Source: https://sec.report/Document/0001493152-17-003239
Timestamp: 2019-06-19 13:00:38
Document Index: 242419782

Matched Legal Cases: ['arty 500', 'arty 25', 'arty 500', '§ 1350', '§ 906', '§ 1350', '§ 906']

Filed: 2017-03-31 16:44:36
Dated: 2017-03-31
Period of Report: 2016-12-31
ENT> 10-K 1 form10k.htm
The aggregate market value of the voting stock held by non-affiliates of the Registrant as of the most recently completed second fiscal quarter: $5,221,382.
As of March 28, 2017, the issuer had 5,153,706 shares of common stock, par value $0.01, outstanding.
Except for the historical information contained in this annual report, the statements contained in this annual report are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, or the Exchange Act, as amended, and the Private Securities Litigation Reform Act of 1995, as amended, with respect to our business, financial condition and results of operations. Such forward-looking statements reflect our current view with respect to future events and financial results. We urge you to consider that statements which use the terms “anticipate,” “believe,” “do not believe,” “expect,” “plan,” “intend,” “estimate,” “anticipate” and similar expressions are intended to identify forward-looking statements. We remind readers that forward-looking statements are merely predictions and therefore inherently subject to uncertainties and other factors and involve known and unknown risks that could cause the actual results, performance, levels of activity, or our achievements, or industry results, to be materially different from any future results, performance, levels of activity, or our achievements expressed or implied by such forward-looking statements. Such forward-looking statements are also included in Item 1. “Business” and Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. We undertake no obligation to update or revise any forward-looking statements to reflect new information, future events or circumstances, or otherwise after the date hereof. We have attempted to identify significant uncertainties and other factors affecting forward-looking statements in the Risk Factors section that appears in Item 1A. “Risk Factors.”
We operate on a fiscal year ending on the Saturday closest to December 31. Fiscal years for the financial statements included herein are the fifty-two week period ended December 31, 2016 (fiscal 2016) and the fifty-three week period ended January 2, 2016 (fiscal 2015).
We are engaged in the development, production and marketing of TOFUTTI® brand non-dairy frozen desserts and other food products. TOFUTTI products are soy-based, vegan, non-dairy products which contain no butterfat, cholesterol or lactose. Our products are 100% milk free yet offer the same texture and full-bodied taste as their dairy counterparts. Our products are also free of cholesterol and derive their fat from soy, corn, and palm, all naturally lower in saturated fat than dairy products. With the exception of Mintz’s Blintzes, all of our products are completely vegan and our soy-cheese products are gluten free as well. In addition, all of our products are certified kosher-parve and all of our soy-cheese products are also certified halal.
We focus our marketing efforts toward those consumers who find our products essential to their everyday diets because of health, lifestyle or religious reasons. In order to broaden the use of our soy-cheese products, we incorporate them into our branded food products such as blintzes, pizza, and other frozen entrée products. As part of this strategy, we seek to achieve brand awareness through product innovation, eye-catching packaging, trade advertising, and a strong word-of-mouth marketing program. We believe that our ability to offer a wide range of non-dairy, vegan, soy-based, kosher-parve products will continue to provide us with a competitive advantage.
On September 30, 2016, we announced that we had engaged a financial advisor and are pursuing strategic alternatives to enhance shareholder value, including a possible sale or other form of business combination. There can be no assurance that any transaction will be consummated.
We offer a broad product line of soy-based, vegan, non-dairy products. Our non-dairy products include frozen desserts, soy-based cheeses and spreads, and other frozen food products.
● Premium TOFUTTI® non-dairy frozen dessert, available in pre-packed pints, three-gallon cans, and soft serve mix, is sold nationally in supermarkets, health food stores, retail shops, and restaurants. Premium TOFUTTI was the first non-dairy frozen dessert to be marketed to the general public through supermarkets. We currently offer six flavors of premium, hard frozen TOFUTTI in pints, three flavors in three gallon bulk cans and one soft-serve flavor.
● TOFUTTI CUTIES®, our best-selling frozen dessert product, are bite size frozen sandwiches combining a choice of one of four different fillings between two chocolate wafers. Half the size of traditional ice cream sandwiches, TOFUTTI CUTIES offer consumers a portion controlled treat. Unlike ice cream sandwiches, CUTIES are totally dairy free, without butterfat or cholesterol, yet with the same great taste that makes ice cream sandwiches one of the bestselling novelties in the freezer case. Like all our frozen dessert products, they are completely trans-fat free, including the wafers.
● YOURS TRULY cones have a generous scoop of creamy vanilla TOFUTTI set in a chocolate-coated crispy cone, then covered in deep, rich chocolate and topped with a crispy chocolate cookie crunch.
● TOTALLY FUDGE POPS® and CHOCOLATE FUDGE TREATS are stick novelties that offer the consumer the same taste as real fudge or coffee bars. The TOTALLY FUDGE POPS, made with organic sugar and with no gluten added, have 70 calories and 1 gram of fat per bar, while fat free, no sugar added CHOCOLATE FUDGE TREATS have only 30 calories per bar.
● HOORAY HOORAY is a sugar free stick novelty made with stevia, a natural sugar replacement ideal for those individuals who want to avoid sugar without using an artificial sweetener. Each bar has a creamy center of vanilla Tofutti, surrounded by a sugar-free chocolate coating containing crisped rice.
● MARRY ME BARSTM are stick novelties that feature creamy vanilla TOFUTTI surrounded by a dark chocolate coating. Made with organic sugar and with no gluten added, MARRY ME BARS satisfy important diet requirements of certain consumers with that great TOFUTTI taste.
● BETTER THAN CREAM CHEESE® is similar in taste and texture to traditional cream cheese, but is milk-free, butterfat-free, gluten-free and contains no cholesterol. It is as versatile as real cream cheese, whether spread on a bagel, used as a dip for snack items, such as crackers or chips, or used in any favorite recipe. BETTER THAN CREAM CHEESE comes in three flavors, plain, Herb & Chives, and Garlic & Herb and is available in 8 oz. retail packages and in 5 lb. containers and 30 lb. bulk boxes for food service customers.
● TOFUTTI WHIPPED BETTER THAN CREAM CHEESE is the whipped version of our original BETTER THAN CREAM CHEESE available in a 16 oz. container. It is available in many supermarkets and health food stores.
● SOUR SUPREME® is similar in taste and texture to traditional sour cream, but is milk-free, butterfat-free, gluten-free and contains no cholesterol. SOUR SUPREME has the versatility of sour cream with the added benefit of being dairy free. The 12 oz. retail packages are available in plain and guacamole. The plain version is also available in 5 lb. containers for food service customers. Like BETTER THAN CREAM CHEESE, SOUR SUPREME is available nationally in many health food stores and select supermarkets.
● TOFUTTI SOY-CHEESE SLICESTM offer consumers a delicious non-dairy, gluten-free, vegan alternative to regular cheese slices and contain no trans fatty acids. Available as individually wrapped slices in 8 oz. packages, TOFUTTI SOY-CHEESE SLICES are sold in most health food stores and select supermarkets and come in two flavors: Mozzarella and American. The Mozzarella version is also available in 40 lb. blocks for food service customers.
● BETTER THAN RICOTTA CHEESE®, our dairy free ricotta cheese alternative, offers consumers a dairy-free and gluten-free alternative that tastes and works just like real ricotta cheese in all their favorite recipes. Available in 16 oz. retail containers, BETTER THAN RICOTTA is available nationally in supermarkets and health food stores.
● TOFUTTI PIZZA PIZZAZ combines a delicious pan crust, zesty sauce and TOFUTTI totally dairy free mozzarella cheese into a completely authentic, yet healthy pizza. TOFUTTI PIZZA PIZZAZ is sold nine square slices to a package and is available in freezer cases in select supermarkets and health food stores.
● TOFUTTI BLINTZES are frozen crepes filled with TOFUTTI BETTER THAN CREAM CHEESE that are dairy and cholesterol free, yet taste just like real cheese blintzes. Our BLINTZES are available in freezer cases in select supermarkets and health food stores and can be served hot, warm, or slightly chilled as a main meal or a snack.
Planned 2017 Product Introductions
We plan to introduce a new line of vegan dips and shredded cheddar and mozzarella soy-cheeses in the third quarter of 2017.
