Attached files
| file | filename |
|---|---|
| EX-32.2 - EXHIBIT 32.2 - TOFUTTI BRANDS INC | t83594_ex32-2.htm |
| EX-31.2 - EXHIBIT 31.2 - TOFUTTI BRANDS INC | t83594_ex31-2.htm |
| EX-31.1 - EXHIBIT 31.1 - TOFUTTI BRANDS INC | t83594_ex31-1.htm |
| EX-32.1 - EXHIBIT 32.1 - TOFUTTI BRANDS INC | t83594_ex32-1.htm |
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 3, 2015 |
| ¨ | 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 ¨
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 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 ¨ | Accelerated filer ¨ |
|
Non-accelerated filer ¨ (Do not check if smaller reporting company) |
Smaller reporting company x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
As of November 13, 2015 the Registrant had 5,153,706 shares of Common Stock, par value $0.01, outstanding.
TOFUTTI BRANDS INC.
INDEX
| 2 |
PART I - FINANCIAL INFORMATION
| Item 1. | Financial Statements |
Condensed Balance Sheets
(in thousands, except share and per share figures)
| October 3, 2015 | December 27, 2014* | |||||||
| (Unaudited) | ||||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 136 | $ | 341 | ||||
| Accounts receivable, net of allowance for doubtful accounts and sales promotions of $366 and $275, respectively | 2,049 | 1,914 | ||||||
| Inventories, net of reserve of $150 and $150, respectively | 1,523 | 1,852 | ||||||
| Prepaid expenses | 59 | 71 | ||||||
| Deferred costs | 75 | 105 | ||||||
| Total current assets | 3,842 | 4,283 | ||||||
| Fixed assets (net of accumulated depreciation of $7 and $2, respectively) | 22 | 27 | ||||||
| Other assets | 16 | 16 | ||||||
| Total Assets | $ | 3,880 | $ | 4,326 | ||||
| Liabilities and Stockholders’ Equity | ||||||||
| Current liabilities: | ||||||||
| Note payable-current | $ | 5 | $ | 5 | ||||
| Accounts payable | 1,277 | 1,367 | ||||||
| Accrued expenses | 357 | 264 | ||||||
| Deferred revenue | 83 | 114 | ||||||
| Total Current Liabilities | 1,722 | 1,750 | ||||||
| Note payable—long-term | 17 | 22 | ||||||
| Total liabilities | 1,739 | 1,772 | ||||||
| Commitments and contingencies | -- | -- | ||||||
| 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 5,153,706 shares at October 3, 2015, and 5,153,706 shares at December 27, 2014 | 52 | 52 | ||||||
| Additional paid-in capital | 113 | -- | ||||||
| Retained earnings | 1,976 | 2,502 | ||||||
| Total stockholders’ equity | 2,141 | 2,554 | ||||||
| Total liabilities and stockholders’ equity | $ | 3,880 | $ | 4,326 | ||||
*Derived from audited financial information.
See accompanying notes to condensed financial statements.
| 3 |
Condensed Statements of Operations
(Unaudited)
(in thousands, except per share figures)
| Fourteen weeks ended October 3, 2015 | Thirteen weeks ended September 27, 2014 | Forty weeks ended October 3, 2015 | Thirty-nine weeks ended September 27, 2014 | |||||||||||||
| Net sales | $ | 3,671 | $ | 3,292 | $ | 10,438 | $ | 10,647 | ||||||||
| Cost of sales | 2,796 | 2,451 | 7,741 | 7,555 | ||||||||||||
| Gross profit | 875 | 841 | 2,697 | 3,092 | ||||||||||||
| Operating expenses: | ||||||||||||||||
| Selling and warehouse | 386 | 306 | 1,136 | 1,117 | ||||||||||||
| Marketing | 74 | 128 | 277 | 402 | ||||||||||||
| Research and development | 106 | 152 | 389 | 488 | ||||||||||||
| General and administrative | 435 | 419 | 1,413 | 1,327 | ||||||||||||
| Total operating expenses | 1,001 | 1,005 | 3,215 | 3,334 | ||||||||||||
| Loss before income taxes | (126 | ) | (164 | ) | (518 | ) | (242 | ) | ||||||||
| Income tax expense | -- | -- | 8 | 6 | ||||||||||||
| Net loss | $ | (126 | ) | $ | (164 | ) | $ | (526 | ) | $ | (248 | ) | ||||
| Weighted average common shares outstanding: | ||||||||||||||||
| Basic and diluted | 5,154 | 5,154 | 5,154 | 5,154 | ||||||||||||
| Net loss per common share: | ||||||||||||||||
| Basic and diluted | $ | (0.02 | ) | $ | (0.03 | ) | $ | (0.10 | ) | $ | (0.05 | ) | ||||
See accompanying notes to condensed financial statements.
