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Investing
in our common stock involves a high degree of risk and uncertainty. You should carefully consider the risks and uncertainties described
below before investing in our common stock. If any of the following risks actually occur, our business prospects, financial condition
and results of operations could be harmed. In that case, the value of our common stock could decline, and you could lose all or part
of your investment.
Risks
Related to Our Business
David
Mintz, our founder, Chairman of the Board, Chief Executive Officer and the developer of all of our products died in February 2021 and
we may be unable to adequately replace him.
On
February 24, 2021, David Mintz, our founder, Chief Executive Officer and Chairman of the Board of Directors, passed away. Steven Kass,
Chief Financial Officer, was appointed CEO by our Board of Directors and was confirmed as permanent CEO by the Board on April 27, 2021.
We presently do not intend to employ a successor to Mr. Mintz in his role as our head of research and development. The loss of his services
could have a material adverse effect on our business and results of operations.
We
depend on a limited number of suppliers for ingredients, packaging materials and the production of our products.
We
depend on a limited number of suppliers for ingredients, packaging materials and the production of our products. We do not produce any
of our own products. For the fiscal years ended December 31, 2022 and January 1, 2022, we purchased approximately 49% and 50%, respectively,
of our finished goods from Franklin Foods, including our BETTER THAN CREAM CHEESE, WHIPPED BETTER THAN CREAM CHEESE, BETTER THAN SOUR
CREAM, and BETTER THAN RICOTTA products, and purchased approximately 14% and 11%, respectively, of our finished goods from
Luke’s Ice Cream, our frozen dessert novelty co-packer. Any disruption in supply could have a material adverse effect on our company.
We
have little control over the suppliers of ingredients to our co-packers. Disruptions in these relationships may reduce our sales and
revenues. Overall difficulty of suppliers meeting product demand, interruptions in the supply chain, obstacles or delays in the process
of renegotiating or renewing agreements with preferred suppliers, financial difficulties experienced by suppliers, or the deficiency,
lack, or poor quality of alternative suppliers could adversely impact our sales which, in turn, would adversely affect our business and
operating results. We believe that, if necessary, we could obtain available alternative sources of supply for each of our products. Depending
on the product, that might entail using more than one source of supply.
Our
operations may be adversely affected by failure to maintain or renegotiate distribution, supply or manufacturing agreements on favorable
terms.
We
have a number of distribution, supply and co-packing agreements for our suppliers and products. These agreements vary depending on the
particular supplier and/or product. There can be no assurance that we will be able to renew these agreements on favorable terms or that
these agreements will not be terminated. Termination of these agreements or failure to renew these agreements on favorable terms could
have a negative effect on our results of operations and financial condition.
We
may not be able to achieve and maintain profitable operations in the future. We may not have sufficient working capital to fund our operations
in the future.
We
incurred a net loss of $525,000 in the fiscal year ended December 31, 2022. As of December 31, 2022, we had $1,072,000 in cash and our
working capital was $3,625,000 as compared to $1,698,000 and $4,326,000 at January 1, 2022. The lack of sufficient working capital in
the past has negatively impacted 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.
Our
operating costs are subject to fluctuations which could affect our business results.
The
principal raw materials that we use are commodities that experience price volatility caused by external conditions such as weather, product
scarcity, limited sources of supply, commodity market fluctuations, currency fluctuations, changes in governmental agricultural and energy
policies and regulations, and more recently by potential residual COVID-19 supply chain disruption. Commodity price changes may result
in unexpected increases in raw material, packaging, and energy costs. Therefore, our success is dependent, in part, on our continued
ability to manage these fluctuations through pricing actions, cost savings projects and sourcing decisions. In the manufacturing and
general overhead areas, we need to maintain key manufacturing and supply arrangements, including any key sole supplier and manufacturing
plant arrangements.
Our
business and results of operations may be negatively impacted by the spread of COVID-19.
An
outbreak of an infectious respiratory illness caused by a novel coronavirus known as COVID-19 was first detected in China in December
2019 and spread globally. This outbreak resulted in travel restrictions, closed international borders, enhanced health screenings at
ports of entry and elsewhere, prolonged quarantines, order cancellations, supply chain disruptions, increased costs for raw materials,
and lower consumer demand, and other significant economic impacts, as well as general concern and uncertainty.
The
residual uncertainty regarding the length of the pandemic’s effects could have negative consequences for our company. To date,
the effects of the pandemic have affected certain aspects of our operations. All of our co-packing facilities operated and continue to
operate normally, and the pandemic did not constrain any of our production requirements. The cost of certain key ingredients and packaging
has increased substantially due to short and long-term supply issues related to COVID-19. We continue to be able to schedule trucks for
delivery and a large majority of our customers are still operating and ordering our products as before. Additionally, our freight costs
have increased due to a driver shortage caused by COVID-19. In response to these cost increases and the potential for additional cost
increases affecting various aspects of our operations, we initiated a series of sales price increases commencing in the fourth quarter
of 2021 which continued into 2022 to help offset these cost increases. If such costs continue to increase during 2023, it may necessitate
additional selling price increases, which could have a negative effect on our sales. The pandemic has had a negative impact on our sales,
specifically with respect to our food service sales to retail outlets, such as restaurants and small food shops, which have historically
accounted for a small part of our total business and with respect to our inability to regain our level of export sales to certain foreign
jurisdictions.
Our
ability to handle customer and consumer communications, schedule production, and order ingredients necessary for our production has not
been materially impacted. Nor have we experienced a significant change in the timeliness of payments of our invoices and our cash position
of approximately $968,000 as of March 27, 2023 has improved since our fiscal year end.
Successful
customer relationships are vital to our business and continued growth.
We
must maintain strong relationships with our existing customers and build relationships with new customers in order to ensure our products
are well presented to our consumers and available for purchase in major markets. The strength of our customer relationships also affects
our ability to obtain pricing and competitive trade terms. Failure to maintain strong relationships with customers could negatively impact
our terms of business with affected customers and reduce the availability of our products to consumers.
We
rely on Steven Kass, our Chief Executive and Financial Officer to manage our business.
Our
future success is significantly dependent on the services of Steven Kass (age 71), our Chief Executive and Financial Officer. The loss
of his services would have a material adverse effect on our business and results of operations.
As
a branded goods business, our success depends on the value and relevance of our brand and products to consumers and on our ability to
innovate and remain competitive.
Consumer
tastes, preferences and behaviors are constantly changing and our ability to anticipate and respond to these changes and to continue
to maintain loyalty to our brand and products is vital to our business. If we are unable to innovate effectively, our sales or margins
could be materially adversely affected.
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 continued acceptance of our current products and the future degree of market acceptance
of any of products, which may be accompanied by significant promotional expenditures, is likely to have an important impact on our future
financial results.
Our
suppliers are subject to federal, state and local government regulations that could adversely affect our business and financial position.
Virtually
all food manufacturing operations are subject to regulation by various federal, state and local government entities and agencies. As
producers of food products for human consumption, our suppliers are subject to stringent production, packaging, quality, labeling and
distribution standards, including regulations mandated by the Federal Food, Drug and Cosmetic Act, the Food Safety Modernization Act,
the FDA, OSHA, the EPA and the USDA. Future regulation by various federal, state or local governmental entities or agencies could, among
other things, increase our suppliers’ cost of production, cause them to incur unexpected expenditures or encumber productivity,
any of which may adversely affect our business and financial results.
We
may not be able to compete effectively in the highly competitive frozen dessert, dairy free cheese food and health food markets.
The
plant-based, vegan and dairy free frozen dessert, cheese and health food markets are highly competitive. In addition, many of our principal
competitors are large, diversified companies with resources significantly greater than ours. We expect strong competition to continue,
including competition for adequate distribution and competition for the limited shelf space for the dairy free frozen dessert and dairy
free cheese food categories in supermarkets and other retail food outlets. 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.
From
time to time, we and our customers experience price pressure in some of our markets as a result of competitors’ promotional pricing
practices as well as general market conditions. Our failure to match or exceed our competitors’ cost reductions through innovative
products and other improvements could weaken our competitive position. Competition is based on product quality, reliability, food safety,
distribution effectiveness, brand loyalty, price, effective promotional activities, the ability to identify and satisfy emerging consumer
preferences and the ability to provide ancillary support services. We may not be able to compete effectively with these larger, more
diversified companies.
A
material change in consumer demand for our products could have a significant impact on our business.
We
are a consumer food products company and rely on continued demand for our products. To achieve business goals, we must develop and sell
products that appeal to consumers. If demand and growth rates fall substantially below expected levels or our market share declines significantly
in these businesses, our results could be negatively impacted. This could occur due to unforeseen negative economic or political events
or to changes in consumer trends and habits.