TOFUTTI products are sold and distributed across the United States and internationally, and can be found in gourmet specialty shops, kosher supermarkets, natural/health food stores, and national and regional supermarket chains. All of our products are sold by independent unaffiliated food brokers to distributors and sometimes on a direct basis to retail chain accounts or to warehouse accounts that directly service chain accounts. Such direct accounts include Walmart, Kroger, Roundy’s Supermarkets, King Soopers, Fred Meyer, Restaurant Depot, DeMoulas/Market Basket, Wakefern Food Corp., Associated Wholesale Grocers (AWG) and Ahold USA. Food brokers act as our agents within designated territories or for specific accounts and receive commissions, which average 5% of net collected sales. Certain key domestic accounts and all international accounts are handled directly by us. Our products are also sold in approximately thirty other countries.
We currently sell our dairy-free frozen dessert products, frozen entrees and soy-cheese products in most major markets in the United States, including Atlanta, Baltimore, Boston, Charlotte, Chicago, Cincinnati, Cleveland, Dallas, Denver, Detroit, Houston, Kansas City, Los Angeles, Miami, Milwaukee, Minneapolis, Nashville, New York, Orlando, Philadelphia, Phoenix, Portland, Richmond, Salt Lake City, San Diego, San Francisco, Seattle, St. Louis, Tampa and Washington, D.C.
In addition to ice cream and cheese distributors, our products are handled by most major national and regional natural and/or gourmet specialty distributors in the country. We distribute our products through forty-one (41) distributors in the national health food market.
Our sales to health food accounts in fiscal 2016 increased to $7,132,000, or 49% of total sales, from approximately $6,081,000, or 44% of total sales, in fiscal 2015. Our sales to the kosher market increased to $1,542,000, or 11% of sales, in fiscal 2016, from sales of approximately $1,436,000, or 10% of sales, in fiscal 2015.
Sales % of total Sales Sales % of total Sales
Metropolitan New York $ 2,308 16 % $ 2,172 16 %
California 1,972 14 % 1,712 12 %
Midwest 1,878 13 % 2,182 16 %
New England 1,330 9 % 1,176 9 %
Northwest 948 7 % 867 6 %
Florida 895 6 % 764 6 %
Upstate New York 716 5 % 687 5 %
Southwest 474 3 % 456 3 %
Mid-Atlantic 446 3 % 515 4 %
Southeast 320 2 % 276 2 %
Rocky Mountains 227 2 % 210 2 %
During fiscal 2016, we shipped our products to distributors in Australia, Brazil, Canada, Egypt, England, Ireland, Israel, Malaysia, Mexico, Panama, South Africa, and Trinidad. Our distributor in England is our master distributor for all of Europe and part of the Middle East, excluding Israel, and sells our products to approximately twenty other countries. Sales to foreign distributors decreased to $2,198,000, or 15% of sales, in fiscal 2016, from to $2,319,000, or 17% of sales, in fiscal 2015. We conduct all of our foreign business in U.S. dollars. Accordingly, our future export sales could be adversely affected by an increase in the value of the U.S. dollar against local currencies, which could increase the local currency price of our products.
TOFUTTI frozen desserts compete with all forms of ice cream products, yogurt-based desserts and other plant-based frozen desserts. We believe that we are a leader in the non-dairy frozen dessert product market and offer the most complete line of non-dairy frozen dessert products. Other plant-based frozen dessert products are presently being sold throughout the United States by established manufacturers and distributors of ice cream and other frozen dessert products. The ice cream and frozen dessert industry is highly competitive and most companies with whom we compete are substantially larger and have significantly greater resources than us. All of our products face substantial competition from non-dairy and dairy products marketed by companies with significantly greater resources than we have. Similar to our frozen desserts, all our vegan cheese products face stiff competition within their category from both dairy cheese products and plant-based cheese products.
In most product categories, we compete not only with widely advertised branded products, but also with generic and private label products that are generally sold at lower prices. Competition in our product categories is based on product innovation, product quality, price, brand recognition and loyalty, effectiveness of marketing, promotional activity, and the ability to identify and satisfy consumer preferences. Our market share and ability to grow our revenue could also be adversely impacted if we are not successful in introducing innovative products in response to changing consumer demands or by new product introductions of our competitors. If we are unable to build and sustain brand equity by offering recognizably superior product quality, we may be unable to maintain premium pricing over competitive products. We believe that we are able to compete effectively due to our ability to offer an array of non-dairy frozen dessert, soy-cheese and other food products that contain no butterfat, cholesterol or lactose and are 100% milk-free, yet offer the same texture and full-bodied taste as their dairy counterparts.
All of our current products were developed by us in our own laboratory. David Mintz, our Chief Executive Officer, devotes a substantial amount of his time and effort to new product development and product reformulation. In fiscal 2016 and 2015, our product development expenses were approximately $426,000 and $523,000, respectively. These amounts do not include any portion of Mr. Mintz’s salary. All product development costs are expensed as incurred and are recorded as operating expenses in our financial statements.
During the years ended December 31, 2016 and January 2, 2016, we purchased approximately 33% and 29% of our finished goods, respectively, from Franklin Foods, our BETTER THAN CREAM CHEESE, SOUR SUPREME, and BETTER THAN RICOTTA co-packer and 22% and 24%, respectively, of our finished goods from Ice Cream Specialties, our frozen dessert novelty co-packer.
KOF-K Kosher Supervision, or KOF-K, of Teaneck, New Jersey provides us with our kosher certification service. Before KOF-K will permit its certification, evidenced by its symbol, to be placed on a product, KOF-K must approve both the ingredients contained in the product and the facility processing the product. Approval of the manufacturing facilities we use include periodic inspections, and in most cases, on-site supervision of actual production. We pay a yearly renewal fee for certification and ongoing fees throughout the year for supervisory services for each production run. We believe that our ability to successfully market and distribute our products is dependent upon our continued compliance with the requirements of rabbinical certification. All TOFUTTI products meet the requirements for certification as kosher-parve.
The Food, Drug and Cosmetic Act, the Food Safety Modernization Act and rules and regulations promulgated by the FDA thereunder, contain no specific Federal standard of identity which is applicable to our products. Our frozen dessert products meet the New York State standard of identity for “parevine,” which has been adopted by at least eight other states. Many states require registration and label review before food products can be sold. While approval in one jurisdiction generally indicates the products will meet with approval in other jurisdictions, there is no assurance that approval from other jurisdictions will be forthcoming. Additionally, many of our major customers now require that any food products that they purchase be produced in Safe Quality Food, or SQF, manufacturing facilities. The SQF program is recognized by the Global Food Safety Initiative and provides a rigorous system to manage food safety risks and provide safe products use by companies in the food industry. All of our current co-packers are SQF certified.
Food manufacturing facilities are subject to inspections by various safety, health and environmental regulatory authorities. A finding of a failure to comply with one or more regulatory requirements can result in the imposition of sanctions including the closing of all or a portion of a company’s facilities, subject to a period during which the company can remedy the alleged violations. Our Cranford, New Jersey facility is subject to inspection by the New Jersey-Kosher Enforcement Bureau and the New Jersey Environmental Health Services. We believe that we, our distributors and our co-packers are in compliance in all material respects with governmental regulations regarding our current products and have obtained the material governmental permits, licenses, qualifications and approvals required for our operations. Our compliance with Federal, state and local environmental laws has not materially affected us either economically or in the manner in which we conduct our business. However, there can be no assurance that our company, our distributors and our co-packers will be able to comply with such laws and regulations in the future or that new governmental laws and regulations will not be introduced that could prevent or temporarily inhibit the development, distribution and sale of our products to consumers.
We employed nine persons on a full-time basis on both December 31, 2016 and January 2, 2016. We do not have any collective bargaining agreements with our employees.
We may not be able to maintain profitable operations in the future. We may not have sufficient working capital to fund our operations in the future.
While we returned to profitable operations in fiscal 2016 after recording a 5% increase in revenues, we incurred losses in fiscal 2015 and 2014. As of December 31, 2016, we had $132,000 in cash and cash equivalents and our working capital was $2,949,000. The lack of sufficient working capital could negatively impact our ability to introduce and adequately promote new products. To the extent that we incur operating losses in the future or are unable to generate free cash flows from our business, we may not have sufficient working capital to fund our operations and will be required to obtain additional financing. Such financing may not be available, or, if available, may not be on terms satisfactory to us. If adequate funds are not available to us, our business, and results of operations and financial condition will be adversely affected.
We are indebted to our Chairman and Chief Executive Officer pursuant to a promissory note which is secured by substantially all of our assets. Any failure to meet our obligations under the note could materially harm our business, financial condition and results of operations.