| 4 |
Condensed Statements of Cash Flows
(Unaudited)
(in thousands)
| Forty weeks ended October 3, 2015 | Thirty-nine weeks ended September 27, 2014 | |||||||
| Cash used in operating activities, net | $ | (200 | ) | $ | (150 | ) | ||
| Cash used in financing activities, net | (5 | ) | -- | |||||
| Net decrease in cash and cash equivalents | (205 | ) | (150 | ) | ||||
| Cash and cash equivalents at beginning of period | 341 | 214 | ||||||
| Cash and cash equivalents at end of period | $ | 136 | $ | 64 | ||||
| Supplemental cash flow information: | ||||||||
| Income taxes paid | $ | 8 | $ | 6 | ||||
See accompanying notes to condensed financial statements.
| 5 |
Notes to Condensed Financial Statements
(In thousands, except for share and per share data)
Note 1: Liquidity and Capital Resources
At October 3, 2015, Tofutti Brands, Inc. (“Tofutti” or the “Company”) had approximately $136 in cash compared to $341 at December 27, 2014. Net cash used in operating activities for the forty weeks ended October 3, 2015 was $200 compared to $150 used in operating activities for the thirty-nine weeks ended September 27, 2014. Net cash used in operating activities for the forty weeks ended October 3, 2015 was primarily a result of the net loss of $526 and a decrease in current liabilities of $28, which were partially offset by a decrease in current assets, excluding cash, of $236. The decrease in current assets was primarily due to a decrease in inventory of $329.
The Company has historically financed operations and met capital requirements primarily through positive cash flow from operations. However, due to the net losses and cash used in operations in the previous two fiscal years and the first three quarters of fiscal 2015, the Company will likely require additional financing in order to accomplish or exceed their business plans for future periods.
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 as 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.
Note 2: Description of Business
Tofutti Brands Inc. is engaged in one business segment, the development, production and marketing of non-dairy frozen desserts and other food products.
Note 3: Basis of Presentation
The accompanying financial information is unaudited, but, in the opinion of management, reflects all adjustments (which include only normally recurring adjustments) necessary to present fairly the Company's financial position, operating results and cash flows for the periods presented. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. The condensed balance sheet amounts as of December 27, 2014 are derived from our audited financial statements for the year ended December 27, 2014. The financial information should be read in conjunction with the audited financial statements and notes thereto for the year ended December 27, 2014 included in the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission. The results of operations for the fourteen and forty week periods ended October 3, 2015 are not necessarily indicative of the results to be expected for the full year or any other period.
| 6 |
TOFUTTI BRANDS INC.
Notes to Condensed Financial Statements
(In thousands, except for share and per share data)
The Company’s fiscal year is either a fifty-two or fifty-three week period which ends on the Saturday closest to December 31st. The 2015 fiscal year is a fifty-three week year ending on January 2, 2016, and the Company has elected to incorporate the additional week into the third quarter and nine month results, resulting in fourteen and forty week periods, respectively.
Note 4: Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-09, Revenue from Contracts with Customers (ASU 2014-09), which supersedes most existing revenue recognition guidance under US GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing U.S. GAAP. The standard is effective for annual periods beginning after December 15, 2016, and interim periods therein, using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures). On July 9, 2015, the FASB voted to defer the effective date of the new revenue recognition standard by one year. Based on the Board's decision, public organizations would apply the new revenue standard to annual reporting periods beginning after December 15, 2017. The Company is currently evaluating the impact of ASU 2014-09.
In July 2015, the Financial Accounting Standards Board issued Accounting Standards Update 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory (“ASU 2015-11”) which changes the measurement principle for inventory from the lower of cost or market to the lower of cost and net realizable value. ASU 2015-11 defines net realizable value as estimated selling prices 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 periods beginning after December 15, 2016, with early adoption permitted. The Company is currently evaluating the effect that the new guidance will have on its financial statements and related disclosures.
