Item
1.
Financial Statements
TOFUTTI
BRANDS INC.
Condensed
Balance Sheets
(in
thousands, except share and per share figures)
|
|
October 1, 2016
|
|
|
January 2, 2016*
|
|
Assets
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
197
|
|
|
$
|
55
|
|
Accounts receivable, net of allowance for doubtful accounts and sales promotions of $361 and $316 respectively
|
|
|
2,503
|
|
|
|
1,783
|
|
Inventories
|
|
|
1,616
|
|
|
|
1,473
|
|
Prepaid expenses
|
|
|
51
|
|
|
|
74
|
|
Deferred costs
|
|
|
99
|
|
|
|
101
|
|
Total current assets
|
|
|
4,466
|
|
|
|
3,486
|
|
|
|
|
|
|
|
|
|
|
Fixed assets (net of accumulated depreciation of $12 and $8, respectively)
|
|
|
17
|
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
16
|
|
|
|
16
|
|
|
|
$
|
4,499
|
|
|
$
|
3,523
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders’ Equity
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Note payable-current
|
|
$
|
6
|
|
|
$
|
5
|
|
Accounts payable
|
|
|
1,118
|
|
|
|
1,117
|
|
Accrued expenses
|
|
|
352
|
|
|
|
248
|
|
Deferred revenue
|
|
|
107
|
|
|
|
113
|
|
Total current liabilities
|
|
|
1,583
|
|
|
|
1,483
|
|
|
|
|
|
|
|
|
|
|
Convertible note payable-related party
|
|
|
500
|
|
|
|
—
|
|
Note payable-long term
|
|
|
11
|
|
|
|
16
|
|
Total liabilities
|
|
|
2,094
|
|
|
|
1,499
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity:
|
|
|
|
|
|
|
|
|
Preferred stock - par value $.01 per share; authorized 100,000 shares, none issued C
|
|
|
—
|
|
|
|
—
|
|
Common stock - par value $.01 per share; authorized 15,000,000 shares, issued and outstanding
5,153,706 shares at October 1, 2016 and January 2, 2016
|
|
|
52
|
|
|
|
52
|
|
Additional paid-in capital
|
|
|
138
|
|
|
|
113
|
|
Retained earnings
|
|
|
2,215
|
|
|
|
1,859
|
|
Total stockholders’ equity
|
|
|
2,405
|
|
|
|
2,024
|
|
Total liabilities and stockholders’ equity
|
|
$
|
4,499
|
|
|
$
|
3,523
|
|
*Derived
from audited financial information.
See
accompanying notes to condensed financial statements.
TOFUTTI
BRANDS, INC.
Condensed
Statements of Operations
(Unaudited)
(in
thousands, except per share figures)
|
|
Thirteen
Weeks ended
October 1, 2016
|
|
|
Fourteen
Weeks ended
October 3, 2015
|
|
|
Thirty-nine
Weeks ended
October 1, 2016
|
|
|
Forty
Weeks ended
October 3, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
3,606
|
|
|
$
|
3,671
|
|
|
$
|
10,902
|
|
|
$
|
10,438
|
|
Cost of sales
|
|
|
2,498
|
|
|
|
2,796
|
|
|
|
7,371
|
|
|
|
7,741
|
|
Gross profit
|
|
|
1,108
|
|
|
|
875
|
|
|
|
3,531
|
|
|
|
2,697
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and warehouse
|
|
|
355
|
|
|
|
386
|
|
|
|
1,087
|
|
|
|
1,136
|
|
Marketing
|
|
|
43
|
|
|
|
74
|
|
|
|
174
|
|
|
|
277
|
|
Research and development
|
|
|
60
|
|
|
|
106
|
|
|
|
309
|
|
|
|
389
|
|
General and administrative
|
|
|
612
|
|
|
|
435
|
|
|
|
1,580
|
|
|
|
1,413
|
|
|
|
|
1,070
|
|
|
|
1,001
|
|
|
|
3,150
|
|
|
|
3,215
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before interest expense
|
|
|
38
|
|
|
|
(126
|
)
|
|
|
381
|
|
|
|
(518
|
)
|
Interest expense
|
|
|
6
|
|
|
|
—
|
|
|
|
19
|
|
|
|
—
|
|
Income (loss) before income tax
|
|
|
32
|
|
|
|
(126
|
)
|
|
|
362
|
|
|
|
(518
|
)
|
Income tax expense
|
|
|
—
|
|
|
|
—
|
|
|
|
6
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
32
|
|
|
$
|
(126
|
)
|
|
$
|
356
|
|
|
$
|
(526
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
5,154
|
|
|
|
5,154
|
|
|
|
5,154
|
|
|
|
5,154
|
|
Diluted
|
|
|
5,154
|
|
|
|
5,154
|
|
|
|
5,154
|
|
|
|
5,154
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common
share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.01
|
|
|
$
|
(0.02
|
)
|
|
$
|
0.07
|
|
|
$
|
(0.10
|
)
|
Diluted
|
|
$
|
0.01
|
|
|
$
|
(0.02
|
)
|
|
$
|
0.07
|
|
|
$
|
(0.10
|
)
|
See
accompanying notes to condensed financial statements.
