TOFUTTI BRANDS INC

NOTE 1: DESCRIPTION OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of Business – Tofutti is engaged in the development, production and marketing of plant-based, dairy free cheese and frozen desserts.

Basis of Presentation – The accompanying financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) and in conformity with accounting principles generally accepted in the United States of America (“GAAP”). Any reference in these notes to applicable guidance is meant to refer to the authoritative United States GAAP as found in the Accounting Standards Codification (“ASC”) and Accounting Standards Updates (“ASU”) of the Financial Accounting Standards Board (“FASB”).

Fiscal Year - The Company operates on a fiscal year ending on the Saturday closest to December 31st. Fiscal years for the financial statements included herein are the fifty-two week fiscal periods ended December 28, 2024 and December 30, 2023, fiscal 2024 and fiscal 2023, respectively.

Estimates and Uncertainties - The preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and 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. Significant estimates include allowance for doubtful accounts and sales incentives and allowances. Actual results could differ from those estimates.

**Accounts Receivable -**The majority of the Company’s 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 promotion. Accounts outstanding longer than the contractual payment terms are considered past due. The Company determines its allowance by considering a number of factors, including the length of time trade accounts receivable are past due, the Company’s previous loss history, the customer’s current ability to pay its obligation to the Company, and the condition of the general economy and the industry as a whole. The Company writes-off accounts receivable when they become uncollectible, and payments subsequently received on such receivables are credited to the bad debt expense. The Company does not accrue interest on accounts receivable past due. The allowance for current expected credit losses was approximately $389 and $525 as of December 28, 2024 and December 30, 2023, respectively.

Inventories- 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 or approaching expiration are written down and charged to the provision for inventories.

The Company purchased approximately 41% and 57% of its finished products from one supplier and 13% and 9% of its finished products from another supplier during the years ended December 28, 2024 and December 30, 2023, respectively.

**Equipment, net –**Additions are recorded at cost. Depreciation is provided by charges to income using the straight-line method over the estimated useful life of the equipment, which is ten years. Ordinary maintenance and repair costs are expensed in the year incurred.

Revenue Recognition – The Company accounts for revenue recognition in accordance with accounting guidance codified as FASB ASC 606 “Revenue from Contracts with Customers” (“ASC 606”), as amended regarding revenue from contracts with customers. Under the standard an entity is required to recognize revenue to depict the transfer of promised goods to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods.

Under ASC 606, revenue is recognized as the customer obtains control of the goods and services promised in the contract (i.e., performance obligations). In evaluating our contracts with our customers under ASC 606, we have determined that there is no future performance obligation once delivery has occurred.

The Company sells plant-based, dairy free cheeses and frozen desserts. The Company recognizes revenue when control over the products transfers to its customers, deemed to be the performance obligation, which generally occurs upon shipment of the products. The Company accounts 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. The Company bases 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. The Company generally does not have any unbilled receivables at the end of a period.

Concentration of Credit/Sales Risk - Financial instruments that potentially subject the Company to concentration of credit risk consist primarily of cash and unsecured trade receivables. During the year, the Company’s cash balance at the financial institution it utilizes exceeded the FDIC limit of $250.

The Company performs ongoing evaluations of its customers’ financial condition and does not require collateral. Management believes that credit risk beyond the established allowances at December 28, 2024 is limited.

During the fiscal years ended December 28, 2024 and December 30, 2023, the Company derived approximately 86% and 88% of its net sales domestically, respectively. The remaining sales in both periods were exports to foreign countries. The accounts receivable balance of two customers represented approximately 25% of total accounts receivable at December 28, 2024 and the accounts receivable balance of two customers represented approximately 21% of total accounts receivable at December 30, 2023. In addition, a significant portion of the Company’s sales are to several key distributors, which are large distribution companies with numerous divisions and subsidiaries who act independently. Such distributors as a group accounted for 33% and 37% of the Company’s net sales for the fiscal years ended December 28, 2024 and December 30, 2023, respectively.

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. The Company 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.

Loss Per Share- Basic loss per common share applicable to common stockholders is computed by dividing loss applicable to common stockholders by the weighted-average number of common shares outstanding.

The following are securities excluded from weighted-average shares used to calculate diluted earnings (loss) per common share, as the result of including them to calculate diluted loss per share is anti-dilutive:

Fair Value of Financial Instruments - The fair value of financial instruments, which primarily consist of cash, accounts receivable, accounts payable and accrued expenses are stated at their carrying values. The carrying amounts approximate fair value because of the short-term nature of those instruments.

Freight Costs- Freight costs to ship inventory to customers and to outside warehouses amounted to $682 and $773 during the fiscal years ended December 28, 2024 and December 30, 2023, respectively. Such costs are included in costs of sales on the statements of income.

