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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q


 

 

x

Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended October 1, 2011

 

 

o

Transition report pursuant to Section 13 or 15(d) of the Exchange Act for the transition period from [          ] to [          ]

Commission file number: 1-9009

 

Tofutti Brands Inc.

(Exact Name of Registrant as Specified in Its Charter)


 

 

 

Delaware

 

13-3094658

(State of Incorporation)

 

(I.R.S. Employer Identification No.)

50 Jackson Drive, Cranford, New Jersey 07016
(Address of Principal Executive Offices)

(908) 272-2400
(Registrant’s Telephone Number, including area code)

N/A
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)

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 o

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 o No x

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

 

 

 

 

Large accelerated filer o

 

Accelerated filer o

 

Non-accelerated filer o

 

Smaller reporting company x

 

(Do not check if smaller reporting company)

 

 

 


Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
As of November 14, 2011 the Registrant had 5,176,678 shares of Common Stock, par value $0.01, outstanding.


TOFUTTI BRANDS INC.

INDEX

 

 

 

 

 

 

 

 

 

 

Page

 

 

 

 


 

 

 

 

 

 

Part I - Financial Information:

 

 

 

 

 

 

 

 

 

 

Item 1.

Financial Statements

 

3

 

 

 

 

 

 

 

 

 

Condensed Balance Sheets – October 1, 2011 (Unaudited) and January 1, 2011

 

3

 

 

 

 

 

 

 

 

 

Condensed Statements of Operations - (Unaudited) Thirteen and Thirty-nine Week Periods ended October 1, 2011 and October 2, 2010

 

4

 

 

 

 

 

 

 

 

 

Condensed Statements of Cash Flows - (Unaudited) - Thirty-nine Week Periods ended October 1, 2011 and October 2, 2010

 

5

 

 

 

 

 

 

 

 

 

Notes to Condensed Financial Statements

 

6

 

 

 

 

 

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

8

 

 

 

 

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

12

 

 

 

 

 

 

 

 

Item 4.

Controls and Procedures

 

12

 

 

 

 

 

 

 

Part II - Other Information:

 

 

 

 

 

 

 

 

 

 

Item 1.

Legal Proceedings

 

14

 

 

 

 

 

 

 

 

Item 1A.

Risk Factors

 

14

 

 

 

 

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

14

 

 

 

 

 

 

 

 

Item 3.

Defaults Upon Senior Securities

 

14

 

 

 

 

 

 

 

 

Item 4.

(Removed and Reserved)

 

14

 

 

 

 

 

 

 

 

Item 5.

Other Information

 

14

 

 

 

 

 

 

 

 

Item 6.

Exhibits

 

14

 

 

 

 

 

 

 

 

 

Signatures

 

15

 

2


PART I - FINANCIAL INFORMATION

 

 

Item 1.

Financial Statements

TOFUTTI BRANDS INC.
Condensed Balance Sheets
(in thousands, except share and per share figures)

 

 

 

 

 

 

 

 

 

 

October 1,
2011

 

January 1,
2011*

 

 

 


 


 

 

 

(unaudited)

 

 

 

 

Assets

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

1,624

 

$

2,528

 

Accounts receivable, net of allowance for doubtful accounts and sales promotions of $365 and $320, respectively

 

 

1,979

 

 

1,338

 

Inventories

 

 

1,375

 

 

1,697

 

Prepaid expenses

 

 

162

 

 

16

 

Refundable income taxes

 

 

91

 

 

 

Deferred income taxes

 

 

204

 

 

186

 

 

 



 



 

Total current assets

 

 

5,435

 

 

5,765

 

 

 



 



 

 

 

 

 

 

 

 

 

Fixed assets, net of accumulated depreciation and amortization of $42 and $38

 

 

6

 

 

10

 

Other assets

 

 

16

 

 

16

 

 

 



 



 

 

 

$

5,457

 

$

5,791

 

 

 



 



 

 

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

 

$

359

 

$

260

 

Accrued expenses

 

 

350

 

 

585

 

Accrued officers’ compensation

 

 

250

 