Note 5: Inventories
The composition of inventories, net of reserves of $150 and $150, is as follows:
| October 3, 2015 | December 27, 2014 | |||||||
| Finished products | $ | 937 | $ | 1,290 | ||||
| Raw materials and packaging | 586 | 562 | ||||||
| $ | 1,523 | $ | 1,852 | |||||
| 7 |
TOFUTTI BRANDS INC.
Notes to Condensed Financial Statements
(In thousands, except for share and per share data)
Note 6: Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred tax assets are reduced by a valuation allowance to the extent management concludes it is more likely than not that the assets will not be realized. As of the periods ended October 3, 2015 and December 27, 2014, the Company recorded a full valuation allowance on its deferred tax asset balances.
Note 7: Loss Per Share
Basic and diluted loss per common share has been computed by dividing net loss by the weighted average number of common shares outstanding. Because of the loss during the period the inclusion of options was anti-dilutive.
The following table sets forth the computation of basic and diluted loss per share:
| Fourteen
Weeks Ended October 3, 2015 | Thirteen
Weeks Ended September 27, 2014 | Forty
Weeks Ended October 3, 2015 | Thirty-nine
Weeks Ended September 27, 2014 | |||||||||||||
| Numerator | ||||||||||||||||
| Net loss-basic and diluted | $ | (126 | ) | $ | (164 | ) | $ | (526 | ) | $ | (248 | ) | ||||
| Denominator | ||||||||||||||||
| Denominator for basic and diluted earnings per share weighted average shares | 5,153,706 | 5,153,706 | 5,153,706 | 5,153,706 | ||||||||||||
| Loss per common share | ||||||||||||||||
| Basic and diluted | $ | (0.02 | ) | $ | (0.03 | ) | $ | (0.10 | ) | $ | (0.05 | ) | ||||
Note 8: Fixed Assets
Fixed assets consist of the following:
| October 3, 2015 | December 27, 2014 | |||||||
| Automobile | $ | 29 | $ | 29 | ||||
| Less: accumulated depreciation | (7 | ) | (2 | ) | ||||
| Fixed assets, net | $ | 22 | $ | 27 | ||||
Depreciation expense for the fourteen and forty weeks ended October 3, 2015 was $2 and $5, respectively. There was no depreciation expense for the thirteen and thirty-nine weeks ended September 27, 2014.
| 8 |
TOFUTTI BRANDS INC.
NOTES TO FINANCIAL STATEMENTS
(In thousands, except for share and per share data)
Note 9: Stock Based Compensation
On June 10, 2014, the shareholders of the Company approved the 2014 Equity Incentive Plan (the "2014 Plan"). The 2014 Plan provides for grants of various types of awards that are designed to attract and retain highly qualified personnel who will contribute to the success of the Company and to provide incentives to participants in the 2014 Plan that are linked directly to increases in shareholder value which will therefore inure to the benefit of all shareholders of the Company. The Company intends to rely on a combination of multi-year performance awards, options and other stock-based awards for these purposes.
The 2014 Plan made 250,000 shares of Common Stock available for awards. The 2014 Plan also permits performance-based 2014 awards paid under it to be tax deductible under Section 162(m) of the Internal Revenue Code of 1986, as amended, as “performance-based compensation.” As of October 3, 2015, the Company issued 80,000 non-qualified stock option awards under the 2014 Plan.
The following is a summary of stock option activity from December 27, 2014 to October 3, 2015:
| NON-QUALIFIED OPTIONS | ||||||||
| Shares | Weighted Average Exercise Price ($) | |||||||
| Outstanding at December 27, 2014 | -- | -- | ||||||
| Exercisable at December 27, 2014 | -- | -- | ||||||
| Granted as of October 3, 2015 | 80,000 | 4.41 | ||||||
| Exercised as of October 3, 2015 | -- | -- | ||||||
| Outstanding at October 3, 2015 | 80,000 | 4.41 | ||||||
The following table summarizes information about stock options outstanding at October 3, 2015:
| Range of Exercise Prices ($) | Number Outstanding | Weighted Average Remaining Life (in years) | Weighted
Average Price($) | Number Exercisable | ||||||||||||
| 4.39-4.46 | 80,000 | 4.55 | 4.41 | 43,333 | ||||||||||||
The fair value of each option award is estimated on the date of grant using the Black-Scholes option-pricing formula. Expected volatilities and risk-free interest rates are based upon the expected life of the grant. The interest rates used are the U.S. Treasury yield curve in effect at the time of the grant.