Breaches
of network or information technology security could have an adverse effect on our business.
We
rely heavily on IT systems to manage critical functions such as operations, data storage and retrieval, revenue recognition, budgeting,
forecasting, financial reporting and other administrative functions. Cyber-attacks or other breaches of network or information technology,
or IT, may cause equipment failures or disrupt our systems and operations. In particular, both unsuccessful and successful cyber-attacks
on companies have increased in frequency, scope and potential harm in recent years. A party who is able to compromise the security measures
on our networks or the security of our infrastructure could, among other things, misappropriate our proprietary information and the personal
information of our customers and employees, cause interruptions or malfunctions in our or our customers’ operations, cause delays
or interruptions to our ability to meet customer needs, cause us to breach our legal, regulatory or contractual obligations, create an
inability to access or rely upon critical business records or cause other disruptions in our operations. These breaches may result from
human errors, equipment failure, or fraud or malice on the part of employees or third parties. Our exposure to cybersecurity threats
and negative consequences of cybersecurity breaches will likely increase as we store increasing amounts of customer data. While no actual
or attempted attacks have had a material impact on our operations or financial condition, we cannot provide any assurance that our business
operations will not be negatively materially affected by such attacks in the future.
We
seek to protect against such threats and may be required to expend significant financial resources to alleviate problems caused by physical,
electronic, and cyber security breaches. As techniques used to breach security are growing in frequency and sophistication and are generally
not recognized until launched against a target, regardless of our protection efforts, we may not be able to implement security measures
in a timely manner or, if and when implemented, these measures could be circumvented. Any breaches that may occur could expose us to
increased risk of lawsuits, loss of existing or potential future customers, harm to our reputation and increases in our security costs,
which could have a material adverse effect on our financial performance and operating results.
In
the event of a breach resulting in loss of data, such as personally identifiable information or other such data protected by data privacy
or other laws, we may be liable for damages, fines and penalties for such losses under applicable regulatory frameworks despite not handling
the data. Furthermore, if a high-profile security breach or cyber-attack occurs with respect to another provider of mission-critical
data center facilities, our customers and potential customers may lose trust in the security of these business models generally, which
could harm our reputation and brand image as well as our ability to retain existing customers or attract new ones. In addition, the regulatory
framework around data custody, data privacy and breaches vary by jurisdiction and is an evolving area of law. We may not be able to limit
our liability or damages in the event of such a loss.
While
we maintain insurance coverage for some of these events, the potential liabilities associated with these events could exceed the insurance
coverage we maintain. A failure to protect the privacy of customer and employee confidential data against breaches of network or IT security
could result in damage to our reputation. Any of these occurrences could result in a material adverse effect on our results of operations
and financial condition.
Economic
conditions adversely affecting consumer discretionary spending may negatively impact our business and operating results.
We
believe that our revenues and profitability are strongly correlated to consumer discretionary spending, which is influenced by general
economic conditions, unemployment levels, and the availability of discretionary income. In an economic downturn or in the event of the
renewed spread of COVID-19, our business and results of operations could be materially and adversely affected.
Our
operating results vary quarterly.
Sales
to our major customers fluctuate widely from period to period and there is no way to accurately predict that their sales pattern from
one year will be repeated in the corresponding period of the next fiscal year. Due to the foregoing factors, in some future quarter our
operating results may be below the expectations of investors. In such event, it is likely that the price of our common stock would be
materially adversely affected.
Global
climate change and legal, regulatory, or market measures to address climate change, may negatively affect our business, operations and
financial results.
We
are subject to risks associated with the long-term effects of climate change on the global economy and on our industry in particular.
Extreme weather and natural disasters within or outside the United States, such as drought, wildfires, storms, changes in ocean currents
and flooding, could make it more difficult and costly for us to manufacture and deliver our products to our customers, obtain raw materials
from our suppliers, or perform other critical corporate functions. In particular, if such climate change impacts negatively affect agricultural
productivity, we may be subject to decreased availability or less favorable pricing from certain commodities that are necessary for our
products. Adverse weather conditions and natural disasters could reduce crop size and crop quality, which could reduce our supplies of
raw materials, lower recoveries of usable raw materials, increase the prices of our raw materials, increase our costs of storing and
transporting raw materials, or disrupt production schedules.
There
is a growing societal concern that carbon dioxide and other greenhouse gases in the atmosphere may have an adverse effect on global temperatures,
weather patterns and the frequency and severity of natural disasters. The increasing concern over climate change could result in new
domestic or international legal requirements for us to reduce greenhouse gas emissions and other environmental impacts of our operations,
improve our energy efficiency, or undertake sustainability measures that exceed those we currently pursue. Furthermore, such measures
may result in the taxation of greenhouse gas emissions. Any such regulatory requirements could cause disruptions in the manufacture of
our products and result in increased capital, procurement, manufacturing and distribution costs. Our reputation and brand could be harmed
if we fail, or are seen as having failed, to respond responsibly and effectively to changes in legal and regulatory measures adopted
to address climate change.
In
addition, changing customer preferences may result in increased demands regarding packaging materials and other components in our products
and their environmental impact on sustainability. Further, customers may place increasing importance on purchasing products that are
sustainably grown and made.. These demands may cause us to incur additional costs or make other changes to other operations to respond
to such demands, which could adversely affect our financial results.
We
have no registered patents. The absence of patent protection could adversely affect our results of operations.
We
rely upon the confidentiality of our formulas and our know-how rather than upon patent protection. There is no assurance that such confidentiality
can or will be maintained or that our know-how cannot be obtained by others or that others do not now possess similar or even more effective
capabilities. The failure to maintain the confidentiality of our know-how could adversely affect our operating results.
Unanticipated
business disruptions could adversely affect our ability to provide our products to our customers.
We
have a complex network of suppliers, co-manufacturing locations, distribution networks, and information systems that support our ability
to consistently provide our products to our customers. Factors that are hard to predict or beyond our control, such as weather, raw material
shortages, natural disasters, fires or explosions, terrorism, or health pandemics, such as the coronavirus, COVID-19, could damage or
disrupt our operations or our suppliers’, co-manufacturers’ or distributors’ operations. These disruptions may require
additional resources to restore our supply chain or distribution network. If we cannot respond to disruptions in our operations, whether
by finding alternative suppliers or replacing capacity at key manufacturing or distribution locations, or if we are unable to quickly
repair damage to our information, production, or supply systems, we may be late in delivering, or be unable to deliver, products to our
customers and may also be unable to track orders, inventory, receivables, and payables. If that occurs, our customers’ confidence
in us and long-term demand for our products could decline. Any of these events could materially and adversely affect our product sales,
financial condition, and operating results.
We
are subject to risks associated with international operations.
In
fiscal 2022, approximately 12% 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 our products or may sell our products
in the future; |
|
|
● |
seasonal
reductions in business activities; and |
|
|
● |
on-going
or newly imposed Covid-19 restrictions imposed by foreign governments. |
Negative
developments in any of these areas in one or more countries could result in a reduction in demand for our products, the cancellation
or delay of orders already placed, difficulty in collecting receivables, and a higher cost of doing business, any of which could adversely
affect our business, results of operations or financial condition.
We
may be adversely affected by fluctuations in currency exchange rates.
Our
foreign transactions are always in U.S. dollars. Therefore, our future export sales could be adversely affected by an increase in the
value of the U.S. dollar, which could increase the local currency price of our products. There can be no assurance such fluctuations
in the future will not materially and adversely affect our revenues from international sales and, consequently, our business, operating
results and financial condition.
Incidents
involving food-borne illnesses, food tampering, or food contamination involving our products or our supply chain could create negative
publicity and significantly harm our operating results.
While
we, our ingredient suppliers and our co-packers dedicate substantial resources to food safety matters to enable customers to enjoy safe,
quality food products, food safety events, including instances of food-borne illness (such as salmonella or E. Coli), have occurred in
the food industry in the past, and could occur in the future. Instances or reports, whether true or not, of food-safety issues, such
as food-borne illnesses, food tampering, food contamination or mislabeling, either during the growing, manufacturing, packaging, storing,
or preparation of products, have in the past severely injured the reputations of companies in the frozen desert and dairy sectors and
could affect us as well. Any report linking us, our suppliers or co-packers to food-borne illnesses or food tampering, contamination,
mislabeling, or other food-safety issues could damage the value of our brands immediately and severely hurt sales of our products and
possibly lead to product liability claims, litigation (including class actions), or other damages. In addition, food safety incidents,
whether or not involving our brands, could result in negative publicity for the industry or market segments in which we operate. Increased
use of social media could create and/or amplify the effects of negative publicity. This negative publicity may reduce demand for our
products.