Advertising Costs - The Company expenses advertising costs as they are incurred. Advertising expenses amounted to $215 and $249 during the fiscal years December 28, 2024 and December 30, 2023, respectively, and are included in marketing expenses on the statements of income.

Product Development Costs - Costs of new product development and product redesign are charged to expense as incurred. Product development costs amounted to $132 and $166 during the fiscal years ended December 28, 2024 and December 30, 2023, respectively.

Stock-Based Compensation -We account for our stock-based compensation under ASC 718 “Compensation - Stock Compensation” using the fair value-based method. Under this method, compensation cost is measured at the grant date based on the value of the award and is recognized over the shorter of the service period or the vesting period of the stock-based compensation. This guidance establishes standards for the accounting for transactions in which an entity exchanges it equity instruments for goods or services. It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity’s equity instruments or that may be settled by the issuance of those equity instruments. The Company estimates the fair value of each stock option at the grant date by using the Black-Scholes option pricing model. Determining the fair value of stock-based compensation at the grant date under this model requires judgment, including estimating volatility, employee stock option exercise behaviors and forfeiture rates. The assumptions used in calculating the fair value of stock-based compensation represent the Company’s best estimates, but these estimates involve inherent uncertainties and the application of management judgment.

Segment Information - Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision maker, or decision-making group, in making decisions regarding resource allocation and assessing performance. To date, the Company has viewed its operations and manages its business as principally one operating segment, which is the development, production and marketing of soy and other vegetable protein- based, dairy free cheese and frozen food products. See Note 10 for additional details.

Recent Accounting Pronouncements and adoption – 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 November 2023, the FASB issued ASU 2023-07,Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures. The ASU is intended to improve reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses. The standard is effective for annual reporting periods beginning after December 15, 2023, and interim periods beginning after December 15, 2024. The Company’s adoption of this standard effective for the fiscal year ending December 28, 2024 resulted in increased disclosures in the notes to its financial statements (See Note 10).

In November 2024, the FASB issued ASU 2024-03, Income Statement - Reporting Comprehensive Income - Expense Disaggregation Disclosures (Subtopic 220-40): Disaggregation of Income Statement Expenses (“ASU 2024-03”), and in January 2025, the FASB issued ASU 2025-01, Income Statement - Reporting Comprehensive Income - Expense Disaggregation Disclosures (Subtopic 220-40): Clarifying the Effective Date (“ASU 2025-01”). ASU 2024-03 requires additional disclosure of the nature of expenses included in the income statement as well as disclosures about specific types of expenses included in the expense captions presented in the income statement. ASU 2024-03, as clarified by ASU 2025-01, is effective for fiscal years beginning after December 15, 2026, and interim periods within fiscal years beginning after December 15, 2027, with early adoption permitted. The Company is currently evaluating the impact of these standards will have on it financial statements.

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

NOTE 2: INVENTORIES

Inventories consist of the following:

NOTE 3: STOCK-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. Such grants can be, but are not limited to, options, stock appreciation rights, restricted stock, performance grants, stock bonuses, and any other type of award that is consistent with the purposes of the 2014 Plan. Employees and officers of the Company are eligible to receive incentive stock options while corporate directors are only eligible to receive non-qualified options.

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 2024 and 2023, and 250,000 non-qualified options were outstanding as of December 28, 2024 and December 30, 2023, respectively. The exercise price of all options granted in 2022 is $0.95 per share, the market price at the close of business on the date of the grant. 83,333 of the options vested at the respective grant date, 83,333 vested in December 2023, and 83,334 vested in December 2024. All outstanding options will expire on December 21, 2027.

The following is a summary of stock option activity from December 31, 2022 to December 28, 2024:

The following table summarizes information about stock options outstanding at December 28, 2024:

The fair value of each option award is estimated on the date of grant using the Black-Scholes option-pricing formula. Expected volatilities and risk-free interest rates are based upon the expected life of the grant. The interest rates used are the U.S. Treasury yield curve in effect at the time of the grant.

During fiscal 2022, 250,000 options were granted, with 83,333 of the options vesting at the respective grant date, 83,333 vested in December 2023, and 83,334 vested in December 2024. At the date of grant, expected volatility was 82.65%, a risk-free rate of 3.79%, 0% expected dividends, and an expected term of five years.

As of December 28, 2024, and December 30, 2023, the intrinsic value of the options outstanding and exercisable options was $54 and $56 respectively, and there was $0 of total unrecognized compensation cost as of December 28, 2024. Total stock-based compensation for the fiscal years ended December 28, 2024 and December 30, 2023, was $54 and $60, respectively, which is recorded in general and administrative expenses on the statement of operations.

NOTE 4: 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: Early payment term discounts, off-invoice allowance, manufacturer chargeback, freight allowance, spoilage discounts, and product returns. In 2024, the Company only provided off-invoice and early payment discounts to its customers, and the amount was netted against revenue.