On January 6, 2016, we received a $500,000 loan from Mr. David Mintz, our Chairman of the Board and Chief Executive Officer. The loan bears interest at 5% per annum and may be prepaid in whole or in part at any time without premium or penalty. The loan is secured by substantially all of our assets and is convertible into shares of our common stock at a conversion price of $4.01 per share. Initially due December 31, 2017, the loan has been extended until December 31, 2018.
In the event we are unable to repay the loan, or if there is an event of default, without any action on the part of Mr. Mintz, the interest rate will increase to 12% per annum and the entire principal and interest balance under the loan, and all of our other obligations under the loan, will be immediately due and payable, and Mr. Mintz will be entitled to seek and institute any and all remedies available to him. Any failure to meet our obligations under the note could materially harm our business, financial condition and results of operations.
A significant portion of our 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 46% of our net sales in the fiscal year ended December 31, 2016 and 44% of our net sales for the fiscal year ended January 2, 2016. Although we believe that the business associated with any of our primary distributors can be readily transferred to other distributors or directly to supermarket warehouses if necessary, no assurance can be given that a change in distributors would not be disruptive to our business, which could have a material adverse effect on our business and results of operations.
We do not produce any of our own products. During the years ended December 31, 2016 and January 2, 2016, we purchased approximately 33% and 29% of our finished goods, respectively, from Franklin Foods, our BETTER THAN CREAM CHEESE, SOUR SUPREME, and BETTER THAN RICOTTA co-packer and 22% and 24%, respectively, of our finished goods from Ice Cream Specialties, our frozen dessert novelty co-packer. Although we believe that there will be no problem in continuing to obtain finished goods from our current or alternative sources in the future, any disruption in supply could have a material adverse effect on our company.
Our success is significantly dependent on the services of David Mintz (age 85), Chief Executive Officer, and Steven Kass (age 65), Chief Financial Officer. The loss of the services of either of these persons could have a material adverse effect on our business and results of operations.
We need to continue to introduce new products and packaging.
The successful introduction of innovative products and packaging on a periodic basis has become increasingly important to our ability to maintain and grow our sales. Accordingly, the future degree of market acceptance of any of our new products, and continued acceptance of our current products, which may be accompanied by significant promotional expenditures, is likely to have an important impact on our future financial results.
In fiscal 2016, approximately 15% of our revenues were from international sales. Although we intend to expand our international operations, we cannot be certain that we will be able to maintain or increase international market demand for our products. To the extent that we cannot do so in a timely manner, our business, operating results and financial condition will be adversely affected. International operations are subject to inherent risks, including the following:
● different and changing regulatory requirements in the jurisdictions in which we currently operate or may operate in the future;
● the impact of possible recessionary environments in multiple foreign markets;
● export restrictions, tariffs and other trade barriers;
● difficulties in managing and supporting foreign operations;
● longer payment cycles;
● difficulties in collecting accounts receivable;
● political and economic changes, hostilities and other disruptions in regions where we currently sell or products or may sell our products in the future; and
● seasonal reductions in business activities.
The Sarbanes-Oxley Act of 2002 imposes certain duties on us and our executives and directors. Our efforts to comply with the requirements of Section 404 have resulted in increased general and administrative expense and a diversion of management time and attention, and we expect these efforts to require the continued commitment of resources. Section 404 of the Sarbanes-Oxley Act requires us to provide management’s annual review and evaluation of our internal control over financial reporting in connection with the filing of our Annual Report on Form 10-K for each fiscal year. Based on their evaluation under the frameworks described above, our chief executive officer and chief financial officer concluded that our internal control over financial reporting was ineffective as of December 31, 2016 because of the following material weaknesses in internal controls over financial reporting:
● a continuing lack of sufficient resources and an insufficient level of monitoring and oversight, which may restrict our ability to gather, analyze and report information relative to the financial statements in a timely manner.
On September 30, 2016, we announced that we had engaged a financial advisor and are pursuing strategic alternatives to enhance shareholder value, including a possible sale or other form of business combination. There can be no assurance that any transaction will be consummated. The process of exploring strategic alternatives will involve the dedication of significant resources and the incurrence of significant costs and expenses. In addition, speculation and uncertainty regarding our exploration of strategic alternatives may cause or result in:
● disruption of our business;
● distraction of our management and employees;
● difficulty in maintaining or negotiating and consummating new, business or strategic relationships or transactions;
● increased stock price volatility; and
● increased costs and advisory fees.
If we are unable to mitigate these or other potential risks related to the uncertainty caused by our exploration of strategic alternatives, it may disrupt our business or adversely impact our revenue, operating results, and financial condition.
Trading on the OTCQB tier of the OTC Markets may be volatile and sporadic, which could depress the market price of our common stock and make it difficult for our stockholders to resell their shares.
Since October 24, 2016 our common stock has been quoted on the OTCQB tier of the electronic quotation system operated by OTC Markets. Trading in stock quoted on the OTC Markets is often thin and characterized by wide fluctuations in trading prices, due to many factors that may have little to do with our operations or business prospects. This volatility could depress the market price of our common stock for reasons unrelated to operating performance. Moreover, the OTC Markets is not a stock exchange, and trading of securities on the OTC Markets is often more sporadic than the trading of securities listed on a quotation system like NASDAQ or a stock exchange like the NYSE MKT. Accordingly, shareholders may have difficulty reselling any of their shares and the lack of liquidity may negatively impact our ability to pursue strategic alternatives.
The Securities and Exchange Commission has adopted regulations which generally define “penny stock” to be any equity security that has a market price (as defined) less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exceptions. Our securities are covered by the penny stock rules, which impose additional sales practice requirements on broker-dealers who sell to persons other than established customers and “accredited investors.” The term “accredited investor” refers generally to institutions with assets in excess of $5,000,000 or individuals with a net worth in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 jointly with their spouse. The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document in a form prepared by the Securities and Exchange Commission, which provides information about penny stocks and the nature and level of risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction and monthly account statements showing the market value of each penny stock held in the customer’s account. The bid and offer quotations, and the broker-dealer and salesperson compensation information, must be given to the customer orally or in writing prior to effecting the transaction and must be given to the customer in writing before or with the customer’s confirmation. In addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from these rules, the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction. These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for the stock that is subject to these penny stock rules. Consequently, these penny stock rules may affect the ability of broker-dealers to trade our securities. We believe that the penny stock rules discourage investor interest in and limit the marketability of our common stock.
In addition to the penny stock rules described above, FINRA has adopted rules that require that, in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable for that customer. Prior to recommending speculative, low-priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial status, tax status, investment objectives and other information. Under interpretations of these rules, FINRA believes that there is a high probability that speculative, low-priced securities will not be suitable for at least some customers. FINRA requirements make it more difficult for broker-dealers to recommend that their customers buy our common stock, which may limit your ability to buy and sell our stock and have an adverse effect on the market for its shares.
● actual or anticipated variations in our quarterly operating results or those of our competitors;
● announcements by us or our competitors of new and enhanced products;
● developments or disputes concerning proprietary rights;
● introduction and adoption of new industry standards;
● market conditions or trends in our industry;
● announcements by us or our competitors of significant acquisitions;
● entry into strategic partnerships or joint ventures by us or our competitors;
● political and economic conditions, such as a recession or interest rate or currency rate fluctuations or political events; and
● other events or factors in any of the countries in which we do business, including those resulting from war, incidents of terrorism, natural disasters or responses to such events.
Our facilities are located in a one-story facility in Cranford, New Jersey. The 6,200 square foot facility houses our administrative offices, a warehouse, walk-in freezer and refrigerator, and a product development laboratory and test kitchen. Our lease agreement expired in 1999, but we continue to occupy the premises under the terms of that agreement, subject to a six month notification period from us and the landlord with respect to any changes. We currently have no plans to enter into a long-term lease agreement for the facility. Our rent expense was $81,000 and $82,000 in fiscal 2016 and fiscal 2015, respectively. Our management believes that the Cranford facility will continue to satisfy our space requirements for the foreseeable future. We rent warehouse storage space at various outside facilities. Outside warehouse expenses amounted to $503,000 and $513,000 during fiscal 2016 and 2015, respectively.
Our common stock was listed on the American Stock Exchange on October 29, 1985 and traded on the AMEX or its successor, NYSE MKT, under the symbol TOF since such time. On October 24, 2016, our common stock began to be quoted on the OTCQB tier of the electronic quotation system operated by OTC Markets under the symbol TOFB.