TOFUTTI
BRANDS INC.
Condensed
Statements of Cash Flows
(Unaudited)
(in
thousands)
|
|
Thirty-nine Weeks
ended
October 1, 2016
|
|
|
Forty Weeks
ended
October 3, 2015
|
|
|
|
|
|
|
|
|
Cash used in operating activities, net
|
|
$
|
(354
|
)
|
|
$
|
(200
|
)
|
|
|
|
|
|
|
|
|
|
Cash provided by (used in) financing activities, net
|
|
|
496
|
|
|
|
(5
|
)
|
Net increase (decrease) in cash and cash equivalents
|
|
|
142
|
|
|
|
(205
|
)
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of period
|
|
|
55
|
|
|
|
341
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
197
|
|
|
$
|
136
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information:
|
|
|
|
|
|
|
|
|
Income taxes paid
|
|
$
|
6
|
|
|
$
|
8
|
|
Interest paid
|
|
$
|
13
|
|
|
$
|
—
|
|
See
accompanying notes to condensed financial statements.
TOFUTTI
BRANDS INC.
Notes
to Condensed Financial Statements
(In
thousands, except for share and per share data)
Note
1: Liquidity and Capital Resources
At
October 1, 2016, Tofutti Brands, Inc. (“Tofutti” or the “Company”) had approximately $197 in cash compared
to $55 at January 2, 2016. Net cash used in operating activities for the thirty-nine weeks ended October 1, 2016 was $354 compared
to $200 used in operating activities for the forty weeks ended October 3, 2015. Net cash provided by financing activities for
the thirty-nine weeks ended October 1, 2016 was $496 compared to $5 used in financing activities for the forty weeks ended October
3, 2015. Net cash provided by financing activities for the thirty-nine weeks ended October 1, 2016 was primarily a result of the
loan provided by the Company’s Chairman and Chief Executive Officer. Net cash used in operating activities for the thirty-nine
weeks ended October 1, 2016 was due primarily to the significant increase in accounts receivable and inventory, which were partially
offset by the net income for the period as well as an increase in accrued expenses.
The
Company has historically financed operations and met capital requirements primarily through positive cash flow from operations.
However, due to the net loss and cash used in operations for the year ended January 2, 2016 and in order to provide the Company
with additional working capital, David Mintz, the Company’s Chairman and Chief Executive Officer, provided it with a loan
on January 6, 2016 of $500 which is due on December 31, 2017. Commencing March 31, 2016, interest of 5% is payable on a quarterly
basis without compounding. The loan may be prepaid in whole or in part at any time without premium or penalty. The loan is convertible
into the Company’s common stock at a conversion price of $4.01 per share, the closing price of the Company’s common
stock on the date the promissory note was entered into.
The
Company’s ability to introduce and support successful new products may be adversely affected by a number of factors, such
as unforeseen cost and expenses, economic environment, increased competition, and other factors beyond the Company’s control.
Management cannot provide assurance that the Company will operate profitably in the future, or that it will not require significant
additional financing in order to accomplish or exceed the objectives of its business plan. Consequently, the Company’s historical
operating results cannot be relied on to be an indicator of future performance, and management cannot predict whether the Company
will obtain or sustain positive operating cash flow or generate net income in the future.
On
September 30, 2016, the Company announced that it had engaged a financial advisor and is pursuing strategic alternatives to enhance
shareholder value, including a possible sale or other form of business combination. There can be no assurance that any transaction
will be consummated.
Note
2: Description of Business
Tofutti
is engaged in one business segment, the development, production and marketing of non-dairy frozen desserts and other food products.
TOFUTTI
BRANDS INC.
