UNITED STATES

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-K

For the fiscal year ended December 30, 201729, 2018

Commission File Number: 1-9009

TOFUTTI BRANDS INC.
(Exact name of registrant as specified in its charter)

(908) 272-2400

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

Title of each class
Common Stock, par value $0.01 per share

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes [  ] No [X]

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes [  ] No [X]

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes [X] No [  ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [  ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. [  ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.)

Yes [  ] No [X]

The aggregate market value of the voting stock held by non-affiliates of the Registrant as of the most recently completed second fiscal quarter: $4,246,266.$4,026,741.

As of March 28, 2018,25, 2019, the issuer had 5,153,706 shares of common stock, par value $0.01, outstanding.

TABLE OF CONTENTS

INTRODUCTION

We are engaged in the development, production and marketing of TOFUTTI® brand dairy free, vegan frozen desserts, cheeses and other food products. TOFUTTI products are soy and other vegetable protein-based, vegan, dairy free products which contain no butterfat, cholesterol or lactose.

As used in this annual report, the terms “we,” “us” and “our” mean Tofutti Brands Inc., unless otherwise indicated. Statements made in this annual report concerning the contents of any contract, agreement or other document are summaries of such contracts, agreements or documents and are not complete descriptions of all of their terms. If we filed any of these documents as an exhibit to this annual report or to any previous filling with the Securities and Exchange Commission, you may read the document itself for a complete recitation of its terms.

Except for the historical information contained in this annual report, the statements contained in this annual report are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, or the Exchange Act, as amended, and the Private Securities Litigation Reform Act of 1995, as amended, with respect to our business, financial condition and results of operations. Such forward-looking statements reflect our current view with respect to future events and financial results. We urge you to consider that statements which use the terms “anticipate,” “believe,” “do not believe,” “expect,” “plan,” “intend,” “estimate,” “anticipate” and similar expressions are intended to identify forward-looking statements. We remind readers that forward-looking statements are merely predictions and therefore inherently subject to uncertainties and other factors and involve known and unknown risks that could cause the actual results, performance, levels of activity, or our achievements, or industry results, to be materially different from any future results, performance, levels of activity, or our achievements expressed or implied by such forward-looking statements. Such forward-looking statements are also included in Item 1. “Business” and Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. We undertake no obligation to update or revise any forward-looking statements to reflect new information, future events or circumstances, or otherwise after the date hereof. We have attempted to identify significant uncertainties and other factors affecting forward-looking statements in the Risk Factors section that appears in Item 1A. “Risk Factors.”

We operate on a fiscal year ending on the Saturday closest to December 31. Fiscal years for the financial statements included herein are the fifty-two week period ended December 30, 201729, 2018 (fiscal 2017)2018) and the fifty-two week period ended December 31, 201630, 2017 (fiscal 2016)2017).

PART I

Item 1. Business.

GENERAL

We are engaged in the development, production and marketing of TOFUTTI® brand dairy free, vegan frozen desserts, cheeses and other food products. TOFUTTI products are vegan, dairy free products which contain no butterfat, cholesterol or lactose and use soy and other vegetable proteins. Our products are 100% dairy free yet offer the same texture and full-bodied taste as their dairy counterparts. Our products are also free of cholesterol and derive their fat from soy, corn and palm oils, alleach naturally lower in saturated fat than dairy products. With the exception of Mintz’s Blintzes, all of our products are completely vegan and our vegan cheese products are gluten free as well. In addition, all of our products are certified kosher-parve and all of our vegan cheese products are also certified halal.

We were organized under the laws of the State of New York in 1981 and became a Delaware corporation in 1984. Our registered office and principal executive offices are located at 50 Jackson Drive, Cranford, New Jersey 07016, our telephone number is 908-272-2400. Our address on the Internet is www.tofutti.com. The information on our website is not incorporated by reference into this annual report.

STRATEGY

Our objective is to be a leading provider of dairy free, vegan food products, primarily cheese products and frozen desserts, to supermarkets, and health food stores, and food service customers in the United States and abroad. We intend to continue to introduce new products that offer good taste while containing no butterfat, cholesterol or dairy to these markets.

We focus our marketing efforts toward those consumers who find our products essential to their everyday diets because of health, lifestyle or religious reasons. As part of this strategy, we seek to achieve brand awareness through product innovation, eye-catching packaging, trade advertising, and a strong word-of-mouth marketing program. We believe that our ability to offer a wide range of dairy free, vegan, and kosher-parve products will continue to provide us with a competitive advantage.

TOFUTTI PRODUCT LINE

We offer a broad product line vegan, dairy free products that use soy or other vegetable based proteins. Our dairy free products include frozen desserts, cheeses and spreads, and other frozen food products.

Frozen Desserts

Dairy Free Vegan Cheese Products

Frozen Food Products

Planned 20182019 Product Introductions

We plan to reintroduce ourTOFUTTI MARRYME® BARS, CHOCOLATE FUDGE TREATS,andTOTALLY FUDGE POPSin the second quarter of 2019. We also plan to introduce a new line of vegan dips and shredded cheddar and mozzarella vegan cheeses in the third quarter of 2018.2019.

MARKETING AND DISTRIBUTION

TOFUTTI products are sold and distributed across the United States and internationally, and can be found in gourmet specialty shops, kosher supermarkets, natural/health food stores, and national and regional supermarket chains. All of our products are sold by independent unaffiliated food brokers to distributors and sometimes on a direct basis to retail chain accounts or to warehouse accounts that directly service chain accounts. Such direct accounts include Albertsons, Walmart, Kroger, King Soopers, Fred Meyer, DeMoulas/Market Basket, Wakefern Food Corp., and Ahold USA. Food brokers act as our agents within designated territories or for specific accounts and receive commissions, which average 5% of net collected sales. Certain key domestic, kosher, and food service accounts and all international accounts are handled directly by us. Our products are also sold in approximately thirty other countries.

We currently sell our dairy-free vegan cheese products and frozen dessert products in most major markets in the United States, including Atlanta, Baltimore, Boston, Charlotte, Chicago, Cincinnati, Cleveland, Dallas, Denver, Detroit, Houston, Jacksonville, Kansas City, Los Angeles, Miami, Milwaukee, Minneapolis, Nashville, New York, Orlando, Philadelphia, Phoenix, Portland, Richmond, Salt Lake City, San Diego, San Francisco, Seattle, St. Louis, Tampa and Washington, D.C.

We currently distribute all of our products by common carrier or by allowing customers to pick-up products from outside storage facilities. We do not own, lease or otherwise maintain any vehicles involved in the shipping of our products. From our co-packing facilities, we either ship direct to our customers or we ship to outside public storage facilities from where our customers are able to pick up their orders. Use of outside storage facilities in several key locations in the United States allows us to provide our customers with products in a timely fashion. Currently, we use two warehouses in New Jersey, one for our frozen dessert and food products and one for our cheese products, and one warehouse in northern California for both categories of products.

In addition to ice cream and cheese distributors, our products are handled by most major national and regional natural and/or gourmet specialty distributors in the country. We distribute our products through forty-two (42)thirty-nine (39) distributors into the national health food market.

Our sales to health food accounts in fiscal 20172018 decreased slightly to $6,916,000,$5,850,000, or 49%45% of total sales, from approximately $7,132,000,$6,916,000, or 49% of total sales, in fiscal 2016.2017, due to the decline in frozen dessert sales to health food accounts. Our sales to the kosher market decreasedincreased to $1,498,000, or 11% of sales, in fiscal 2018, from sales of approximately $1,364,000, or 10% of sales, in fiscal 2017, from sales of approximately $1,542,000, or 11% of sales, in fiscal 2016.2017.

The following table presents the geographical breakdown of our sales in our largest domestic markets for the last two fiscal years.

During fiscal 2017,2018, we shipped our products to distributors in Australia, Canada, Egypt, England, Ireland, Israel, Mexico, Panama, and South Africa, and Trinidad.Africa. Our distributor in England isacts as our master distributor for all of Europe and part of the Middle East, excluding Israel, and sells our products tointo approximately twenty other countries. Sales to foreign distributors decreasedincreased to $2,333,000, or 18% of sales, in fiscal 2018, from $1,663,000, or 12% of sales, in fiscal 2017, from to $2,198,000, or 15% of sales, in fiscal 2016.2017. We conduct all of our foreign business in U.S. dollars. Accordingly, our future export sales could be adversely affected by an increase in the value of the U.S. dollar against local currencies, which could increase the local currency price of our products.

COMPETITION

TOFUTTI frozen desserts compete with all forms of ice cream products, yogurt-based desserts and other plant-based frozen desserts. We believe that we are a leader in the dairy free frozen dessert product market and offer the most complete line of dairy free frozen dessert products. Other plant-based frozen dessert products are presently being sold throughout the United States by established manufacturers and distributors of ice cream and other frozen dessert products. The ice cream and frozen dessert industry is highly competitive and most companies with whom we compete are substantially larger and have significantly greater resources than us. All of our products face substantial competition from dairy free and dairy products marketed by companies with significantly greater resources than we have. Similar to our frozen desserts, all our vegan cheese products face stiff competition within their category from both dairy cheese products and plant-based cheese products.

In most product categories, we compete not only with widely advertised branded products, but also with generic and private label products that are generally sold at lower prices. Competition in our product categories is based on product innovation, product quality, price, brand recognition and loyalty, effectiveness of marketing, promotional activity, and the ability to identify and satisfy consumer preferences. Our market share and ability to grow our revenue could also be adversely impacted if we are not successful in introducing innovative products in response to changing consumer demands or by new product introductions of our competitors. If we are unable to build and sustain brand equity by offering recognizably superior product quality, we may be unable to maintain premium pricing over competitive products. We believe that we are able to compete effectively due to our ability to offer an array of vegan cheese products, dairy free frozen desserts, and other food products that contain no butterfat, cholesterol or lactose and are 100% dairy free, yet offer the same texture and full-bodied taste as their dairy counterparts.