 

500

 

 

 



 



 

Total current liabilities

 

 

959

 

 

1,345

 

 

 



 



 

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

Preferred stock - par value $.01 per share;
authorized 100,000 shares, none issued

 

 

 

 

 

Common stock - par value $.01 per share;
authorized 15,000,000 shares, issued and
outstanding 5,176,678 shares at October 1, 2011
and 5,176,678 shares at January 1, 2011

 

 

52

 

 

52

 

Additional paid-in capital

 

 

7

 

 

7

 

Retained earnings

 

 

4,439

 

 

4,387

 

 

 



 



 

Total stockholders’ equity

 

 

4,498

 

 

4,446

 

 

 



 



 

Total liabilities and stockholders’ equity

 

$

5,457

 

$

5,791

 

 

 



 



 


 

 

*

Derived from audited financial information.

See accompanying notes to condensed financial statements.

3


TOFUTTI BRANDS, INC.
Condensed Statements of Operations
(Unaudited)
(in thousands, except per share figures)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Thirteen
weeks ended
October 1, 2011

 

Thirteen
weeks ended
October 2, 2010

 

Thirty-nine
weeks ended
October 1, 2011

 

Thirty-nine
weeks ended
October 2, 2010

 

 

 


 


 


 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

3,617

 

$

4,378

 

$

12,072

 

$

13,474

 

Cost of sales

 

 

2,496

 

 

2,909

 

 

8,636

 

 

9,221

 

 

 



 



 



 



 

Gross profit

 

 

1,121

 

 

1,469

 

 

3,436

 

 

4,253

 

 

 



 



 



 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling and warehouse

 

 

331

 

 

376

 

 

1,069

 

 

1,163

 

Marketing

 

 

168

 

 

100

 

 

361

 

 

403

 

Research and development

 

 

128

 

 

148

 

 

411

 

 

430

 

General and administrative

 

 

424

 

 

508

 

 

1,496

 

 

1,517

 

 

 



 



 



 



 

 

 

 

1,051

 

 

1,132

 

 

3,337

 

 

3,513

 

 

 



 



 



 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

 

70

 

 

337

 

 

99

 

 

740

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income tax expense

 

 

36

 

 

125

 

 

47

 

 

295

 

 

 



 



 



 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

34

 

$

212

 

$

52

 

$

445

 

 

 



 



 



 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted

 

 

5,177

 

 

5,177

 

 

5,177

 

 

5,177

 

 

 



 



 



 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted

 

$

0.01

 

$

0.04

 

$

0.01

 

$

0.09

 

 

 



 



 



 



 

See accompanying notes to condensed financial statements.

4


TOFUTTI BRANDS INC.
Condensed Statements of Cash Flows
(Unaudited)
(in thousands)

 

 

 

 

 

 

 

 

 

 

Thirty-nine
weeks
ended
October 1, 2011

 

Thirty-nine
weeks
ended
October 2, 2010

 

 

 


 


 

 

 

 

 

 

 

 

 

Cash flows (used in) provided by operating activities, net

 

$

(904

)

$

876

 

 

 

 

 

 

 

 

 

Cash flows used in financing activities, net

 

 

 

 

 

 

 



 



 

Net (decrease) increase in cash and cash equivalents

 

 

(904

)

 

876

 

 

 

 

 

 

 

 

 

Cash and cash equivalents at beginning of period

 

 

2,528

 

 

1,413

 

 

 



 



 

 

 

 

 

 

 

 

 

Cash and cash equivalents at end of period

 

$

1,624

 

$

2,289

 

 

 



 



 

 

 

 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

 

 

Income taxes paid

 

$

312

 

$

 

 

 



 



 

See accompanying notes to condensed financial statements.