Notes
to Condensed Financial Statements
(In
thousands, except for share and per share data)
Note
2: Description of Business (cont.)
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.
While the Company has multiple products and or product groups, its goal is to focus on non-dairy foods. The Company’s chief
operating decision maker tracks revenue by product groups, but does not track more granular operating results by product group
as many of the ingredients are similar amongst these groups. As a result, the Company has determined that it has only one operating
segment, which is the development, production and marketing of soy-based, non-dairy frozen desserts, frozen food products and
soy-based cheese products.
Note
3: Basis of Presentation
The
accompanying financial information is unaudited, but, in the opinion of management, reflects all adjustments (which include only
normally recurring adjustments) necessary to present fairly the Company's financial position, operating results and cash flows
for the periods presented. Certain information and footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant
to the rules and regulations of the Securities and Exchange Commission. The condensed balance sheet amounts as of January 2, 2016
are derived from our audited financial statements for the year ended January 2, 2016. The financial information should be read
in conjunction with the audited financial statements and notes thereto for the year ended January 2, 2016 included in the Company's
Annual Report on Form 10-K filed with the Securities and Exchange Commission. The results of operations for the thirteen and thirty-nine
week periods ended October 1, 2016 are not necessarily indicative of the results to be expected for the full year or any other
period.
The
Company operates on a fiscal year which ends on the Saturday closest to December 31st. The 2015 fiscal year was a fifty-three
week year ended January 2, 2016, and the Company elected to incorporate the additional week into the 2015 third quarter, resulting
in fourteen and forty week periods in fiscal 2015.
Note
4: Recent Accounting Pronouncements
In
March 2016, the FASB issued ASU 2016-09, Stock Compensation, which simplifies several aspects of the accounting for share-based
payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification
on the statement of cash flows. The guidance is effective for annual periods beginning after December 15, 2016, and interim periods
within those annual periods. The Company is currently evaluating the impact of adopting this guidance on its financial statements.
Note
5: Inventories
The
composition of inventories is as follows:
|
|
October 1, 2016
|
|
|
January 2, 2016
|
|
Finished products
|
|
$
|
999
|
|
|
$
|
1,007
|
|
Raw materials and packaging
|
|
|
617
|
|
|
|
466
|
|
|
|
$
|
1,616
|
|
|
$
|
1,473
|
|
TOFUTTI
BRANDS INC.
Notes
to Condensed Financial Statements
(In
thousands, except for share and per share data)
Note
6: Income Taxes
Income
taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities
and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred
tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred
tax assets are reduced by a valuation allowance to the extent management concludes it is more likely than not that the assets
will not be realized. As of the periods ended October 1, 2016 and January 2, 2016, the Company recorded a full valuation allowance
on its deferred tax asset balances.
Note
7: Earnings Per Share
Basic
earnings per common share has been computed by dividing net income (loss) by the weighted average number of common shares outstanding.
Diluted earnings per common share for the periods ended October 1, 2016 and October 3, 2015 have been computed by dividing net
income (loss) by the weighted average number of common shares outstanding and common stock equivalents, which include options
outstanding during the same period. Not included in the calculation for October 1, 2016 were 80,000 non-qualified options granted
to directors that were antidilutive because the market price of the common stock as of October 1, 2016 was less than the exercise
prices of any of these options.
The
following table sets forth the computation of basic and diluted earnings per share:
|
|
Thirteen
Weeks
Ended
October 1, 2016
|
|
|
Fourteen
Weeks
Ended
October 3, 2015
|
|
|
Thirty-nine Weeks
Ended
October 1, 2016
|
|
|
Forty
Weeks
Ended
October 3, 2015
|
|
Numerator
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)-basic
|
|
$
|
32
|
|
|
$
|
(126
|
)
|
|
$
|
356
|
|
|
$
|
(526
|
)
|
Net income (loss)-diluted
|
|
$
|
32
|
|
|
$
|
(126
|
)
|
|
$
|
356
|
|
|
$
|
(526
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share weighted average shares
|
|
|
5,153,706
|
|
|
|
5,153,706
|
|
|
|
5,153,706
|
|
|
|
5,153,706
|
|
Diluted earnings per share weighted average shares
|
|
|
5,153,706
|
|
|
|
5,153,706
|
|
|
|
5,153,706
|
|
|
|
5,153,706
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.01
|
|
|
$
|
(0.02
|
)
|
|
$
|
0.07
|
|
|
$
|
(0.10
|
)
|
Diluted
|
|
$
|
0.01
|
|
|
$
|
(0.02
|
)
|
|
$
|
0.07
|
|
|
$
|
(0.10
|
)
|
TOFUTTI
BRANDS INC.
