TOFUTTI BRANDS INC - Quarter Report: 2010 April (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended April 3, 2010
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Transition report pursuant to Section 13 or 15(d) of the Exchange Act for the transition period from [ ] to [ ]
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Commission file number: 1-9009
Tofutti Brands Inc.
(Exact Name of Registrant as Specified in Its Charter)
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Delaware
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13-3094658
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(State of Incorporation)
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(I.R.S. Employer Identification No.)
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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 T 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 * 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.
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Large accelerated filer *
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Accelerated filer *
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Non-accelerated filer *
(Do not check if smaller reporting company)
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Smaller reporting company T
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
As of May 14, 2010 the Registrant had 5,176,678 shares of Common Stock, par value $.01, outstanding.
TOFUTTI BRANDS INC.
INDEX
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TOFUTTI BRANDS INC.
(in thousands, except share and per share figures)
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April 3,
2010
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January 2,
2010
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(unaudited)
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Assets
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Current assets:
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Cash and cash equivalents
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$ | 1,771 | $ | 1,413 | ||||
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Accounts receivable, net of allowance for doubtful
accounts and sales promotions of $403 and $538,
respectively
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1,686 | 1,461 | ||||||
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Inventories
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1,765 | 1,931 | ||||||
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Prepaid expenses
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8 | 13 | ||||||
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Refundable income taxes
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58 | 252 | ||||||
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Deferred income taxes
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299 | 299 | ||||||
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Total current assets
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5,587 | 5,369 | ||||||
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Fixed assets, net of accumulated amortization of
$35 and $34
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14 | 15 | ||||||
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Other assets
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16 | 16 | ||||||
| $ | 5,617 | $ | 5,400 | |||||
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Liabilities and Stockholders’ Equity
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Current liabilities:
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Accounts payable
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$ | 670 | $ | 164 | ||||
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Accrued expenses
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423 | 616 | ||||||
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Accrued officers’ compensation
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125 | 500 | ||||||
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Total current liabilities
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1,218 | 1,280 | ||||||
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Stockholders’ equity:
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| Preferred stock - par value $.01 per share;
authorized 100,000 shares, none issued
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-- | -- | ||||||
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Common stock - par value $.01 per share;
authorized 15,000,000 shares, issued and
outstanding 5,176,678 shares at April 3, 2010
and 5,176,678 shares at January 2, 2010
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52 | 52 | ||||||
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Retained earnings
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4,347 | 4,068 | ||||||
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Total stockholders’ equity
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4,399 | 4,120 | ||||||
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Total liabilities and stockholders’ equity
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$ | 5,617 | $ | 5,400 | ||||
See accompanying notes to condensed financial statements.
3
TOFUTTI BRANDS, INC.
(Unaudited)
(in thousands, except per share figures)
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Thirteen
weeks
ended
April 3, 2010
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Thirteen
weeks
ended
March 28, 2009
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Net sales
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$ | 4,592 | $ | 4,178 | ||||
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Cost of sales
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2,978 | 2,807 | ||||||
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Gross profit
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1,614 | 1,371 | ||||||
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Operating expenses:
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Selling
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354 | 415 | ||||||
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Marketing
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133 | 85 | ||||||
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Research and development
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141 | 130 | ||||||
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General and administrative
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511 | 488 | ||||||
| 1,139 | 1,118 | |||||||
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Income before income taxes
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475 | 253 | ||||||
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Income taxes
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200 | 101 | ||||||
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Net income
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$ | 275 | $ | 152 | ||||
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Weighted average common
shares outstanding:
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Basic
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5,177 | 5,183 | ||||||
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Diluted
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5,177 | 5,183 | ||||||
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Net income per common share:
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Basic
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$ | 0.05 | $ | 0.03 | ||||
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Diluted
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$ | 0.05 | $ | 0.03 | ||||
See accompanying notes to condensed financial statements.
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TOFUTTI BRANDS INC.
(Unaudited)
(in thousands)
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Thirteen
weeks
ended
April 3, 2010
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Thirteen
weeks
ended
March 28, 2009
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Cash flows provided by operating activities, net
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$ | 358 | $ | 1 | ||||
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Cash flows used in financing activities, net
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-- | (14 | ) | |||||
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Net increase (decrease) in cash and cash equivalents
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358 | (13 | ) | |||||
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Cash and cash equivalents at beginning of period
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1,413 | 238 | ||||||
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Cash and cash equivalents at end of period
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$ | 1,771 | $ | 225 | ||||
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Supplemental cash flow information:
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Income taxes paid
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$ | 5 | $ | -- | ||||
See accompanying notes to condensed financial statements.