PRODUCT DEVELOPMENT

All of our current products were developed by us in our own laboratory. David Mintz, our Chief Executive Officer, devotes a substantial amount of his time and effort to new product development and product reformulation. In fiscal 20172018 and 2016,2017, our product development expenses were approximately $393,000$410,000 and $426,000,$393,000, respectively. These amounts do not include any portion of Mr. Mintz’s salary. All product development costs are expensed as incurred and are recorded as operating expenses in our financial statements.

PRODUCTION

We believe that all of our products are produced under the strictest quality control procedures that are available in each manufacturing facility used by us. These quality control procedures include, but are not limited to, the cleaning processes utilized prior to running our products; spot line inspections during production; in-house laboratory testing as required by government agencies; supervision of all our production by our kosher supervisory service; supervision of all our vegan cheese production by our halal supervisory service; and random testing by outside independent laboratories to ensure that our internal quality control procedures and guidelines are being properly followed.

All of our products are produced by co-packers to whom we supply certain key ingredients and packaging for the manufacturing processes. Our co-packing facilities are fully licensed and must comply with all state and federal laws and regulations. We currently utilize five co-packers. Our co-packers manufacture and package our products and, in certain instances, warehouse such products pending shipment. For certain key product categories, such as dairy free vegan cheeses and dairy free frozen desserts, we have more than one co-packer. In selecting an appropriate co-packer, we take into account all of the preceding factors, plus cost considerations such as product processing fees and freight and warehouse expenses.

DuringFor the years ended December 30, 201729, 2018 and December 31, 2016,30, 2017, we purchased approximately 41%49% and 36%41% of our finished goods, respectively, from Franklin Foods, our co-packer for ourBETTER THAN CREAM CHEESE, WHIPPED BETTER THAN CREAM CHEESE, SOUR SUPREME, and BETTER THAN RICOTTAco-packer, products, and 17%20% and 25%17%, respectively, of our finished goods from Ice Cream Specialties and Luke’s Ice Cream, our former and current frozen dessert novelty co-packer.co-packers.

Relationships with Co-Packers

We do not have any written production agreements with our co-packers and do not anticipate that we would encounter any material difficulty in obtaining alternative production sources, at a comparable cost, if one or all of our co-packers decide to terminate their relationships with us. Nevertheless, any disruption in supply could have a material adverse effect on our company.

In order to protect our formulas, we have entered into confidentiality arrangements with our co-packers and some of our co-packers’ employees. All of our employees, including officers, sign similar confidentiality agreements. There can be no assurance that such confidentiality arrangements can or will be maintained, or that our trade secrets, know-how and marketing ability cannot be obtained by others, or that others do not now possess similar or even more effective capabilities.

In September 2016, we were notified by Ice Cream Specialties, the co-packer of our frozen dessert stick novelties, Tofutti Cuties, and Yours Truly Cones, that they would cease manufacturing those products by the end of January 2018. We have been able to secure a new co-packing facility that will be makingIn April 2018 we began production of our Tofutti Cutie sandwiches andCuties at Luke’s Ice Cream, located in Florida. Luke’s Ice Cream began manufacturing Yours Truly Cones. We are currently investigating other facilities to co-packCones in November 2018 and will begin the manufacture of our frozen dessert stick novelties. Our frozen dessert pints are still being produced by Leiby’s Dairynovelty bars in Pennsylvania.the second quarter of 2019.

Kosher Certification

KOF-K Kosher Supervision, or KOF-K, of Teaneck, New Jersey provides us with our kosher certification service. Before KOF-K will permit its certification, evidenced by its symbol, to be placed on a product, KOF-K must approve both the ingredients contained in the product and the facility processing the product. Approval of the manufacturing facilities we use include periodic inspections, and in most cases, on-site supervision of actual production. We pay a yearly renewal fee for certification and ongoing fees throughout the year for supervisory services for each production run. We believe that our ability to successfully market and distribute our products is dependent upon our continued compliance with the requirements of rabbinical certification. All TOFUTTI products meet the requirements for certification as kosher-parve.

Halal Certification

In early 2013, we completed a halal certification process at Franklin Foods, the co-packer of ourBETTER THAN CREAM CHEESE,WHIPPED BETTER THAN CREAM CHEESE, SOUR SUPREME andBETTER THAN RICOTTA products and at Whitehall Specialties, the co-packer of our vegan cheese slices and bulk Better Than Mozzarella products. This certification is provided by the Islamic Food and Nutrition Council of America (IFANCA) of Park Ridge, Illinois and currently applies only to those products manufactured by Franklin Foods and Whitehall Specialties. Before IFANCA will permit its certification to be placed on a product, which is evidenced by its symbol, IFANCA must approve both the ingredients contained in the product and the facility processing the product. Approval of the manufacturing facilities we use includes periodic inspections. There is a yearly renewal fee for certification. All TOFUTTI vegan cheese products meet the requirements for certification as halal.

TRADEMARKS AND PATENTS

We have registered our trademark, TOFUTTI®, and other trademarks for our frozen desserts and other products in the United States and approximately thirty-seven foreign countries. We believe our trademarks are an important means of establishing consumer recognition for our products and we will vigorously oppose any unauthorized use of our trademarks. We are not currently involved in any trademark litigation.

Although we believe that our formulas and processes are proprietary, we have not sought patent protection for such technology. Instead, we are relying on the complexity of our technology, on trade secrecy laws and on confidentiality agreements. We believe that our technology has been independently developed and does not infringe the patents of others.

GOVERNMENT REGULATION

Companies engaged in the manufacture, packaging and distribution of food items are subject to extensive regulation by various government agencies which, pursuant to statutes, rules, and regulations, prescribe quality, purity, manufacturing and labeling requirements. Food products are often subject to “standard of identity” requirements, which are promulgated at either the Federal or state level to determine the permissible qualitative and quantitative ingredient content of food. To the extent that any product that we seek to market does not conform to an applicable standard, special permission to market such a product is required.

Our United States product labels are subject to regulation by the United States Food and Drug Administration, or the FDA. Such regulations include standards for product descriptions, nutritional claims, label format, minimum type sizes, content and location of nutritional information panels, nutritional comparisons, and ingredient content panels. Our labels, ingredients and manufacturing processes are subject to inspection by the FDA. We believe that we are in compliance with current labeling requirements and conduct periodic reviews to make certain that such compliance is on-going.

The Food, Drug and Cosmetic Act, the Food Safety Modernization Act and rules and regulations promulgated by the FDA thereunder, contain no specific Federal standard of identity which is applicable to our products. Our frozen dessert products meet the New York State standard of identity for “parevine,” which has been adopted by at least eight other states. Many states require registration and label review before food products can be sold. While approval in one jurisdiction generally indicates the products will meet with approval in other jurisdictions, there is no assurance that approval from other jurisdictions will be forthcoming. Additionally, many of our major customers now require that any food products that they purchase be produced in Safe Quality Food, or SQF, manufacturing facilities. The SQF program is recognized by the Global Food Safety Initiative and provides a rigorous system to manage food safety risks and provide safe products use by companies in the food industry. All of our current co-packers are SQF certified or are in the process of becoming certified.

Food manufacturing facilities are subject to inspections by various safety, health and environmental regulatory authorities. A finding of a failure to comply with one or more regulatory requirements can result in the imposition of sanctions including the closing of all or a portion of a company’s facilities, subject to a period during which the company can remedy the alleged violations. Our Cranford, New Jersey facility is subject to inspection by the New Jersey-Kosher Enforcement Bureau and the New Jersey Environmental Health Services. We believe that we, our distributors and our co-packers are in compliance in all material respects with governmental regulations regarding our current products and have obtained the material governmental permits, licenses, qualifications and approvals required for our operations. Our compliance with Federal, state and local environmental laws has not materially affected us either economically or in the manner in which we conduct our business. However, there can be no assurance that our company, our distributors and our co-packers will be able to comply with such laws and regulations in the future or that new governmental laws and regulations will not be introduced that could prevent or temporarily inhibit the development, distribution and sale of our products to consumers.

New government laws and regulations may be introduced in the future that could result in additional compliance costs, seizures, confiscations, recalls or monetary fines, any of which could prevent or inhibit the development, distribution and sale of our products. If we fail to comply with applicable laws and regulations, we may be subject to civil remedies, including fines, injunctions, recalls or seizures, as well as potential criminal sanctions, which could have a material adverse effect on our business, results of operations and financial condition.

EMPLOYEES

We employed nine persons on a full-time basis in fiscal 2018 and eight persons on a full-time basis in fiscal 2017 and nine persons on a full-time basis in fiscal 2016.2017. We do not have any collective bargaining agreements with our employees.

Item 1A. Risk Factors.

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 occurs, 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

We may not be able to maintain profitable operations in the future. We may not have sufficient working capital to fund our operations in the future.

While we returned to profitable operations in fiscal 2016 and maintained profitable operations in 2017 and 2018, we incurred losses in prior years. As of December 30, 2017,29, 2018, we had $1,414,000$558,000 in cash and cash equivalents and our working capital was $3,721,000.$3,896,000. Our cash and cash equivalents decreased from $1,414,000 as of December 29, 2018 as a result of increases in accounts receivable and inventory and decreases in accounts payable and accrued expenses. The lack of sufficient working capital couldhas negatively impactimpacted our ability to introduce and adequately promote new products. To the extent that we incur operating losses in the future or are unable to generate free cash flows from our business, we may not have sufficient working capital to fund our operations and will be required to obtain additional financing. Such financing may not be available, or, if available, may not be on terms satisfactory to us. If adequate funds are not available to us, our business, and results of operations and financial condition will be adversely affected.

We 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 year ended December 29, 2018, we purchased approximately 49% of our finished goods from Franklin Foods, including ourBETTER THAN CREAM CHEESE, WHIPPED BETTER THAN CREAM CHEESE, SOUR SUPREME,andBETTER THAN RICOTTAproducts, and purchased approximately 20% of our finished goods from Ice Cream Specialties and Luke’s Ice Cream, our former and current frozen dessert novelty co-packers.

