TOFUTTI BRANDS INC - Quarter Report: 2011 October (Form 10-Q)

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

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

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

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

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

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

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

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

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

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

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

Liquidity and Capital Resources

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

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

		Thirty-Nine Weeks ended October 1, 2011			Thirty-Nine Weeks ended October 2, 2010
Net cash (used in) provided by operating activities		$	(904,000	)	$	876,000
Net cash used in financing activities			—			—
Net change in cash and cash equivalents		$	(904,000	)	$	876,000

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

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

Inflation and Seasonality

We do not believe that our operating results have been materially affected by inflation during the preceding two years. There can be no assurance, however, that our operating results will not be affected by inflation in the future. Our business is subject to minimal seasonal variations with slightly increased sales historically in the second and third quarters of the fiscal year. We expect to continue to experience slightly

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

Off-balance Sheet Arrangements

None.

Contractual Obligations

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

Recent Accounting Pronouncements

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

Item 3.	Quantitative and Qualitative Disclosures About Market Risk

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

Item 4.	Controls and Procedures

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

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

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

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

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

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

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

	•	a lack of sufficient resources and an insufficient level of monitoring and oversight, which may restrict our ability to gather, analyze and report information relative to the financial statements and income tax assertions in a timely manner.
	•	The limited size of the accounting department makes it impracticable to achieve an optimum separation of duties.

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

Changes in Internal Control over Financial Reporting

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

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PART II - OTHER INFORMATION

Item 1.	Legal Proceedings

We are not a party to any material litigation.

Item 1A.	Risk Factors

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

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

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds
	None.
Item 3.	Default Upon Senior Securities
	None.
Item 4.	Removed and Reserved
Item 5.	Other Information
	None.
Item 6.	Exhibits
31.1	Certification by Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended.
31.2	Certification by Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended.
32.1	Certification by Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification by Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS	Instance Document
101.SCH	Schema Document
101.CAL	Calculation Linkbase Document
101.DEF	Definition Linkbase Document
101.LAB	Labels Linkbase Document
101.PRE	Presentation Linkbase Document

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SIGNATURES

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

	TOFUTTI BRANDS INC.
	(Registrant)
	/s/David Mintz
	David Mintz
	President
	/s/Steven Kass
	Steven Kass
	Chief Accounting and Financial Officer
Date: November 15, 2011

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