5


TOFUTTI BRANDS INC.
Notes to Condensed Financial Statements
(in thousands, except per share figures)

 

 

Note 1: Description of Business

 

 

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

 

 

Note 2: Basis of Presentation

 

 

The accompanying financial information is unaudited, but, in the opinion of management, reflects all adjustments (which include only normally recurring adjustments) necessary to present fairly the Company’s financial position, operating results and cash flows for the periods presented. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. The condensed balance sheet amounts as of January 1, 2011 have been derived from our audited financial statements for the year ended January 1, 2011. The financial information should be read in conjunction with the audited financial statements and notes thereto for the year ended January 1, 2011 included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission. The results of operations for the thirteen and thirty-nine week periods ended October 1, 2011 are not necessarily indicative of the results to be expected for the full year or any other period.

 

 

 

The Company operates on a fiscal year which ends on the Saturday closest to December 31st.

 

 

Note 3: Recent Accounting Pronouncements

 

 

There have been no recent accounting pronouncements or changes in accounting pronouncements during the thirteen weeks ended October 1, 2011, as compared to the recent accounting pronouncements described in the Company’s Annual Report on Form 10-K for the fiscal year ended January 1, 2011, that are of material significance, or have potential material significance, to the Company.

6


TOFUTTI BRANDS INC.
Notes to Condensed Financial Statements
(in thousands, except per share figures)

Note 4: Inventories

 

 

 

The composition of inventories is as follows:


 

 

 

 

 

 

 

 

 

 

October 1,
2011

 

January 1,
2011

 

 

 


 


 

Finished products

 

$

831

 

$

1,236

 

Raw materials and packaging

 

 

544

 

 

461

 

 

 



 



 

 

 

$

1,375

 

$

1,697

 

 

 



 



 

Note 5: Income Taxes

 

 

 

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

 

 

Note 6: Earnings Per Share

 

 

Basic earnings per common share has been computed by dividing net income by the weighted average number of common shares outstanding. Diluted earnings per common share for all periods presented in the accompanying statement of operations was computed by dividing net income by the weighted average number of common shares outstanding and common stock equivalents, which include options outstanding during the same period. Not included in the calculation for each period were 41,000 and 51,000 non-qualified options, respectively, granted to directors, that were antidilutive because the average market price of our common stock for the thirteen and thirty-nine week periods ended October 1, 2011 and October 2, 2010, respectively, was less than the exercise price of any of these options.

 

 

 

The following table sets forth the computation of basic and diluted earnings (loss) per share:


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Thirteen
Weeks
Ended
October 1, 2011

 

Thirteen
Weeks
Ended
October 2, 2010

 

Thirty-nine
Weeks
Ended
October 1, 2011

 

Thirty-nine
Weeks
Ended
October 2, 2010

 

 

 


 


 


 


 

Numerator

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)-basic and diluted

 

$

34

 

$

212

 

$

52

 

$

445

 

 

 



 



 



 



 

Denominator

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominator for basic and diluted earnings per share weighted average shares

 

 

5,177

 

 

5,177

 

 

5,177

 

 

5,177

 

 

 



 



 



 



 

Earnings (loss) per common share basic and diluted

 

$

0.01

 

$

0.04

 

$

0.01

 

$

0.09

 

 

 



 



 



 



 

7


TOFUTTI BRANDS INC.

 

 

Item 2.

Management’s Discussion and Analysis of Financial

 

Condition and Results of Operations

The following is management’s discussion and analysis of certain significant factors which have affected our financial position and operating results during the periods included in the accompanying financial statements.

The discussion and analysis which follows in this Quarterly Report and in other reports and documents and in oral statements made on our behalf by our management and others may contain trend analysis and other forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 which reflect our current views with respect to future events and financial results. These include statements regarding our earnings, projected growth and forecasts, and similar matters which are not historical facts. We remind stockholders that forward-looking statements are merely predictions and therefore are inherently subject to uncertainties and other factors which could cause the actual future events or results to differ materially from those described in the forward-looking statements. These uncertainties and other factors include, among other things, business conditions in the food industry and general economic conditions, both domestic and international; lower than expected customer orders; competitive factors; changes in product mix or distribution channels; and resource constraints encountered in developing new products. The forward-looking statements contained in this Quarterly Report and made elsewhere by or on our behalf should be considered in light of these factors.