Notes
to Condensed Financial Statements
(In
thousands, except for share and per share data)
Note
8: Fixed Assets
Fixed
assets consist of the following:
|
|
October
1, 2016
|
|
January
2, 2016
|
Automobile
|
|
$
|
29
|
|
$
|
29
|
|
|
|
|
|
|
|
Less:
accumulated depreciation
|
|
|
(12)
|
|
|
(8)
|
Fixed
assets, net
|
|
$
|
17
|
|
$
|
21
|
Depreciation
expense for the thirteen and thirty-nine weeks ended October 1, 2016 was $1 and $4, respectively. Depreciation expense for the
fourteen and forty weeks ended October 3, 2015 was $2 and $5, respectively.
Note
9: Stock Based Compensation
On
June 10, 2014, the shareholders of the Company approved the 2014 Equity Incentive Plan (the "2014 Plan"). The 2014 Plan
provides for grants of various types of awards that are designed to attract and retain highly qualified personnel who will contribute
to the success of the Company and to provide incentives to participants in the 2014 Plan that are linked directly to increases
in shareholder value which will therefore inure to the benefit of all shareholders of the Company. The Company intends to rely
on a combination of multi-year performance awards, options and other stock-based awards for these purposes.
The
2014 Plan made 250,000 shares of common stock available for awards. The 2014 Plan also permits performance-based 2014 awards paid
under it to be tax deductible under Section 162(m) of the Internal Revenue Code of 1986, as amended, as “performance-based
compensation.” As of October 1, 2016, the Company issued 80,000 non-qualified stock option awards under the 2014 Plan.
The
following is a summary of stock option activity from January 2, 2016 to October 1, 2016:
|
|
Non-Qualified Options
|
|
|
|
Shares
|
|
|
Weighted Average
Exercise Price ($)
|
|
Outstanding at January 2, 2016
|
|
|
80,000
|
|
|
|
4.42
|
|
Exercised as of October 1, 2016
|
|
|
—
|
|
|
|
—
|
|
Outstanding at October 1, 2016
|
|
|
80,000
|
|
|
|
4.42
|
|
Exercisable at October 1, 2016
|
|
|
53,336
|
|
|
|
4.42
|
|
TOFUTTI
BRANDS INC.
Notes
to Condensed Financial Statements
(In
thousands, except for share and per share data)
Note
9: Stock Based Compensation (cont.)
The
following table summarizes information about stock options outstanding at October 1, 2016:
Range
of
Exercise
Prices ($)
|
Number
Outstanding
|
Weighted
Average Remaining Life
(in years)
|
Weighted
Average
Exercise
Price($)
|
Number
Exercisable
|
4.39
– 4.46
|
80,000
|
3.47
|
4.42
|
53,336
|
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.
There
were no options granted during the thirteen and thirty-nine weeks ended October 1, 2016.
As
of October 1, 2016, the intrinsic value of the options outstanding and exercisable was immaterial. As of October 1, 2016, there
was approximately $68 of total unrecognized compensation cost that will be recognized
through
January 2, 2017 related to non-vested share-based compensation arrangements granted under the Plan. For the thirteen and thirty-nine
weeks ended October 1, 2016, stock compensation expense was $0 and $25, respectively.
Note
10: Notes Payable
In
September 2014, the Company obtained an auto loan of approximately $29 from a bank. The loan requires 60 monthly payments of $0.535
through August 2019. Interest is charged at a fixed nominal rate of 4.64%. The loan is collateralized by the underlying automobile.
|
|
October 1, 2016
|
|
|
January
2, 2016
|
|
Note payable
|
|
$
|
17
|
|
|
$
|
21
|
|
Less current maturity
|
|
|
6
|
|
|
|
5
|
|
Note payable, net of current maturity
|
|
$
|
11
|
|
|
$
|
16
|
|
Related
Party
On
January 6, 2016, David Mintz, the Company’s Chairman and Chief Executive, provided it with a loan of $500 which is due on
December 31, 2017. Commencing March 31, 2016, interest of 5% is payable on a quarterly basis without compounding. The loan may
be prepaid in whole or in part at any time without premium or penalty. The loan is convertible into the Company’s common
stock at a conversion price of $4.01 per share, the closing price of the Company’s common stock on the date the promissory
note was entered into. In any event of default, as defined in the promissory note, without any action on the part of Mr. Mintz,
the interest rate will increase to 12% per annum and the entire principal and interest balance under the loan, and all of the
Company’s other obligations under the loan, will be immediately due and payable, and Mr. Mintz will be entitled to seek
and institute any and all remedies available to him.