During the forty week period ending October 3, 2015, 80,000 options were granted, with 26,668 of the options vesting at the respective grant date, 26,666 vesting in January 2016, and 26,666 vesting in January 2017. At the date of grant, expected volatility was 69.8%-71.4%, a risk-free rate of 1.3%-1.8%, 0% expected dividends, and an expected term of five year. There were no options granted during the fourteen weeks ended October 3, 2015.
| 9 |
TOFUTTI BRANDS INC.
NOTES TO FINANCIAL STATEMENTS
(In thousands, except for share and per share data)
As of October 3, 2015, the intrinsic value of the options outstanding and exercisable was immaterial. As of October 3, 2015, there was approximately $94 of total unrecognized compensation cost that will be recognized through January 2, 2017 related to non-vested share-based compensation arrangements granted under the Plan. For the forty weeks ended October 3, 2015 stock compensation expense was $113.
Note 10: Note Payable
In September 2014, the Company obtained an auto loan of approximately $29 from a bank. The loan requires 60 monthly payments of $0.535 through August 2019. Interest is charged at a fixed nominal rate of 4.64%. The loan is collateralized by the underlying automobile.
| October 3, 2015 | December 27, 2014 | |||||||
| Note payable | $ | 22 | $ | 27 | ||||
| Less current maturity | (5 | ) | (5 | ) | ||||
| Note payable, net of current maturity | $ | 17 | $ | 22 | ||||
Note 11: Sales by Geographic Region and Product Category
Revenues by geographical region are as follows (in thousands):
| Fourteen Weeks ended October 3, 2015 | Thirteen Weeks ended September 27, 2014 | Forty Weeks ended October 3, 2015 | Thirty-nine Weeks ended September 27, 2014 | |||||||||||||
| Revenues by geography: | ||||||||||||||||
| Americas | $ | 3,357 | $ | 2,884 | $ | 9,388 | $ | 9,413 | ||||||||
| Europe | 164 | 140 | 510 | 535 | ||||||||||||
| Asia Pacific and Africa | 70 | 127 | 258 | 434 | ||||||||||||
| Middle East | 80 | 141 | 282 | 265 | ||||||||||||
| $ | 3,671 | $ | 3,292 | $ | 10,438 | $ | 10,647 | |||||||||
Approximately 93% of the Americas revenue is attributable to sales in the United States in the 2015 fourteen and forty week periods and 2014 thirteen and thirty-nine week periods. All of the Company’s assets are located in the United States.
Net sales by major product category (in thousands):
| Fourteen Weeks ended October 3, 2015 | Thirteen Weeks ended September 27, 2014 | Forty Weeks ended October 3, 2015 | Thirty-nine Weeks ended September 27, 2014 | |||||||||||||
| Frozen Desserts | $ | 1,238 | $ | 1,149 | $ | 3,081 | $ | 3,311 | ||||||||
| Cheeses | 2,289 | 1,936 | 6,883 | 6,828 | ||||||||||||
| Frozen Foods | 144 | 207 | 474 | 508 | ||||||||||||
| $ | 3,671 | $ | 3,292 | $ | 10,438 | $ | 10,647 | |||||||||
| 10 |
TOFUTTI BRANDS INC.
| Item 2. | Management’s Discussion and
Analysis of Financial Condition and Results of Operations |
The following is management's discussion and analysis of certain significant factors which have affected our financial position and operating results during the periods included in the accompanying financial statements.
The discussion and analysis which follows in this Quarterly Report and in other reports and documents and in oral statements made on our behalf by our management and others may contain trend analysis and other forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 which reflect our current views with respect to future events and financial results. These include statements regarding our earnings, projected growth and forecasts, and similar matters which are not historical facts. We remind stockholders that forward-looking statements are merely predictions and therefore are inherently subject to uncertainties and other factors which could cause the actual future events or results to differ materially from those described in the forward-looking statements. These uncertainties and other factors include, among other things, business conditions in the food industry and general economic conditions, both domestic and international; lower than expected customer orders; competitive factors; changes in product mix or distribution channels; and resource constraints encountered in developing new products. The forward-looking statements contained in this Quarterly Report and made elsewhere by or on our behalf should be considered in light of these factors.