Each share ranks equally as to dividends, voting rights, participation in assets on winding-up and in all other respects. No shares have been or will be issued subject to call or assessment. There are no preemptive rights, provisions for redemption or for either cancellation or surrender, or provisions for sinking or purchase funds.
The following table sets forth the high and low sales prices as reported on the OTCQB or the NYSE MKT, as the case may be, for the two most recent fiscal years:
March 28, 2015 $ 7.17 $ 4.46
June 27, 2015 5.11 3.53
October 3, 2015 4.95 3.76
January 2, 2016 4.91 4.01
April 2, 2016 4.17 2.08
July 1, 2016 3.65 2.01
October 1, 2016 3.85 2.20
December 31, 2016 2.79 1.53
The closing price for our common stock on March 28, 2017, as reported on the OTCQB, was $1.98.
As of March 28, 2017, there were approximately 399 direct holders of record of our common stock.
Our shareholders adopted our 2014 Equity Incentive Plan (the “Plan”) on June 10, 2014. As of December 31, 2016, we had issued 80,000 non-qualified stock option awards under the Plan. The Plan will expire on June 9, 2024. The Plan provides for grants of various types of awards (“Awards”) that are designed to attract and retain highly qualified employees and directors who will contribute to the success of the company and to provide incentives to participants in this Plan that are linked directly to increases in shareholder value which will, therefore, inure to the benefit of all of our shareholders. The Plan makes 250,000 shares of our common stock available for Awards under the Plan. The Plan also permits performance-based Awards paid under the Plan to be tax deductible to the company as “performance-based compensation” under Section 162(m) of the Internal Revenue Code of 1986, as amended (the “Code”).
The Plan is administered in accordance with the requirements of Section 162(m) of the Code (but only to the extent necessary and desirable to qualify Awards under the Plan as “performance-based compensation” under Section 162(m)) and, to the extent applicable, Rule 16b-3 under the Exchange Act (“Rule 16b-3”), by the Board or, at the Board’s sole discretion, by the compensation or any other committee of the Board, as appointed by the Board (the “Administrator”).
There were no sales of unregistered securities during fiscal 2016.
We did not purchase any shares of our common stock in the thirteen weeks ended December 31, 2016 (the fourth quarter of fiscal 2016).
Revenue Recognition. We recognize revenue when goods are shipped from our production facilities or outside warehouses and the following four criteria have been met: (i) the product has been shipped and we have no significant remaining obligations; (ii) persuasive evidence of an arrangement exists; (iii) the price to the buyer is fixed or determinable; and (iv) collection is probable. We record as deductions against sales all trade discounts, returns and allowances that occur in the ordinary course of business, when the sale occurs. To the extent we charge our customers for freight expense, it is included in freight out expense in cost of goods sold. The amount of freight costs charged to customers has not been material to date.
Stock Based Compensation. We follow the provisions of ASC 718 Share-Based Payment. We use the Black-Scholes option pricing model to measure the estimated fair value of the options under ASC 718. Stock-based compensation expense is recognized over the requisite service period.
In June 2016, the FASB issued Accounting Standards Update, or ASU 2016-13, Financial Instruments (Topic 326)- Credit Losses, Measurement of Credit Losses on Financial Instruments, which provides guidance regarding the measurement of credit losses on financial instruments. The new guidance replaces the incurred loss impairment methodology in the current guidance with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to determine credit loss estimates. This ASU will be effective for fiscal years beginning after December 15, 2019, with early adoption permitted for fiscal years beginning after December 15, 2018. We are in the process of assessing the impact of this guidance on our financial statements.
In March 2016, the FASB issued ASU 2016-09, Stock Compensation, which simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The guidance is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. We are currently evaluating the impact of adopting this guidance on its financial statements.
In February 2016, the FASB issued guidance which amends the existing accounting standards for lease accounting, including requiring lessees to recognize most leases on their balance sheets and making targeted changes to lessor accounting. This guidance will be effective for fiscal years beginning after December 15, 2018 including interim periods within those fiscal years. Early adoption is permitted. The new leases standard requires a modified retrospective transition approach for all leases existing at, or entered into after, the date of initial application, with an option to use certain transition relief. We are currently evaluating the impact of adopting the new leases standard on our financial statements.
In November 2015, the FASB issued guidance that eliminates the current requirement for organizations to present deferred tax liabilities and assets as current and non-current in a classified balance sheet. Instead, organizations will be required to classify all deferred tax assets and liabilities as noncurrent. The amendments apply to all organizations that present a classified balance sheet. This amendment is effective for our company for financial statements issued for annual periods beginning after December 15, 2016 and interim periods within those annual periods. We have not yet adopted this guidance but do not expect the adoption of this guidance will have a material impact on our financial statements and related disclosures.
In July 2015, the FASB issued guidance which changes the measurement principle for inventory from the lower of cost or market to the lower of cost and net realizable value. ASU 2015-11 defines net realizable value as estimated selling pricings in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The new guidance must be applied on a prospective basis and is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years, with early adoption permitted. We do not expect the adoption of this guidance will have a material impact on our financial statements and related disclosures.
In 2015, the FASB issued an accounting standards update which deferred the effective date of ASU 2014-09 for all entities by one year. The update applies to all companies that enter into contracts with customers to transfer goods or services and is effective for public companies for interim and annual reporting periods beginning after December 15, 2017. Early application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. We are currently evaluating the requirements of this update and have not yet determined its impact on our financial statements.
In August, 2014, the FASB issued guidance that requires management to evaluate whether there are conditions or events that raise substantial doubt about an entity’s ability to continue as a going concern. If such conditions or events exist, disclosures are required that enable users of the financial statements to understand the nature of the conditions or events, management’s evaluation of the circumstances and management’s plans to mitigate the conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern. This standard became effective for us in the annual period ending December 31, 2016. The adoption of this guidance is not expected to impact our financial position, results of operations or cash flows.
Our operations and the operating metrics discussed below have been, and will likely continue to be affected by certain key factors as well as certain historical events and actions. The key factors affecting our business and results of operations include among others, our lack of sufficient working capital, lack of profitable operations in recent years, dependence on a few key distributors for a significant portion of our sales, dependence on several key suppliers to produce our products, our reliance on a limited number of key executives to manage our business, and competition. For further discussion of the factors affecting our results of operations, see “Risk Factors.”
We may not be able to maintain profitability in the future and may not have sufficient working capital to fund our operations in the future.
While we returned to profitable operations in fiscal 2016 after recording a 5% increase in revenues, we incurred losses in fiscal 2015 and 2014. As a result of our losses, our cash and cash equivalents and working capital were negatively affected, declining to $55,000 and $2,003,000, respectively, as of January 2, 2016. With our improved results in fiscal 2016, our cash and cash equivalents and working capital increased to $132,000 and $2,949,000, respectively, as of December 31, 2016. The lack of sufficient working capital could negatively impact our ability to introduce and adequately promote new products. To the extent that we incur operating losses in the future or are unable to generate free cash flows from our business, we may not have sufficient working capital to fund our operations and will be required to obtain additional financing. Such financing may not be available, or, if available, may not be on terms satisfactory to us. If we are unable to maintain revenues, we may not be able sustain profitable operations in the future or generate positive cash flows from our operations.
A significant portion of our 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 46% and 44% of our net sales for the fiscal years ended December 31, 2016 and January 2, 2016, respectively. Although we believe that the business associated with any of our primary distributors can be readily transferred to other distributors or directly to supermarket warehouses if necessary, no assurance can be given that a change in distributors would not be disruptive to our business, which could have a material adverse effect on our business and results of operations.
We do not produce any of our own products. During the years ended December 31, 2016 and January 2, 2016, we purchased approximately 33% and 29% of our finished goods, respectively, from Franklin Foods, our BETTER THAN CREAM CHEESE, SOUR SUPREME, and BETTER THAN RICOTTA co-packer and 22% and 24%, respectively, of our finished goods from Ice Cream Specialties, our primary frozen dessert novelty co-packer. Although we believe that there will be no problem in continuing to obtain finished goods from our current or alternative sources in the future, any disruption in supply could have a material adverse effect on our company.
Fiscal Year Ended December 31, 2016 Compared with Fiscal Year Ended January 2, 2016
We operate on a fiscal year ending on the Saturday closest to December 31. Fiscal years for the financial statements included in this report are the fifty-two week period ended December 31, 2016 (fiscal 2015) and the fifty-three week period ended January 2, 2016 (fiscal 2015).