Food
safety and food-borne illness incidents may materially adversely affect our business by exposing us to lawsuits, product recalls or regulatory
enforcement actions, increasing our operating costs and reducing demand for our product offerings.
Selling
food for human consumption involves inherent legal and other risks, and there is increasing governmental scrutiny of and public awareness
regarding food safety. Unexpected side effects, illness, injury or death related to allergens, food-borne illnesses or other food safety
incidents caused by products we sell, or involving our suppliers or co-manufacturers, could result in the discontinuance of sales of
these products or our relationships with such suppliers or co-manufacturers, or otherwise result in increased operating costs, regulatory
enforcement actions or harm to our reputation. Shipment of adulterated or misbranded products, even if inadvertent, can result in criminal
or civil liability. Such incidents could also expose us to product liability, negligence or other lawsuits, including consumer class
action lawsuits. Any claims brought against us may exceed or be outside the scope of our existing or future insurance policy coverage
or limits. Any judgment against us that is more than our policy limits or not covered by our policies or not subject to insurance would
have to be paid from our cash reserves, which would reduce our capital resources.
The
occurrence of food-borne illnesses or other food safety incidents could also adversely affect the price and availability of affected
ingredients, resulting in higher costs, disruptions in supply and a reduction in our sales. Furthermore, any instances of food contamination
or regulatory noncompliance, whether or not caused by our actions, could compel us, our suppliers, our distributors or our customers,
depending on the circumstances, to conduct a recall in accordance with FDA regulations, comparable state laws or foreign laws. Food recalls
could result in significant losses due to their costs, the destruction of product inventory, lost sales due to the unavailability of
the product for a period of time and potential loss of existing distributors or customers and a potential negative impact on our ability
to attract new customers due to negative consumer experiences or because of an adverse impact on our brand and reputation. The costs
of a recall could exceed or be outside the scope of our existing or future insurance policy coverage or limits.
In
addition, food companies have been subject to targeted, large-scale tampering as well as to opportunistic, individual product tampering,
and we, like any food company, could be a target for product tampering. Forms of tampering could include the introduction of foreign
material, chemical contaminants and pathological organisms into consumer products as well as product substitution. FDA regulations require
companies like us to analyze, prepare and implement mitigation strategies specifically to address tampering (i.e., intentional adulteration)
designed to inflict widespread public health harm. If we do not adequately address the possibility, or any actual instance, of intentional
adulteration, we could face possible seizure or recall of our products and the imposition of civil or criminal sanctions, which could
materially adversely affect our business, financial condition and operating results.
Product
liability suits, if brought, could have a material adverse effect on our business.
From
time to time in the normal course of our business, we become subject to product liability claims. If a product liability claim exceeding
our insurance coverage were to be successfully asserted against us, it could harm our business. We cannot assure you that such coverage
will be sufficient to insure against claims which may be brought against us, or that we will be able to maintain such insurance or obtain
additional insurance covering existing or new products. As a marketer of food products, we are subject to the risk of claims for product
liability. We maintain general product liability and umbrella insurance coverages and generally require that our co-packers maintain
product liability insurance naming us as a co-insured. Similarly, most of our customers require us to name them as additional insureds
as well, and in some cases we are required to sign hold harmless and indemnification agreements.
Our
failure to maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act of 2002 could have an adverse
effect on our financial results and the market price of our common stock.
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 our evaluation under the frameworks described above, our chief executive and financial officer concluded
that our internal control over financial reporting was ineffective as of December 31, 2022 because of the following material weaknesses
in internal controls over financial reporting:
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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, including but not limited to accounting estimates, reserves,
allowances, and income tax matters, in a timely manner. |
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The
limited size of the accounting department makes it impracticable to achieve an optimum separation of duties and monitoring of internal
controls. |
Our
failure to maintain effective internal controls over financial reporting could result in investigation or sanctions by regulatory authorities
and could have a material adverse effect on our operating results, investor confidence in our reported financial information, and the
market price of our common stock.
Risks
Relating to Our Common Stock
Our
principal shareholder has the ability to control the policies and management of our company.
The
estate of our founder, former Chairman of the Board and Chief Executive Officer, David Mintz, holds 2,630,440 shares of common stock
representing approximately 51.0% of the outstanding shares. As long as the estate maintains a controlling interest in our company, it
will have the ability to exercise a controlling influence over our business and affairs, including any determinations with respect to
potential mergers or other business combinations involving us, our acquisition or disposition of assets, our incurrence of indebtedness,
our issuance of any additional common shares or other equity securities, our repurchase or redemption of common shares and our payment
of dividends. Similarly, as long as the estate of Mr. Mintz has a controlling interest in our company, it will have the power to determine
the outcome of matters submitted to a vote of our shareholders, including the power to elect all of the members of our board of directors
and prevent an acquisition or any other change in control of us.
Trading
on the OTCQX 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. On January
10, 2022, our common stock was upgraded to the OTCQX tier. 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.
Penny
stock rules will limit the ability of our stockholders to sell their stock.
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.
The
Financial Industry Regulatory Authority, or FINRA, has adopted sales practice requirements which may also limit a shareholder’s
ability to buy and sell our 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.
Volatility
of the market price of our common stock could adversely affect our shareholders and us.
The
market price of our common stock has been subject to fluctuations in the past and may be subject to wide fluctuations in response to
numerous factors, including the following:
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actual
or anticipated variations in our quarterly operating results or those of our competitors; |
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announcements
by us or our competitors of new and enhanced products; |
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developments
or disputes concerning proprietary rights; |
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introduction
and adoption of new industry standards; |
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market
conditions or trends in our industry; |
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announcements
by us or our competitors of significant acquisitions; |
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entry
into strategic partnerships or joint ventures by us or our competitors; |
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additions
or departures of key personnel; |
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political
and economic conditions, such as a recession or interest rate or currency rate fluctuations or political events; and |
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other
events or factors in any of the countries in which we do business, including those resulting from war, incidents of terrorism, natural
disasters, pandemics or responses to such events. |
In
addition, in recent years the stock market has been highly volatile. Many of these factors are beyond our control and may materially
adversely affect the market price of our ordinary shares, regardless of our performance. In the past, following periods of market volatility,
shareholders have often instituted securities class action litigation relating to the stock trading and price volatility of the company
in question. If we were involved in any securities litigation, it could result in substantial cost to us to defend and divert resources
and the attention of management from our business.
We
do not intend to pay cash dividends.
Our
policy is to retain earnings, if any, for use in our business and, for this reason, we do not intend to pay cash dividends on our shares
of common stock in the foreseeable future.
PART
II
Item
5. |
Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. |
Our
common stock was listed on the American Stock Exchange, or the AMEX, on October 29, 1985 and traded on the AMEX or its successor, NYSE
MKT, under the symbol TOF, until October 24, 2016 when our common stock began to be quoted on the OTCQB tier of the electronic
quotation system operated by OTC Markets under the symbol TOFB. On January 10, 2022, our stock was upgraded to the OTCQX tier.
Holders
of Record
As
of March 27, 2023, there were approximately 290 direct holders of record of our common stock.
Dividends
We
have not paid and have no present intention of paying cash dividends on our common stock in the foreseeable future.
2014
Equity Incentive Plan
Our
shareholders adopted our 2014 Equity Incentive Plan (the “Plan”) on June 10, 2014. 250,000 non-qualified option awards were
granted in the fiscal year ended December 31, 2022, which remain outstanding as of December 31, 2022. No option awards were granted in
the fiscal year ended January 1, 2022.
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 will expire
on June 9, 2024. 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”).
Administration
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”).
Eligible
Participants
Incentive
stock options, or ISOs, may be granted only to employees (including officers and directors who are also employees) of the company. Options
and stock appreciation rights may be granted only to eligible participants as to whom company shares constitute “service recipient
stock,” within the meaning of the regulations under Section 409A of the Code. All other Awards may be granted to employees, officers
and directors of the company. An Eligible Participant may be granted more than one Award under the Plan.
The
Plan allows us to grant ISOs to our employees and non-statutory stock options, stock appreciation rights, restricted stock, performance
grants, stock bonuses and any other types of equity-based awards to our employees, officers and directors. We believe that our ability
to grant this broad array of equity incentives is critical to secure, retain and motivate our employees and directors and to respond
to market conditions and best practices, while at the same time balancing such issuances and the potential dilution to our stockholders.
No
options or stock appreciation rights were exercised in the two fiscal years ended December 31, 2022. There are currently 250,000 outstanding
non-qualified stock options.
Sales
of Unregistered Securities
There
were no sales of unregistered securities during fiscal 2022.
Purchase
of Equity Securities by the Issuer and Affiliates
We
did not purchase any shares of our common stock in the thirteen weeks ended December 31, 2022 (the fourth quarter of fiscal 2022).