Critical Accounting Policies
Our financial statements have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The policies discussed below are considered by management to be critical to an understanding of our financial statements because their application places the most significant demands on management’s judgment, with financial reporting results relying on estimation about the effect of matters that are inherently uncertain. Specific risks for these critical accounting policies are described in the following paragraphs. For all of these policies, management cautions that future events rarely develop exactly as forecast, and the best estimates routinely require adjustment.
Revenue Recognition. We recognize revenue when goods are shipped from our production facilities or outside warehouses and the following four criteria have been met: (i) the product has been shipped and we have no significant remaining obligations; (ii) persuasive evidence of an arrangement exists; (iii) the price to the buyer is fixed or determinable; and (iv) collection is probable. We record as deductions against sales all trade discounts, returns and allowances that occur in the ordinary course of business, when the sale occurs. To the extent we charge our customers for freight expense, it is included in revenues. The amount of freight costs charged to customers has not been material to date.
Accounts Receivable. The majority of our accounts receivables are due from distributors (domestic and international) and retailers. Credit is extended based on evaluation of a customers’ financial condition and, generally, collateral is not required. Accounts receivable are most often due within 30 to 90 days and are stated at amounts due from customers net of an allowance for doubtful accounts. Accounts outstanding longer than the contractual payment terms are considered past due. We determine whether an allowance is necessary by considering a number of factors, including the length of time trade accounts receivable are past due, our previous loss history, the customer’s current ability to pay its obligation, and the condition of the general economy and the industry as a whole. We write off accounts receivable when they become uncollectible, and payments subsequently received on such receivables are credited to the bad debt expense account. We do not accrue interest on accounts receivable past due.
| 11 |
Deferred Revenue and Costs. Deferred revenue represents amounts from sales of our products that have been billed and shipped, but for which the transactions have not met our revenue recognition criteria. The cost of the related products have been recorded as deferred costs on our balance sheet.
Inventory. Inventory is stated at lower of cost or market determined by first in first out (FIFO) method. Inventories in excess of future demand are written down and charged to the provision for inventories. At the point of which loss is recognized, a new, lower cost basis for that inventory is established and subsequent changes in facts and circumstances do not result in the restoration or increase in the newly established cost basis.
Fixed Assets. Fixed assets consist of a company automobile used for advertising and trade show purposes. Amortization is provided by charges to income using the straight-line method over the useful life of five years.
Income Taxes. The carrying value of deferred tax assets assumes that we will be able to generate sufficient future taxable income to realize the deferred tax assets based on estimates and assumptions. If these estimates and assumptions change in the future, we may be required to record a valuation allowance against deferred tax assets which could result in additional income tax expense. We will recognize a tax benefit in the financial statements for an uncertain tax position only if management's assessment is that the position is "more likely than not" (i.e., a likelihood greater than 50 percent) to be allowed by the tax jurisdiction based solely on the technical merits of the position. The term "tax position" refers to a position in a previously filed tax return or a position expected to be taken in a future tax return that is reflected in measuring current or deferred income tax assets and liabilities for financial reporting purposes. Our federal and state tax returns are open to examination for the years 2012 through 2014.
Stock Based Compensation. The Company follows the provisions of ASC 718 Share-Based Payment. The Company uses the Black-Scholes option pricing model to measure the estimated fair value of the options under ASC 718. Stock-based compensation expense is recognized over the requisite service period.
Results of Operations
The company’s fiscal year is either a fifty-two or fifty-three week period which ends on the Saturday closest to December 31st. The 2015 fiscal year is a fifty-three week year ending on January 2, 2016, and the company has elected to incorporate the additional week into the third quarter and nine month results, resulting in fourteen and forty week periods, respectively.