TOFUTTI
BRANDS INC.
Notes
to Condensed Financial Statements
(In
thousands, except for share and per share data)
Note
10: Notes Payable (cont.)
Related
Party (cont.)
|
|
October 1, 2016
|
|
|
January 2, 2016
|
|
Note payable-related party
|
|
$
|
500
|
|
|
$
|
—
|
|
Less current maturity
|
|
|
—
|
|
|
|
—
|
|
Note payable related party, net of current maturity
|
|
$
|
500
|
|
|
$
|
—
|
|
Note
11: Sales by Geographic Region and Product Category
Revenues
by geographical region are as follows (in thousands):
|
|
Thirteen
Weeks ended
October 1, 2016
|
|
|
Fourteen
Weeks ended
October 3, 2015
|
|
|
Thirty-nine
Weeks ended
October 1, 2016
|
|
|
Forty
Weeks ended
October 3, 2015
|
|
Revenues by geography:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas
|
|
$
|
3,225
|
|
|
$
|
3,357
|
|
|
$
|
9,783
|
|
|
$
|
9,388
|
|
Europe
|
|
|
184
|
|
|
|
164
|
|
|
|
496
|
|
|
|
510
|
|
Asia Pacific and Africa
|
|
|
106
|
|
|
|
70
|
|
|
|
308
|
|
|
|
258
|
|
Middle East
|
|
|
91
|
|
|
|
80
|
|
|
|
315
|
|
|
|
282
|
|
|
|
$
|
3,606
|
|
|
$
|
3,671
|
|
|
$
|
10,902
|
|
|
$
|
10,438
|
|
Approximately
95% of the Americas revenue in the 2016 thirteen week period and 93% of the Americas revenue in 2015 fourteen week period is attributable
to sales in the United States. Approximately 90% of the Americas revenue in the 2016 thirty-nine week period and 93% of the Americas
revenue in 2015 forty week period is attributable to sales in the United States. All of the Company’s assets are located
in the United States.
Net
sales by major product category (in thousands):
|
|
Thirteen
Weeks ended
October 1, 2016
|
|
|
Fourteen
Weeks ended
October 3, 2015
|
|
|
Thirty-nine
Weeks ended
October 1, 2016
|
|
|
Forty
Weeks ended
October 3, 2015
|
|
Cheeses
|
|
$
|
2,423
|
|
|
$
|
2,289
|
|
|
$
|
7,563
|
|
|
$
|
6,883
|
|
Frozen Desserts
|
|
|
1,131
|
|
|
|
1,238
|
|
|
|
3,200
|
|
|
|
3,081
|
|
Frozen Foods
|
|
|
52
|
|
|
|
144
|
|
|
|
139
|
|
|
|
474
|
|
|
|
$
|
3,606
|
|
|
$
|
3,671
|
|
|
$
|
10,902
|
|
|
$
|
10,438
|
|
Note
12: Subsequent Events
Subsequent
to the period end, the Company resolved a wrongful termination claim, the costs of which have been included in the Company’s
general and administrative expenses in the period.
TOFUTTI
BRANDS INC.
Item
2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
The
following is management's discussion and analysis of certain significant factors which have affected our financial position and
operating results during the periods included in the accompanying financial statements.
The
discussion and analysis which follows in this Quarterly Report and in other reports and documents and in oral statements made
on our behalf by our management and others may contain trend analysis and other forward-looking statements within the meaning
of Section 21E of the Securities Exchange Act of 1934 which reflect our current views with respect to future events and financial
results. These include statements regarding our earnings, projected growth and forecasts, and similar matters which are not historical
facts. We remind stockholders that forward-looking statements are merely predictions and therefore are inherently subject to uncertainties
and other factors which could cause the actual future events or results to differ materially from those described in the forward-looking
statements. These uncertainties and other factors include, among other things, business conditions in the food industry and general
economic conditions, both domestic and international; lower than expected customer orders; competitive factors; changes in product
mix or distribution channels; and resource constraints encountered in developing new products. The forward-looking statements
contained in this Quarterly Report and made elsewhere by or on our behalf should be considered in light of these factors.