Net sales for the fiscal year ended December 31, 2016 were $14,473,000, an increase of $709,000, or 5%, from net sales of $13,764,000 for the fiscal year ended January 2, 2016. Sales in our frozen dessert product line decreased to $3,449,000 in fiscal 2016 from $3,866,000 in fiscal 2015. Our frozen dessert business continues to be negatively impacted by the overall sluggish sales in the ice cream category. Sales of soy-cheese products increased to $10,863,000 in fiscal 2016 from $9,311,000 in fiscal 2015. Sales of our soy-cheese products were positively impacted by the elimination of various sales promotions, which increased the net selling prices of our products in the 2016 period. Sales of our frozen food entrée products decreased to $161,000 in fiscal 2015 from $587,000 in fiscal 2015. Sales of frozen food entrée products, which consist of pizza and blintzes, decreased primarily as a result of an decrease in our Pizza Pizzaz sales which were primarily impacted by consumer resistance to purchasing the nine-slice pizza package that we introduced in 2015 as compared to the three-slice package it replaced.
Our gross profit in the year ended December 31, 2016 increased by $993,000 to $4,591,000 from $3,598,000, reflecting the increase in our sales and gross profit percentages. Our gross profit percentage for the year ended December 31, 2016 increased to 32% from 26% for the year ended January 2, 2016, due to the implementation of price increases in 2016 and the elimination of various sales promotion programs in 2016. Freight out expense increased to $943,000 for the year ended December 31, 2016 compared with $857,000 for the year ended January 2, 2016 due to the increase in sales. Freight out cost as a percentage of sales in fiscal 2016 was 6.5% compared to 6% for fiscal 2015. We anticipate that our freight cost as a percentage of sales in fiscal 2017 will approximate the 2016 percentages should fuel costs remain steady. We intend to increase gross profitability in future periods through selective price increases and selective ingredient replacements to lower cost alternatives.
Selling and warehousing expenses decreased by $157,000, or 10%, to $1,393,000 for fiscal 2016 from $1,550,000 in fiscal 2015. This decrease was primarily attributable to decreases in bad debt expense of $51,000, commission expense of $43,000, meetings and conventions expense of $41,000, outside warehouse rental expense of $10,000, and messenger expense of $9,000. We anticipate that selling expenses in 2017 should be comparable to or slightly less than our expenses in 2016.
Marketing expenses decreased in fiscal 2016 by $119,000, or 33%, to $238,000 from $357,000 in fiscal 2015 due to decreases in advertising expense of $76,000, public relations expense of $17,000, artwork and plates expense of $15,000, and promotion expense of $8,000. We expect marketing expenses to decline in fiscal 2017 due to the elimination of certain promotion and advertising programs.
Product development expenses decreased by $97,000, or 19%, to $426,000 in fiscal 2016 from $523,000 in fiscal 2015. The decrease was primarily attributable to decreases in payroll expense of $52,000, lab costs and supplies of $29,000, and professional fees and outside services expense of $28,000. We expect product development costs to remain constant or decline slightly in fiscal 2017.
General and administrative expenses increased by $171,000, or 9%, to $2,059,000 for fiscal 2016 from $1,888,000 for fiscal 2015. The increase was due primarily due to increases in professional fees and outside services expense of $215,000, payroll expense of $49,000, travel, entertainment and auto expense of $36,000, public relations expense of $21,000, general insurance expense of $15,000, equipment rental expense of $10,000, real estate property tax expense of $9,000, IT expense of $9,000, and building repair and maintenance expense of $7,000. These expenses were partially offset by a decrease in stock compensation expense of $86,000. The increase in professional fees and outside services expense was due principally to litigation and related legal expenses of $265,000. Our management expects that general and administrative expenses in 2017 will decrease significantly with the resolution of the litigation.
Overall, total operating expenses in fiscal 2016 decreased by $202,000, or 5%, to $4,116,000 compared to total operating expenses of $4,318,000 in fiscal 2015. We anticipate that our operating expenses in fiscal 2017 will decrease due to reductions in sales, marketing, and general and administrative expenses.
Income before income taxes increased to $449,000 in fiscal 2016 as compared with a loss of $721,000 in fiscal 2015.
Income tax expense for the 2016 fiscal period was $28,000 compared to income tax benefit of $78,000 for the 2015 fiscal period. The income tax expense in fiscal 2016 was due to our return to profitable operations in fiscal 2016.
Our recent operating history has resulted in a decrease in our capital resources. At December 31, 2016, we had approximately $132,000 in cash and cash equivalents, and our working capital was $2,949,000, an increase of $946,000 from January 2, 2016. Our current and quick acid test ratios, both measures of liquidity, were 2.9 and 1.9, respectively, as of December 31, 2016 and 2.4 and 1.4, respectively, as of January 2, 2016.
In order to provide our company with additional working capital, on January 6, 2016, David Mintz, our Chairman and Chief Executive, provided our company with a loan of $500,000 which is secured by substantially all of our assets and is due on December 31, 2018. Interest of 5% is payable on a quarterly basis without compounding. The loan may be prepaid in whole or in part at any time without premium or penalty. The loan is convertible into our common stock at a conversion price of $4.01 per share, the closing price of our common stock on the NYSE MKT on the date the promissory note was entered into. Initially due December 31, 2017, the loan has been extended until December 31, 2018.
Net cash used in operating activities $ (418 ) $ (280 )
Net cash provided by (used in) financing activities 495 (6 )
Net increase (decrease) increase in cash and cash equivalents 77 (286 )
Cash and cash equivalents at beginning of year 55 341
Cash and cash equivalents at end of year $ 132 $ 55
Cash used by operating activities was $418,000 for the fiscal year ended December 31, 2016 compared with cash used in operating activities of $280,000 for the fiscal year ended January 2, 2016. In the fiscal year ended December 31, 2016, our cash flow from operating activities reflected net income of $421,000, offset by increases in accounts receivable and inventory of $897,000 and $92,000, respectively.
Cash provided by financing activities was $495,000 for the fiscal year ended December 31, 2016 compared to $6,000 used in financing activities for the fiscal year ended January 2, 2016. Net cash provided by financing activities for the fiscal year ended December 31, 2016 was the result of a $500,000 loan from our Chairman of the Board and Chief Executive Officer.
As a result of the foregoing, our cash and cash equivalents increased to $132,000 at December 31, 2016 from $55,000 at January 2, 2016.
We believe our existing cash and cash equivalents on hand at December 31, 2016, existing working capital, and our expected cash flows from operations will be sufficient to support our operating and capital requirements during the next twelve months. However, we may require additional financing in order to carry out our business plans for future periods.
We had no material contractual obligations at December 31, 2016.
We will invest our excess cash, should there be any, in highly rated money market funds which are subject to changes in short-term interest rates. We do not believe that our foreign currency exposure is significant as our export sales are transacted in U.S. dollars. We did not enter into any foreign exchange contracts in the year ended December 31, 2016.
We have audited the accompanying balance sheets of Tofutti Brands, Inc. (the “Company”) as of December 31, 2016 and January 2, 2016, and the related statements of operations, changes instockholders’ equity, and cash flows for each of the fiscal years then ended. The financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Tofutti Brands, Inc. as of December 31, 2016 and January 2, 2016, and the results of its operations and its cash flows for each of the fiscal years then ended, in conformity with accounting principles generally accepted in the United States of America.