In September 2016, we were notified by Ice Cream Specialties, the then co-packer of our frozen dessert stick novelties, Tofutti Cuties, and Yours Truly Cones, that they would cease manufacturing those products by the end of January 2018. In April 2018 we began production of our Tofutti Cuties at Luke’s Ice Cream, located in Florida. Luke’s began manufacturing Yours Truly Cones in November 2018 and we expect that they will initiate the manufacture of our frozen dessert novelty bars in the second quarter of 2019. Our frozen dessert pints are produced by Leiby’s Dairy in Pennsylvania. Any future disruption in supply could have a further 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 supplies and products. These agreements vary depending on the particular supply 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 are indebted to our Chairman and Chief Executive Officer pursuant to a promissory note which is secured by substantially all of our assets. Any failure to meet our obligations under the note could materially harm our business, financial condition and results of operations.

On January 6, 2016, we received a $500,000 loan from Mr. David Mintz, our Chairman of the Board and Chief Executive Officer. The loan bears interest at 5% per annum and may be prepaid in whole or in part at any time without premium or penalty. The loan is secured by substantially all of our assets and is convertible into shares of our common stock at a conversion price of $4.01 per share.share, at the option of the holder. Initially due on December 31, 2017, the loan has been extended until December 31, 2019.2020.

In the event we are unable to repay the loan, or if there is an event of default, without any action on the part of Mr. Mintz, the interest rate will increase to 12% per annum and the entire principal and interest balance under the loan, and all of our other obligations under the loan, will be immediately due and payable, and Mr. Mintz will be entitled to seek and institute any and all remedies available to him. Any failure to meet our obligations under the note could materially harm our business, financial condition and results of operations.

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% of our net sales in the fiscal year ended December 30, 2017 and 46% of our net sales for the fiscal year ended December 31, 2016. Although we believe that the business associated with any of our primary distributors can be readily transferred to other distributors or directly to supermarket warehouses if necessary, no assurance can be given that a change in distributors would not be disruptive to our business, which could have a material adverse effect on our business and results of operations.

We depend on several key suppliers to produce our products.

We do not produce any of our own products. During the years ended December 30, 2017 and December 31, 2016, we purchased approximately 41% and 36% of our finished goods, respectively, from Franklin Foods, ourBETTER THAN CREAM CHEESE,WHIPPED BETTER THAN CREAM CHEESE,SOUR SUPREME, andBETTER THAN RICOTTA co-packer, and 17% and 25%, respectively, of our finished goods from Ice Cream Specialties, our frozen dessert novelty co-packer. In 2017, Ice Cream Specialties, the co-packer of our frozen dessert stick novelties, Tofutti Cuties, and Yours Truly Cones, stopped manufacturing our frozen dessert stick novelties and Yours Truly Cones. They also ceased manufacturing Tofutti Cuties at the end of January 2018. We have been able to secure a new co-packing facility that will be making our Tofutti Cutie sandwiches and Yours Truly Cones beginning mid-April and mid-May 2018, respectively. We are currently investigating other facilities to co-pack our frozen dessert stick novelties. Our frozen dessert pints are still being produced by Leiby’s Dairy in Pennsylvania. Any continued or future disruption in supply could have a further material adverse effect on our company.

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 a limited number of key executives to manage our business.

Our success is significantly dependent on the services of David Mintz (age 86)87), Chief Executive Officer, and Steven Kass (age 66)67), Chief Financial Officer. The loss of the services of either of these persons could have a material adverse effect on our business and results of operations.

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. We are dependent on creating innovative products that continue to meet the needs of our consumers. 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 future degree of market acceptance of any of our new products, and continued acceptance of our current products, which may be accompanied by significant promotional expenditures, is likely to have an important impact on our future financial results.

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.

Our abilityWe may not be able to compete effectively in the highly competitive frozen dessert and health food markets may affect our operational performance and financial results.markets.

The frozen dessert, dairy free cheese food 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. 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.

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, and changes in governmental agricultural and energy policies and regulations. 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.

Economic downturnsconditions adversely affecting consumer discretionary spending may negatively impact our business and disruptions in financial markets can adversely affectoperating 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 our business and results of operations.

Our results of operations cancould be materially affected by adverse conditions in the financial markets and depressed economic conditions generally. Worsening economic conditions may result in diminished demand for our products and in decreased sales volumes. Recessionary environments adversely affect the demand for our products as a result of constraints on discretionary spending by our retail customers. In addition, this could result in longer sales cycles, slower acceptance of new products and increased competition for our products, which in turn could cause us to reduce prices for our products resulting in reduced gross margins. Any of these events would likely harm our business, operating results and financial condition.

In addition, the current economic climate, and particularly the increased difficulty in securing credit, could impact the ability of our customers to purchase our products. Certain of our retail customers who have seen significant dampening of consumer demand, could face increased financial pressures that could impact their ability to purchase our products and make payments in a timely manner. The continued high unemployment levels in the U.S. and the lingering effects of the global credit crisis, will impact the ability of our customers to purchase our products.affected.

Natural disasters, terrorist attacks or breaches of network or information technology security could have an adverse effect on our business.

Natural disasters, cyber-attacks or other breaches of network or information technology (IT) security, terrorist acts or acts of war may cause disrupt our systems and operations. We expect that our inability to operate our facilities as a result of such events, even for a limited period of time, may result in significant expenses and/or loss of market share to our competitors. While we maintain insurance coverage for some of these events, the potential liabilities associated with these events could exceed the insurance coverage we maintain. Any of these occurrences could result in a material adverse effect on our results of operations and financial condition.

Our operating results vary quarterly.

We have often recognized a slightly greater portion of revenues in the second and third quarter of the 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. In addition, salesSales 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.

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.

We are subject to risks associated with international operations.

In fiscal 2017,2018, approximately 12%18% 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:

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, and to date we have not engaged in any currency hedging transactions intended to reduce the effect of fluctuations in foreign currency exchange rates on our results of operations.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. Although exposure to currency fluctuations to date has not had a material effect on our business, 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.

While we 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.

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 coverage and generally require that our co-packers maintain product liability insurance with 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.

If our food products become adulterated or misbranded, we would need to recall those items and may experience product liability claims if consumers are injured as a result.

Food products occasionally contain contaminants due to inherent defects or improper storage or handling. Under adverse circumstances, food producers may be required to recall some of their products if they become adulterated or misbranded or as a result of a government-mandated recall. The scope of such a recall could result in significant costs incurred as a result of the recall, potential destruction of inventory, and lost sales. Should consumption of any product cause injury, we may be liable for monetary damages as a result of a settlement or judgment against us. A widespread product recall could result in changes to one or more of our business processes, product shortages, a loss of customer confidence in our brand or other adverse effects on our business.

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 officer and chief financial officer concluded that our internal control over financial reporting was ineffective as of December 30, 201729, 2018 because of the following material weaknesses in internal controls over financial reporting:

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

There can be no assurance that ourOur announced exploration of strategic alternatives will resulthas not resulted in any transaction, being consummated, and speculation and uncertainty regarding the outcome of ourany further exploration of strategic alternatives may adversely impact our business.

On September 30, 2016, we announced that we had engaged a financial advisor and were pursuing strategic alternatives to enhance shareholder value, including a possible sale or other form of business combination. In August 2017, we announced that we had terminated our engagement with the financial advisor. While we are continuing to pursue value-enhancing initiatives, there can be no assurance that any transaction will be consummated. The process of exploring strategic alternatives involves the dedication of significant resources and the incurrence of significant costs and expenses. If we are unable to mitigate these or other potential risks related to the uncertainty caused by our exploration of strategic alternatives, it may disrupt our business or adversely impact our revenue, operating results, and financial condition.

Our principal shareholder has the ability to control the policies and management of our company.

Our 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. For as long as Mr. Mintz has a controlling interest in our company, he 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 Mr. Mintz has a controlling interest in our company, he 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 OTCQB tier of the OTC Markets may be volatile and sporadic, which could depress the market price of our common stock and make it difficult for our stockholders to resell their shares.

Since October 24, 2016 our common stock has been quoted on the OTCQB tier of the electronic quotation system operated by OTC Markets. Trading in stock quoted on the OTC Markets is often thin and characterized by wide fluctuations in trading prices, due to many factors that may have little to do with our operations or business prospects. This volatility could depress the market price of our common stock for reasons unrelated to operating performance. Moreover, the OTC Markets is not a stock exchange, and trading of securities on the OTC Markets is often more sporadic than the trading of securities listed on a quotation system like NASDAQ or a stock exchange like the NYSE MKT. Accordingly, shareholders may have difficulty reselling any of their shares and the lack of liquidity may negatively impact our ability to pursue strategic alternatives.

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:

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.

Risks Related to Changes in the Tax Code

Federal income tax reform could have unforeseen effects on our financial condition and results of operations.

On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act of 2017. We are still in the process of analyzing this law and its possible effects on our company. The law includes a number of provisions, including the lowering of the United States corporate tax rate from 35% to 21%, effective January 1, 2018. We have reflected the impact of the Act in our financial statements for 2017, the year of enactment. There are also provisions that may partially offset the benefit of such rate reduction. Financial statement impacts include adjustments for, among other things, the re-measurement of deferred tax assets and liabilities. While the provisions of the law generally are expected to benefit us, the law remains subject to implementation through rulemaking and administrative guidance that has not yet been implemented. We anticipate that the impact of Tax Cuts and Jobs Act may be material to our business, financial condition and results of operations; however, the intended and unintended consequences of the Tax Cuts and Jobs Act and of future tax legislation on our business are uncertain.

Item 1B. Unresolved Staff Comments.

None.

Item 2. Properties.