Fourteen Weeks Ended October 3, 2015 Compared with Thirteen Weeks Ended September 27, 2014
Net sales for the fourteen weeks ended October 3, 2015 were $3,671,000, an increase of $379,000, or 12%, from net sales of $3,292,000 for the thirteen weeks ended September 27, 2014. Sales of our frozen dessert product line increased to $1,238,000 in the fourteen weeks ended October 3, 2015 from $1,149,000 for the thirteen weeks ended September 27, 2014 as a result of improved frozen dessert novelty sales. Sales of soy-cheese products increased to $2,289,000 in the 2015 period from $1,936,000 in the 2014 period, primarily as a result of improved domestic sales. Sales of frozen food entrée products decreased to $144,000 in the 2015 fourteen week period from $207,000 in the 2014 thirteen week period, reflecting the decrease in sales of our new nine slice pizza package. The increase in gross sales in the frozen desserts and soy-cheese categories was offset in part by the impact of sales allowance discounts in the 2015 period that were approximately $89,000 greater than in the corresponding period in 2014. We expect that the costs of these discount programs, which we believe are necessary to support the distribution of our products, will be lower for the balance of 2015.
| 12 |
Our gross profit increased to $875,000 in the fourteen weeks ended October 3, 2015 from $841,000 in the thirteen weeks ended September 27, 2014 due to the increase in sales. Our gross profit percentage was 24% for the fourteen weeks ending October 3, 2015 compared to 26% for the thirteen weeks ending September 27, 2014. The decrease in our gross profit percentage was due primarily to a significant increase in allowance expense for the fourteen week period ending October 3, 2015 to $543,000 compared with $454,000 for the 2014 period. Freight out expense, a significant part of our cost of sales, increased by $28,000, or 11%, to $289,000 for the fourteen weeks ended October 3, 2015 compared with $261,000 for the thirteen weeks ended September 27, 2014 due primarily to the increase in sales in the 2015 period. As a percentage of sales, freight out expense increased to 8% in the 2015 fourteen week period compared to 7% for the 2014 thirteen week period. We anticipate that our freight out expense as a percentage of cost of sales will continue at the same percentage for the balance of 2015.
Selling expenses increased by $80,000, or 26%, to $386,000 for the fourteen weeks ended October 3, 2015 compared to $306,000 for the thirteen weeks ended September 27, 2014. This increase was due principally to increases in outside warehouse rental expense of $30,000, commission expense of $22,000, and bad debt expense of $29,000. Outside warehouse rental expense increased due to the significant increase in unit sales volume, which resulted in more in and out charges through the warehouses. Commission expense increased due to the increase in sales for the quarter. The increase in bad debt expense in 2015 reflects a recovery of accounts during 2014 that were previously charged to bad debt expense, which reduced the bad debt expense during the 2014 period.
Marketing expenses decreased by $54,000, or 42%, to $74,000 for the fourteen weeks ended October 3, 2015 compared to $128,000 for the thirteen weeks ended September 27, 2014, due principally to decreases in advertising expense of $21,000, promotions expense of $11,000, artwork and plate expense of $11,000 and public relations expense of $3,000. We anticipate greater reductions in marketing expenses throughout the balance of 2015, specifically in the areas of artwork and plate expense, public relations, promotions and advertising.
Research and development costs, which consist principally of salary expenses and laboratory costs, decreased by $46,000 to $106,000 for the fourteen weeks ended October 3, 2015 from $152,000 for the thirteen weeks ended September 27, 2014, primarily due to a decrease in payroll expense of $26,000, and lab costs and supplies expense of $16,000. We anticipate a similar reduction in research and development expense over the balance of the year, specifically in the area of payroll.
General and administrative expenses increased by $16,000, or 4%, to $435,000 for the fourteen weeks ended October 3, 2015 compared with $419,000 for the thirteen weeks ended September 27, 2014 due to increases in payroll expense of $11,000, public relations expense of $7,000, and IT expense of $7,000, which were partially offset by a decrease in general insurance expense of $7,000.
We did not recognize any income tax expense in either the fourteen weeks ended October 3, 2015 or the thirteen weeks ended September 27, 2014 due to the net loss in both periods.
Forty Weeks Ended October 3, 2015 Compared with Thirty-Nine Weeks Ended September 27, 2014
Net sales for the forty weeks ended October 3, 2015 were $10,438,000, a decrease of $209,000, or 2%, from net sales of $10,647,000 for the thirty-nine weeks ended September 27, 2014. Sales of our frozen dessert product line decreased to $3,081,000 in the forty weeks ended October 3, 2015 from $3,311,000 for the thirty-nine weeks ended September 27, 2014. Our frozen dessert business continues to be negatively impacted by the overall sluggishness in ice cream category sales. Sales of soy-cheese products increased to $6,883,000 in the 2015 period from $6,828,000 in the 2014 period, primarily as a result of increased sales in the U.S. market in the 2015 period as compared to the 2014 period. Sales of frozen food entrée products decreased to $474,000 in the 2015 forty week period from $508,000 in the 2014 thirty-nine week period, reflecting the decrease in sales of our new nine slice pizza package. Sales were negatively impacted by a significant increase in sales allowance discounts that were approximately $548,000 greater than in the corresponding period in 2014.