Critical Accounting Policies

Our financial statements have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The policies discussed below are considered by management to be critical to an understanding of our financial statements because their application places the most significant demands on management’s judgment, with financial reporting results relying on estimation about the effect of matters that are inherently uncertain. Specific risks for these critical accounting policies are described in the following paragraphs. For all of these policies, management cautions that future events rarely develop exactly as forecast, and the best estimates routinely require adjustment.

Revenue Recognition. We recognize revenue when goods are shipped from our production facilities or outside warehouses and the following four criteria have been met: (i) the product has been shipped and we have no significant remaining obligations; (ii) persuasive evidence of an arrangement exists; (iii) the price to the buyer is fixed or determinable; and (iv) collection is probable. We record as deductions against sales all trade discounts, returns and allowances that occur in the ordinary course of business, when the sale occurs. To the extent we charge our customers for freight expense, it is included in revenues. The amount of freight costs charged to customers has not been material to date.

Accounts Receivable. The majority of our accounts receivables are due from distributors (domestic and international) and retailers. Credit is extended based on evaluation of a customers’ financial condition and, generally, collateral is not required. Accounts receivable are most often due within 30 to 90 days and are stated at amounts due from customers net of an allowance for doubtful accounts. Accounts outstanding longer than the contractual payment terms are considered past due. We determine whether an allowance is necessary by considering a number of factors, including the length of time trade accounts receivable are past due, our previous loss history, the customer’s current ability to pay its obligation, and the condition of

8


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 market determined by first in first out (FIFO) method. Inventories in excess of future demand are written down and charged to the provision for inventories. At the point of which loss is recognized, a new, lower cost basis for that inventory is established and subsequent changes in facts and circumstances do not result in the restoration or increase in the newly established cost basis.

Income Taxes. The carrying value of deferred tax assets assumes that we will be able to generate sufficient future taxable income to realize the deferred tax assets based on estimates and assumptions. If these estimates and assumptions change in the future, we may be required to record a valuation allowance against deferred tax assets which could result in additional income tax expense. We will recognize a tax benefit in the financial statements for an uncertain tax position only if management’s assessment is that the position is “more likely than not” (i.e., a likelihood greater than 50 percent) to be allowed by the tax jurisdiction based solely on the technical merits of the position. The term “tax position” refers to a position in a previously filed tax return or a position expected to be taken in a future tax return that is reflected in measuring current or deferred income tax assets and liabilities for financial reporting purposes. Our federal and state tax returns are open to examination for the years 2007 through 2010.

Results of Operations

Thirteen Weeks Ended October 1, 2011 Compared with Thirteen Weeks Ended October 2, 2010

Net sales for the thirteen weeks ended October 1, 2011 were $3,617,000, a decrease of $761,000, or 17%, from the sales level realized for the thirteen weeks ended October 2, 2010. The reduction in sales was primarily due to the determination of Trader Joe’s, our largest customer, to cease selling branded goods. During the quarter, sales to Trader Joe’s declined to $2,000 from $656,000 in the second quarter of 2011 and $764,000 in the third quarter of 2010. We believe that we will recover some portion of these sales as our retail customers switch to other retail sources to purchase our products.

Our gross profit in the thirteen week period ended October 1, 2011 decreased by $348,000 to $1,121,000, reflecting the lower level of sales. Our gross profit percentage for the thirteen week period ending October 1, 2011 was 31% compared to 34% for the period ending October 2, 2010. This decrease in gross profit percentage was due to an increase in certain material and packaging costs in the 2011 period compared to the 2010 period. Freight out expense increased slightly to $239,000 for the thirteen weeks ended October 1, 2011 compared with $237,000 for the thirteen weeks ended October 2, 2010. While the actual dollar cost of freight increased slightly from the 2010 thirteen week period to the 2011 thirteen week period, its cost as a percentage of sales increased from 5% for the thirteen weeks ended October 2, 2010 to 7% for the thirteen weeks ended October 1, 2011.