Item
7. |
Management’s
Discussion and Analysis of Financial Condition and Results of Operations. |
The
following is management’s discussion and analysis of certain significant factors which have affected our financial position and
operating results during the periods included in the accompanying audited financial statements.
Critical
Accounting Policies
Our
financial statements have been prepared in accordance with accounting principles generally accepted in the United States. The preparation
of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities
and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. The policies discussed below are considered by management to be critical to an understanding
of our financial statements because their application places the most significant demands on management’s judgment, with financial
reporting results relying on estimation about the effect of matters that are inherently uncertain. Specific risks for these critical
accounting policies are described in the following paragraphs. For all of these policies, management cautions that future events rarely
develop exactly as forecast, and the best estimates routinely require adjustment.
Revenue
Recognition. We primarily sell plant-based, vegan, dairy-free soy-based cheeses and frozen desserts. We recognize revenue when control
over the products transfers to our customers, deemed to be the performance obligation, which generally occurs when the product is shipped
or picked up from one of our distribution locations by the customer. We account for product shipping, handling and insurance as fulfillment
activities with revenues for these activities recorded within net revenue and costs recorded within cost of sales. Revenues are recorded
net of trade and sales incentives and estimated product returns. Known or expected pricing or revenue adjustments, such as trade discounts,
rebates or returns, are estimated at the time of sale. We base these estimates of expected amounts principally on historical utilization
and redemption rates. Estimates that affect revenue, such as trade incentives and product returns, are monitored and adjusted each period
until the incentives or product returns are realized.
Key
sales terms, such as pricing and quantities ordered, are established on a frequent basis such that most customer arrangements and related
incentives have a one year or shorter duration. As such, we do not capitalize contract inception costs and we capitalize product fulfillment
costs in accordance with U.S. GAAP and our inventory policies. We generally do not have any unbilled receivables at the end of a period.
Accounts
Receivable. The majority of our accounts receivables are due from distributors (domestic and international) and retailers. Credit
is extended based on evaluation of a customers’ financial condition and, generally, collateral is not required. Accounts receivable
are most often due within 30 to 90 days and are stated at amounts due from customers net of an allowance for doubtful accounts and reserve
for sales promotions. Accounts outstanding longer than the contractual payment terms are considered past due. We determine whether an
allowance is necessary by considering a number of factors, including the length of time trade accounts receivable are past due, our previous
loss history, the customer’s current ability to pay its obligation, and the condition of the general economy and the industry as
a whole. We write-off accounts receivable when they become uncollectible, and payments subsequently received on such receivables are
credited to the bad debt expense account. We do not accrue interest on accounts receivable past due.
Inventory.
Inventory is stated at lower of cost or net realizable value determined by first in first out (FIFO) method. Inventories in excess
of future demand are written down and charged to the provision for inventories. At the point of which loss is recognized, a new, lower
cost basis for that inventory is established and subsequent changes in facts and circumstances do not result in the restoration or increase
in the newly established cost basis.
Income
Taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected
to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date. A valuation allowance is recorded if there is uncertainty as to the realization of deferred
tax assets. We will recognize a tax benefit in the financial statements for an uncertain tax position only if management’s assessment
is that the position is “more likely than not” (i.e., a likelihood greater than 50 percent) to be allowed by the tax jurisdiction
based solely on the technical merits of the position. The term “tax position” refers to a position in a previously filed
tax return or a position expected to be taken in a future tax return that is reflected in measuring current or deferred income tax assets
and liabilities for financial reporting purposes.
Recent
Accounting Pronouncements
Our
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 our balance sheets or statements of operations.
In
June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326) Measurement of Credit Losses on Financial Instruments.
The amendments in this Update require a new topic to be added (Topic 326) to the Accounting Standards Codification (“ASC”)
and removes the thresholds that entities apply to measure credit losses on financial instruments measured at amortized cost, such as
loans, trade receivables, reinsurance recoverables, and off-balance-sheet credit exposures, and held-to-maturity securities. Under current
U.S. GAAP, entities generally recognize credit losses when it is probable that the loss has been incurred. The guidance under ASU 2016-13
will remove all current recognition thresholds and will require entities under the new current expected credit loss (“CECL”)
model to recognize an allowance for credit losses for the difference between the amortized cost basis of a financial instrument and the
amount of amortized cost that an entity expects to collect over the instrument’s contractual life. The new CECL model is based
upon expected losses rather than incurred losses. The ASU is effective for fiscal years beginning after December 15, 2022, including
interim periods within those fiscal years. We are currently evaluating the effect that this new guidance will have on our financial statements
and related disclosures.
Key
Factors Affecting Our Business
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, 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 significant competition
from better capitalized competitors. 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.
We
incurred a loss in fiscal 2022 and have not been consistently profitable in recent years. Our cash decreased to $1,072,000 as of December
31, 2022 from $1,698,000 as of January 1, 2022 and our working capital decreased to $3,625,000 as of December 31, 2022 from $4,326,000
as of January 1, 2022. The lack of sufficient working capital in the future 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.
We
depend on a few key distributors for a significant portion of our sales.
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 47% and 48% of our net sales for the fiscal years ended
December 31, 2022 and January 1, 2022, 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.
Interruptions
in the supply of products from our co-packers and suppliers could adversely affect our revenues.
We
depend on a limited number of suppliers for ingredients, packaging materials and the production of our products. We do not produce any
of our own products. For the years ended December 31, 2022 and January 1, 2022, we purchased approximately 49% and 50%, respectively,
of our finished goods from Franklin Foods, including our BETTER THAN CREAM CHEESE, WHIPPED BETTER THAN CREAM CHEESE, BETTER THAN SOUR
CREAM, and BETTER THAN RICOTTA products, and purchased approximately 14% and 11%, respectively, of our finished goods from
Luke’s Ice Cream, our frozen dessert novelty co-packer. Any disruption in supply could have a material adverse effect on our company.
We
have little control over the suppliers of ingredients to our co-packers. Disruptions in these relationships may reduce our sales and
revenues. Overall difficulty of suppliers meeting product demand, interruptions in the supply chain, obstacles or delays in the process
of renegotiating or renewing agreements with preferred suppliers, financial difficulties experienced by suppliers, or the deficiency,
lack, or poor quality of alternative suppliers could adversely impact our sales which, in turn, would adversely affect our business and
operating results. We believe that, if necessary, we could obtain available alternative sources of supply for each of our products. Depending
on the product, that might entail using more than one source of supply.
We
have a complex network of suppliers, co-manufacturing locations, distribution networks, and information systems that support our ability
to consistently provide our products to our customers. Factors that are hard to predict or beyond our control, such as weather, raw material
shortages, natural disasters, fires or explosions, terrorism, or health pandemics, such as COVID-19, could damage or disrupt our operations
or our suppliers’, co-packers’ or distributors’ operations. These disruptions may require additional resources to restore
our supply chain or distribution network. If we cannot respond to disruptions in our operations, whether by finding alternative suppliers
or replacing capacity at key manufacturing or distribution locations, or if we are unable to quickly repair damage to our information,
production, or supply systems, we may be late in delivering, or be unable to deliver, products to our customers and may also be unable
to track orders, inventory, receivables, and payables. If that occurs, our customers’ confidence in us and long-term demand for
our products could decline. Any of these events could materially and adversely affect our product sales, financial condition, and operating
results.
We
rely on Steven Kass to manage our business.
Upon
the death of Mr. Mintz, our continued success is significantly dependent on the services of Steven Kass (age 71), who is serving as our
Chief Executive and Financial Officer. The loss of his services would have a material adverse effect on our business and results of operations.
Competition.
The
plant-based, dairy free vegan frozen dessert, cheese and health food markets are highly competitive. In addition, many of our principal
competitors are large, diversified companies with resources significantly greater than ours. We expect strong competition to continue,
including competition for adequate distribution and competition for the limited shelf space for the frozen dessert and dairy free cheese
food categories in supermarkets and other retail food outlets.
From
time to time, we and our customers experience price pressure in some of our markets as a result of competitors’ promotional pricing
practices as well as general market conditions. Our failure to match or exceed our competitors’ cost reductions through innovative
products and other improvements could weaken our competitive position. Competition is based on product quality, reliability, food safety,
distribution effectiveness, brand loyalty, price, effective promotional activities, the ability to identify and satisfy emerging consumer
preferences and the ability to provide ancillary support services. We may not be able to compete effectively with these larger, more
diversified companies.
Recent
Developments
An
outbreak of an infectious respiratory illness caused by a novel coronavirus known as COVID-19 has spread globally since December 2019.