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Our gross profit decreased to $2,697,000 in the period ended October 3, 2015 from $3,092,000 in the period ended September 27, 2014, due to the decrease in sales. Our gross profit percentage was 26% for the period ending October 3, 2015 compared to 29% for the period ending September 27, 2014. The decrease in our gross profit percentage was due primarily to a significant increase in allowance expense for the forty week period ending October 3, 2015 to $1,501,000 compared with $953,000 for the 2014 period. Freight out expense, a significant part of our cost of sales, decreased by $59,000, or 8%, to $640,000 for the forty weeks ended October 3, 2015 compared to $699,000 for the thirty-nine weeks ended September 27, 2014. As a percentage of sales, freight out expense decreased to 6% in the 2015 forty week period compared to 7% for the 2014 thirty-nine week period. Freight out expense during the forty week period ended October 3, 2015 was positively impacted by a substantial decrease in the cost of shipping our products to the west coast, the reduction in our overall inventory, which required fewer shipments to our warehouses, including those on the west coast, and the significant decrease in the cost of fuel in the forty weeks ended October 3, 2015 as compared to the thirty-nine weeks ended September 27, 2014. Freight out expense in the forty week period ended October 3, 2015 was responsible for a smaller part of our cost of sales than in the thirty-nine week period ended September 27, 2014, because the pick-up allowance we offer saves us a significant expense, as we no longer have to incur costs associated with shipping products to those customers who utilize it.
Selling expenses increased by $19,000, or 2%, to $1,136,000 for the forty weeks October 3, 2015 compared to $1,117,000 for the thirty-nine weeks ended September 27, 2014. This increase was due principally to increases in commissions expense of $8,000, outside warehouse rental expense of $43,000, and payroll expense of $17,000, which increases were partially offset by a decrease in meetings and convention expense of $18,000.
Marketing expenses decreased by $125,000, or 31%, to $277,000 for the forty weeks ended October 3, 2015 compared to $402,000 for the thirty-nine weeks ended September 27, 2014, due principally to decreases in artwork and plate expense of $57,000, promotion expense of $32,000 and public relations expense of $31,000.
Research and development costs, which consist principally of salary expenses and laboratory costs, decreased by $99,000, or 20%, to $389,000 for the forty weeks ended October 3, 2015 from $488,000 for the thirty-nine weeks ended September 27, 2014, due primarily to decreases in payroll expense of $76,000 and professional fees and outside services expense of $20,000.
General and administrative expenses increased by $86,000, or 6%, to $1,413,000 for the forty weeks ended October 3, 2015 compared with $1,327,000 for the thirty-nine weeks ended September 27, 2014, primarily due to a non-cash stock option expense of $113,000. This increase was partially offset by decreases in professional fees and outside services expense of $15,000, building and maintenance expense of $10,000, and travel and entertainment expense of $19,000.
For the forty weeks ended October 3, 2015 we recognized income tax expense of $8,000 compared to income tax expense of $6,000 for the thirty-nine weeks ended September 27, 2014. We have a history of losses and have a full valuation allowance on our deferred tax assets. We did not record tax expense other than state taxes for the forty weeks ending October 3, 2015 and thirty-nine weeks ending September 27, 2014.
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Our operating income for the 2015 forty week period was negatively impacted by a non-cash stock-based compensation expense of $113,000 arising from the grant of options, which contributed to the loss before income taxes of $518,000.
Liquidity and Capital Resources
As of October 3, 2015, we had approximately $136,000 in cash and cash equivalents and our working capital was approximately $2.1 million, compared with approximately $341,000 in cash and cash equivalents and working capital of $2.5 million at December 27, 2014.