Selling and warehouse expenses decreased to $331,000 for the thirteen weeks ended October 1, 2011 compared with $376,000 for the thirteen weeks ended October 2, 2010. This decrease was due primarily to a $28,000 decrease in payroll expense, a $14,000 decrease in outside warehouse rental expense and a $3,000 decrease in commission expense. The decline in payroll expense is primarily the result of no provision for year-end bonuses being made in the quarter.

Marketing expenses increased by $68,000 to $168,000 for the thirteen weeks ended October 1, 2011 compared with $100,000 for the thirteen weeks ended October 2, 2010 due principally to a $60,000 increase in promotion expense and a $7,000 increase in public relations expense.

9


Research and development costs, which consist principally of salary expenses and laboratory costs, decreased to $128,000 for the thirteen weeks ended October 1, 2011 compared to $148,000 for the thirteen weeks ended October 2, 2010. This decrease was primarily due to a decrease of $17,000 in payroll expense and a decrease in lab costs and supplies of $7,000.

General and administrative expenses decreased to $424,000 for the thirteen weeks ended October 1, 2011 compared with $508,000 for the thirteen weeks ended October 2, 2010, due primarily to decreases in payroll expense of $94,000 and office supply expense of $3,000, offset by increases of $3,000 for building maintenance and repairs and $5,000 for public relations expense. The decline in payroll expense is primarily the result of no provision for year-end bonuses being made in the 2011 third quarter.

During the thirteen weeks ended October 1, 2011 and October 2, 2010, we recognized income tax expense of $36,000 and $125,000, respectively, resulting primarily from adjustments to reconcile the prior year’s book amount to the actual amounts in the tax returns.   Our policy is to record income tax related interest and penalties as income tax expense.  At October 1, 2011, potential interest and penalties related to uncertain tax positions of $158,000 is included in “Accrued Expenses” in the balance sheet.

Thirty-Nine Weeks Ended October 1, 2011 Compared with Thirty-Nine Weeks Ended October 2, 2010

Net sales for the thirty-nine weeks ended October 1, 2011 were $12,072,000, a decrease of $1,402,000 or 10.4%, from the sales level realized for the thirty-nine weeks ended October 2, 2010. The reduction in sales was primarily due to the determination of Trader Joe’s, our largest customer, to cease selling branded goods. During the thirty-nine weeks ended October 1, 2011, sales to Trader Joe’s declined to $1,420,000 compared to $2,655,00 for the thirty-nine weeks ended October 2, 2010. We believe that we will recover some portion of these sales as our retail customers switch to other retail sources to purchase our products. Sales were also negatively impacted because of a significant decrease in sales in all frozen dessert categories. Management believes this is an industry-wide trend, which may be due to the continuing economic recession.

Our gross profit in the period ended October 1, 2011 decreased by $817,000, or 19%, to $3,436,000 due to the decrease in sales in the 2011 period. Our gross profit percentage decreased to 28% for the thirty-nine week period ended October 1, 2011 compared to 32% for the thirty-nine week period ended October 2, 2010. This decrease in gross profit percentage was due to an increase in certain material and packaging costs in the 2011 period compared to the 2010 period. Packaging costs increased due to the higher cost of oil, and certain ingredients we use in our products were subject to substantial increases in price. Freight out expense, part of our cost of sales, increased by $13,000, or 2%, to $735,000 for the thirty-nine weeks ended October 1, 2011 compared with $722,000 for the thirty-nine weeks ended October 2, 2010. While the actual dollar cost of freight decreased slightly from the 2010 thirty-nine week period to the 2011 thirty-nine week period, this expense as a percentage of sales increased from 5% for the thirty-nine weeks ended October 2, 2010 to 6% for the thirty-nine weeks ended October 1, 2011.

Selling and warehouse expenses decreased by 8% to $1,069,000 for the thirty-nine week period ended October 1, 2011 compared with $1,163,000 for the comparable period in 2010. This decrease is due primarily to decreases in outside warehouse rental of $64,000, payroll expense of $20,000 and commission expense of $19,000, offset in part by increases in messenger costs of $5,000 and telephone expense of $4,000.