This outbreak resulted in travel restrictions, closed international borders, enhanced health screenings at ports of entry and elsewhere,
prolonged quarantines, order cancellations, supply chain disruptions, increased costs for raw materials, and lower consumer demand, and
other significant economic impacts, as well as general concern and uncertainty.
The
residual uncertainty regarding the length of the pandemic’s effects could have negative consequences for our company. To date,
the effects of the pandemic have affected certain aspects of our operations. All of our co-packing facilities operated and continue to
operate normally, and the pandemic did not constrain any of our production requirements. The cost of certain key ingredients and packaging
has increased substantially due to short and long-term supply issues related to COVID-19. We continue to be able to schedule trucks for
delivery and a large majority of our customers are still operating and ordering our products as before. Additionally, our freight costs
have increased due to a driver shortage caused by COVID-19. In response to these cost increases and the potential for additional cost
increases affecting various aspects of our operations, we had initiated a series of sales price increases commencing in the fourth quarter
of 2021 which continued into 2022 to help offset these cost increases. The pandemic has had a negative impact on our sales, specifically
with respect to our food service sales to retail outlets, such as restaurants and small food shops, which account for a small part of
our total business and with respect to our inability to regain our level of export sales to certain foreign jurisdictions.
Our
ability to handle customer and consumer communications, schedule production and order ingredients necessary for our production has not
been materially impacted. Nor have we experienced a significant change in the timeliness of payments of our invoices and our cash position
of approximately $968,000 as of March 27, 2022 has improved since our fiscal year end December 31, 2022.
Fiscal
Year Ended December 31, 2022 Compared with Fiscal Year Ended January 1, 2022
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 periods ended December 31, 2022 (fiscal 2022) and January 1, 2022 (fiscal 2021).
Net
sales for the fiscal year ended December 31, 2022 were $12,827,000, a slight increase of $237,000 or 2%, from net sales of $12,590,000
for the fiscal year ended January 1, 2022 due to the price increases implemented by the Company in the fourth quarter of 2022. Sales
of our frozen dessert and frozen food product lines increased slightly to $1,876,000 in the fiscal year ended December 31, 2022 from
$1,829,000 in fiscal 2021. Sales of vegan cheese products also increased slightly to $10,951,000 in the fiscal year ended December 31,
2022 from $10,761,000 in the fiscal year ended January 1, 2022.
Our
gross profit for the year ended December 31, 2022 decreased by $1,000,000 to $2,342,000 from $3,342,000 for the fiscal year ended January
1, 2022. Our gross profit percentage for the fiscal year ended December 31, 2022 was 18% compared to 27% for the fiscal year ended January
1, 2022. Sales promotion and allowance expense increased to $1,514,000 in the fiscal year ended December 31, 2022 from $1,487,000 in
the fiscal year ended January 1, 2022. The decrease in both our gross profit and gross profit percentage was primarily caused by the
substantial increases in the costs for certain ingredients, especially palm oil, gums and flavorings and the substantial increase in
freight out expense. These substantial cost increases were due primarily to the lingering supply chain issues caused by the Covid-19
pandemic and the record high cost of petroleum. The high cost of petroleum directly impacted the costs of certain ingredients and packaging
such as the plastic packaging we use for our spreadable cheese products.
Freight
out expense increased by $100,000 or 9% to $1,159,000 for the year ended December 31, 2022 compared with $1,059,000, or 8%, for the year
ended January 1, 2022. Freight out expense increased due to significant increases in freight rates across all methods of shipping due
to increases in fuel costs and the reduction in vehicle availability due to the pandemic. Freight out cost as a percentage of sales was
9% and 8% for the years ended December 31, 2022 and January 1, 2022, respectively. Due to the continued high cost of petroleum, we anticipate
that our freight out expense will continue at a high percentage of sales in 2023, similar to fiscal year 2022.
Selling
and warehousing expenses decreased by $59,000, or 5%, to $1,147,000 for the fiscal year ended December 31, 2022 from $1,206,000 for the
fiscal year ended January 1, 2022. This decrease was primarily attributable to decreases in payroll expense of $22,000, outside warehouse
rental expense of $96,000, and commission expense of $19,000, which were partially offset by increases in messenger costs of $15,000
and meeting and convention expense of $57,000. We anticipate that our selling expense will continue at the same level in 2023. The increase
in meeting and convention expense was due to the resumption of the Company’s participation in trade and distribution shows.
Marketing
expenses increased in the fiscal year ended December 31, 2022 by $283,000, or 101%, to $564,000 from $281,000 in the fiscal year ended
January 1, 2022 due to increases in promotion expense of $86,000, non-capitalizable artwork and plate expense of $98,000, point of sale
material expense of $33,000 and advertising expense of $61,000. In 2022, we completed the rebranding of our product line and introduced
new packaging for our products, which along with other related marketing expenditures, accounted for a substantial increase in our marketing
expenses. Because many of the expenditures were one-time expenses, we anticipate that our marketing expenses for 2023 will decrease significantly.
Research
and development expenses increased by $19,000, or 15%, to $143,000 in the fiscal year ended December 31, 2022 from $124,000 in the fiscal
year ended January 1, 2022. The increase was primarily attributable to an increase in professional fees and outside services expense
of $39,000, which was partially offset by decreases in lab costs and supplies expense of $9,000 and depreciation expense of 10,000.
General
and administrative expenses decreased by $85,000, or 6%, to $1,404,000 for the year ended December 31, 2022 from $1,489,000 for the year
ended January 1, 2022. The decrease was primarily due to decreases in payroll expense of $42,000, professional fees and outside services
expense of $73,000, equipment rental expense of $24,000 and the one-time $75,000 expense in fiscal 2021 relating to the sale of an asset,
which were partially offset by increases in public relations expense of $67,000, stock-based compensation expense of $56,000, and building
maintenance expense of $17,000. The decrease in payroll expense was due to no salary being paid to Mr. Mintz this period compared to
the same period in the prior year. We anticipate that our total general and administrative expenses for fiscal 2023 will be consistent
with those in fiscal 2022.
Overall,
total operating expenses increased by $158,000, or 5%, to $3,258,000 for the year ended December 31, 2022 compared to total operating
expenses of $3,100,000 in the year ended January 1, 2022. Due to the one-time nature of certain of our operating expenses in fiscal 2022,
we anticipate a reduction in our operating expenses in fiscal 2023.
As
a result of the foregoing we incurred an operating loss of $916,000 in the year ended December 31, 2022 as compared with operating income
of $242,000 in the year ended January 1, 2022.
Loss
before income taxes was $753,000 in the year ended December 31, 2022 as compared with income before income taxes of $217,000 in the year
ended January 1, 2022.
Benefit
from income taxes for the year ended December 31, 2022 was $228,000 compared to income tax expense of $74,000 for the year ended January
1, 2022 resulting from the lower pre-tax income during this period compared to prior year.
Liquidity
and Capital Resources
At
December 31, 2022, we had approximately $1,072,000 in cash, and our working capital was $3,625,000 as compared to $1,698,000 and $ 4,326,000
at January 1, 2022. We principally operate our business on the cash flows from our operations and currently have no borrowings. In order
to provide our company with needed working capital, David Mintz, our former Chairman and Chief Executive Officer, provided our company
with a convertible loan of $500,000 in January 2016. On December 22, 2021, the loan balance of $500,000 plus accrued interest of $25,000
was paid by the Company to Mr. Mintz’s estate.
Cash
Flows
| |
Fiscal
Year ended | |
| |
December
31, 2022 | | |
January
1, 2022 | |
| |
(In
thousands) | |
Net
cash (used in) provided by operating activities | |
$ | (616 | ) | |
$ | 689 | |
Net
cash provided by investing activities – sale and disposal of equipment | |
| - | | |
| 50 | |
Net
cash used in financing activities | |
| (10 | ) | |
| (500 | ) |
Net
(decrease) increase in cash | |
| (626 | ) | |
| 239 | |
Cash
at beginning of year | |
| 1,698 | | |
| 1,459 | |
Cash
at end of year | |
$ | 1,072 | | |
$ | 1,698 | |
Cash
used in operating activities for the fiscal year ended December 31, 2022 was $616,000 compared to $689,000 provided by operating activities
for the fiscal year ended January 1, 2022. Cash used in operating activities was primarily from our net loss of $525,000, SBA loan forgiveness
of $165,000, a deferred tax asset increase of $255,000, an increase in inventories of $589,000, and a non-cash change in right of use
assets and lease liabilities of $12,000, offset by stock-based compensation of $56,000, amortization of financing right-of-use asset
of $9,000, provision for bad debts expense of $15,000, a decrease in accounts receivable of $16,000 and an increase in accounts payable
and accrued expenses of $819,000.
