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

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 2007 through 2010.

Results of Operations

Thirteen Weeks Ended July 2, 2011 Compared with Thirteen Weeks Ended July 3, 2010

Net sales for the thirteen weeks ended July 2, 2011 were $4,450,000, a decrease of $54,000, or 1%, from the sales level realized for the thirteen weeks ended July 3, 2010. Sales of both frozen dessert and cheese products in the current thirteen week period remained consistent with sales in the 2010 period.

In the thirteen week period ended July 3, 2010, we identified accounting errors in our Condensed Financial Statements for the thirteen weeks ended April 3, 2010. To correct such errors, we recorded a $148,000 reduction in net sales and a $55,000 reduction in cost of sales in the Condensed Statement of Operations for the thirteen weeks ended July 3, 2010. The after-tax impact of recording this adjustment was a $56,000 reduction in net income, or $0.01 per share. We determined that the errors were not material to the financial statements in the period in which they originated and, accordingly, a restatement of the financial statements for the thirteen weeks ended April 3, 2010 was not necessary. We also determined that the impact of correcting the errors was not material to its financial statements for the period ended July 3, 2010. We evaluated the relevant internal controls over financial reporting in light of the deficiencies in internal controls noted and did not identify any additional material weakness in internal control over financial reporting that were not previously reported.

Our gross profit in the thirteen week period ended July 2, 2011 increased by $61,000 to $1,231,000. Our gross profit percentage for the thirteen week period ending July 2, 2011 was 28% compared to 26% for the period ending July 3, 2010. The increase in both gross profit and gross profit percentage is the result of our ongoing program to eliminate marginally profitable products. Freight out expense, a significant part of our cost of sales, increased to $267,000 for the thirteen weeks ended July 2, 2011 compared with $258,000 for the thirteen weeks ended July 3, 2010. This increase was the result of significant increases in fuel costs, which in turn increased our freight rates

Selling and warehouse expenses decreased to $364,000 for the thirteen weeks ended July 2, 2011 compared with $433,000 for the thirteen weeks ended July 3, 2010. This decrease was due primarily to a $43,000 decrease in outside warehouse expense, a $21,000 decrease in meeting and convention expense

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and a $16,000 decrease in travel, entertainment and auto expense. The decrease in outside warehouse expense is the result of the lower level of inventory that we maintained during the period.

Marketing expenses decreased by $114,000 to $56,000 for the thirteen weeks ended July 2, 2011 compared with $170,000 for the thirteen weeks ended July 3, 2010 due principally to a $36,000 decrease in advertising expense and a $74,000 decrease in promotion expense, both decreases primarily the result of the lower sales level in the 2011 period. Research and development costs, which consist principally of salary expenses and laboratory costs, decreased slightly to $134,000 for the thirteen weeks ended July 2, 2011 compared to $142,000 for the thirteen weeks ended July 3, 2010. This decrease was primarily due to a decrease in lab costs and supplies of $18,000, which was offset by an increase in professional fees and outside services of $10,000.

General and administrative expenses increased to $538,000 for the thirteen weeks ended July 2, 2011 compared with $497,000 for the thirteen weeks ended July 3, 2010, due primarily to increases public relations expense of $4,000, professional fees and outside services expense of $48,000 and data processing and related supplies expense of $15,000, offset by a decrease in travel and entertainment expense of $29,000 and telephone expense of $2,000.

Income tax expense was $56,000 in the thirteen weeks ended July 2, 2011 compared to income tax benefit of $30,000 in the thirteen weeks ended July 3, 2010 due to an operating profit in the 2011 period compared to the loss incurred in the 2010 period. The effective tax rate used to calculate the tax expense was 40% for the current period as compared to a tax rate of 42% for the 2010 period.

Twenty-Six Weeks Ended July 2, 2011 Compared with Twenty-Six Weeks Ended July 3, 2010

Net sales for the twenty-six weeks ended July 2, 2011 were $8,455,000, a decrease of $640,000 or 7%, from the sales level realized for the twenty-six weeks ended July 3, 2010. Sales were negatively impacted in the period ended July 2, 2011 due to the severe winter weather and the weak economy during the first thirteen weeks of the twenty-six week period. The decline in sales leveled off in the second half of the period.