Marketing expenses decreased by $42,000 to $361,000 in the thirty-nine week period ended October 1, 2011 from $403,000 in the thirty-nine weeks ended October 2, 2010 due principally to a $56,000 decrease in advertising expense, which was partially offset by a $10,000 increase in public relations expense.

10


Research and development costs, which consist principally of salary expenses and laboratory costs, decreased to $411,000 for the thirty-nine weeks ended October 1, 2011 compared to $430,000 for the thirty-nine weeks ended October 2, 2010, due to a decrease of $19,000 in payroll expense.

General and administrative expenses decreased to $1,496,000 for the thirty-nine week period ended October 1, 2011 compared with $1,517,000 for the thirty-nine week period ended October 2, 2010 due primarily to decreases in payroll expense of $102,000, stock compensation expense of $9,000, office supply expense of $4,000 and travel and entertainment expense of $8,000, which were offset by increases in outside fees and professional fees of $48,000, data processing expense of $18,000, public relations expense of $14,000 and building maintenance and repair expense of $12,000. The decline in payroll expense is primarily the result of no provision for year-end bonuses being made in the 2011 third quarter.

The decrease in income tax expense in the thirty-nine week period ended October 1, 2011 to $47,000 from $295,000 in the thirty-nine week period ended October 2, 2010 reflects the lower level of operating income in the 2011 period. During the thirty-nine weeks ended October 1, 2011 and October 2, 2010, we recognized an increase in the reserve for uncertain tax positions of $21,000 and $0 respectively, primarily related to changes in deferred tax balances and penalties and interest charges.  Our policy is to record income tax related interest and penalties as income tax expense.  At October 1, 2011, potential interest and penalties related to uncertain tax positions of $158,000 is included in “Accrued Expenses” in the balance sheet.

Liquidity and Capital Resources

As of October 1, 2011, we had approximately $1.6 million in cash and cash equivalents and our working capital was approximately $4.5 million compared to $2.5 million in cash and cash equivalents and working capital of approximately $4.4 million at January 1, 2011.

The following table summarizes our cash flows for the periods presented:

 

 

 

 

 

 

 

 

 

 

Thirty-Nine Weeks
ended October 1, 2011

 

Thirty-Nine Weeks
ended October 2, 2010

 

 

 




 

Net cash (used in) provided by operating activities

 

$

(904,000

)

$

876,000

 

Net cash used in financing activities

 

 

 

 

 

 

 



 



 

Net change in cash and cash equivalents

 

$

(904,000

)

$

876,000

 

 

 



 



 

The decrease in our cash and cash equivalents at October 1, 2011 was primarily due to our payment of accrued bonuses to management of $500,000 and the payment of $312,000 of income taxes. We believe that we will be able to fund our operations during the next twelve months with the cash we have on hand and cash generated from operations. We believe that these sources will be sufficient to meet our operating and capital requirements during the next twelve months.

Our Board of Directors first instituted a share repurchase program in September 2000 and has to date authorized the repurchase of 2,200,000 shares of our common stock at prevailing market prices. As of October 1, 2011, we had repurchased 1,818,889 shares at a total cost of $5,294,000, or an average price of $2.91 per share. We have not repurchased any shares since the period ended March 28, 2009 in order to conserve our cash position.

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

11


higher sales in the second and third quarters, and slightly lower sales in the fourth and first quarters, as a result of reduced sales of nondairy frozen desserts during those periods.

Off-balance Sheet Arrangements

None.

Contractual Obligations

As of October 1, 2011, we did not have any contractual obligations or commercial commitments, including obligations relating to discontinued operations.

Recent Accounting Pronouncements

See Note 3 to the unaudited condensed consolidated financial statements included in Part I, Item 1, Financial Statements, of this Quarterly Report on Form 10-Q.

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

We do not believe that our exposure to market risk related to the effect of changes in interest rates, foreign currency exchange rates, commodity prices and other market risks with regard to instruments entered into for trading or for other purposes is material.

 

 

Item 4.