Cash
provided by investing activities was $0 for the fiscal year ended December 31, 2022 compared to cash provided by investing activities
of $50,000 for the fiscal year ended January 1, 2022. Cash provided by investing activities in the fiscal year ended January 1, 2022
was due to proceeds from the sale of equipment.
Cash
used in financing activities for the fiscal year ended December 31, 2022 was $10,000 compared to cash used of $500,000 for the fiscal
year ended January 1, 2022. Cash used in financing activities for the fiscal year ended December 31, 2022 was due to payments made on
our financing lease. Cash used in financing activities in the fiscal year ended January 1, 2022 was due to the repayment of a convertible
note of $500,000 that had been provided to us by Mr. Mintz.
As
a result of the foregoing, our cash decreased to $1,072,000 at December 31, 2022 from $1,698,000 at January 1, 2022.
We
believe our existing cash on hand at December 31, 2022, our existing working capital, and our expected cash flows from operations will
be sufficient to support our operating and capital requirements for at least the next twelve months dating from the issuance of the financial
statements.
Contractual
Obligations
We
had no material contractual obligations at December 31, 2022.
Inflation
and Seasonality
We
do not believe that our operating results have been materially affected by inflation during the preceding two years. There can be no
assurance, however, that our operating results will not be affected by inflation in the future. Our business is subject to minimal seasonal
variations with slightly increased sales historically in the second and third quarters of the fiscal year. We expect to continue to experience
slightly higher sales in the second and third quarters, and slightly lower sales in the fourth and first quarters, as a result of reduced
sales of dairy free frozen desserts during those periods.
Market
Risk
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, 2022.
Off-Balance
Sheet Arrangements
None.
Item
7A. |
Quantitative
and Qualitative Disclosures about Market Risk. |
Not
applicable.
Item
8. |
Financial
Statements and Supplementary Data. |
Index
to Financial Statements
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the Board of Directors and Stockholders of Tofutti Brands Inc.
Opinion
on the Financial Statements
We
have audited the accompanying balance sheets of Tofutti Brands Inc (the “Company”) as of December 31, 2022 and January 1,
2022, the related statements of operations, stockholders’ equity, and cash flows, for the fiscal years then ended, and the related
notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly,
in all material respects, the financial position of the Company as of December 31, 2022 and January 1, 2022, and the results of its operations
and its cash flows for the fiscal years then ended, in conformity with accounting principles generally accepted in the United States
of America.
Basis
for Opinion
These
financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s
financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board
(United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal
securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We
conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company
is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit,
we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion
on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our
audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or
fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding
the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant
estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits
provide a reasonable basis for our opinion.
Critical
Audit Matter
The
critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated
or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial
statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters
does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit
matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Significant
estimates of sales discounts and allowances
As
described in Note 1 to the financial statements, 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 the sale.
The Company bases these estimates of expected amounts principally on historical utilization and redemption rates. Estimates that affect
revenue and trade receivables, such as trade incentives and product returns, are monitored and adjusted each period until the incentives
or product returns are realized. Considering the estimation and judgement required by management in determining these amounts, our audit
of these estimates require a degree of auditor judgement regarding these qualitative factors.
The
primary procedures we performed to address this critical audit matter included:
Our
audit procedures related to significant estimates of sales discounts and allowances included the following, among others:
|
● |
We
obtained an understanding of the Company’s evaluation of the historical application of sales discounts and allowances. |
|
|
|
|
● |
We
performed audit procedures that included, among others, testing of the significant estimates surrounding sales discounts and allowance
included an understanding of all sales promotions, and other discounts available during the year, analysis of credit memos, including
those subsequent to year end, and an historical analysis of accrued sales allowances and discounts compared to the current trends. |
We
have served as the Company’s auditor since 2021.
/s/
Mazars USA LLP
Edison,
NJ
March
31, 2023
TOFUTTI
BRANDS INC.
BALANCE
SHEETS
(In
thousands, except for share and per share data)
See
accompanying notes to financial statements
TOFUTTI
BRANDS INC.
STATEMENTS
OF OPERATIONS
(In
thousands, except for per share data)
See
accompanying notes to financial statements.
TOFUTTI
BRANDS INC.
STATEMENTS
OF CHANGES IN STOCKHOLDERS’ EQUITY
Fiscal
Years ended December 31, 2022 and January 1, 2022
(In
thousands, except for share data)
See
accompanying notes to financial statements.
TOFUTTI
BRANDS INC.
STATEMENTS
OF CASH FLOWS
(In
thousands)
See
accompanying notes to financial statements.
TOFUTTI
BRANDS INC.
NOTES
TO FINANCIAL STATEMENTS
(In
thousands, except for share and per share data)
NOTE
1: DESCRIPTION OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description
of Business – Tofutti is engaged in one business segment, the development, production and marketing of plant based, dairy vegan
free frozen desserts and other food products.
Operating
Segments - The Company reports on operating segments in accordance with standards for public companies to report information about
operating segments and geographic distribution of sales in financial statements. The Company has determined that it has only one operating
segment, which is the development, production and marketing of soy and other vegetable protein- based, dairy free cheese and frozen food
products.
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 and fifty-three week fiscal periods ended December 31, 2022 and January 1, 2022, fiscal 2022 and
fiscal 2021, 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 promotion accruals. 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.
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 49% and 50% of its finished products from one supplier and 14% and 11% of its finished products from
another supplier during the periods ended December 31, 2022 and January 1, 2022, 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 primarily sells plant-based, dairy free vegan 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 delivery or 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.
TOFUTTI
BRANDS INC.
NOTES
TO FINANCIAL STATEMENTS
(In
thousands, except for share and per share data)
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 one of the two financial institutions 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 31, 2022 is limited.
During
the fiscal years ended December 31, 2022 and January 1, 2022, the Company derived approximately 88% and 87%, respectively, of its net
sales domestically. The remaining sales in both periods were exports to foreign countries. The accounts receivable balance of two customers
represented approximately 47% of total accounts receivable at December 31, 2022 and the accounts receivable balance of two customers
represented approximately 55% of total accounts receivable at January 1, 2022. 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 % and % of the Company’s net sales for the fiscal years ended December 31, 2022
and January 1, 2022, 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.
Earnings
Per Share - Basic earnings per common share (“EPS”) applicable to common stockholders is computed by dividing earnings
applicable to common stockholders by the weighted-average number of common shares outstanding. If there is a loss from operations, diluted
EPS is computed in the same manner as basic EPS is computed.
SCHEDULE OF EARNINGS PER SHARE, BASIC AND DILUTED
| |
Fiscal
Year Ended December
31, 2022 | | |
Fiscal
Year Ended January
1, 2022 | |
Net
income (loss), numerator, basic computation | |
$ | (525 | ) | |
$ | 143 | |
Net
income (loss), numerator, diluted computation | |
$ | (525 | ) | |
$ | 143 | |
| |
| | | |
| | |
Weighted
average shares - denominator basic computation | |
| 5,154 | | |
| 5,154 | |
Weighted
average shares, as adjusted - denominator diluted computation | |
| 5,154 | | |
| 5,154 | |
Earnings
(loss) per common share: | |
| | | |
| | |
Basic | |
$ | (0.10 | ) | |
$ | 0.03 | |
Diluted | |
$ | (0.10 | ) | |
$ | 0.03 | |
TOFUTTI
BRANDS INC.
NOTES
TO FINANCIAL STATEMENTS
(In
thousands, except for share and per share data)
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 EPS is anti-dilutive:
SCHEDULE
OF WEIGHTED AVERAGE NUMBERS OF SHARES
| |
Fiscal
Year Ended December
31, 2022 | | |
Fiscal
Year Ended January
1, 2022 | |
Shares
subject to outstanding common stock options | |
| 250,000 | | |
| - | |
Shares
subject to outstanding convertible note (repaid in full in fiscal year 2021) | |
| - | | |
| 282,486 | |
Shares
subject to outstanding, shares | |
| - | | |
| 282,486 | |
Fair
Value of Financial Instruments - The fair value of financial instruments, which primarily consist of cash, accounts receivable, SBA
note payable, 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.
Small
Business Administration (SBA) Loan - On May 2, 2020 the Company received from the SBA a loan of $165 from the Paycheck Protection
Program at an interest rate of 1%. Interest and payments were deferred until March 4, 2021 The current portion of the loan was $165 as
of January 1, 2022 and the loan would have expired on May 2, 2022. On January 12, 2022, the Company was informed by the SBA that the
entire amount of the loan had been forgiven. The Company recorded forgiveness of debt income of $165 in fiscal year 2022 as SBA loan
forgiveness on the statement of operations. See Note 4.
