily caused by the substantial increases in the costs for certain ingredients, especially soybean oil. These substantial cost increases were due primarily to the lingering supply chain issues caused by the Covid-19 pandemic and the record high cost of petroleum. The high cost of petroleum has also directly impacted the costs of certain ingredients and packaging such as the plastic packaging we use for our spreadable cheese products. While the costs of some of these key ingredients have recently started to decline, we anticipate that our gross margin and gross margin percentage will continue to be negatively impacted into fiscal year 2023.

Freight out expense, a significant part of our cost of sales, decreased by $59,000, or 20%, to $218,000 for the thirteen weeks ended October 1, 2022 compared with $277,000 for the thirteen weeks October 2, 2021. Freight out expense was 8% of sales for the thirteen weeks ended October 1, 2022 compared to 8% of sales for the thirteen weeks ended October 2, 2021. While actual freight expense declined for the current quarter, it was due to more customers picking up their orders due to the additional pickup allowances we offer. The availability of trucks is still limited and the actual cost of shipping is still at the same high cost from the first half of 2022.

Selling expenses decreased by $21,000, or 7%, to $261,000 for the thirteen weeks ended October 1, 2022 from $282,000 for the thirteen weeks ended October 2, 2021. The decrease was due to decreases in outside warehouse rental expense of $40,000 and commission expense of $13,000, which were partially offset by increases in meeting and convention expense of $22,000 and messenger expense of $5,000.

Marketing expenses increased by $65,000, or 171%, to $103,000 for the thirteen weeks ended October 1, 2022 from $38,000 for the thirteen weeks ended October 2, 2021. The increase was primarily due to increases in point of sale materials expense of $24,000 and advertising expenses of $12,000, and an increase in promotion expenses of $21,000. We anticipate that our marketing expenses for the balance of the year will be higher that the corresponding period in fiscal year 2021.

Product development costs, which consist principally of salary expenses and laboratory costs, increased slightly by $2,000, or 8%, to $26,000 for the thirteen weeks ended October 1, 2022 from $24,000 for the thirteen weeks ended October 2, 2021. We anticipate our product development costs for the balance of the year will continue at a similar level as those for the 2021 period.

General and administrative expenses decreased by $33,000, or 9%, to $298,000 for the thirteen weeks ended October 1, 2022 from $331,000 for the thirteen weeks ended October 2, 2021, primarily due to a decrease in professional fees and outside services expense of $33,000, a decrease in loss incurred on the sale of assets of $36,000, and a decrease on franchise tax expenses of $7,000, which were partially offset by increases in payroll expense of $24,000, and general insurance expense of $15,000. We anticipate our general and administrative expense for the remaining period in 2022 will approximate the same level as in the corresponding 2021 period.

Income tax benefit was $69,000 for the thirteen weeks ended October 1, 2022 and income tax expense was $16,000 for the thirteen weeks ended October 2, 2021. The income tax benefit resulted from the lower taxable income during the thirteen weeks ended October 1, 2022 compared to the thirteen weeks ended October 2, 2021.

Thirty-Nine Weeks Ended October 1, 2022 Compared with Thirty-Nine Weeks Ended October 2, 2021