Cash and cash equivalents $ 132 $ 55
accounts and sales promotions of $370 and $316,
respectively 2,626 1,783
Inventories 1,565 1,473
Prepaid expenses 66 74
Deferred costs 100 101
Total current assets 4,489 3,486
Fixed assets (net of accumulated depreciation of $14 and $8, respectively) 15 21
$ 4,520 $ 3,523
Notes payable-current $ 6 $ 5
Accounts payable 1,148 1,117
Accrued expenses 278 248
Deferred revenue 108 113
Total current liabilities 1,540 1,483
Convertible note payable-long term-related party 500 —
Note payable-long term 10 16
Total liabilities 2,050 1,499
outstanding 5,153,706 shares at December 31, 2016
and January 2, 2016 52
Additional paid-in capital 138 113
Retained earnings 2,280 1,859
Total stockholders’ equity 2,470 2,024
Total liabilities and stockholders’ equity $ 4,520 $ 3,523
December 31, 2016 Fiscal year
Net sales $ 14,473 $ 13,764
Cost of sales 9,882 10,166
Gross profit 4,591 3,598
Selling and warehousing 1,393 1,550
Marketing 238 357
Product development costs 426 523
General and administrative 2,059 1,888
Total operating expenses 4,116 4,318
Income (loss) from operations 475 (720 )
Interest expense- related party 25 —
Interest expense-other 1 1
Income (loss) before provision for income tax 449 (721 )
Income tax expense (benefit) 28 (78 )
Net income (loss) $ 421 $ (643 )
Basic and diluted $ 0.08 $ (0.12 )
Balances, December 27, 2014 5,153,706 $ 52 $ — $ 2,502 $ 2,554
Net (loss) — — — (643 ) (643 )
Stock-based compensation — — 113 — 113
Balances, January 2, 2016 5,153,706 52 113 1,859 2,024
Net income — — — 421 421
Stock-based compensation — — 25 — 25
Balances December 31, 2016 5,153,706 $ 52 $ 138 $ 2,280 $ 2,470
Stock-based compensation expense 25 113
Provision for bad debts and sales promotions 54 41
Change in the unrecognized tax position 19 (82 )
Accounts receivable (897 ) 90
Inventories (92 ) 379
Prepaid expenses 8 (3 )
Deferred costs 1 4
Deferred revenue (5 ) (1 )
Accounts payable and accrued expenses 42 (184 )
Net cash flows used in operating activities (418 ) (280 )
Financing received through convertible note payable-related party 500 —
Principal payments on note payable obligation (5 ) (6 )
Net cash flows provided by (used in) financing activities 495 (6 )
NET CHANGE IN CASH AND CASH EQUIVALENTS 77 (286 )
CASH AND CASH EQUIVALENTS, AT BEGINNING OF YEAR 55 341
CASH AND CASH EQUIVALENTS, AT END OF YEAR $ 132 $ 55
Interest paid $ 26 $ 1
At December 31, 2016, Tofutti Brands, Inc. (the “Company”) had approximately $132 in cash compared to $55 at January 2, 2016. Net cash used in operating activities for the year ended December 31, 2016 was $418 compared to $280 used in operating activities for the year ended January 2, 2016. Net cash provided by operating activities for the year ended December 31, 2016 was primarily the result of our net income of $421 offset by increases in accounts receivable and inventory of $897 and $92, respectively.
Cash provided by financing activities was $495 for the fiscal year ended December 31, 2016 compared to $6 used in financing activities for the fiscal year ended January 2, 2016. Net cash provided by financing activities for the fiscal year ended December 31, 2016 was the result of a $500 loan from the Company’s Chairman of the Board and Chief Executive Officer.
The Company has historically financed operations and met capital requirements primarily through positive cash flow from operations. However, due to the net loss and cash used in operations for the year ended January 2, 2016 in order to provide the Company with additional working capital, on January 6, 2016, David Mintz, the Company’s Chairman and Chief Executive, provided it with a loan of $500,000. Commencing March 31, 2016, interest of 5% is payable on a quarterly basis without compounding. The loan may be prepaid in whole or in part at any time without premium or penalty. The loan is convertible into 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 entered into. Initially due December 31, 2017, the loan has been extended until December 31, 2018.
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 period ended on December 31, 2016 and the fifty-three week period fiscal ended January 2, 2016.
The Company performs ongoing evaluations of its customers’ financial condition and does not require collateral. Management feels that credit risk beyond the established allowances at January 2, 2016 is limited.
During the fiscal years ended December 31, 2016 and January 2, 2016, the Company derived approximately 85% and 83% of its net sales domestically. The remaining sales in both periods were exports to foreign countries. The accounts receivable balance of one customer represented approximately 5% of total accounts receivable at December 31, 2016, and one customer represented 9% of total accounts receivable at January 2, 2016. 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 46% and 44% of the Company’s net sales for the fiscal years ended December 31, 2016 and January 2, 2016.
The Company purchased approximately 33% and 29% of its finished products from one supplier and 22% and 24% of its finished products from another supplier during the periods ended December 31, 2016 and January 2, 2016, respectively.
Stock-based compensation - The Company accounts for stock-based awards to employees and directors in accordance with the provisions of ASC 718, “Compensation – Stock Compensation”. Under ASC 718, share-based awards are valued at fair value on the date of grant and that fair value is recognized over the requisite service period on a straight-line basis. The Company values its stock option using the Black- Scholes option pricing model.
Net Income (Loss) Per Share - Basic earnings per common share has been computed by dividing earnings by the weighted average number of common shares outstanding. For the fiscal year ended December 31, 2016, stock equivalents of 80,000 shares were excluded from diluted earnings per share calculations since the effect was anti-dilutive because the strike price was greater than the quoted market value at such date. For the fiscal year ended January 2, 2016, stock equivalents of 80,000 shares were excluded from diluted earnings per share calculations since the effect was anti-dilutive due to overall net loss position.
Net income (loss), numerator, basic and diluted computation $ 421 $ (643 )
Weighted average shares - denominator basic computation 5,154 5,154
Weighted average shares, as adjusted - denominator diluted computation 5,154 5,154
Fair Value of Financial Instruments - The fair value of financial instruments, which primarily consist of cash and equivalents, 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 $943 and $857 during the fiscal years ended December 31, 2016 and January 2, 2016, respectively. Such costs are included in costs of goods sold.
Advertising Costs - The Company expenses advertising costs as they are incurred. Advertising expenses amounted to $158 and $236 during the fiscal years ended December 31, 2016 and January 2, 2016, respectively.
Product Development Costs - Costs of new product development and product redesign are charged to expense as incurred. Product development costs amounted to $426 and $523 during the fiscal years ended December 31, 2016 and January 2, 2016, respectively.
Recent Accounting Pronouncements – In June 2016, the FASB issued Accounting Standards Update, or ASU 2016-13, Financial Instruments (Topic 326)- Credit Losses, Measurement of Credit Losses on Financial Instruments, which provides guidance regarding the measurement of credit losses on financial instruments. The new guidance replaces the incurred loss impairment methodology in the current guidance with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to determine credit loss estimates. This ASU will be effective for fiscal years beginning after December 15, 2019, with early adoption permitted for fiscal years beginning after December 15, 2018. The Company is in the process of assessing the impact of this guidance on its financial statements.
In March 2016, the FASB issued ASU 2016-09, Stock Compensation, which simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The guidance is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The Company is currently evaluating the impact of adopting this guidance on its financial statements.
In February 2016, the FASB issued guidance which amends the existing accounting standards for lease accounting, including requiring lessees to recognize most leases on their balance sheets and making targeted changes to lessor accounting. This guidance will be effective for fiscal years beginning after December 15, 2018 including interim periods within those fiscal years. Early adoption is permitted. The new leases standard requires a modified retrospective transition approach for all leases existing at, or entered into after, the date of initial application, with an option to use certain transition relief. The Company is currently evaluating the impact of adopting the new leases standard on its financial statements.
In November 2015, the FASB issued guidance that eliminates the current requirement for organizations to present deferred tax liabilities and assets as current and non-current in a classified balance sheet. Instead, organizations will be required to classify all deferred tax assets and liabilities as noncurrent. The amendments apply to all organizations that present a classified balance sheet. This amendment is effective for the Company for financial statements issued for annual periods beginning after December 15, 2016 and interim periods within those annual periods. The Company has not yet adopted this guidance but does not expect the adoption of this guidance will have a material impact on its financial statements and related disclosures.
In July 2015, the FASB issued guidance which changes the measurement principle for inventory from the lower of cost or market to the lower of cost and net realizable value. ASU 2015-11 defines net realizable value as estimated selling pricings in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The new guidance must be applied on a prospective basis and is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years, with early adoption permitted. The Company does not expect the adoption of this guidance will have a material impact on its financial statements and related disclosures.
In 2015, the FASB issued an accounting standards update which deferred the effective date of ASU 2014-09 for all entities by one year. The update applies to all companies that enter into contracts with customers to transfer goods or services and is effective for public companies for interim and annual reporting periods beginning after December 15, 2017. Early application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The Company is currently evaluating the requirements of this update and has not yet determined its impact on its financial statements.