Our facilities are located in a one-story facility in Cranford, New Jersey. The 6,200 square foot facility houses our administrative offices, a warehouse, walk-in freezer and refrigerator, and a product development laboratory and test kitchen. Our lease agreement expired in 1999, but we continue to occupy the premises under the terms of that agreement, subject to a six month notification period from us and the landlord with respect to any changes. We currently have no plans to enter into a long-term lease agreement for the facility. Our rent expense was $81,000 in both fiscal 20172018 and fiscal 2016.2017. Our management believes that the Cranford facility will continue to satisfy our space requirements for the foreseeable future. We rent warehouse storage space at various outside facilities. Outside warehouse expenses amounted to $507,000$448,000 and $503,000$507,000 during fiscal 2018 and 2017, and 2016, respectively.

Item 3. Legal Proceedings.

We are not a party to any material litigation.

Item 4. Mine Safety Disclosures.

Not applicable.

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.

Each share ranks equally as to dividends, voting rights, participation in assets on winding-up and in all other respects. No shares have been or will be issued subject to call or assessment. There are no preemptive rights, provisions for redemption or for either cancellation or surrender, or provisions for sinking or purchase funds.

The following table sets forth the high and low sales prices as reported on the OTCQB or the NYSE MKT, as the case may be, for the two most recent fiscal years:

The closing price for our common stock on March 27, 2018,25, 2019, as reported on the OTCQB, was $2.07.$1.65.

Holders of Record

As of March 27, 2018,25, 2019, there were approximately 370356 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. As of December 30, 2017,29, 2018, we had issued 80,000 non-qualified stock option awards under the Plan. No option awards were granted in the two fiscal years ended December 30, 2017.29, 2018. 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.

Sales of Unregistered Securities

There were no sales of unregistered securities during fiscal 2017.2018.

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 30, 201729, 2018 (the fourth quarter of fiscal 2017)2018).

Item 6. Selected Financial Data.

Not applicable.

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 RecognitionRecognition.. We primarily sell non-dairy soy-based cheeses, frozen desserts and other food products. We recognize revenue when goods are shipped fromcontrol over the products transfers to our production facilities or outside warehouses and the following four criteria have been met: (i)customers, which generally occurs when the product has beenis 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 no significant remaining obligations; (ii) persuasive evidenceany unbilled receivables at the end 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 as a credit in freight out expense in cost of goods sold. The amount of freight costs charged to customers has not been material to date.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.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.

Fixed Assets. During fiscal 2018, we spent $121,000 on equipment to be used at our new co-packer’s frozen dessert facility. We anticipate that this equipment will begin being used in connection with the production of frozen stick novelty items in the second quarter of 2019.Depreciation will be provided by charges to income using the straight-line method over the useful life of ten 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 allowedsustained 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.

Deferred Revenue and Costs. Deferred revenue represents amounts from sales of our product that have been billed and shipped, but for which the transactions have not met our revenue recognition criteria. The cost of the related product has been recorded as deferred costs on our balance sheets.

Stock Based Compensation.We follow the provisions of ASC 718Share-Based Payment. We use the Black-Scholes option pricing model to measure the estimated fair value of the options under ASC 718. Stock-based compensation expense is recognized over the requisite service period.

Recent Accounting Pronouncements

In July 2015,Our company considers the FASB issued guidance which changes the measurement principle for inventory from the lowerapplicability and impact of costall Accounting Standard Updates (“ASUs”). ASUs not discussed below were assessed and determined to be either not applicable or marketare expected to the lower of cost and net realizable value.  ASU 2015-11 defines net realizable value as estimated selling pricings in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation.  The new guidance must be applied on a prospective basis and is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years, with early adoption permitted.  Our adoption of this ASU, effective January 1, 2017, did not have significantminimal impact on our financial statements.

balance sheets or statements of operations.

In May 2014,February 2016, the FASB issuedestablished Topic 842, Leases, by issuing Accounting Standards Update (ASU) No. 2016-02, which requires lessees to recognize leases on-balance sheet and disclose key information about leasing arrangements. Topic 842 was subsequently amended by ASU No. 2018-01, Land Easement Practical Expedient for Transition to Topic 842; ASU No. 2018-10, Codification Improvements to Topic 842, Leases; ASU No. 2018-11, Targeted Improvements; and ASU No. 2018-20, Narrow-Scope Improvements for Lessors. The new standard establishes a right-of-use model (“ASU”ROU”) 2014-09, “Revenue from Contractsthat requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with Customers” (“ASU 2014-09”). a term longer than 12 months. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement.

The objectivenew standard was effective for our company on December 30, 2018. A modified retrospective transition approach is required, applying the new standard to all leases existing at the date of ASU 2014-09 is to establish a single comprehensive model for entitiesinitial application. An entity may choose to use in accounting for revenue arising from contracts with customers and will supersede mosteither (1) its effective date or (2) the beginning of the earliest comparative period presented in the financial statements as its date of initial application. If an entity chooses the second option, the transition requirements for existing leases also apply to leases entered into between the date of initial application and the effective date. The entity must also recast its comparative period financial statements and provide the disclosures required by the new standard for the comparative periods. We adopted the new standard on December 30, 2018 and used the effective date as our date of initial application. Consequently, financial information will not be updated, and the disclosures required under the new standard will not be provided for dates and periods before December 30, 2018.

The new standard provides several optional practical expedients in transition. We elected the ‘package of practical expedients’, which permits us not to reassess under the new standard our prior conclusions about lease identification, lease classification and initial direct costs.

The new standard also provides practical expedients for an entity’s ongoing accounting. We elected the short-term lease recognition exemption for all leases that qualify. This means, for those leases that qualify, we will not recognize ROU assets or lease liabilities, and this includes not recognizing ROU assets or lease liabilities for existing short-term leases of those assets in transition. We did not elect the practical expedient to not separate lease and non-lease components for any of our leases.

We expect that this standard will have a material effect on our financial statements. While we continue to assess all the effects of adoption, we currently believe the most significant effects relate to the recognition of new ROU assets and lease liabilities on our balance sheet for our real estate and equipment operating leases and providing significant new disclosures about our leasing activities. We do not expect a significant change in our leasing activities between now and adoption.

We currently expect to recognize additional operating liabilities of approximately $359,000 with corresponding ROU assets of the same amount, based on the present value of the remaining minimum rental payments under current leasing standards for existing operating leases.

Effective December 31, 2017, we adopted Financial Accounting Standards Board (“FASB”) Topic 606, Revenue from Contacts with Customers (“ASC 606”). In accordance with ASC 606, it was determined that the standard only impacted enhanced disclosure regarding revenue recognition, guidance, including industry specific guidance. The core principledisclosures of ASU 2014-09revenue streams, performance obligations, variable consideration and the related judgments and estimates necessary to apply the new standard.

ASC 606 was applied using the modified retrospective method. There was no cumulative effect of the initial application to be recognized as an adjustment to opening retained earnings at December 31, 2017. Accordingly, comparative periods have not been adjusted and continue to be reported under FASB ASC Topic 605, Revenue Recognition (“ASC” 605).

We generate revenues from the delivery of Tofutti branded plant-based cheeses, frozen desserts and other food products. Under ASC 606, revenue is that an entity recognizes revenue to depict the transferrecognized when a customer obtains control of promised goods or services to customers in an amount that reflects the consideration to which the entity expectsexpected to be entitledreceived in exchange for those goods or services. In applyingWe recognizes revenue when obligations under the new guidance, an entity will: (1) identifyterms of a contract with customers are satisfied; generally, this occurs with the contract(s) with a customer; (2) identifytransfer of control of our products. Revenue is measured as the performance obligationsamount of net consideration expected to be received in the contract; (3) determine the transaction price; (4) allocateexchange for transferring products. Revenue from product sales is governed primarily by purchase orders (“contracts”) which specify quantity and product(s) ordered, shipping terms and certain aspects of the transaction price including discounts. Contracts are at standalone pricing that is governed by a pricing list. A performance obligation is a promise in a contract to transfer a distinct service to the contract’scustomer. The performance obligations; and (5) recognize revenue when (or as) the entity satisfies a performance obligation. ASU 2014-09 applies to allobligation in these contracts with customers except those that are within the scope of other topics in the FASB ASC. In April and May 2016, the FASB issued ASU 2016-10, “Revenue from Contracts with Customers – Identifying Performance Obligations and Licensing,” ASU 2016-11, “Revenue Recognition and Derivatives and Hedging – Recession of SEC Guidance,” ASU 2016-12, “Revenue from Contracts with Customers – Narrow-Scope Improvements and Practical Expedients”, and ASU 2016-20, “Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers.” These ASUsis determined by each affect the guidance of the newindividual purchase orders and the respective stated quantities, with revenue recognition standardbeing recognized at a point in ASU 2014-09 and related subsequent ASUs. The new guidance is effective for annual reporting periods (including interim periods within those periods) beginning after December 15, 2017 for public companies. Early adoption is only permitted as of annual reporting periods beginning after December 15, 2016. Entities have the option of using either a full retrospective or modified approach to adopt ASU 2014-09.

On December 31, 2017, we adopted the new accounting standard ASC 606, “Revenue from Contracts with Customers and all the related amendments” (“ASC 606”) to all contracts which were not completed or expired as of December 31, 2017 using the modified retrospective method. We will recognize the cumulative effect of initially applying the new revenue standard as an adjustment to the opening balance of retained earnings. Results for reporting periods beginning after December 30, 2017 will be presented under ASC 606, while the comparative information will not be restated and will continue to be reportedtime when obligations under the accounting standards in effect for those periods. We expect that the impactterms of the adoptionagreement are satisfied. This generally occurs with the transfer of control when the new standard will not have a material impact onproduct is shipped or in most cases, picked up from one of our financial statements.

Withdistribution locations, by the adoption of the standard, the financial statements will be supplemented by new disclosure requirements. Areas of focus and updated presentation requirements include disclosures surrounding contracts with customers, disaggregation of revenue, contract balances, performance obligations, significant judgements used in the application of the guidance and transaction price allocation to remaining performance obligations.

