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TOF > SEC Filings for TOF > Form 10-Q on 13-Aug-2013All Recent SEC Filings

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Form 10-Q for TOFUTTI BRANDS INC


13-Aug-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.

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.

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.

Results of Operations

Thirteen Weeks Ended June 29, 2013 Compared with Thirteen Weeks Ended June 30, 2012

Net sales for the thirteen weeks ended June 29, 2013 were $4,262,000, an increase of $563,000, or 13%, from net sales of $3,699,000 for the thirteen weeks ended June 30, 2012. The increase in sales was primarily from increased sales of our non-dairy cheese products. 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 throughout the year. These price increases will range from 5% to 10%, depending on the product category.

Our gross profit increased to $1,489,000 in the period ended June 29, 2013 from $1,133,000 in the period ended June 30, 2012 due to the increase in sales. Our gross profit percentage was 35% for the period ending June 29, 2013 compared to 31% for the period ending June 30, 2012. The increase in our gross profit percentage was due primarily to price increases in certain product categories during the second 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, decreased by $57,000, or 21%, to $217,000 for the thirteen weeks ended June 29, 2013 compared with $274,000 for the thirteen weeks ended June 30, 2012. As a percentage of sales, freight out expense decreased to 5% in the 2013 thirteen week period compared to 7% for the 2012 thirteen week period. Our freight out expense during the second quarter was positively impacted by lower fuel costs and more full loads of product being shipped. We expect freight out expense to continue at a lower level in 2013 due to these factors.

Selling expenses increased by $42,000, or 10%, to $464,000 for the thirteen weeks ended June 29, 2013 compared to $422,000 for the thirteen weeks ended June 30, 2012. This increase was due principally to increases in payroll expense of $73,000 due to the addition of three salespersons and an increase in travel, entertainment and auto expense of $23,000, which increases were partially offset by decreases in meetings

and conventions expense of $20,000 and outside warehouse rental expense of $30,000. Outside warehouse rental expense declined due to the reduction in inventory. We anticipate that the current period's selling expenses will continue on the same level for the balance of 2013 due to higher payroll costs resulting from the additional sales personnel.

Marketing expenses decreased by $13,000, or 7%, to $180,000 for the thirteen weeks ended June 29, 2013 compared to $193,000 for the thirteen weeks ended June 30, 2012 due principally to decreases in artwork and plate expense of $7,000, magazine advertising expense of $15,000, public relations expense of $21,000, promotions expense of $9,000, and point of sales materials expense of $5,000, which decreases were partially offset by an increase in newspaper advertising expense of $44,000. 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 $25,000, or 14%, to $160,000 for the thirteen weeks ended June 29, 2013 from $185,000 for the thirteen weeks ended June 30, 2012, due to a decrease in lab costs and supplies expense of $22,000.

General and administrative expenses increased slightly by $7,000, or 1%, to $505,000 for the thirteen weeks ended June 29, 2013 compared with $498,000 for the thirteen weeks ended June 30, 2012 due to increases in payroll costs of $8,000, professional fees and outside services expense of $8,000, public relations expense of $5,000, and general insurance expense of $8,000, which increases were partially offset by a decrease in IT expense of $28,000. The decrease in IT expense was due to no expense for internal website design as there was in the 2012 period. We anticipate that our general and administrative expenses will continue on the same level for the balance of 2013.

For the thirteen weeks ended June 29, 2013, we recognized no income tax expense compared to an income tax benefit of $67,000 for the thirteen weeks ended June 30, 2012. The effective income tax expense rate for the thirteen weeks ended June 29, 2013 was 0% compared to 41% for the thirteen weeks ended June 30, 2012. The decrease in our effective tax rate was primarily a result of not recording an income tax expense for the period, which is because we expect to break even for the year ending December 28, 2013. The income tax benefit for the thirteen weeks ended June 30, 2012 was primarily related to the net operating loss generated during the quarter.

Twenty-Six Weeks Ended June 29, 2013 Compared with Twenty-Six Weeks Ended June 30, 2012

Net sales for the twenty-six weeks ended June 29, 2013 were $7,701,000, an increase of $712,000, or 10%, from net sales of $6,989,000 for the twenty-six weeks ended June 30, 2012. The increase in sales was primarily from increased sales of our non-dairy cheese products.