In August, 2014, the FASB issued guidance that requires management to evaluate whether there are conditions or events that raise substantial doubt about an entity’s ability to continue as a going concern. If such conditions or events exist, disclosures are required that enable users of the financial statements to understand the nature of the conditions or events, management’s evaluation of the circumstances and management’s plans to mitigate the conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern. The Company will be required to perform an annual assessment of its ability to continue as a going concern as this standard became effective for it for annual periods ending after December 15, 2016 and interim periods within annual periods beginning after December 15, 2016. The adoption of this guidance is not expected to impact the Company’s financial position, results of operations or cash flows.
Finished products Finished products $ 1,047 $ 1,007
Raw materials and packaging 518 466
$ 1,565 $ 1,473
Less: accumulated depreciation (14 ) (8 )
Fixed assets, net $ 15 $ 21
Depreciation expense as of year-end December 31, 2016 and January 2, 2016 was $6 and $6, respectively.
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 250,000 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.” As of December 31, 2016, the Company has issued 80,000 non-qualified stock option awards under the 2014 Plan.
The following is a summary of stock option activity from January 2, 2016 to December 31, 2016:
Outstanding at January 2, 2016 80,000 4.42
Exercisable at December 31, 2016 53,336 4.42
Outstanding Weighted Average Remaining Life
4.39-4.46 80,000 3.31 4.42 53,336
During fiscal 2015, 80,000 options were granted, with 26,668 of the options vesting at the respective grant date, 26,666 vesting in January 2016, and 26,666 vesting in January 2017. At the date of grant, expected volatility was 69.8%-71.4%, a risk-free rate of 1.3%-1.8%, 0% expected dividends, and an expected term of five year.
As of December 31, 2016, the intrinsic value of the options outstanding and exercisable was immaterial. As of December 31, 2016, there was approximately $69 of total unrecognized compensation cost that will be recognized through December 30, 2017 related to non-vested share-based compensation arrangements granted under the Plan. For the fiscal years ended December 31, 2016 and January 2, 2016 stock compensation expense was $113 and $25, respectively.
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 $81 in fiscal 2016 and $82 in fiscal 2015. 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 components of income tax benefit for the fiscal years ended December 31, 2016 and January 2, 2016 are as follows:
Federal $ 19 $ (62 )
State 9 (16 )
Total income tax expense (benefit) $ 28 $ (78 )
A reconciliation between the expected federal tax expense at the statutory tax rate of 34% and the Company’s actual tax expense for the fiscal years ended December 31, 2016 and January 2, 2016 follows:
Income tax expense computed at federal statutory rate $ 153 $ (245 )
State income taxes, net of federal income tax benefit 9 2
Permanent items 10 9
Change in federal valuation allowance (176 ) 238
Increase (reduction) in unrecognized tax position 19 (82 )
$ 28 $ (78 )
Deferred tax assets for the fiscal years ended December 31, 2016 and January 2, 2016 consist of the following components:
Allowance for doubtful accounts $ 133 $ 114
Inventory 29 31
Federal and state net operating loss 467 685
Valuation allowance (682 ) (869 )
At December 31, 2016, the Company has $1,254 of federal net operating loss carryforwards and $2,058 of state net operating loss carryforwards, which will begin to expire in 2032.
Management has concluded that based upon all available evidence it is more likely than not that deferred tax assets will not be utilized. The Company has recorded a decrease in the federal and state valuation allowances in the amount of $187 during the year ended December 31, 2016. The remaining deferred tax asset is offset by the federal unrecorded tax benefit.
The following table indicates the changes to the Company’s uncertain tax positions for the fiscal years ended December 31, 2016 and January 2, 2016:
Balance at December 27, 2014 $ 169
Reduction due to the expiration of the statute of
limitations and tax positions related to prior years (52 )
Balance at January 2, 2016 $ 117
Increase due to increase in reserves and tax positions related to prior years 19
Balance at December 31, 2016 136
The Company accounts for penalties or interest related to uncertain tax positions as part of its provision for income taxes. The Company had approximately $2 and $2 of accrued interest and penalties related to uncertain tax positions at December 31, 2016 and January 2, 2016, respectively. The amount of uncertain tax positions that would affect the effective tax rate if they were recognized is $136.
The liability at December 31, 2016 for uncertain tax positions is included in accrued expenses. The Company’s federal and state tax returns are open to examination for the years 2013 to 2016.
Note payable $ 16 $ 21
Less current maturity 6 5
Note payable, net of current maturity 10 $ 16
Minimum estimated future payments on this loan as of December 31, 2016 are as follows:
On January 6, 2016, David Mintz, the Company’s Chairman and Chief Executive, provided it with a loan of $500. The loan, which was originally set to expire on December 31, 2017 has been extended to December 31, 2018. No other terms of the loan were modified. Commencing March 31, 2016, interest of 5% is payable on a quarterly basis without compounding. The loan may be prepaid in whole or in part at any time without premium or penalty. The loan is convertible into the Company’s common stock at a conversion price of $4.01 per share, the closing price of the Company’s common stock on the date the promissory note was entered into. In any event of default, as defined in the promissory note, without any action on the part of Mr. Mintz, the interest rate will increase to 12% per annum and the entire principal and interest balance under the loan, and all of the Company’s other obligations under the loan, will be immediately due and payable, and Mr. Mintz will be entitled to seek and institute any and all remedies available to him.
Note payable-related party $ 500 $ —
Note payable related party, net of current maturity $ 500 $ —
NOTE 9: SALES BY GEOGRAPHIC REGION AND PRODUCT CATEGORY
Americas $ 13,086 $ 12,318
Europe 576 677
Asia Pacific and Africa 327 355
Middle East 484 414
$ 14,473 $ 13,764
Approximately 94% in fiscal 2016 and 93% in fiscal 2015 of the Americas revenue is attributable to the United States. All of the Company’s assets are located in the United States.
Frozen Desserts $ 3,449 $ 3,866
Cheeses 10,863 9,311
Frozen Foods 161 587
Evaluation of Disclosure Controls and Procedures. As of January 2, 2016, our company’s chief executive officer and chief financial officer conducted an evaluation regarding the effectiveness of our company’s disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Exchange Act. Based upon the evaluation of these controls and procedures, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were not effective with respect to the material weaknesses, as described below in our internal control over financial reporting, that have not been fully remediated as of the end of the fiscal year 2016.
Disclosure Controls and Internal Controls. As provided in Rule 13a-14 of the General Rules and Regulations under the Securities and Exchange Act of 1934, as amended, Disclosure Controls are defined as meaning controls and procedures that are designed with the objective of insuring that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, designed and reported within the time periods specified by the SEC’s rules and forms. Disclosure Controls include, within the definition under the Exchange Act, and without limitation, controls and procedures to ensure that information required to be disclosed by us in our reports is accumulated and communicated to our management, including our chief executive officer and principal financial officer, as appropriate to allow timely decisions regarding disclosure. Internal Controls are procedures which are designed with the objective of providing reasonable assurance that (1) our transactions are properly authorized; (2) our assets are safeguarded against unauthorized or improper use; and (3) our transactions are properly recorded and reported, all to permit the preparation of our financial statements inconformity with generally accepted accounting principles.
Based on their evaluation under the frameworks described above, our chief executive officer and chief financial officer have concluded that our internal control over financial reporting was ineffective as of December 31, 2016 because of the following material weaknesses in internal controls over financial reporting:
No change in our internal control over financial reporting occurred during the quarter ended December 31, 2016 that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
David Mintz 85 Chairman of the Board of Directors, Chief Executive Officer
Steven Kass 65 Chief Financial Officer, Secretary and Treasurer
Scott Korman has served as member of the Board of Directors since December 2011 and as a member of the Audit Committee from December 2011 until March 2016. Mr. Korman founded Nashone, Inc., a private equity firm, in 1984 and is its President. Nashone is also involved in financial advisory, turnaround and general management assignments. Mr. Korman is currently Chairman of Da-Tech Corporation, a Pennsylvania based contract electronics manufacturer. He previously served as Chairman and CEO of Best Manufacturing Group LLC., a leading manufacturer and distributor of uniforms, napery, service apparel, and hospitality and healthcare textiles. Mr. Korman also served as President and CEO of Welsh Farms Inc., a full service dairy, processing and distributing milk, ice cream mix and ice cream products. Mr. Korman received a B.S. degree in Economics from the University of Pennsylvania Wharton School in 1977. He also serves on the boards of various not-for-profit groups and was the founder of the Englewood Business Forum. Mr. Korman’s experience as a CEO of a frozen dessert company enhances the breadth of experience of the board of directors.