5
TOFUTTI BRANDS INC.
Notes to Condensed Financial Statements
(in thousands, except per share figures)
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 2, 2010 have been derived from our audited financial statements for the year ended January 2, 2010. The financial information should be read in conjunction with the audited financial statements and notes thereto for the year ended January 2, 2010 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 week period ended April 3, 2010 are not necessarily indicative of the results to be expected for the full year.
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 April 3, 2010, as compared to the recent accounting pronouncements described in the Company’s Annual Report on Form 10-K for the fiscal year ended January 2, 2010, that are of material significance, or have potential material significance, to the Company.
Note 4: Inventories
The composition of inventories is as follows:
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April 3,
2010
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January 2,
2010
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Finished products
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$ | 1,209 | $ | 1,214 | ||||
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Raw materials and packaging
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556 | 717 | ||||||
| $ | 1,765 | $ | 1,931 | |||||
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TOFUTTI BRANDS INC.
Notes to Condensed Financial Statements
(in thousands, except per share figures)
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: Market Risk
We invest our excess cash, should there be any, in bank certificates of deposit and high rated money market funds. The bank certificate of deposits are usually for a term of not more than six months and never for more than $100 per account.
Note 7: Earnings Per Share
Basic earnings per common share has been computed by dividing net income by the weighted average number of common shares outstanding. Diluted earnings per common share has been computed by dividing net income by the weighted average number of common shares outstanding and common stock equivalents, which include options outstanding during the same period. Not included in the calculation were 51,000 non-qualified options and 61,000 non-qualified options to directors, respectively, that were antidilutive because the average market price of our common stock for the thirteen week periods ended April 3, 2010 and March 28, 2009, respectively, was less than the exercise price of any of these options.
The following table sets forth the computation of basic and diluted earnings per share:
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Thirteen Weeks
Ended
April 3, 2010
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Thirteen Weeks
Ended
March 28, 2009
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Numerator
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Net income-basic and diluted
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$ | 275 | $ | 152 | ||||
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Denominator
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Denominator for basic earnings per share
weighted average shares
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5,177 | 5,183 | ||||||
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Effect of dilutive securities
stock options
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--
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--
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Denominator for diluted earnings per share
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5,177 | 5,183 | ||||||
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Earnings per share
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Basic
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$ | 0.05 | $ | 0.03 | ||||
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Diluted
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$ | 0.05 | $ | 0.03 | ||||
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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 customer’s 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. We provide various promotional allowances to our customers which are included in our reserves based on our estimated expense for the period.
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Allowance for Inventory Obsolescence. We are required to state our inventories at the lower of cost or market price. We maintain an allowance for inventory obsolescence for losses resulting from inventory items becoming unsaleable due to expiration of product shelf life, loss of specific customers or changes in customers’ requirements. Based on historical and projected sales information, we believe our allowance is adequate. However, changes in general economic, business and market conditions could cause our customers’ purchasing requirements to change. These changes could affect our ability to sell our inventory; therefore, the allowance for inventory obsolescence is reviewed regularly and changes to the allowance are updated as new information is received.
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. Our federal and state tax returns are open to examination for the years 2007 through 2009.
Results of Operations
Thirteen Weeks Ended April 3, 2010 Compared with Thirteen Weeks Ended March 28, 2009
Net sales for the thirteen weeks ended April 3, 2010 were $4,592,000, an increase of $414,000, or 10%, from the sales level realized for the thirteen weeks ended March 28, 2009 due to the improving economic climate. Sales of our soy-cheese products improved while sales of our frozen dessert products maintained their 2009 levels.
Our gross profit increased to $1,614,000 in the period ended April 3, 2010 from $1,371,000 in the period ended March 28, 2009 due to the higher level of sales. Our gross profit percentage was 35% for the period ending April 3, 2010 compared to 33% for the period ending March 28, 2009. The improvement in our gross profit percentage was due primarily to the discontinuance of slower selling, lower margin products in 2009, therefore these products are no longer negatively impacting our 2010 sales. Freight out expense, a significant part of our cost of sales, decreased by $16,000, or 7%, to $227,000 for the thirteen weeks ended April 3, 2010 compared with $243,000 for the thirteen weeks ended March 28, 2009.