Critical
Accounting 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 recognize revenue when goods are shipped from our production facilities or outside warehouses and the
following four criteria have been met: (i) the product has been shipped and we have no significant remaining obligations; (ii)
persuasive evidence of an arrangement exists; (iii) the price to the buyer is fixed or determinable; and (iv) collection is probable.
We record as deductions against sales all trade discounts, returns and allowances that occur in the ordinary course of business,
when the sale occurs. To the extent we charge our customers for freight expense, it is included in revenues. The amount of freight
costs charged to customers has not been material to date.
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. 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
.
Deferred
Revenue and Costs
.
Deferred revenue represents amounts from sales of our products that have been billed and shipped,
but for which the transactions have not met our revenue recognition criteria. The cost of the related products have been recorded
as deferred costs on our balance sheet.
Inventory.
Inventory is stated at lower of cost or market 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.
Fixed
Assets.
Fixed assets consist of a company automobile used for advertising and trade show purposes. Amortization is provided
by charges to income using the straight-line method over the useful life of five years.
Income
Taxes
.
The carrying value of deferred tax assets assumes that we will be able to generate sufficient future taxable
income to realize the deferred tax assets based on estimates and assumptions. If these estimates and assumptions change in the
future, we may be required to record a valuation allowance against deferred tax assets which could result in additional income
tax expense. 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.
Our federal and state
tax returns are open to examination for the years 2013
through 2015
.
Stock
Based Compensation.
The Company follows the provisions of ASC 718
Share-Based Payment
. The Company uses the Black-Scholes
option pricing model to measure the estimated fair value of the options under ASC 718
. Stock-based
compensation expense is recognized over the requisite service period.
Results
of Operations
Thirteen
Weeks Ended October 1, 2016 Compared with Fourteen Weeks Ended October 3, 2015
Net
sales for the thirteen weeks ended October 1, 2016 were $3,606,000, a decrease of $65,000, or 2%, from net sales of $3,671,000
for the fourteen weeks ended October 3, 2015. Sales of soy-cheese products increased to $2,423,000 in the 2016 period from $2,289,000
in the 2015 period, primarily as a result of improved export sales. Sales of our frozen dessert product line decreased to $1,131,000
in the thirteen weeks ended October 1, 2016 from $1,238,000 for the fourteen weeks ended October 3, 2015. Sales of frozen food
entrée products, which consist of pizza and blintzes, decreased to $52,000 in the 2016 thirteen week period from $144,000
in the 2015 fourteen week period. Sales of our soy cheese products were positively impacted by the elimination of various sales
promotions, which increased the net selling prices of our products in the 2016 period. While positively impacted by the elimination
of various sales promotions, our frozen dessert sales declined due to a reduction in volume. Sales of frozen food entrée
products were negatively impacted primarily as a result of consumer resistance to purchasing the
nine-slice
pizza package that we introduced in 2015 as compared to the three-slice package it replaced.
Sales allowance expense decreased
to $403,000 for the thirteen weeks ended October 1, 2016 compared to $543,000 for the fourteen weeks ended October 3, 2015,
reflecting our decision to reduce various sales promotion programs.
Our
gross profit increased to $1,108,000 in the thirteen weeks ended October 1, 2016 from $875,000 in the fourteen weeks ended October
3, 2015. Our gross profit percentage was 31% for the thirteen weeks ending October 1, 2016 compared to 24% for the fourteen weeks
ending October 3, 2015 as a result of the reduction in sales allowances. As a percentage of sales, freight out expense decreased
to 6% in the 2016 thirteen week period compared to 8% for the 2015 fourteen week period. Freight out expense, a significant part
of our cost of sales, decreased by $71,000, or 25%, to $218,000 for the thirteen weeks ended October 1, 2016 from $289,000 for
the fourteen weeks ended October 3, 2015 as a result of more of our customers picking up their orders.
Selling
expenses decreased to $355,000 for the thirteen weeks ended October 1, 2016 from $386,000 for the fourteen weeks ended October
3, 2015. This decrease was principally due to a decrease in outside warehouse rental expense of $27,000 due to the decrease in
our inventory levels. We anticipate that our selling expenses for the remainder of 2016 will continue to benefit from the cost
cutting measures that we instituted in our sales operations, such as lowering the commission rate paid to outside food brokers,
reducing the number of brokers, and reducing the number of trade shows we participate in.