Freight
Costs - Freight costs to ship inventory to customers and to outside warehouses amounted to $1,159 and $1,037 during the fiscal years
ended December 31, 2022 and January 1, 2022, 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 $251 and $209 during the fiscal
years December 31, 2022 and January 1, 2022, respectively, and are included in marketing 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 $143 and $124 during the fiscal years ended December 31, 2022 and January 1, 2022, 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.
Recent
Accounting Pronouncements – The Company considers the applicability and impact of all Accounting Standard Updates (“ASUs”).
ASUs not discussed below were assessed and determined to be either not applicable or are expected to have minimal impact on the Company’s
balance sheets or statements of operations.
In
June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326) Measurement of Credit Losses on Financial Instruments.
The amendments in this Update require a new topic to be added (Topic 326) to the Accounting Standards Codification (“ASC”)
and removes the thresholds that entities apply to measure credit losses on financial instruments measured at amortized cost, such as
loans, trade receivables, reinsurance recoverables, off-balance-sheet credit exposures, and held-to-maturity securities. Under current
U.S. GAAP, entities generally recognize credit losses when it is probable that the loss has been incurred. The guidance under ASU 2016-13
will remove all current recognition thresholds and will require entities under the new current expected credit loss (“CECL”)
model to recognize an allowance for credit losses for the difference between the amortized cost basis of a financial instrument and the
amount of amortized cost that an entity expects to collect over the instrument’s contractual life. The new CECL model is based
upon expected losses rather than incurred losses. Additionally, the credit loss recognition guidance for available-for-sale securities
is amended and will require that credit losses on such debt securities should be recognized as an allowance for credit losses rather
than a direct write-down of amortized cost balance. As the Company is a smaller reporting company, the ASU is effective for fiscal years
beginning after December 15, 2022, including interim periods within those fiscal years. The adoption
of ASU 2016-13 is not expected to have a material impact on our consolidated financial statements.
TOFUTTI
BRANDS INC.
NOTES
TO FINANCIAL STATEMENTS
(In
thousands, except for share and per share data)
NOTE
2: INVENTORIES
Inventories
consist of the following:
SCHEDULE OF INVENTORIES
| |
December
31, 2022 | | |
January
1, 2022 | |
Finished
products | |
$ | 1,387 | | |
$ | 1,218 | |
Raw
materials and packaging | |
| 1,076 | | |
| 656 | |
Inventories, net | |
$ | 2,463 | | |
$ | 1,874 | |
NOTE
3: EQUIPMENT
During
September 2021, the Company sold manufacturing equipment with a cost of $102 and accumulated depreciation of $15 for total proceeds of
$50. As of the year ended January 1, 2022, the Company disposed of the remaining balance of the equipment due to the discontinuance of
the frozen dessert products manufactured using this equipment. The $75 loss on this sale and disposal has been presented as a component
of general and administrative expenses on the statements of income for the fiscal year ended January 1, 2022.
NOTE
4: NOTES PAYABLE
Small
Business Administration (SBA) Loan
On
May 2, 2020 the Company received from the SBA a loan of $165 from the Paycheck Protection Program at an interest rate of 1%. Interest
and payments were deferred until March 4, 2021 The current portion of the loan was $165 as of January 1, 2022 and the loan would have
expired on May 2, 2022. On January 12, 2022, the Company was informed by the SBA that the entire amount of the loan had been forgiven.
The Company recorded forgiveness of debt income of $165 in fiscal year 2022 as SBA loan forgiveness
on the statement of operations.
Related
Party
On
January 6, 2016, David Mintz, the Company’s former Chairman and Chief Executive, provided the Company with a loan of $500. The
loan was extended until December 31, 2021 and was, at the option of the holder, convertible into the Company’s common stock at
a conversion price of $1.77 per share, the closing price of the Company’s common stock on the date of the extension of the promissory
note. Interest expense incurred to the related party was $0 and $25 for fiscal years ended December 31, 2022 and January 1, 2022, respectively.
On December 22, 2021, the entire loan of $500 plus accrued interest of $25 was paid by the Company to Mr. Mintz’s estate.
NOTE
5: 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.”
250,000 and 0 stock options were issued in 2022 and 2021, respectively, and 250,000 non-qualified options were outstanding as of December
31, 2022. The exercise price of all options granted in 2022 is $0.95 per share, the market price at the close of business on the date
of the grant. 83,333 of the options vested at the respective grant date, 83,333 will vest in December 2023, and 83,334 will vest in December
2024. In the event of a sale of the Company at any time prior to December 22, 2024, all remaining unvested options shall vest immediately.
All options expire on December 21, 2027.
TOFUTTI
BRANDS INC.
NOTES
TO FINANCIAL STATEMENTS
(In
thousands, except for share and per share data)
The
following is a summary of stock option activity from January 1, 2022 to December 31, 2022:
SCHEDULE
OF STOCK OPTION ACTIVITY
| |
NON-QUALIFIED
OPTIONS | |
| |
Shares | | |
Weighted
Average Exercise
Price ($) | |
Outstanding
at January 1, 2022 | |
| — | | |
| — | |
Granted | |
| 250,000 | | |
| 0.95 | |
Exercised | |
| — | | |
| — | |
Outstanding
at December 31, 2022 | |
| 250,000 | | |
| 0.95 | |
Exercisable
at December 31, 2022 | |
| 83,333 | | |
| 0.95 | |
The
following table summarizes information about stock options outstanding at December 31, 2022:
SCHEDULE
OF INFORMATION ABOUT STOCK OPTIONS
Range
of Exercise
Prices ($) | | |
Number Outstanding | | |
Weighted
Average Remaining Life (in
years) | | |
Weighted
Average Exercise Price($) | | |
Number Exercisable | |
$ | 0.95 | | |
| 250,000 | | |
| 5.00 | | |
$ | 0.95 | | |
| 83,333 | |
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 vesting in December
2023, and 83,334 vesting 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 31, 2022, the intrinsic value of the options outstanding and exercisable options was $60 and $20 respectively, and there
was $105 of total unrecognized compensation cost. Total stock-based compensation for the year ended December 31, 2022 was $56, which
is recorded in general and administrative expenses on the statement of operations.
250,000
options will expire on December 22, 2027 if not exercised by that date.
NOTE
6: REVENUE
Performance
obligations relating to the delivery of food products are satisfied when the goods are shipped to the customer and net of all applicable
discounts, as follows: Payment term discounts, off-invoice allowance, manufacturer chargeback, freight allowance, spoilage discounts,
and product returns.
Revenues
by geographical region are as follows:
SCHEDULE
OF DISAGGREGATION REVENUE
| |
December
31, 2022 | | |
January
1, 2022 | |
Revenues
by geography: | |
| | | |
| | |
Americas | |
$ | 12,110 | | |
$ | 11,864 | |
Europe | |
| 170 | | |
| 183 | |
Middle
East | |
| 494 | | |
| 334 | |
Asia
Pacific and Africa | |
| 53 | | |
| 209 | |
Revenues | |
$ | 12,827 | | |
$ | 12,590 | |
TOFUTTI
BRANDS INC.
NOTES
TO FINANCIAL STATEMENTS
(In
thousands, except for share and per share data)
Approximately
88% in fiscal 2022 and 87% in fiscal 2021 of the Americas revenue is attributable to the United States. All of the Company’s assets
are located in the United States.
NOTE
7: LEASES
The
Company’s facilities are located in a one-story facility in Cranford, New Jersey. The 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 $86 in fiscal 2022 and $79 in fiscal 2021. The Company’s management believes that
the Cranford facility will continue to satisfy its space requirements for the foreseeable 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 $363 and 459 for the fiscal years ended December 31, 2022 and January 1, 2022, respectively. The Company
rents copiers under finance leases. In 2022, the Company terminated two copier leases, and entered into one additional lease, which exists
as of December 31, 2022. Payments for copiers amounted to $10 and $35 for the fiscal years ended December 31, 2022 and January 1, 2022,
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
ROU assets.
The
Company’s lease agreements generally do not provide an implicit borrowing rate; therefore, an internal incremental borrowing rate
is determined based on information available at lease commencement date for purposes of determining the present value of lease payments.
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:
SCHEDULE OF ROU LEASE ASSETS AND LIABILITIES FOR OPERATING LEASES
| |
As
of | | |
As
of | |
| |
December
31, 2022 | | |
January
1, 2022 | |
Operating
lease right-of-use assets | |
$ | 158 | | |
$ | 203 | |
| |
| | | |
| | |
Current
portion of lease liabilities | |
| 74 | | |
| 123 | |
Operating
lease liabilities, net of current portion | |
| 85 | | |
| 95 | |
Total
lease liabilities | |
$ | 159 | | |
$ | 218 | |
| |
| | | |
| | |
Weighted
average remaining lease term (in years) | |
| 2.1 | | |
| 3.0 | |
Weighted
average discount rate | |
| 5.5 | % | |
| 5.5 | % |
TOFUTTI
BRANDS INC.
