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TOF > SEC Filings for TOF > Form 10-Q on 14-May-2013All Recent SEC Filings

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Form 10-Q for TOFUTTI BRANDS INC


14-May-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations

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

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

Critical Accounting Policies

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

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

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


past due, our previous loss history, the customer's current ability to pay its obligation, and the condition of the general economy and the industry as a whole. We write off accounts receivable when they become uncollectible, and payments subsequently received on such receivables are credited to the bad debt expense account. We do not accrue interest on accounts receivable past due.

Deferred Revenue and Costs. Deferred revenue represents amounts from sales of our products that have been billed, 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.

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 2009 through 2012.

Results of Operations

Thirteen Weeks Ended March 30, 2013 Compared with Thirteen Weeks Ended March 31, 2012

Net sales for the thirteen weeks ended March 30, 2013 were $3,439,000, an increase of $149,000, or 5%, from net sales of $3,290,000 for the thirteen weeks ended March 31, 2012. We believe that our sales will continue to improve during the remainder of fiscal 2013 due to the introduction of new products and price increases instituted in the first and second quarters of this year, which will become effective at various times in the second and third quarters of this year. These increases will range from 5% to 10%, depending on the product category.

Our gross profit increased to $1,004,000 in the period ended March 30, 2013 from $813,000 in the period ended March 31, 2012 due to the increase in sales. Our gross profit percentage was 29% for the period ending March 30, 2013 compared to 25% for the period ending March 31, 2012. The increase in our gross profit percentage was due primarily to price increases in certain product categories during the first quarter of 2013 and not having certain promotional allowance programs that were in place during the 2012 thirteen week period repeated in the 2013 thirteen week period. Freight out expense, a significant part of our cost of sales, increased by $49,000, or 20%, to $290,000 for the thirteen weeks ended March 30, 2013 compared with $241,000 for the thirteen weeks ended March 31, 2012. As a percentage of sales, freight out expense increased to 8% in the 2013 thirteen week period compared to 7% for the 2012 thirteen week period. We expect freight out expense to continue at a higher level in 2013 due to the increased cost of oil, which will also negatively impact our packaging costs.

Selling expenses increased by $97,000, or 25%, to $482,000 for the thirteen weeks ended March 30, 2013 compared to $385,000 for the thirteen weeks ended March 31, 2012. This increase was due principally to


increases in payroll expense of $100,000 due to the addition of three salespersons and an increase in commissions expense of $20,000, which were partially offset by decreases in messenger costs of $14,000 and outside warehouse expense of $16,000. We anticipate that the current period's selling expenses will continue on the same or a slightly higher level for the balance of 2013 due to higher payroll costs resulting from the additional sales personnel.

Marketing expenses increased by $12,000, or 9% to $144,000 for the thirteen weeks ended March 30, 2013 compared to $132,000 for the thirteen weeks ended March 31, 2012 due principally to increases in artwork and plate expense of $12,000 and newspaper advertising expense of $27,000, which were partially offset by a reduction in public relations expense of $15,000 and magazine advertising expense of $9,000. We anticipate that the current period's marketing expenses will continue on the same level for the balance of 2013.

Research and development costs, which consist principally of salary expenses and laboratory costs, decreased by $7,000, or 4% to $161,000 for the thirteen weeks ended March 30, 2013 from $168,000 for the thirteen weeks ended March 31, 2012, due to a decrease in lab costs and maintenance and repair expense of $33,000, which was partially offset by an increase in professional fees and outside services expense of $30,000.

General and administrative expenses increased by $11,000, or 3% to $479,000 for the thirteen weeks ended March 30, 2013 compared with $468,000 for the thirteen weeks ended March 31, 2012 due to an increase in payroll costs of $16,000 and an increase in professional fees and outside services expense of $30,000, which were partially offset by a decrease in IT expense of $26,000. The increase in professional fees and outside services expense was due to legal fees, kashrut or rabbinical certification fees, and other consulting fees. The decrease in IT expense was due to no expense for internal website design as there was in the 2012 period. We anticipate that the current period's general and administrative expenses will continue on the same level, or increase slightly, for the balance of 2013.

For the thirteen weeks ended March 30, 2013, we recognized income tax expense of $6,000 compared to an income tax benefit of $130,000 for the thirteen weeks ended March 31, 2012. The income tax expense in 2013 was related to the pre-tax loss without recognizing an income tax benefit related to the net operating loss which our management believes we will be unable to utilize. The income tax benefit for the thirteen weeks ended March 31, 2012 was primarily related to the net operating loss generated during the quarter.

The effective income tax expense rate for the thirteen weeks ended March 30, 2013 was 2% compared to 38% for the thirteen weeks ended March 31, 2012. The decrease in our effective tax rate was primarily a result of not recording an income tax benefit related to the current year net operating loss estimated for fiscal year 2013.

Liquidity and Capital Resources

As of March 30, 2013, we had approximately $454,000 in cash and cash equivalents and our working capital was approximately $3.3 million, compared with approximately $471,000 in cash and cash equivalents and working capital of $3.6 million at December 29, 2012.


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

                                 Thirteen Weeks              Thirteen Weeks
                               ended March 30, 2013        ended March 31, 2012
      Net cash used in
      operating activities   $               (17,000 )   $              (605,000 )
      Net cash used in
      financing activities                         -                     (17,000 )
      Net change in
      cash and cash
      equivalents            $               (17,000 )   $              (622,000 )

The decrease in our cash and cash equivalents for the thirteen weeks ended March 30, 2013 is primarily attributable to the $17,000 used in operating activities. The net cash used in operating activities was the result of the $268,000 net loss in the period and a $217,000 increase in inventory, offset in part by an increase in accounts payable and accrued expenses of $291,000 and a decrease in accounts receivable of $207,000. Inventory increased as a result of purchases by us of finished goods in preparation for the historically stronger selling periods of the second and third quarters. Accounts payable and accrued expenses increased primarily as a result of the inventory purchases made during the thirteen weeks ended March 30, 2013. 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.

Our Board of Directors first instituted a share repurchase program in September 2000 which, after several amendments, has to date authorized the repurchase of 2,200,000 shares of our common stock at prevailing market prices. During December 2011, we repurchased 14,492 shares at a cost of $24,115, and we repurchased an additional 8,480 shares in January and February 2012 at a cost of $16,000. We have made no purchases since February 2012.

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

We had no material contractual obligations as of March 30, 2013.

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.


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