Net sales for the thirty-nine weeks ended October 1, 2022 decreased by $195,000, or 2%, to $9,338,000, from net sales of $9,533,000 for the thirty-nine weeks ended October 2, 2021. Sales of our vegan cheese products decreased by $257,000 to $7,776,000 in the thirty-nine weeks ended October 1, 2022 from $8,033,000 in the thirty-nine weeks ended October 2, 2021. Sales of our frozen dessert and frozen food products, which consist primarily of frozen dessert products, decreasedincreased to $453,000$1,562,000 in the thirteenthirty-nine weeks ended July 2,October 1, 2022 from $530,000$1,500,000 for the thirteenthirty-nine weeks ended July 3,October 2, 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 $525,000 for$1,812,000 in the thirteenthirty-nine weeks ended July 2,October 1, 2022 from $758,000 for$2,577,000 in the thirteenthirty-nine weeks ended July 3,October 2, 2021. Our gross profit percentage was 18%19% for the thirteenthirty-nine weeks ending July 2,October 1, 2022 compared to 25%27% for the thirteenthirty-nine weeks ending July 3,October 2, 2021. The decrease in both our gross profit and gross profit percentage were caused by the substantial increases in certain ingredients and freight expense.expenses. These substantial cost increases were due primarily to the lingering supply chain issues caused by the Covid-19 pandemic and the record high cost of petroleum. Besides causing substantial increases in our freight expenses, the high cost of petroleum has also directly impacted the costs of certain ingredients and packaging such as the plastic packaging we use for our spreadable cheese products. Our gross profit dollars and gross profit percentage were also negatively impacted by an increase in our sales promotion and allowance expenses to $403,000 in the second quarter of this year as compared to $336,000 in the second quarter of 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 $53,000,$86,000, or 20%11%, to $324,000$861,000 for the thirteenthirty-nine weeks ended July 2,October 1, 2022 compared with $271,000$775,000 for the thirteenthirty-nine weeks July 3,October 2, 2021. Freight out expense was 11% of sales for the thirteen weeks ended July 2, 2022 compared to 9% of sales for the thirteenthirty-nine weeks ended July 3,October 1, 2022 compared to 8% of sales for the thirty-nine weeks ended October 2, 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 July 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 due to a complete redesign of all the Company’s packaging. We anticipate 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 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 $54,000,$75,000, or 9%8%, to $573,000$834,000 for the twenty-sixthirty-nine weeks ended July 2,October 1, 2022 from $627,000$909,000 for the twenty-sixthirty-nine weeks ended July 3,October 2, 2021. This decrease was primarily attributable to decreases in payroll expense of $24,000 and$22,000, outside warehouse rental expense of $59,000,$98,000, and commission expense of $15,000, which were offset by increases in meetings and convention expenseexpenses of $20,000$42,000 and travel, entertainment, and auto expenseexpenses of $18,000.$20,000.

Marketing expenses increased by $132,000,$197,000, or 98%114%, to $267,000$370,000 for the twenty-sixthirty-nine weeks ended July 2,October 1, 2022 from $135,000$173,000 for the twenty-sixthirty-nine weeks ended July 3,October 2, 2021. The increase was primarily due to increases in promotions expense of $38,000,$59,000, artwork and platesplate expenses of $73,000, advertising expenses of $32,000, and point of sales material expense of $13,000,$30,000. In 2022, we completed the rebranding of our product line and advertising expense of $3,000.introduced new packaging for our products.

Product development costs which consist principally of salary expenses and laboratory costs, increased by $7,000,$9,000, or 9%, to $82,000$108,000 for the twenty-sixthirty-nine weeks ended July 2,October 1, 2022 from $75,000$99,000 for the twenty-sixthirty-nine weeks ended July 3,October 2, 2021, primarily due to the increase in professional fees and outside services of $22,000$28,000 which was partially offset by a decrease in lab costs and supplies of $9,000.

General and administrative expenses decreased by $80,000,$110,000, or 10%, to $686,000$987,000 for the twenty-sixthirty-nine weeks ended July 2,October 1, 2022 from $766,000$1,097,000 for the twenty-sixthirty-nine weeks ended July 3,October 2, 2021, primarily due to decreases in payroll expense of $56,000,$32,000, professional fees and outside services expense of $15,000,$48,000, loss on the sale of asset of $36,000, equipment rental expense of $19,000, and travel, auto and entertainment and auto expenseexpenses of $20,000$14,000, which were partially offset by an increase in public relations expense of $45,000.$50,000 and an increase in general insurance expense of $9,000. The decrease in payroll expense was due to no salary being paid to Mr. Mintz this period compared to the same period in the prior year.

Income tax benefit was $58,000$127,000 for the twenty-sixthirty-nine weeks ended July 2,October 1, 2022 and income tax expense was $36,000$52,000 for the twenty-sixthirty-nine weeks ended July 3,October 2, 2021 resulting from the lower taxable income during the twenty-sixthirty-nine weeks ended July 2,October 1, 2022 compared to the twenty-sixthirty-nine weeks ended July 3,October 2, 2021.

Liquidity and Capital Resources

As of July 2,October 1, 2022, we had approximately $1,176,000$965,000 in cash and our working capital was approximately $4,259,000,$3,994,000, compared with approximately $1,698,000 in cash and working capital of $4,326,000 at January 1, 2022. The decrease in cash is primarily due to the use of funds to purchase ingredients during the period, due to management’s decision to purchase certain key ingredients in advance of production needs to ensure an adequate supply and to prevent future production disruptions.

In order to provide our company with additional working capital, on January 6, 2016, David Mintz, our former Chairman and Chief Executive Officer, provided our company with a convertible loan of $500,000. On December 22, 2021, the loan balance of $500,000 plus accrued interest of $25,000 was paid by the Company to Mr. Mintz’s estate.

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