In the twenty-six week period ended July 3, 2010, we identified accounting errors in our Condensed Financial Statements for the thirteen weeks ended April 3, 2010. To correct such errors, we recorded a $148,000 reduction in net sales and a $55,000 reduction in cost of sales in the Condensed Statement of Operations for the thirteen weeks ended July 3, 2010. The after-tax impact of recording this adjustment was a $56,000 reduction in net income, or $0.01 per share. We determined that the errors were not material to the financial statements in the period in which they originated and, accordingly, a restatement of the financial statements for the thirteen weeks ended April 3, 2010 was not necessary. We also determined that the impact of correcting the errors was not material to its financial statements for the period ended July 3, 2010. We evaluated the relevant internal controls over financial reporting in light of the deficiencies in internal controls noted and did not identify any additional material weakness in internal control over financial reporting that were not previously reported.

Our cost of goods sold in the period ended July 2, 2011 decreased by $170,000, or 3%, to $6,141,000 due to the lower level of sales in the 2011 period. Our gross profit percentage for the twenty-six week period ending July 2, 2011 was 27% compared to 31% for the period ending July 3, 2010. Freight out expense, part of our cost of sales, increased slightly by $11,000, or 2%, to $496,000 for the twenty-six weeks ended July 2, 2011 compared with $485,000 for the twenty-six weeks ended July 3, 2010. The impact of the higher cost of freight was offset by the reduction in sales in 2011.

We expect freight out expense to continue at a higher level in 2011 due to the increased cost of oil, which will also negatively impact our packaging costs. We have instituted a series of price increases which will

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become effective at various times in the third and fourth quarters of this year and the first quarter of next year. These increases will range from 5% to 10%, depending on the product category.

Selling and warehouse expenses decreased by 6% to $738,000 for the twenty-six week period ended July 2, 2011 compared with $787,000 for the comparable period in 2010. This decrease is due primarily to decreases in commission expense of $15,000, reflecting the lower level of sales, and decreased outside warehouse rental expense of $50,000, due to the lower level of inventory. These decreases were partially offset by an increase in payroll expense of $8,000.

Marketing expenses decreased by $110,000 to $193,000 in the twenty-six week period ended July 2, 2011 from $303,000 in the twenty-six weeks ended July 3, 2010 due principally to a $51,000 decrease in advertising expenses and a $62,000 decrease in promotion expense, which are both reflective of the lower sales level in 2011.

Research and development costs, which consist principally of salary expenses and laboratory costs, remained unchanged at $284,000 for the twenty-six weeks ended July 2, 2011 compared to $283,000 for the twenty-six weeks ended July 3, 2010.

General and administrative expenses increased to $1,071,000 for the twenty-six week period ended July 2, 2011 compared with $1,008,000 for the twenty-six week period ended July 3, 2010 due primarily to increases in outside fees and professional fee expense of $48,000, public relations expense of $8,000 and data processing supplies expense of $22,000, which were partially offset by a decrease in payroll expense of $14,000.

The decrease in income tax expense in the twenty-six week period ended July 2, 2011 to $11,000 from $170,000 in the twenty-six week period ended July 3, 2010 reflects the lower operating profit in the 2011 period. The effective tax rate of 39% in the 2011 period decreased slightly compared to 42% in the 2010 period.

Liquidity and Capital Resources

As of July 2, 2011, we had approximately $1.9 million in cash and cash equivalents and our working capital was approximately $4.4 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:

		Twenty-Six Weeks ended July 2, 2011			Twenty-Six Weeks ended July 3, 2010
Net cash (used in) operating activities		$	(608,000	)	$	(121,000	)
Net cash used in financing activities			—			—
Net change in cash and cash equivalents		$	(608,000	)	$	(121,000	)

The decrease in our cash and cash equivalents at July 2, 2011 was due to our payment of accrued bonuses to management of $500,000 and income taxes of $312,000. 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.

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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 July 2, 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 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 July 2, 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 July 2, 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 July 2, 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

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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.

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 July 2, 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 eight employees at July 2, 2011, 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
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 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: August 16, 2011

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