Selling expenses decreased by $61,000 to $354,000 for the current fiscal quarter compared with $415,000 for the comparable period in 2009. This decrease was partially due to a decrease in payroll expense of $33,000 and outside warehouse rental expense of $31,000. We anticipate that the current period's selling expenses will continue on the same level for the balance of 2010.
Marketing expenses increased by $48,000 to $133,000 in the fiscal 2010 period due principally to increases in newspaper advertising expense of $34,000 and promotion expense of $12,000. We anticipate that the current period's marketing expenses will continue on the same level for the balance of 2010.
Research and development costs, which consist principally of salary expenses and laboratory costs, increased by $11,000 to $141,000 for the thirteen weeks ended April 3, 2010 from $130,000 for the comparable period in 2009 due to an increase in lab costs and supplies of $15,000.
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General and administrative expenses increased by $23,000 to $511,000 for the thirteen weeks ended April 3, 2010 compared with $488,000 for the comparable period in 2009 due to an increase in public relations expense of $28,000, which was partially offset by a decrease in travel and entertainment expense of $19,000. We anticipate that the current period's general and administrative expenses will continue on the same level, or increase slightly, for the balance of 2010.
The increase in income tax expense in the thirteen weeks ended April 3, 2010 to $200,000, or 42% of income before taxes, from $101,000, or 40% of taxable income, in the thirteen weeks ended March 28, 2009 reflects the increase in our taxable income. Our tax rates historically fall within a range of 40% to 44%.
Liquidity and Capital Resources
As of April 3, 2010, we had approximately $1,771,000 in cash and cash equivalents and our working capital was approximately $4.4 million compared to working capital of approximately $3.8 million at January 2, 2010. Management determined not to incur the costs associated with renewing the Company's line of credit with Wachovia Bank which lapsed on April 30, 2010 after assessing the Company's financial condition, which improved substantially since the beginning of 2009 and the Company's history of never drawing on the line since 2006 when the line of credit was first obtained.
The following table summarizes our cash flows for the periods presented:
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Thirteen Weeks
ended
April 3, 2010
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Thirteen Weeks
ended
March 28, 2009
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Net cash provided by operating activities
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$ | 358,000 | $ | 1,000 | ||||
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Net cash used in financing activities
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-- | (14,000 | ) | |||||
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Net change in cash
and cash equivalents
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$ | 358,000 | $ | (13,000 | ) | |||
The increase in our net cash flows provided by operating activities was the result of the increase in net income and a reduction in our inventories. During the thirteen weeks ending April 3, 2010, we paid bonuses to management of $500,000. We believe that we will be able to fund our operations during the next twelve months with 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 net cash flows used in financing activities in the thirteen weeks ended March 28, 2009 represents the repurchase of our common stock. 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 January 2, 2010, 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 did not repurchase any additional shares since the period ended March 28, 2009 in order to conserve our cash position. In March 2010, our Board of Directors authorized management to reinitiate share repurchases and increased the authorized repurchase program to 2,200,000 shares from 1,850,000 shares of common stock.
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.
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Off-balance Sheet Arrangements
None.
Contractual Obligations
As of April 3, 2010, 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.
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.
Evaluation of Disclosure Controls and Procedures. As of April 3, 2010, 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 the end of the thirteen weeks ended April 3, 2010.
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.
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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 April 3, 2010 because of the following material weaknesses in internal controls over financial reporting:
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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.
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·
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The limited size of the accounting department makes it impracticable to achieve an optimum separation of duties.
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Remediation Plan
We are seeking ways to remediate these weaknesses, which stem from our small workforce, 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.
12
TOFUTTI BRANDS INC.
We are not a party to any material litigation.
There have been no material changes to the Company’s “Risk Factors” set forth in its Annual Report on Form 10-K for the year ended January 2, 2010.
None.
None.
None.
None.
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31.1
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Certification by Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended.
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31.2
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Certification by Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended.
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32.1
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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.
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32.2
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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.
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13
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.
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TOFUTTI BRANDS INC.
(Registrant)
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By:
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/s/ David Mintz | |
| David Mintz | |||
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President
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By:
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/s/ Steven Kass | |
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Steven Kass
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Chief Accounting and Financial Officer
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Date: May 18, 2010
14