In February 2016, the FASB issued guidance which amends the existing accounting standards for lease accounting. ASU 2016-02 requires lessees to recognize most leases on their balance sheets and making targeted changes to lessor accounting. This guidance will be effective for fiscal years beginning after December 15, 2018 including interim periods within those fiscal years. Early adoption is permitted. The new leases standard requires a modified retrospective transition approach for all leases existing at, or entered into after, the date of initial application, with an option to use certain transition relief. We are currently evaluating the impact of adopting the new leases standard on our financial statements.

In June 2016, the FASB issued Accounting Standards Update, or ASU 2016-13, Financial Instruments (Topic 326)- Credit Losses, Measurement of Credit Losses on Financial Instruments, which provides guidance regarding the measurement of credit losses on financial instruments. The new guidance replaces the incurred loss impairment methodology in the current guidance with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to determine credit loss estimates. This ASU will be effective for fiscal years beginning after December 15, 2019, with early adoption permitted for fiscal years beginning after December 15, 2018. We are in the process of assessing the impact of this guidance on our financial statements.

In March 2018, the FASB issued ASU 2018-05, Income Taxes (Topic 740) - Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118. This ASU adds SEC paragraphs pursuant to the SEC Staff Accounting Bulletin No. 118, which expresses the view of the staff regarding application of Topic 740, Income Taxes, in the reporting period that includes December 22, 2017 - the date on which the Tax Cuts and Jobs Act (H.R.1, An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018) was signed into law. This ASU is effective for annual and interim periods beginning after December 15, 2018. We are in the process of assessing the impact of this guidance on our financial statements.customer.

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, lack of profitable operations in recent years, dependence on a few key distributors for a significant portion of our sales, dependence on several key suppliers to produce our products, our reliance on a limited number of key executives to manage our business, and competition. For further discussion of the factors affecting our results of operations, see “Risk Factors.”

We may not be able to maintain profitability in the future and may not have sufficient working capital to fund our operations in the future.

While our operations werehave been profitable infor the last three fiscal 2017 and 2016,years, we incurred losses in prior years. With our improved results in fiscal 2016 and 2017, ourOur cash and cash equivalents anddecreased to $558,000 while our working capital increased to $1,414,000 and $3,721,000, respectively,$3,896,000 as of December 30, 2017.29, 2018. 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%42% and 46%47% of our net sales for the fiscal years ended December 30, 201729, 2018 and December 31, 2016,30, 2017, respectively. Although we believe that the business associated with any of our primary distributors can be readily transferred to other distributors or directly to supermarket warehouses if necessary, no assurance can be given that a change in distributors would not be disruptive to our business, which could have a material adverse effect on our business and results of operations.

We depend on several keyInterruptions in the supply of products from our co-packers and suppliers to producecould adversely affect our products.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. DuringFor the yearsyear ended December 30, 2017 and December 31, 2016,29, 2018, we purchased approximately 41% and 36% of our finished goods, respectively, from Franklin Foods, ourBETTER THAN CREAM CHEESE,WHIPPED BETTER THAN CREAM CHEESE,SOUR SUPREME, andBETTER THAN RICOTTA co-packer and 17% and 25%, respectively,49% of our finished goods from Franklin Foods, our co-packer ofBETTER THAN CREAM CHEESE, WHIPPED BETTER THAN CREAM CHEESE, SOUR SUPREME,andBETTER THAN RICOTTAproducts. We purchased 20% of our finished goods in fiscal 2018 from Ice Cream Specialties and Luke’s Ice Cream, our former and current frozen dessert novelty co-packer. co-packers.

In 2017,September 2016, we were notified by Ice Cream Specialties, the co-packer of our frozen dessert stick novelties, Tofutti Cuties, and Yours Truly Cones, stoppedthat they would cease manufacturing our frozen dessert stick novelties and Yours Truly Cones. They also ceased manufacturing Tofutti Cuties atthose products by the end of January 2018. We have been able to secure a new co-packing facility that will be makingIn April 2018 we began production of our Tofutti Cutie sandwiches andCuties at our new frozen dessert novelty co-packer, Luke’s Ice Cream, located in Florida. Luke’s began manufacturing Yours Truly Cones beginning mid-Aprilin November 2018 and mid-May 2018, respectively. We are currently investigating other facilitieswe expect them to co-packinitiate the manufacture of our frozen dessert stick novelties.novelty bars in the second quarter of 2019. Our frozen dessert pints are still being produced by Leiby’s Dairy in Pennsylvania. Any continued or future disruption in supply could have a further 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 rely on a limited number of key executives to manage our business.

Our success is significantly dependent on the services of David Mintz (age 86)87), our Chief Executive Officer, and Steven Kass (age 66)67), our Chief Financial Officer. The loss of the services of either of these persons could have a material adverse effect on our business and results of operations.

Competition.

The dairy free, vegan frozen dessert dairy free cheeseand food 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.

Fiscal Year Ended December 30, 201729, 2018 Compared with Fiscal Year Ended December 31, 201630, 2017

We operate on a fiscal year ending on the Saturday closest to December 31. Fiscal years for the financial statements included in this report are the fifty-two week period ended December 30, 201729, 2018 (fiscal 2017)2018) and the fifty-two week period ended December 31, 201630, 2017 (fiscal 2016)2017).

Net sales for the fiscal year ended December 30, 201729, 2018 were $14,107,000,$13,066,000, a decrease of $366,000,$1,041,000, or 3%7%, from net sales of $14,473,000$14,107,000 for the fiscal year ended December 31, 2016. Beginning in the first quarter of 2017, we elected to combine our frozen dessert and frozen food categories into one category as frozen foods revenue is no longer material.30, 2017. Sales of our frozen dessert and frozen food product lines decreased to $2,255,000 in fiscal 2018 from $2,870,000 in fiscal 2017 from $3,610,000 in fiscal 2016.2017. Our frozen dessert business continues to be negatively impacted by the overall sluggish sales in the ice cream category. Additionally, in September 2016, Ice Cream Specialties, the co-packer who manufactured our frozen dessert novelty products, which included Tofutti Cuties, Yours Truly Cones and stick novelties, notified us that they would completely cease manufacturing these products by the end of January 2018. The co-packer ceased manufacturing our stick novelties and Yours Truly Cones in June 2017. The unavailability of these items negatively impacted sales of our frozen desserts. Tofutti Cutie sales have not been impacted. Sales of vegan cheese products increaseddecreased to $10,811,000 in fiscal 2018 from $11,237,000 in fiscal 2017 from $10,863,000 in fiscal 2016, due to the introductiona FDA industry-wide mandate that by June 2018 it would no longer be permissible to make and sell food products using partially hydrogenated fats. It took several months to transition our accounts purchasing those items to our other version of our Whippedthe Better Than Cream Cheese and improved distributionSour Supreme, which negatively impacted sales. All such accounts were successfully transitioned in 2018, and we expect sales of our Better Than Ricotta product.

cheese products to return to their former levels.

Our gross profit in the year ended December 30, 2017 increased29, 2018 decreased by $149,000$636,000 to $4,740,000$4,104,000 from $4,591,000,$4,740,000, reflecting the increasedecrease in sales and gross profit percentage. Our gross profit percentage for the year ended December 30, 2017 increased29, 2018 decreased to 34%31% from 32%34% for the year ended December 31, 2016,30, 2017. The decline in our gross profit percentage was due to initial start-up costs incurred in connection with re-starting the implementationproduction of price increasesTofutti Cuties and the elimination of various sales promotion programs in 2017.Yours Truly Cones with a new co-packer. Sales promotion and allowance expense was $1,513,000 for the year ended December 29, 2018 compared to $1,529,000 for the year ended December 30, 2017 compared to $1,750,000 for the year ended December 31, 2016. Our gross profit and gross profit percentage were also positively impacted by the increase in domestic sales of vegan cheese products, which offset the decline in foreign sales. We have a significantly higher gross profit margin on domestic sales.2017. We intend to increase gross profitability in future periods through selective price increases and selective ingredient replacements to lower costlower-cost alternatives.

Freight out expense increaseddecreased to $918,000 for the year ended December 29, 2018 compared with $960,000 for the year ended December 30, 2017 compared with $943,000 fordue to the year ended December 31, 2016.reduction in sales. Freight out cost as a percentage of sales in fiscal 2018 and fiscal 2017 was 6.8% comparedapproximately 7%.

Selling and warehousing expenses decreased by $159,000, or 10%, to 6.5%$1,357,000 for fiscal 2016.2018 from $1,516,000 in fiscal 2017. This decrease was primarily attributable to decreases in commission expense of $108,000, outside warehouse rental expense of $59,000 and in payroll expense of $25,000. These decreases were partially offset by increases in travel, entertainment, auto and meetings and conventions expense of $23,000, and messenger expense of $9,000. The decrease in commission expense in fiscal 2018 was largely attributable to the decline in sales. We anticipate that our freight costselling expenses as a percentage of sales in fiscal 2018 will increase due to the implementation of the ELD (Electronic Logging Device) Mandate. The ELD Mandate was established by the Federal Motor Carrier Safety Administration and all commercial trucking is required to adopt these rules as of January 1, 2018. The major purpose of this requirement is to track and record a driver’s hours of service electronically to make sure that all drive segments are captured for reasons of safety. The anticipated net effect for companies using commercial vehicles as their mode of distribution will be an increase in freight costs.

Selling and warehousing expenses increased by $123,000, or 9%, to $1,516,000 for fiscal 2017 from $1,393,000 in fiscal 2016. This increase was primarily attributable to increases in bad debt expense of $41,000, commission expense of $87,000, outside warehouse rental expense of $4,000, travel, entertainment and auto expense of $12,000, and messenger expense of $2,000, which were offset by decreases in payroll expense of $13,000 and meetings and conventions expense of $4,000. The increase in commission expense in fiscal 2017, despite the decrease in total net sales, is attributable to the increase in domestic sales, which are mostly commissionable. We anticipate that selling expenses in fiscal 20182019 will be comparable to or slightly less than our expenses in fiscal 2017.2018.