Controls and Procedures

Evaluation of Disclosure Controls and Procedures. As of October 1, 2011, our company’s chief executive officer and chief financial officer conducted an evaluation regarding the effectiveness of our company’s disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Exchange Act. Based upon the evaluation of these controls and procedures, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were not effective as of October 1, 2011.

Disclosure Controls and Internal Controls. As provided in Rule 13a-14 of the General Rules and Regulations under the Securities and Exchange Act of 1934, as amended, Disclosure Controls are defined as meaning controls and procedures that are designed with the objective of insuring that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, designed and reported within the time periods specified by the SEC’s rules and forms. Disclosure Controls include, within the definition under the Exchange Act, and without limitation, controls and procedures to insure that information required to be disclosed by us in our reports is accumulated and communicated to our management, including our chief executive officer and principal financial officer, as appropriate to allow timely decisions regarding disclosure. Internal Controls are procedures which are designed with the objective of providing reasonable assurance that (1) our transactions are properly authorized; (2) our assets are safeguarded against unauthorized or improper use; and (3) our transactions are properly recorded and reported, all to permit the preparation of our financial statements in conformity with generally accepted accounting principles.

Management’s Report on Internal Control Over Financial Reporting. Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed by, or under the supervision of the Chief Executive Officer and Chief Financial Officer and effected by our board of directors, management and other personnel, to

12


provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management’s evaluation of internal control over financial reporting includes using the COSO framework, an integrated framework for the evaluation of internal controls issued by the Committee of Sponsoring Organizations of the Treadway Commission, to identify the risks and control objectives related to the evaluation of our control environment.

Based on their evaluation under the frameworks described above, our chief executive officer and chief financial officer have concluded that our internal control over financial reporting was ineffective as of October 1, 2011 because of the following material weaknesses in internal controls over financial reporting:

 

 

 

 

a lack of sufficient resources and an insufficient level of monitoring and oversight, which may restrict our ability to gather, analyze and report information relative to the financial statements and income tax assertions in a timely manner.

 

 

 

 

The limited size of the accounting department makes it impracticable to achieve an optimum separation of duties.

We are seeking ways to remediate these weaknesses, which stem from our small workforce, which consisted of ten employees at October 1, 2011, in a manner that will not require us to hire additional personnel.

Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting during the period covered by this report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

13


PART II - OTHER INFORMATION

 

 

Item 1.

Legal Proceedings

We are not a party to any material litigation.

 

 

Item 1A.

Risk Factors

We May be Unable to Offset the Economic Effect of the Loss of Our Largest Customer. During the nine months ended October 1, 2011 and the fiscal years ended January 1, 2011 and January 2, 2010, Trader Joe’s accounted for 12%, 19% and 17% of our net sales, respectively. In third quarter of 2011, we became aware that Trader Joe’s would no longer continue to stock branded products, including our Tofutti Cuties. The loss of Trader Joe’s as a customer could have a material adverse effect on our company’s financial results and we cannot assure you that we will be able make up the loss in sales either through the acquisition of new accounts, increased sales to current accounts, or a combination of the two.

There have been no other material changes to our “Risk Factors” set forth in our Annual Report on Form 10-K for the year ended January 1, 2011.

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

 

 

None.

 

 

Item 3.

Default Upon Senior Securities

 

 

 

None.

 

 

Item 4.

Removed and Reserved

 

 

Item 5.

Other Information

 

 

 

None.

 

 

Item 6.

Exhibits

 

 

31.1

Certification by Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended.

 

 

31.2

Certification by Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended.

 

 

32.1

Certification by Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

32.2

Certification by Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

101.INS

Instance Document

 

 

101.SCH

Schema Document

 

 

101.CAL

Calculation Linkbase Document

 

 

101.DEF

Definition Linkbase Document

 

 

101.LAB

Labels Linkbase Document

 

 

101.PRE

Presentation Linkbase Document

14


SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

 

 

TOFUTTI BRANDS INC.

 

(Registrant)

 

 

 

/s/David Mintz

 


 

 

David Mintz

 

President

 

 

 

/s/Steven Kass

 


 

 

Steven Kass

 

Chief Accounting and Financial Officer

 

 

Date: November 15, 2011

 

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