Marketing
expenses decreased by $31,000, or 42%, to $43,000 for the thirteen weeks ended October 1, 2016 from $74,000 for the fourteen weeks
ended October 3, 2015, due principally to decreases in advertising expense of $13,000, promotions expense of $8,000, and artwork
and plate expense of $12,000. We anticipate that marketing expenses will remain at the same level for the remainder of fiscal
2016.
Research
and development costs, which consist principally of salary expenses and laboratory costs, decreased by $46,000 to $60,000 for
the thirteen weeks ended October 1, 2016 from $106,000 for the fourteen weeks ended October 3, 2015 due to decreases in lab salaries
and supplies. We anticipate that research and development expenses will remain at the same level for the remainder of fiscal 2016.
General
and administrative expenses increased by $177,000, or 41%, to $612,000 for the thirteen weeks ended October 1, 2016 from $435,000
for the fourteen weeks ended October 3, 2015 due to an increase in professional fees (including financial advisory fees), outside
service expense and litigation costs of $190,000, a substantial portion of such increase was due to the settlement of a claim
for wrongful termination by a former employee. While the company believed the complaint was without merit, management deemed it
more cost effective to settle the matter without going through expensive litigation. We anticipate that general and administrative
expenses will decline in the fourth quarter.
We
recognized no income tax expense for the thirteen weeks ended October 1, 2016 and the fourteen weeks ended October 3, 2015. We
have a history of losses and have a valuation allowance on our deferred assets.
Thirty-nine
Weeks Ended October 1, 2016 Compared with Forty Weeks Ended October 3, 2015
Net
sales for the thirty-nine weeks ended October 1, 2016 were $10,902,000, an increase of $464,000, or 4%, from net sales of $10,438,000
for the forty weeks ended October 3, 2015. Sales of soy-cheese products increased to $7,563,000 in the 2016 period from $6,883,000
in the 2015 period. Sales of our frozen dessert product line increased to $3,200,000 in the thirty-nine weeks ended October 1,
2016 from $3,081,000 for the forty weeks ended October 3, 2015. Sales of frozen food entrée products, consisting of pizza
and blintzes, decreased to $139,000 in the 2016 thirty-nine week period from $474,000 in the 2015 forty week period. Sales of
our soy cheese and frozen dessert products were positively impacted by the elimination of various sales promotions, which increased
the net selling prices of our products in the 2016 period. Sales of frozen food entrée products were negatively impacted
primarily as a result of consumer resistance to purchasing the
nine-slice pizza package that we introduced
in 2015 as compared to the three-slice package it replaced.
Sales allowance expense decreased to $1,215,000 for the thirty-nine
weeks ended October 1, 2016 compared to $1,501,000 for the forty weeks ended October 3, 2015, reflecting our decision to reduce
various sales promotion programs.
Our
gross profit increased to $3,531,000 in the thirty-nine week period ended October 1, 2016 from $2,697,000 in the forty week period
ended October 3, 2015, due both to the increase in sales and the elimination of various sales promotion programs in 2016. Our
gross profit percentage was 32% for the period ending October 1, 2016 compared to 26% for the period ending October 3, 2015, due
to the implementation of price increases in 2016 and the elimination of various sales promotion programs in 2016. Freight out
expense, a significant part of our cost of sales, increased by $71,000, or 11%, to $711,000 for the thirty-nine weeks ended October
1, 2016 compared to $640,000 for the forty weeks ended October 3, 2015 due to the increase in sales and increased freight costs
associated with customer orders, while in the 2015 period such expenses benefited from a greater number of customers picking up
their orders. As a percentage of sales, freight out expense increased to 7% in the 2016 thirty-nine week period compared to 6%
for the 2015 forty week period.
Selling
expenses decreased by $49,000, or 4%, to $1,087,000 for the thirty-nine weeks October 1, 2016 from $1,136,000 for the forty weeks
ended October 3, 2015. This decrease was due to decreases in commissions expense of $9,000, meetings and conventions expense of
$38,000 and messenger expense of $11,000, which were partially offset by an increase in outside warehouse rental expense of $14,000.
Outside warehouse rental expense increased due to the increase in inventory from January 2, 2016. Meetings and convention expense
decreased in the 2016 period as a result of less participation in trade shows in 2016.
Marketing
expenses decreased by $103,000, or 37%, to $174,000 for the thirty-nine weeks ended October 1, 2016 from $277,000 for the forty
weeks ended October 3, 2015, due principally to decreases in advertising expense of $63,000, public relations expense of $17,000,
artwork and plate expense of $13,000, and promotion expense of $9,000.