Marketing expenses increaseddecreased in fiscal 2018 by $19,000, or 6%, to $294,000 from $313,000 in fiscal 2017 by $75,000, or 32%, to $313,000 from $238,000 in fiscal 2016 due to increasesa decrease in advertising expense of $34,000, and promotion expense of $58,000,$42,000, which werewas partially offset by a reductionan increase in artwork and plates expense of $16,000.$22,000. We expect that marketing expenses in fiscal 2018 will be comparable to or slightly less than our expenses in fiscal 2017.

Product development expenses decreasedincreased by $33,000,$17,000, or 8%4%, to $393,000$410,000 in fiscal 20172018 from $426,000$393,000 in fiscal 2017. The decreaseincrease was primarily attributable to an increase in payroll expense of $34,000, which was partially offset by decreases in professional fees and outside services expense of $65,000, which was partially offset by increases in payroll expense of $10,000, travel, entertainment and auto expense of $12,000,$11,000, and lab costs and supplies expense of $10,000.$5,000. We expect that product development costs will remain constant or decline slightly in fiscal 2018.2019.

General and administrative expenses decreased by $291,000,$97,000, or 14%5%, to $1,671,000 for fiscal 2018 from $1,768,000 for fiscal 2017 from $2,059,000 for fiscal 2016.2017. The decrease was primarily due to decreases in stock compensation expense of $69,000 as all options fully vested in fiscal 2017, professional fees and outside services expenses of $41,000, utilities expense of $270,000, payroll expense of $8,000, public relations expense of $40,000,$9,000, increased bank fees, and increased general insurance expense of $3,000, real estate property tax expense of $6,000, and IT expense of $25,000.expense. These expensesdecreases were partially offset by an increaseincreases in stock compensationpayroll expense of $44,000, utility$20,000, office supply expense of $5,000, phone expense of $7,000,$6,000 and building maintenance and repairs expense of $4,000. The decrease in professional fees and outside services expense was due principally to the resolution of litigation and related legal expenses of $265,000, which were not repeated in fiscal 2017. Our management expects$5,000. We expect that general and administrative expenses will remain constant in fiscal 2018.

2019.

Overall, total operating expenses in fiscal 20172018 decreased by $126,000,$258,000, or 3%6%, to $3,990,000$3,732,000 compared to total operating expenses of $4,116,000$3,990,000 in fiscal 2016.2017. We anticipate that our operating expenses in fiscal 20182019 will remain comparable with fiscal 20172018 expenses.

Income before income taxes increaseddecreased to $724,000$347,000 in fiscal 20172018 as compared with income before income taxes of $449,000$724,000 in fiscal 2016.2017, due to the reduction in sales.

Income tax expensebenefit for the 20172018 fiscal period was $20,000$160,000 compared to income tax expense of $28,000$20,000 for the 20162017 fiscal period. Our low income tax expense rate in both years2017 resulted from our use of federal and state net operating loss carryforwards. Our income tax benefit during the 2018 fiscal period was due to a reversal of valuation allowance on deferred tax assets as we concluded we will be able to utilize such assets in future periods. As of December 30, 2017,29, 2018, we had $487,000 ofno federal net operating loss carryforwards and $1,289,000$731,000 of state net operating loss carryforwards, which will begin to expire in 2033.

Liquidity and Capital Resources

At December 30, 2017,29, 2018, we had approximately $1,414,000$558,000 in cash and cash equivalents, and our working capital was $3,721,000, an increase of $772,000 from December 31, 2016. Our$3,896,000, and our current and quick acid test ratios, both measures of liquidity, were 4.47.1 and 3.0,4.4, respectively, as of December 30, 2017 and 2.9 and 1.9, respectively, as of December 31, 2016.29, 2018.

In fiscal 2014 and 2015, we incurred significant losses which resulted in a decrease in our capital resources. 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, 2019.assets. 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 at the option of the holder, the closing price of our common stock on the NYSE MKT on the date the promissory note was entered into. Initially due December 31, 2017, the loan has been extended untilDecember 31, 20192020.

Cash used in operating activities for the year ended December 29, 2018 was $725,000 compared to $1,288,000 provided by operating activities for the year ended December 30, 2017. Net cash used in operating activities for the year ended December 29, 2018 was $1,288,000primarily the result of increases in accounts receivable of $463,000 and inventory of $336,000 and a decrease in accounts payable and accrued expenses of $414,000. These uses of cash were partially offset by net income of $507,000.

Cash used in investing activities was $121,000 for the fiscal year ended December 29, 2018 due to fixed asset purchases compared to no cash used in investing activities for the fiscal year ended December 30, 2017 compared with cash used in operating activities of $418,000 for the fiscal year ended December 31, 2016. In the fiscal year ended December 30, 2017, our cash flow from operating activities reflected net income of $704,000 and decreases in accounts receivable and inventory of $840,000 and $82,000, respectively. These decreases were partially offset by a decrease in accounts payable and accrued liabilities of $436,000 and deferred revenue of $14,000.2017.

Cash used in financing activities was $6,000$10,000 for the fiscal year ended December 30, 201729, 2018 compared to $495,000 provided by$6,000 used in financing activities for the fiscal year ended December 31, 2016. Net cash provided by financing activities for the fiscal year ended December 31, 2016 was the result of a $500,000 loan from our Chairman of the Board and Chief Executive Officer.30, 2017.

As a result of the foregoing, our cash and cash equivalents increaseddecreased to $558,000 at December 29, 2018 from $1,414,000 at December 30, 2017 from $132,000 at December 31, 2016.2017.

We believe our existing cash and cash equivalents on hand at December 30, 2017,29, 2018, existing working capital, and our expected cash flows from operations will be sufficient to support our operating and capital requirements during the next twelve months.

Contractual Obligations

We had no material contractual obligations at December 30, 2017.29, 2018.

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 30, 2017.29, 2018.

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 30, 201729, 2018 and December 31, 2016,30, 2017, and the related statements of operations,income, changes in stockholders’ equity, and cash flows for each of 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 30, 201729, 2018 and December 31, 2016,30, 2017, and the results of its operations and its cash flows for each of the fiscal years then ended, in conformity with accounting principles generally accepted in the United States of America.

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 audits 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 audits 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 audits 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.

/s/ EisnerAmper LLP

We have served as the Company’s auditor since fiscal year 2010.

EISNERAMPER LLP

Iselin, New JerseyPhiladelphia, Pennsylvania

March 29, 20182019

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
INCOME

(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 30, 201729, 2018 and December 31, 201630, 2017
(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: LIQUIDITY AND CAPITAL RESOURCES

At December 30, 2017,29, 2018, Tofutti Brands, Inc. (the “Company”) had approximately $1,414$558 in cash compared to $132$1,414 at December 31, 2016.30, 2017. Net cash used in operating activities for the year ended December 29, 2018 was $725 compared to $1,288 provided by operating activities for the year ended December 30, 2017 was $1,288 compared to $4182017. Net cash used in operating activities for the year ended December 31, 2016. Net cash provided by operating activities for the year ended December 30, 201729, 2018 was primarily the result of our net income of $704 and decreasesincreases in accounts receivable of $463 and inventory of $840$336 and $82, respectively. These decreases were partially offset by a decrease in accounts payable and accrued liabilitiesexpenses of $436$414 and deferred revenue of $14.$34. These uses of cash were partially offset by net income of $507.

Cash used in investing activities was $121 for the fiscal year ended December 29, 2018 compared to none for the fiscal year ended December 30, 2017.

Cash used in financing activities was $6$10 for the fiscal year ended December 30, 201729, 2018 compared to $495 provided by$6 used in financing activities for the fiscal year ended December 31, 2016. Net cash provided by financing activities for the fiscal year ended December 31, 2016 was the result of a $500 loan from the Company’s Chairman of the Board and Chief Executive Officer.30, 2017.

The Company has historically financed operations and met capital requirements primarily through positive cash flow from operations. However, due to net losses and cash used in operations in prior years in order to provide the Company with additional working capital, on January 6, 2016, David Mintz, the Company’s Chairman and Chief Executive, provided it with a loan of $500. Commencing March 31, 2016, interest of 5% is payable on a quarterly basis without compounding. The loan may be prepaid in whole or in part at any time without premium or penalty. The loan is convertible into the Company’s common stock at a conversion price of $4.01 per share, the closing price of its common stock on the NYSE MKT on the date the promissory note was entered into. 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. Initially due December 31, 2017, the loan has been extended untilDecember 31, 2019.2020.

The Company’s ability to introduce 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 was pursuing strategic alternatives to enhance shareholder value, including a possible sale or other form of business combination. In August 2017 the Company announced that it had terminated its engagement with the financial advisor that was assisting it.

NOTE 2: DESCRIPTION OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of Business - Tofutti Brands Inc. (“Tofutti” or the “Company”) is engaged in one business segment, the development, production and marketing of dairy free frozen desserts and other food products.

TOFUTTI BRANDS INC.

NOTES TO FINANCIAL STATEMENTS

(In thousands, except for share and per share data)

Operating Segments. The Company reports on operating segments in accordance with standards for publiccompaniesto 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 dairy free 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 and other vegetable protein- based, dairy free frozen desserts, frozen food products and soy and other vegetable protein-based cheese products. All long-lived assets are located in the United States, the Company’s country of domicile.

TOFUTTI BRANDS INC.

NOTES TO FINANCIAL STATEMENTS

(In thousands, except for share and per share data)

Fiscal Year - The Company operates on a fiscal year ending on the Saturday closest to December 31st. Fiscal years for the financial statements included herein are the fifty-two week fiscal periods ended December 29, 2018 and December 30, 2017, fiscal 2018 and December 31, 2016, fiscal 2017, and fiscal 2016, 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, sales promotion accruals, inventory reserves and reserves for uncertain tax positions. Actual results could differ from those estimates.