NOTES
TO FINANCIAL STATEMENTS
(In
thousands, except for share and per share data)
ROU
lease asset and lease liability for our finance lease were recorded in the balance sheet as follows:
SCHEDULE
OF ROU LEASE ASSETS AND LIABILITIES FOR FINANCE LEASES
| |
As
of | | |
As
of | |
| |
December
31, 2022 | | |
January
1, 2022 | |
Finance
lease right-of-use asset | |
$ | 53 | | |
$ | - | |
| |
| | | |
| | |
Current
portion of lease liabilities | |
| 15 | | |
| - | |
Operating
lease liabilities, net of current portion | |
| 39 | | |
| - | |
Total
lease liabilities | |
$ | 54 | | |
$ | - | |
| |
| | | |
| | |
Weighted
average remaining lease term (in years) | |
| 3.4 | | |
| - | |
Weighted
average discount rate | |
| 6.5 | % | |
| - | % |
Future
lease payments included in the measurement of lease liabilities on the balance sheet as of December 31, 2022, for the following three
fiscal years and thereafter are as follows:
SCHEDULE
OF FUTURE LEASE PAYMENTS
|
|
Operating
lease liabilities |
|
|
Finance lease liability |
|
|
Total | |
2023 |
|
$ |
81 |
|
|
$ |
17 |
|
|
$ | 98 | |
2024 |
|
|
81 |
|
|
|
17 |
|
|
| 98 | |
2025 |
|
|
7 |
|
|
|
17 |
|
|
| 24 | |
2026 |
|
|
- |
|
|
|
8 |
|
|
| 8 | |
Total
future minimum lease payments |
|
|
169 |
|
|
|
59 |
|
|
| 228 | |
Present
value adjustment |
|
|
(10 |
) |
|
|
(5 |
) |
|
| (15 | ) |
Total |
|
$ |
159 |
|
|
$ |
54 |
|
|
$ | 213 | |
TOFUTTI
BRANDS INC.
NOTES
TO FINANCIAL STATEMENTS
(In
thousands, except for share and per share data)
NOTE
8: INCOME TAXES
The
components of income tax expense for the fiscal years ended December 31, 2022 and January 1, 2022 are as follows:
SCHEDULE OF COMPONENTS OF INCOME TAX EXPENSE (BENEFIT)
| |
December
31, 2022 | | |
January
1, 2022 | |
Current: | |
Federal | |
$ | - | | |
$ | 64 | |
| |
State | |
| 26 | | |
| 39 | |
| |
| |
| 26 | | |
| 103 | |
Deferred: | |
Federal | |
| (190 | ) | |
| (22 | ) |
| |
State | |
| (64 | ) | |
| (7 | ) |
| |
| |
| (254 | ) | |
| (29 | ) |
Total
income tax (benefit) expense | |
| |
$ | (228 | ) | |
$ | 74 | |
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 31, 2022 and January 1, 2022, respectively, follows:
SCHEDULE OF RECONCILIATION BETWEEN THE EXPECTED FEDERAL TAX EXPENSE AT STATUTORY TAX RATE
| |
December
31, 2022 | | |
January
1, 2022 | |
Federal
income tax | |
$ | (157 | ) | |
$ | 46 | |
State
income taxes, net of federal income tax benefit | |
| (64 | ) | |
| 18 | |
Nontaxable
forgiveness of PPP loan | |
| (35 | ) | |
| - | |
Permanent
items | |
| 2 | | |
| 3 | |
Other | |
| 26 | | |
| 7 | |
Total income tax expense | |
$ | (228 | ) | |
$ | 74 | |
Deferred
tax assets for the fiscal years ended December 31, 2022 and January 1, 2022 consist of the following components:
SCHEDULE OF DEFERRED TAX ASSETS
| |
December
31, 2022 | | |
January
2, 2021 | |
Allowance
for doubtful accounts | |
$ | 105 | | |
$ | 88 | |
Right
of use asset | |
| (59 | ) | |
| (57 | ) |
Lease
liabilities | |
| 60 | | |
| 61 | |
Inventory | |
| 1 | | |
| 1 | |
Net
operating loss carryforward | |
| 189 | | |
| - | |
Stock
options | |
| 16 | | |
| - | |
Research
and development | |
| 36 | | |
| - | |
Fixed
assets | |
| 19 | | |
| 19 | |
Deferred
tax asset, net | |
$ | 367 | | |
$ | 112 | |
TOFUTTI
BRANDS INC.
NOTES
TO FINANCIAL STATEMENTS
(In
thousands, except for share and per share data)
At
December 31, 2022 the Company had $786 federal net operating loss carryforwards and $673 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 31, 2022 and
January 1, 2022:
SCHEDULE OF CHANGES TO COMPANY'S UNCERTAIN TAX POSITIONS
Balance
at January 2, 2021 | |
$ | 172 | |
Increase
due to reserves and tax positions related to current year | |
| 8 | |
| |
| | |
Balance
at January 1, 2022 | |
$ | 180 | |
Increase
due to reserves and tax positions related to current year | |
| 26 | |
Balance
at December 31, 2022 | |
$ | 206 | |
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 $206. The liability at December 31, 2022
of uncertain tax positions is included in accrued expenses. The Company is no longer subject to federal and state examinations for fiscal
years before 2020.
NOTE
9: COMMITMENTS AND CONTINGENCIES
The
Company sells its products throughout the United States and in approximately twelve foreign countries and may be impacted by 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. In December 2019, a novel strain of the Coronavirus, COVID-19, was reported
to have surfaced in Wuhan, China, which has evolved into a pandemic. This situation and preventative or protective actions that governments
have taken to counter the effects of the pandemic have resulted in a period of business disruption, including delays in shipments of
products and raw materials. To the extent the impact of COVID-19 continues or worsens, the demand for the Company’s products may
be negatively impacted, and it and its co-packers may have difficulty obtaining the materials necessary for the production of its products.
In addition, the production facilities of the Company’s co-packers may be closed for sustained periods of time and industry-wide
shipment of products may be negatively impacted. COVID-19 has also impacted the Company’s sales efforts as its ability to make
sales calls is constrained. The Company’s ability to promote sales through promotional activities has also been constrained as
many supermarkets are understaffed and unable to change pricing for items in stock, resulting in the cancelation of all sales promotional
discounts for the foreseeable future. The length and severity of the pandemic could also affect the Company’s regular sales, which
could in turn result in reduced sales and a lower gross margin.
Item
9. |
Changes
in and Disagreements with Accountants on Accounting and Financial Disclosure. |
None.
Item
9A. |
Controls
and Procedures. |
Evaluation
of Disclosure Controls and Procedures
Evaluation
of Disclosure Controls and Procedures. As of December 31, 2022, our company’s chief executive and 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 2021.
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 ensuring
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.
Management’s
Annual Report on Internal Control Over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over
financial reporting is a process designed by, or under the supervision of the Chief Executive and Financial Officer and effected by our
board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
Because
of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of
any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may deteriorate.
Management’s
evaluation of internal control over financial reporting includes using the Committee of Sponsoring Organizations of the Treadway Commission,
or COSO, framework, an integrated framework (2013) for the evaluation of internal controls issued by COSO, to identify the risks and
control objectives related to the evaluation of our control environment.
On
February 24, 2021 David Mintz, our founder, Chief Executive Officer and Chairman of the Board of Directors, passed away. Steven Kass,
Chief Financial Officer, was appointed interim CEO by our Board of Directors and was confirmed as permanent CEO by the Board on April
27, 2021.
Based
on the evaluation under the frameworks described above, Mr. Kass, our chief executive and financial officer, has concluded that our internal
control over financial reporting was ineffective as of December 31, 2022 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, including but not limited to accounting estimates, reserves,
allowances, and income tax matters, in a timely manner. |
|
|
|
|
● |
The
limited size of the accounting department makes it impracticable to achieve an optimum separation of duties and monitoring of internal
controls. |
Remediation
To
date, we have been unable to remediate these weaknesses, which stem from our small workforce. As of the date of this filing we employ
five people.
Changes
in Internal Control over Financial Reporting
No
change in our internal control over financial reporting occurred during the quarter ended December 31, 2022 that materially affected,
or is reasonably likely to materially affect, our internal control over financial reporting.
This
annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial
reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to the rules of
the Securities and Exchange Commission that permit us to provide only management’s report in this annual report.
Item
9B. |
Other
Information. |
None.
Item
9C. |
Disclosure
Regarding Foreign Jurisdictions that Prevent Inspections. |
Not
applicable.