The Audit Committee of the Board of Directors is comprised of Mr. Axelrod, who serves as chairman, Mr. Himy and Mr. Snitow. Mr. Snitow became a member of the Audit Committee in March 2016 after Mr. Korman stepped down. The Board of Directors has determined that all of the Audit Committee members are independent, as that term is defined under the enhanced independence standards for audit committee members in the Exchange Act. The Board of Directors has also determined that Mr. Axelrod is an Audit Committee Financial Expert as that term is defined in rules issued pursuant to the Sarbanes-Oxley Act of 2002.
Section 16(a) of the Exchange Act, as amended, requires our executive officers, directors and persons who own more than 10% of a registered class of our equity securities to file with the Securities and Exchange Commission initial statements of beneficial ownership, reports of changes in ownership and annual reports concerning their ownership of common stock and other of our equity securities, on Forms 3, 4 and 5 respectively. Executive officers, directors and greater than 10% shareholders are required by Commission regulations to furnish us with copies of all Section 16(a) reports they file.
To our knowledge, based solely on our review of the copies of such forms received by us, or written representations from certain reporting persons that no additional forms were required for those persons, we believe that during fiscal 2016 all persons subject to these reporting requirements filed the required reports on a timely basis.
David Mintz 2016 450,000 — — — — — 450,000
Chief Executive Officer 2015 450,000 — — 38,897 — — 488,897
and Director 2014 450,000 — — — — — 450,000
Steven Kass 2016 125,000 — — — — — 125,000
Chief Financial Officer 2015 125,000 — — — — — 125,000
2014 125,000 — — — — — 125,000
(1) The dollar amounts in the Option Awards column above reflect the fair value of options as of the grant date for the year ended January 2, 2016, in accordance with ASC 718 and, therefore, do not necessarily reflect actual benefits received by any individual. Assumptions used in the calculation of these amounts are included in Note 5 to our audited financial statements for the year ended January 2, 2016.
The aggregate value of all other perquisites and other personal benefits furnished to each of these executive officers was less than $10,000 in both the 2016 and 2015 fiscal years.
The following table reflects the options awards granted to the named executive officers identified above in the summary compensation table pursuant to the 2014 Equity Incentive Plan.
David Mintz 10,000 — — 4.39 4/2/20
5,000 — — 4.46 6/10/20
Steven Kass — — — — —
The following table sets forth the compensation received by each of the Company’s non-employee directors for the year ended December 31, 2016. Each non-employee director, other than Mr. Korman, is deemed to be independent under the Exchange Act Rule 10A-3.
Name Fees Earned or Paid in Cash ($) Stock Awards ($) Option Awards ($)
Nonqualified Deferred Compensation ($) All Other Compensation ($) Total ($)
Neal S. Axelrod 12,000 — — — — — —
Joseph N. Himy 6,000 — — — — — —
Scott Korman 9,500 — — — — — —
Franklyn Snitow 1,500 — — — — — —
The following tables set forth as of March 28, 2017 certain information regarding the ownership of our common stock, $0.01 par value, for each person known by us to be the beneficial owner of more than 5% of the outstanding shares of common stock, for each executive officer named in the Summary Compensation Table, for each of our directors and for our executive officers and directors as a group:
Nature of Beneficial Owner(2) Percent of Class(3)
Directors as a group (6 persons) 3,130,218 (7) 58.75 %
(2) Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. Shares of common stock relating to options currently exercisable or exercisable within 60 days of March 28, 2017 are deemed outstanding for computing the percentage of the person holding such securities but are not deemed outstanding for computing the percentage of any other person. Except as indicated by footnote, and subject to community property laws where applicable, the persons named in the table above have sole voting and investment power with respect to all shares shown as beneficially owned by them.
(3) Based on 5,153,706 shares issued and outstanding as of March 28, 2017.
In order to provide our company with additional working capital, on January 6, 2016, David Mintz, our Chairman and Chief Executive, provided us with a loan of $500,000, which has been extended to come due on December 31, 2018. Commencing March 31, 2016, interest of 5% is payable on a quarterly basis without compounding. The loan may be prepaid in whole or in part at any time without premium or penalty. The loan is convertible into our common stock at a conversion price of $4.01 per share, the closing price of our common stock on the NYSE MKT on the date the promissory note was entered into.
In the event of default, as defined in the promissory note, without any action on the part of Mr. Mintz, the interest rate will increase to 12% per annum and the entire principal and interest balance under the loan, and all of our other obligations under the loan, will be immediately due and payable, and Mr. Mintz will be entitled to seek and institute any and all remedies available to him. The loan is secured by is secured by substantially all of our assets.
Set forth below are the aggregate fees billed for each of the fiscal years ended December 31, 2016 and January 2, 2016 for services rendered by EisnerAmper LLP, our independent registered accounting firm.
Tax fees consist of fees billed for professional services related to the preparation of our U.S. federal and state income tax returns and tax advice. No such fees were billed by EisnerAmper LLP in fiscal 2016 or 2015. The Audit Committee pre-approved all Audit-related fees. After considering the provision of services encompassed within the above disclosures about fees, the Audit Committee has determined that the provision of such services is compatible with maintaining EisnerAmper’s independence.
3.1 Certificate of Incorporation, as amended through February 1986.(1)
3.1.1 March 1986 Amendment to Certificate of Incorporation.(2)
3.1.2 June 1993 Amendment to Certificate of Incorporation.(3)
3.2 By-laws.(1)
4.1 Tofutti Brands Inc. 2014 Equity Incentive Plan.(4)
10.1 Promissory Note.(5)
10.2 Security Agreement.(6)
(1) Filed as an exhibit to the Registrant’s Form 10-K for the fiscal year ended July 31, 1985 and hereby incorporated by reference thereto.
(2) Filed as an exhibit to the Registrant’s Form 10-K for the fiscal year ended August 2, 1986 and hereby incorporated by reference thereto.
(3) Filed as an exhibit to the Registrant’s Form 10-KSB for the fiscal year ended January 1, 2005 and hereby incorporated by reference thereto.
(4) Filed as Appendix A to the Proxy Statement filed as the Registrant’s Schedule 14A filed May 14, 2014 and hereby incorporated by reference thereto.
(5) Filed as Exhibit 10.1 to the Registrant’s Form 8-K bearing a cover date of January 6, 2016 and hereby incorporated by reference thereto.
(6) Filed as Exhibit 10.2 to the Registrant’s Form 8-K bearing a cover date of January 6, 2016 and hereby incorporated by reference thereto.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized on March 31, 2017.
In accordance with the Securities Exchange Act of 1934, this Report has been signed below on March 31, 2017, by the following persons on behalf of the Registrant and in the capacities indicated.
/s/ David Mintz /s/ Joseph N. Himy
David Mintz Joseph N. Himy
/s/ Steven Kass /s/ Scott Korman
Steven Kass Scott Korman
Secretary, Treasurer and Chief Financial Director
/s/ Neal S. Axelrod /s/ Franklyn Snitow
Neal S. Axelrod Franklyn Snitow
ENT> EX-23.1 2 ex23-1.htm
We consent to the incorporation in the Registration Statement of Tofutti Brands Inc. on Form S-8 (No. 333-198197) of our report dated March 31, 2017, on our audits of the financial statements as of December 31, 2016 and January 2, 2016 and for each of the fiscal years then ended, which report was included in the Annual Report on Form 10-K, to be filed on March 31, 2017.
In connection with the Annual Report of Tofutti Brands Inc. (the “Company”) on Form 10-K for the period ending December 31, 2016 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, David Mintz, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
ENT> EX-32.1 6 ex32-2.htm
In connection with the Annual Report of Tofutti Brands Inc. (the “Company”) on Form 10-K for the period ending December 31, 2016 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Steven Kass, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
0001493152-17-003239.txt Complete submission text file 3026588
tofb-20161231.xml 7 XBRL INSTANCE FILE EX-101.INS 340688
tofb-20161231.xsd 8 XBRL SCHEMA FILE EX-101.SCH 27782
tofb-20161231_cal.xml 9 XBRL CALCULATION FILE EX-101.CAL 44585
tofb-20161231_def.xml 10 XBRL DEFINITION FILE EX-101.DEF 92992
tofb-20161231_lab.xml 11 XBRL LABEL FILE EX-101.LAB 224661
tofb-20161231_pre.xml 12 XBRL PRESENTATION FILE EX-101.PRE 189869
$IFANCA $TOF $TOFB