Our gross profit increased to $2,493,000 in the period ended June 29, 2013 from $1,946,000 in the period ended June 30, 2012 due to the increase in sales. Our gross profit percentage was 32% for the period ending June 29, 2013 compared to 28% for the period ending June 30, 2012. The increase in our gross profit percentage was due primarily to price increases in certain product categories during the second quarter of 2013 and not having certain promotional allowance programs that were in place during the 2012 twenty-six week period repeated in the 2013 twenty-six week period. Freight out expense, a significant part of our cost of sales, decreased by $8,000, or 2%, to $507,000 for the twenty-six weeks ended June 29, 2013 compared to $515,000 for the twenty-six weeks ended June 30, 2012. Our freight out expense during the twenty-six weeks ending June 29, 2013 was positively impacted by lower fuel costs and a more efficient shipping process in which more full loads of products were being shipped. As a percentage of sales, freight out expense was 7% in both the 2013 and 2012 twenty-six week periods.

Selling expenses increased by $139,000, or 17%, to $946,000 for the twenty-six weeks ended June 29, 2013 compared to $807,000 for the twenty-six weeks ended June 30, 2012. This increase was due principally to increases in payroll expense of $173,000 due to the addition of three salespersons, commissions expense of $23,000, and travel, entertainment and auto expense of $25,000, which increases

were partially offset by decreases in outside warehouse rental expense of $47,000, messenger costs of $22,000, and meeting and convention expense of $14,000. Outside warehouse rental expense declined due to the reduction in inventory on hand in the current period compared to inventory in the twenty-six weeks ended June 30, 2012.

Marketing expenses decreased slightly by $2,000, or 1%, to $323,000 for the twenty-six weeks ended June 29, 2013 compared to $325,000 for the twenty-six weeks ended June 30, 2012 due principally to increases in artwork and plate expense of $6,000 and newspaper advertising expense of $71,000, which increases were offset by a reduction in public relations expense of $36,000, magazine advertising expense of $24,000, promotion expense of $13,000, and point of sale material expense of $6,000.

Research and development costs, which consist principally of salary expenses and laboratory costs, decreased by $32,000, or 9%, to $321,000 for the twenty-six weeks ended June 29, 2013 from $353,000 for the twenty-six weeks ended June 30, 2012, due to a decrease in lab costs and supplies expense of $53,000, which decrease was partially offset by an increase in professional fees and outside services expense of $33,000.

General and administrative expenses increased by $18,000, or 2%, to $984,000 for the twenty-six weeks ended June 29, 2013 compared with $966,000 for the twenty-six weeks ended June 30, 2012 due to increases in payroll costs of $23,000, professional fees and outside services expense of $38,000, and travel, entertainment and auto expense of $5,000, which increases were partially offset by a decrease in IT expense of $53,000. 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.

For the twenty-six weeks ended June 29, 2013, we recognized an income tax expense of $6,000 compared to an income tax benefit of $197,000 for the twenty-six weeks ended June 30, 2012. The effective income tax expense rate for the twenty-six weeks ended June 29, 2013 was 7% compared to 41% for the twenty-six weeks ended June 30, 2012. We did not record an income tax expense related to the current year due to our net operating loss for the six months ended June 29, 2013. The income tax benefit for the twenty-six weeks ended June 30, 2012 was primarily related to the net operating loss generated during the period.

Liquidity and Capital Resources

As of June 29, 2013, we had approximately $351,000 in cash and cash equivalents
and our working capital was approximately $3.5 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:

                                             Twenty-Six Weeks           Twenty-Six Weeks
                                            ended June 29, 2013        ended June 30, 2012
Net cash (used in) operating activities   $             (120,000 )   $           (1,292,000 )
Net cash (used in)
financing activities                                           -                    (17,000 )
Net (decrease) in cash and cash
equivalents                               $             (120,000 )   $           (1,309,000 )

The decrease in our cash and cash equivalents for the twenty-six weeks ended June 29, 2013 is attributable to the $120,000 used in operating activities. The net cash used in operating activities was the result of the $88,000 net loss in the period and a $312,000 increase in current assets, offset in part by an increase in current liabilities of $399,000. Inventory increased by $116,000 as a result of purchases by us of finished goods in preparation for the historically stronger selling periods of the second and third quarters, while accounts receivables increased by $243,000 due to the higher level of sales. Accounts payable and accrued expenses increased primarily as a result of the inventory purchases made during the twenty-six weeks ended June 29, 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

As of June 29, 2013, we did not have any material contractual obligations or commercial commitments, including obligations relating to discontinued operations.

Recent Accounting Pronouncements

See Note 4 to the unaudited condensed consolidated financial statements included in Part I, Item 1, Financial Statements, of this Quarterly Report on Form 10-Q.

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