Revenues by geographical region are as follows:

Approximately 92% in both the fiscal years 2024 and 2023 of the Americas revenue is attributable to the United States. All of the Company’s assets are located in the United States.

Net sales by major product category:

NOTE 5: LEASES

Through September 1, 2024, the Company’s facilities were located in a one-story 6,200 square foot facility in Cranford, New Jersey. The facility housed the Company’s 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 continued to occupy the premises on a monthly basis. In September, the Company left the facility and derecognized the associated right of use asset and liability. In 2024, we signed a five-year lease for a one-story facility in Edison, New Jersey. The lease commenced on July 1, 2024, with an option to extend for an additional five years at the end of the lease. Annual rent for the lease escalates by 3% year over year until the end of the lease term. We completed the move into the new facility in September 2024. The 5,100 square foot facility houses our administrative offices, a warehouse, freezers, and refrigerators. Rent expense was $118 in fiscal 2024 and $93 in fiscal 2023. The Company’s management believes that the Edison facility will continue to satisfy its space requirements for the immediate future and 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 amounted to $359 and $339 for the fiscal years ended December 28, 2024 and December 30, 2023, respectively. The Company rents a copier and mail machine under a finance lease. In 2022, the Company entered into a copier and mail machine lease, which still exists as of December 28, 2024. Payments for the copier and mail machine amounted to $17 and $10 for the fiscal years ended December 28, 2024 and December 30, 2023, respectively.

Under Topic 842, operating lease expense is generally recognized evenly over the term of the lease. The Company has operating leases primarily consisting of facilities with remaining lease terms of approximately two to four years. The Company does not have the option to terminate the leases early. 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 balance sheets.

Under Topic 842, finance lease cost includes amortization, which is recognized on a straight-line basis over the expected life of the leased asset, and interest expense, which is recognized following an effective interest rate method. The Company has a finance lease consisting of a copier lease with a term of four years. The standard requires a lessee to record a right-of-use asset and a corresponding lease liability at the inception of the lease.

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, the Company has combined the lease and non-lease components in determining the lease liabilities and right-of-use assets.

The Company’s lease agreement does 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. The Company used the incremental borrowing rates on of between 5.5% and 6.5% for all leases.

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

ROU lease asset and lease liability for our finance lease were recorded in the balance sheet as follows:

Future lease payments included in the measurement of lease liabilities on the balance sheet as of December 28, 2024, for the following three fiscal years and thereafter are as follows:

NOTE 6: INCOME TAXES

The components of income tax expense for the fiscal years ended December 28, 2024 and December 30, 2023 are as follows:

A reconciliation between the expected federal tax expense at the statutory tax rate of 21% and the Company’s actual tax expense for the fiscal years ended December 28, 2024 and December 30, 2023, respectively, follows:

Deferred tax assets for the fiscal years ended December 28, 2024 and December 30, 2023 consist of the following components:

At December 28, 2024, the Company had $1,308 of federal net operating loss carryforwards and $1,308 of state operating loss carryforwards.

The Company will recognize a tax provision 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 sustained 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.

The following table indicates the changes to the Company’s uncertain tax positions for the fiscal years ended December 28, 2024 and December 30, 2023:

The Company accounts for penalties or interest related to uncertain tax positions as part of its provision for income taxes. The amount of uncertain tax positions that would affect the effective tax rate if they were recognized is $211. The liability at December 28, 2024 of uncertain tax positions is included in accrued expenses. The Company is no longer subject to federal and state examinations for fiscal years before 2022.

NOTE 7: COMMITMENTS AND CONTINGENCIES

The Company sells its products throughout the United States and in approximately twelve foreign countries and may be impacted by any future public health crises beyond its control. This could disrupt its operations and negatively impact sales of its products. The Company’s customers, suppliers and co-packers may experience similar disruption.

NOTE 8: ACCRUED EXPENSES

Accrued expense categories as of December 28, 2024 and December 30, 2023:

NOTE 9: RELATED PARTY TRANSACTIONS

During fiscal 2024 and 2023, we paid The CFO Squad $24,000 and $37,000, respectively, for financial services. Joseph Himy is the Managing Director of The CFO Squad and a member of our Board of Directors.

NOTE 10: SEGMENT INFORMATION

The Company views its operations and manages its business in one reportable segment, which is the development, production and marketing of soy and other vegetable protein- based, dairy free cheese and frozen food products.

Steven Kass, the Company’s Chief Executive Officer and Chief Financial Officer is the Chief Operating Decision Maker (“CODM”). The CODM evaluates performance and makes operating decisions about allocating resources based on net loss and cash balances presented in the accompanying statement of operations and balance sheet, respectively.

The measure of segment assets is reported on the balance sheets as total assets. All material long-lived assets are located in the United States.