Research
and development costs, which consist principally of salary expenses and laboratory costs, decreased by $80,000, or 21%, to $309,000
for the thirty-nine weeks ended October 1, 2016 from $389,000 for the forty weeks ended October 3, 2015, due primarily to decreases
in lab costs and supplies of $36,000 and payroll expense of $51,000.
General
and administrative expenses increased by $167,000, or 12%, to $1,580,000 for the thirty-nine weeks ended October 1, 2016
from $1,413,000 for the forty weeks ended October 3, 2015. Decreases in stock option expense of $87,000 and payroll expense of
$40,000 were offset by increases in IT expense of $10,000 and professional fees (including financial advisory fees), outside service
expense and litigation costs of $240,000.
For
the thirty-nine weeks ended October 1, 2016, we recognized income tax expense of $6,000 compared to income tax expense of $8,000
for the forty weeks ended October 3, 2015. We have a history of losses and have a full valuation allowance on our deferred tax
assets. We did not record tax expense other than state taxes for either the thirty-nine or forty weeks ending October 1,
2016 and October 3, 2015.
Liquidity
and Capital Resources
As
of October 1, 2016, we had approximately $197,000 in cash and cash equivalents and our working capital was approximately $2.9
million, compared with approximately $55,000 in cash and cash equivalents and working capital of $2.0 million at January 2, 2016.
In order to provide our company with additional working capital, on January 6, 2016, David Mintz, our Chairman and Chief Executive,
provided our company with a loan of $500,000 which is secured by substantially all of our assets and is due on December 31, 2017.
Commencing March 31, 2016, interest of 5% is payable on a quarterly basis without compounding. The loan may be prepaid in whole
or in part at any time without premium or penalty. The loan is convertible into our common stock at a conversion price of $4.01
per share, the closing price of our common stock on the date the promissory note was entered into. In any event of default, as
defined in the promissory note, without any action on the part of Mr. Mintz, the interest rate will increase to 12% per annum
and the entire principal and interest balance under the loan, and all of our other obligations under the loan, will be immediately
due and payable, and Mr. Mintz will be entitled to seek and institute any and all remedies available to him.
On
September 30, 2016, we announced that we had engaged a financial advisor and are pursuing strategic alternatives to enhance shareholder
value, including a possible sale or other form of business combination. There can be no assurance that any transaction will be
consummated.
The
following table summarizes our cash flows for the periods presented:
|
|
Thirty-nine
Weeks ended October 1, 2016
|
|
|
Forty Weeks
ended October 3, 2015
|
|
Net cash used in operating activities
|
|
$
|
(354,000
|
)
|
|
$
|
(200,000
|
)
|
Net cash provided by (used in) financing activities
|
|
|
(496,000
|
|
|
|
(5,000
|
)
|
Net increase (decrease) in cash and cash equivalents
|
|
$
|
142,000
|
|
|
$
|
(205,000
|
)
|
Net
cash used in operating activities for the thirty-nine weeks ended October 1, 2016 was $354,000 compared to $200,000 used in operating
activities for the forty weeks ended October 3, 2015. Net cash used in operating activities for the thirty-nine weeks ended October
1, 2016 was primarily a result of net income as well as an increase in accrued expenses, offset by larger increases in accounts
receivable and inventory
.
Accounts receivable increased due to the sales increase in the current period. Inventory increased
as a result of purchases by us of finished goods in preparation for the expectation of continued sales increases in the
fourth quarter. Net cash provided by financing activities for the thirty-nine weeks ended October 1, 2016 was $496,000 compared
to $5,000 used in financing activities for the forty weeks ended October 3, 2015 primarily as a result of the loan from our Chairman
and Chief Executive Officer.
We
believe our existing cash and cash equivalents on hand at October 1, 2016, existing working capital and the cash flows expected
from operations, will be sufficient to support our operating and capital requirements during the next twelve months. However,
we may require additional financing in order to carry out our business plans for future periods.
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 nondairy frozen desserts during those periods.
Off-balance
Sheet Arrangements
None.
Contractual
Obligations
As
of October 1, 2016, we did not have any material contractual obligations or commercial commitments, including obligations relating
to discontinued operations.
Recent
Accounting Pronouncements
See
Note 4 to the unaudited condensed consolidated financial statements included in Part I, Item 1,
Financial Statements
, of
this Quarterly Report on Form 10-Q.