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

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 2007 through 2010.

Results of Operations

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

Net sales for the thirteen weeks ended April 2, 2011 were $4,005,000, a decrease of $587,000, or 13%, from the sales level realized for the thirteen weeks ended April 3, 2010. This decrease can be attributed to a reduction of $450,000 in our sales to Trader Joe’s, our largest account, in the thirteen weeks ended April 2, 2011 compared to the comparable period in 2010. The timing of orders from Trader Joe’s varies from year to year, which can have a significant impact on a comparative analysis. Our overall sales, especially frozen desserts, were also negatively impacted by severe winter weather throughout much of the country during the first quarter of 2011. In addition, as previously disclosed, we had a reporting error for the thirteen weeks ended April 3, 2010, which was corrected in our Form 10-Q for the thirteen weeks ended July 3, 2010 and if the reduction of sales of $148,000 had factored in the out of period adjustment for the thirteen weeks ended April 3, 2010, then the decrease in sales from the thirteen weeks ended April 3, 2010 to the thirteen weeks ended April 2, 2011 would have been $439,000 or 10%.

Our gross profit decreased to $1,083,000 in the period ended April 2, 2011 from $1,614,000 in the period ended April 3, 2010 due to the significant reduction in sales. Our gross profit percentage was 27% for the period ending April 2, 2011 compared to 35% for the period ending April 3, 2010. The decline in our gross profit percentage was due primarily to the reduction in sales to Trader Joe’s, which is a higher margin business. Additionally, increased costs for packaging and ingredients reduced our margin as well. Freight out expense, a significant part of our cost of sales, increased by $2,000, or 1%, to $229,000 for the thirteen weeks ended April 2, 2011 compared with $227,000 for the thirteen weeks ended April 3, 2010. However, as a percentage of sales, freight out expense increased to 6% in the 2011 thirteen week period compared to 5% for the 2010 thirteen week period. 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 already instituted a series of price increases 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. As previously reported, we had a reporting error of a reduction of $93,000 in gross

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profit for the period ended April 3, 2010, which was corrected in our Form 10Q for the thirteen weeks ended July 3, 2010. If this reduction in gross profit had factored in the out of period adjustment for the thirteen weeks ended April 3, 2010, the gross profit for the thirteen weeks ended April 3, 2010 would have been $1,521,000 with a gross profit percentage of 34%.

Selling expenses increased by $20,000 to $374,000 for the current fiscal quarter compared with $354,000 for the comparable period in 2010. This increase was due principally to meeting and convention expense of $21,000, messenger costs of $7,000, auto and travel expense of $11,000, offset by a decrease in commission expense of $19,000. We anticipate that the current period’s selling expenses will continue on the same level or slightly lower for the balance of 2011.

Marketing expenses increased by $4,000 to $137,000 in the fiscal 2011 period due principally to an increase in promotion expense of $27,000, which was offset by a reduction in newspaper advertising expense of $17,000 and artwork and plate expense of $6,000. We anticipate that the current period’s marketing expenses will continue on the same level for the balance of 2011.

Research and development costs, which consist principally of salary expenses and laboratory costs, increased by $9,000 to $150,000 for the thirteen weeks ended April 2, 2011 from $141,000 for the comparable period in 2010 due to an increase in lab costs and supplies of $10,000.

General and administrative expenses increased by $22,000 to $533,000 for the thirteen weeks ended April 2, 2011 compared with $511,000 for the comparable period in 2010 due to increases in building maintenance and repair expense of $9,000, IT expense of $7,000 and outside public relations expense of $4,000. We anticipate that the current period’s general and administrative expenses will continue on the same level, or increase slightly, for the balance of 2011.

In the thirteen weeks ended April 2, 2011 we had an income tax benefit of $45,000, or 41% of income before taxes, compared to income tax expense of $200,000, or 42% of taxable income, in the thirteen weeks ended April 3, 2010. This reflects our net loss for the thirteen weeks ended April 2, 2011.

Liquidity and Capital Resources

As of April 2, 2011, we had approximately $1.7 million in cash and cash equivalents and our working capital was approximately $4.4 million, which was consistent with our working capital at January 1, 2011.

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

		Thirteen Weeks ended April 2, 2011			Thirteen Weeks ended April 3, 2010
Net cash provided (used in) by operating activities		$	(876,000	)	$	358,000
Net change in cash and cash equivalents		$	(876,000	)	$	358,000

The decrease in our net cash flows provided by operating activities was the result of the net loss and an increase in accounts receivable. During the thirteen weeks ending April 2, 2011, we paid bonuses to management of $500,000 and paid 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 April 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 additional 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 April 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 April 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 April 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 April 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 April 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
	None.
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.

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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: May 17, 2011

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