The following table summarizes our cash flows for the periods presented:
| Forty Weeks ended October 3, 2015 | Thirty-nine Weeks ended September 27, 2014 | |||||||
| Net cash used in operating activities | $ | (200,000 | ) | $ | (150,000 | ) | ||
| Net cash used in financing activities | (5,000 | ) | -- | |||||
| Net decrease in cash and cash equivalents | $ | (205,000 | ) | $ | (150,000 | ) | ||
The decrease in our cash and cash equivalents for the forty weeks ended October 3, 2015 is attributable to the $200,000 used in operating activities. The net cash used in operating activities was the result of the $526,000 net loss in the period and a decrease in current liabilities of $28,000 offset in part by a decrease in current assets, excluding cash, of $236,000. Inventory decreased by $329,000 while accounts receivable increased by $135,000 due to the higher level of sales in the third quarter. While we believe that we will be able to fund our operations during the next twelve months from our working capital and from cash generated from operations, we intend to seek additional financing to improve our financial 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 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 3, 2015, we did not have any material contractual obligations or commercial commitments, including obligations relating to discontinued operations.
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Recent Accounting Pronouncements
See Note 4 to the unaudited condensed consolidated financial statements included in Part I, Item 1, Financial Statements, of this Quarterly Report on Form 10-Q.
| 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 3, 2015, 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 October 3, 2015.
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 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.
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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 continued to be ineffective as of October 3, 2015 because of the following continuing 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 twelve employees at October 3, 2015, 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.
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| Item 1. | Legal Proceedings |
We are not a party to any material litigation.
| Item 1A. | Risk Factors |
We may not be able to attain profitability in the future. To the extent that we continue to incur operating losses, we may not have sufficient working capital to fund our operations in the future.
Our sales have not rebounded since the loss in 2011 of our then largest customer, when it discontinued stocking branded goods. We continue to struggle to replace those sales. The loss of revenues from this former customer has affected our profitability. We had net losses of $126,000 and $518,000 in the fourteen and forty week periods ended October 3, 2015 and net losses of $908,000 and $163,000 in our last two fiscal years. If we are unable to increase revenues, we may not be able to return to or sustain profitable operations in the future or generate positive cash flows from our operations.
As of October 3, 2015, we had approximately $136,000 in cash and cash equivalents and our working capital was approximately $2.1 million, compared with approximately $341,000 in cash and cash equivalents and working capital of $2.5 million at December 27, 2014. The lack of sufficient working capital could negatively impact our ability to introduce and adequately promote new products. To the extent that we continue to 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 have received a notice of non-compliance with a continued listing standard from the NYSE MKT for our common stock. If we are unable to avoid the delisting of our common stock from the NYSE MKT, it could have a substantial negative effect on our liquidity and results of operations.
On April 1, 2015, we received a notice from the NYSE MKT LLC (the “NYSE MKT”) indicating that we did not meet continued listing standards of the NYSE MKT. We are not in compliance with Section 1003(a)(ii) of the NYSE MKT Company Guide (the “Company Guide”) because we reported stockholders’ equity of $2.6 million as of December 27, 2014 and had net losses in in three out of our four most recent fiscal years. As a result, we became subject to the procedures and requirements of Section 1009 of the Company Guide.
We submitted a plan of compliance to the NYSE MKT on April 28, 2015 addressing how we intend to regain compliance with Section 1003(a)(ii) of the Company Guide by October 1, 2016 and supplemented such plan on June 12, 2015. On June 23, 2015, we received a notice from NYSE Regulation, Inc. that we have been granted an extension until October 1, 2016 to regain compliance with the continued listing standards of the NYSE MKT. We will be subject to periodic review by the staff of NYSE Regulation, Inc. during the extension period. Failure to make progress consistent with the plan or to regain compliance with the continued listing standards by the end of the extension period could result in our being delisted from the NYSE MKT.
If our common stock ultimately were to be delisted for any reason, it could negatively impact us by (i) reducing the liquidity and market price of our common stock; (ii) reducing the number of investors willing to hold or acquire our common stock, which could negatively impact our ability to raise equity financing; and (iii) limiting our ability to use a registration statement to offer and sell freely tradable securities, thereby preventing us from accessing the public capital markets.
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There have been no other material changes to the company’s “Risk Factors” set forth in its Annual Report on Form 10-K for the year ended December 27, 2014.
| 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* |
| * | Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for the purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections. |
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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 and Chief Executive Officer | ||
| /s/Steve Kass | ||
| Steven Kass | ||
| Chief Accounting and Financial Officer |
Date: November 16, 2015
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