Revenue Recognition - Revenue is recognized when goods are shipped from production facilities or outside warehouses to customers. Revenue is recognized when the following four criteria under ASC 605 have been met: the product has been shipped and the– The Company has no significant remaining obligations; persuasive evidence of an arrangement exists; the price to the buyer is fixed or determinable; and collection is probable. Deductions from sales for promotional programs, manufacturers’ charge-backs, co-operative advertising programsprimarily sell dairy free, vegan cheeses, frozen desserts and other programsfood products as detailed in Note 9 Revenue. The Company recognizes revenue when control over the products transfers to its customers, 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 reductions of revenues andtrade discounts, rebates or returns, are provided forestimated at the time of initial salesale. The Company bases these estimates of product. Freight charged to customers is includedexpected 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 revenues,accordance with U.S. GAAP and hasour inventory policies. The Company generally been insignificant.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 its financial institution exceeded the FDIC limit of $250.

The Company performs ongoing evaluations of its customers’ financial condition and does not require collateral. Management feels that credit risk beyond the established allowances at December 30, 2017 is limited.

During the fiscal years ended December 30, 201729, 2018 and December 31, 2016,30, 2017, the Company derived approximately 88%82% and 85%88% of its net sales domestically. The remaining sales in both periods were exports to foreign countries. The accounts receivable balance of three customers represented approximately 51% of total accounts receivable at December 29, 2018, and three customers represented approximately 45% of total accounts receivable at December 30, 2017, and three customers represented approximately 42% of total accounts receivable at December 31, 2016.2017. 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 47%42% and 46%47% of the Company’s net sales for the fiscal years ended December 30, 201729, 2018 and December 31, 2016.30, 2017.

TOFUTTI BRANDS INC.

NOTES TO FINANCIAL STATEMENTS

(In thousands, except for share and per share data)

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.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.

Deferred Revenue and Deferred Costs - Deferred revenue represents amounts from sales of the Company’s product that have been billed and shipped, but for which the transactions have not met its revenue recognition criteria. The cost of the related product has been recorded as deferred costs on its balance sheet.

Cash and Cash Equivalents - The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents.

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. 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.

The Company purchased approximately 41%49% and 36%41% of its finished products from one supplier and 17%20% and 25%17% of its finished products from another supplier during the periods ended December 30, 201729, 2018 and December 31, 2016,30, 2017, 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 allowedsustained 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.

Stock-based compensation- The Company accounts for stock-based awards to employees and directors in accordance with the provisions of ASC 718, “Compensation – Stock Compensation”.Compensation.” Under ASC 718, share-based awards are valued at fair value on the date of grant and that fair value is recognized over the requisite service period on a straight-line basis. The Company values its stock option using the Black- ScholesBlack-Scholes option pricing model.

TOFUTTI BRANDS INC.

NOTES TO FINANCIAL STATEMENTS

(In thousands, except for share and per share data)

Net Income (Loss)Earnings Per Share- Basic earnings per common share has been computed by dividing earnings by the weighted average number of common shares outstanding. For the fiscal years ended December 30, 201729, 2018 and December 31, 2016,30, 2017, stock equivalents of 80,000 shares were excluded from diluted earnings per share calculations since the effect was anti-dilutive because the strike price was greater than the quoted market value at such date.

TOFUTTI BRANDS INC.

NOTES TO FINANCIAL STATEMENTS

(In thousands, except for share and per share data)

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

Freight Costs- Freight costs to ship inventory to customers and to outside warehouses amounted to $960$918 and $943$960 during the fiscal years ended December 30, 201729, 2018 and December 31, 2016,30, 2017, respectively. Such costs are included in costs of goods sold.

Advertising Costs - The Company expenses advertising costs as they are incurred. Advertising expenses amounted to $192$188 and $158$192 during the fiscal years endedDecember 29, 2018 and December 30, 2017, and December 31, 2016, respectively.

Product Development Costs-Costs of new product development and product redesign are charged to expense as incurred. Product development costs amounted to $393$410 and $426$393 during the fiscal years ended December 30, 201729, 2018 and December 31, 2016,30, 2017, respectively.

Recent Accounting Pronouncements – In July 2015, The Company considers the FASB issued guidance which changes the measurement principle for inventory from the lowerapplicability and impact of costall Accounting Standard Updates (“ASUs”). ASUs not discussed below were assessed and determined to be either not applicable or marketare expected to the lower of cost and net realizable value. ASU 2015-11 defines net realizable value as estimated selling pricings in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The new guidance must be applied on a prospective basis and is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years, with early adoption permitted. The adoption of this ASU, effective January 1, 2017, did not have any significantminimal impact on the Company’s financial statements.balance sheets or statements of operations.

In May 2014,February 2016, the FASB issuedestablished Topic 842, Leases, by issuing Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers” (“(ASU) No. 2016-02, which requires lessees to recognize leases on-balance sheet and disclose key information about leasing arrangements. Topic 842 was subsequently amended by ASU 2014-09”). The objective ofNo. 2018-01, Land Easement Practical Expedient for Transition to Topic 842; ASU 2014-09 is to establish a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and will supersede most of the existing revenue recognition guidance, including industry specific guidance. The core principle of ASU 2014-09 is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In applying the new guidance, an entity will: (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the contract’s performance obligations; and (5) recognize revenue when (or as) the entity satisfies a performance obligation. ASU 2014-09 applies to all contracts with customers except those that are within the scope of other topics in the FASB ASC. In April and May 2016, the FASB issued ASU 2016-10, “Revenue from Contracts with Customers – Identifying Performance Obligations and Licensing,” ASU 2016-11, “Revenue Recognition and Derivatives and Hedging – Recession of SEC Guidance,” ASU 2016-12, “Revenue from Contracts with Customers – Narrow-Scope Improvements and Practical Expedients”, and ASU 2016-20, “Technical Corrections andNo. 2018-10, Codification Improvements to Topic 606, Revenue from Contracts with Customers.” These ASUs each affect the guidance of the new revenue recognition standard in842, Leases; ASU 2014-09No. 2018-11, Targeted Improvements; and related subsequent ASUs.ASU No. 2018-20, Narrow-Scope Improvements for Lessors. The new guidance is effectivestandard establishes a right-of-use model (“ROU”) that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for annual reporting periods (including interim periods within those periods) beginning after December 15, 2017 for public companies. Early adoption is only permittedall leases with a term longer than 12 months. Leases will be classified as finance or operating, with classification affecting the pattern and classification of annual reporting periods beginning after December 15, 2016. Entities haveexpense recognition in the option of using either a full retrospective or modified approach to adopt ASU 2014-09.income statement.

TOFUTTI BRANDS INC.

NOTES TO FINANCIAL STATEMENTS

(In thousands, except for share and per share data)

OnThe new standard was effective for the Company on December 30, 2018. We adopted the new standard on December 30, 2018. A modified retrospective transition approach is required, applying the new standard to all leases existing at the date of initial application. An entity may choose to use either (1) its effective date or (2) the beginning of the earliest comparative period presented in the financial statements as its date of initial application. If an entity chooses the second option, the transition requirements for existing leases also apply to leases entered into between the date of initial application and the effective date. The entity must also recast its comparative period financial statements and provide the disclosures required by the new standard for the comparative periods. The Company adopted the new standard on December 30, 2018 and used the effective date as its date of initial application. Consequently, financial information will not be updated, and the disclosures required under the new standard will not be provided for dates and periods before December 30, 2018.

The new standard provides several optional practical expedients in transition. The Company elected the ‘package of practical expedients’, which permits it not to reassess under the new standard its prior conclusions about lease identification, lease classification and initial direct costs.

The new standard also provides practical expedients for an entity’s ongoing accounting. The Company elected the short-term lease recognition exemption for all leases that qualify. This means, for those leases that qualify, the Company will not recognize ROU assets or lease liabilities, and this includes not recognizing ROU assets or lease liabilities for existing short-term leases of those assets in transition. The Company did not elect the practical expedient to not separate lease and non-lease components for any of its leases.

The Company expects that this standard will have a material effect on its financial statements. While the Company continues to assess all the effects of adoption, it currently believes the most significant effects relate to the recognition of new ROU assets and lease liabilities on its balance sheet for its real estate and equipment operating leases and providing significant new disclosures about its leasing activities. The Company does not expect a significant change in its leasing activities between now and adoption.

The Company currently expects to recognize additional operating liabilities of approximately $370,000 with corresponding ROU assets of the same amount, based on the present value of the remaining minimum rental payments under current leasing standards for existing operating leases.

Effective December 31, 2017, wethe Company adopted Financial Accounting Standards Board (“FASB”) Topic 606, Revenue from Contacts with Customers (“ASC 606”). In accordance with ASC 606, it was determined that the standard only impacted enhanced disclosure regarding revenue recognition, including disclosures of revenue streams, performance obligations, variable consideration and the related judgments and estimates necessary to apply the new accounting standard standard.

ASC 606 “Revenue from Contracts with Customers and all the related amendments” (“ASC 606”) to all contracts which were not completed or expired as of December 31, 2017was applied using the modified retrospective method. We will recognize theThere was no cumulative effect of initially applying the new revenue standardinitial application to be recognized as an adjustment to the opening balance of retained earnings. Results for reportingearnings at December 31, 2017. Accordingly, comparative periods beginning after December 30, 2017 will be presented under ASC 606, while the comparative information willhave not be restatedbeen adjusted and will continue to be reported under the accounting standards in effect for those periods. We expect that the impact of the adoption of the new standard will not have a material impact on our financial statements.FASB ASC Topic 605, Revenue Recognition (“ASC” 605).

With the adoption of the standard, the financial statements will be supplemented by new disclosure requirements. Areas of focus and updated presentation requirements include disclosures surrounding contracts with customers, disaggregation of revenue, contract balances, performance obligations, significant judgements used in the application of the guidance and transaction price allocation to remaining performance obligations.

In February 2016, the FASB issued guidance which amends the existing accounting standards for lease accounting. ASU 2016-02 requires lessees to recognize most leases on their balance sheets and making targeted changes to lessor accounting. This guidance will be effective for fiscal years beginning after December 15, 2018 including interim periods within those fiscal years. Early adoption is permitted. The new leases standard requires a modified retrospective transition approach for all leases existing at, or entered into after, the date of initial application, with an option to use certain transition relief. The Company is currently evaluating the impact of adopting the new leases standard on its financial statements.

In June 2016, the FASB issued Accounting Standards Update, or ASU 2016-13, Financial Instruments (Topic 326)- Credit Losses, Measurement of Credit Losses on Financial Instruments, which provides guidance regarding the measurement of credit losses on financial instruments. The new guidance replaces the incurred loss impairment methodology in the current guidance with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to determine credit loss estimates. This ASU will be effective for fiscal years beginning after December 15, 2019, with early adoption permitted for fiscal years beginning after December 15, 2018. The Company is in the process of assessing the impact of this guidance on its financial statements.

In March 2018, the FASB issued ASU 2018-05, Income Taxes (Topic 740) - Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118. This ASU adds SEC paragraphs pursuant to the SEC Staff Accounting Bulletin No. 118, which expresses the view of the staff regarding application of Topic 740, Income Taxes, in the reporting period that includes December 22, 2017 - the date on which the Tax Cuts and Jobs Act (H.R.1, An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018) was signed into law. This ASU is effective for annual and interim periods beginning after December 15, 2018. The Company is in the process of assessing the impact of this guidance on its financial statements.

TOFUTTI BRANDS INC.

NOTES TO FINANCIAL STATEMENTS

(In thousands, except for share and per share data)

The Company generates revenues from the delivery of Tofutti branded plant-based cheeses, frozen desserts and other food products. Under ASC 606, revenue is recognized when a customer obtains control of promised goods or services in an amount that reflects the consideration expected to be received in exchange for those goods or services. The company recognizes revenue when obligations under the terms of a contract with customers are satisfied; generally, this occurs with the transfer of control of the Company’s products. Revenue is measured as the amount of net consideration expected to be received in exchange for transferring products. Revenue from product sales is governed primarily by purchase orders (“contracts”) which specify quantity and product(s) ordered, shipping terms and certain aspects of the transaction price including discounts. Contracts are at standalone pricing that is governed by a pricing list. A performance obligation is a promise in a contract to transfer a distinct service to the customer. The performance obligation in these contracts is determined by each of the individual purchase orders and the respective stated quantities, with revenue being recognized at a point in time when obligations under the terms of the agreement are satisfied. This generally occurs with the transfer of control when the product is shipped or in most cases, picked up from one of the Company’s distribution locations, by the customer.

NOTE 3: INVENTORIES

Inventories consist of the following:

NOTE 4: FIXED ASSETS

Fixed assets consist of the following:

Depreciation expense as of year-end December 29, 2018 and December 30, 2017 was $10 and December 31, 2016$5, respectively. During the fourth quarter of fiscal 2018, an automobile with a net book value of $3 was $5 and $6, respectively.

sold to a related party for $3. Proceeds from the sale were received in the first quarter of fiscal 2019.

NOTE 5: STOCK OPTIONS

On June 10, 2014, the shareholders of the Company approved the 2014 Equity Incentive Plan (the “2014 Plan”). The 2014 Plan provides for grants of various types of awards that are designed to attract and retain highly qualified personnel who will contribute to the success of the Company and to provide incentives to participants in the 2014 Plan that are linked directly to increases in shareholder value which will therefore inure to the benefit of all shareholders of the Company. The Company intends to rely on a combination of multi-year performance awards, options and other stock-based awards for these purposes. The 2014 Plan made 250,000 shares of Common Stock available for awards. The 2014 Plan also permits performance-based 2014 awards paid under it to be tax deductible under Section 162(m) of the Internal Revenue Code of 1986, as amended, as “performance-based compensation.” As of December 30, 2017,29, 2018, the Company has issued 80,000 non-qualified stock option awards under the 2014 Plan.

The following is a summary of stock option activity from December 31, 2016 to December 30, 2017:

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 December 30, 2017 to December 29, 2018:

The following table summarizes information about stock options outstanding at December 30, 2017:29, 2018:

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 2015, 80,000 options were granted,with 26,668 of the options vesting at the respective grant date, 26,666 vesting in January 2016, and 26,666 vesting in January 2017. At the date of grant, expected volatility was 69.8%-71.4%, a risk-free rate of 1.3%-1.8%, 0% expected dividends, and an expected term of five years.

As of December 30, 2017,29, 2018, the intrinsic value of the options outstanding and exercisable was immaterial, and there was approximately $0 of total unrecognized compensation cost.

NOTE 6: LEASES

The Company’s facilities are located in a one-story facility in Cranford, New Jersey. The 6,200 square foot facility houses its administrative offices, a warehouse, walk-in freezer and refrigerator, and a product development laboratory and test kitchen. The Company’s original lease agreement expired on July 1, 1999, but it continues to occupy the premises on a monthly basis. Any changes by either the landlord or the Company remains subject to a six month notification period. The Company currently has no plans to enter into a long-term lease agreement for the facility. Rent expense was $81 in fiscal 20172018 and fiscal 2016.2017. The Company’s management believes that the Cranford facility will continue to satisfy its space requirements for the foreseeable future and that if necessary, such space can be replaced without a significant impact to the business.

TOFUTTI BRANDS INC.

NOTES TO FINANCIAL STATEMENTS

(In thousands, except for share and per share data)

NOTE 7: INCOME TAXES

The Company calculates its provision for federal and state income taxes based on current tax law. The Tax Cuts and Jobs Act (the “Act”) was enacted on December 22, 2017 (“Enactment Date”) and has several key provisions impacting accounting for and reporting of income taxes. The most significant provision reduces the U.S. corporate statutory tax rate from 35% to 21% beginning on January 1, 2018. Although most provisions of tax reform arewere not effective until 2018, the Company iswas required to record the effect of a change in tax law as of the Enactment Date on its deferred tax assets. As theThe Company maintainsmaintained a full valuation allowance against its deferred tax assets, and there iswas no income tax expense recorded related to this change.change as of December 30, 2017. As of the Enactment Date, the Company estimates that its deferred tax asset and related valuation allowance were each reduced by approximately $155.

Additionally, the Securities Exchange Commission staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) on December 22, 2017, which allows the Company to record provisional amounts during a measurement period not to extend beyond one year of the Enactment Date. SAB 118 was issued to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Act. BecauseAs of December 29, 2018, the Company is still inhas completed the processaccounting of analyzing certain provisionsthe effects of the Act and has no adjustments to the Company has determined that the adjustment to its deferred taxes was a provisional amount as permitted under SAB 118.effects recorded at December 30, 2017.

A reconciliation between the expected federal tax expense at the statutory tax rates of 21% and 34% and the Company’s actual tax expense for the fiscal years ended December 29, 2018 and December 30, 2017, respectively, follows:

TOFUTTI BRANDS INC.

NOTES TO FINANCIAL STATEMENTS

(In thousands, except for share and per share data)

The components of income tax benefit for the fiscal years ended December 30, 2017 and December 31, 2016 are as follows:

A reconciliation between the expected federal tax expense at the statutory tax rate of 34% and the Company’s actual tax expense for the fiscal years ended December 30, 2017 and December 31, 2016 follows:

Deferred tax assets for the fiscal years ended December 30, 201729, 2018 and December 31, 201630, 2017 consist of the following components:

At December 30, 2017,29, 2018, the Company has $487 ofhad no federal net operating loss carryforwards and $1,289$731 of state net operating loss carryforwards, net, which will begin to expire in 2033.

Management has concluded that based upon all available evidence, including generating taxable income for the past three fiscal years and future forecasts, that it is more likely than not that the deferred tax assets will not be utilized. The Companyutilized and has recorded a decrease inreversed the federal and state valuation allowances inallowance on the amount of $399 during the year ended December 30, 2017. The remainingCompany’s deferred tax asset is offset by the federal unrecorded tax benefit.assets as of December 29, 2018.

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 allowedsustained 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.

TOFUTTI BRANDS INC.

NOTES TO FINANCIAL STATEMENTS

(In thousands, except for share and per share data)

The following table indicates the changes to the Company’s uncertain tax positions for the fiscal years ended December 30, 201729, 2018 and December 31, 2016:30, 2017:

The Company accounts for penalties or interest related to uncertain tax positions as part of its provision for income taxes. The Company had approximately $21$29 and $2$21 of accrued interest and penalties related to uncertain tax positions at December 30, 201729, 2018 and December 31, 2016,30, 2017, respectively. The amount of uncertain tax positions that would affect the effective tax rate if they were recognized is $152.$201. The liability at December 30, 201729, 2018 for uncertain tax positions is included in accrued expenses.

NOTE 8: NOTES PAYABLE

In September 2014, the Company obtained an auto loan of approximately $29 from a bank. The loan requiresrequired 60 monthly payments of $0.535 through August 2019. Interest iswas charged at a fixed nominal rate of 4.64%. The loan is collateralized by the underlying automobile.was fully paid off in May 2018.

Minimum estimated future payments on this loan as of December 30, 2017 are as follows:

TOFUTTI BRANDS INC.

NOTES TO FINANCIAL STATEMENTS

(In thousands, except for share and per share data)

Related Party

On January 6, 2016, David Mintz, the Company’s Chairman and Chief Executive, provided it with a loan of $500. The loan, which was originally set to expire on December 31, 2017 has been extended toDecember 31, 2019.2020. No other terms of the loan were modified. Commencing March 31, 2016, interest of 5% is payableon 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.into, at the option of the holder. 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 FINANCIAL STATEMENTS
(In thousands, except for share and per share data)