TOFUTTI BRANDS INC - Quarter Report: 2012 March (Form 10-Q)

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 2008 through 2011.

Results of Operations

Thirteen Weeks Ended March 31, 2012 Compared with Thirteen Weeks Ended April 2, 2011

Net sales for the thirteen weeks ended March 31, 2012 were $3,290,000, a decrease of $715,000, or 18%, from the sales level realized for the thirteen weeks ended April 2, 2011. The reduction in sales was primarily due to the determination of Trader Joe’s, formerly our largest customer, to cease selling branded goods. During the first quarter of 2012, there were no sales to Trader Joe’s as compared to $761,000 in sales in the first quarter of 2011. We believe that we will begin to recover some portion of these sales as our retail customers switch to other retail sources to purchase our products. We also believe that our sales will improve during the remainder of fiscal 2012 due to the introduction of new products and price increases instituted in the first and second quarters of the year, 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.

Our gross profit decreased to $813,000 in the period ended March 31, 2012 from $1,083,000 in the period ended April 2, 2011 due to the significant reduction in sales. Our gross profit percentage was 25% for the period ending March 31, 2012 compared to 27% for the period ending April 2, 2011. The reduction in our gross profit percentage was due primarily to significant promotional activity on behalf of our new products. We expect such promotional activity to continue for the remainder of 2012 and continue to have a negative impact on our gross profit percentage. 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 $12,000, or 5%, to $241,000 for the thirteen weeks ended March 31, 2012 compared with $229,000 for the thirteen weeks ended April 2, 2011. As a percentage of sales, freight out expense increased to 7% in the 2012 thirteen week period compared to 6% for the 2011 thirteen week period. We expect freight out expense to continue at a higher level in 2012 due to the increased cost of oil, which will also negatively impact our packaging costs.

Selling expenses increased by $11,000 to $385,000 for the current fiscal quarter compared with $374,000 for the comparable period in 2011. This increase was due principally to increases in commission expense

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of $13,000, shipping and messenger costs of $12,000, travel expense of $8,000 and outside warehouse expense of $8,000, offset by a decrease in payroll expense of $30,000. We anticipate that the current period’s selling expenses will continue on the same level or at a slightly lower level for the balance of 2012.

Marketing expenses decreased slightly by $5,000 to $132,000 in the fiscal 2012 period due principally to decreases in promotion expense of $20,000, newspaper advertising expense of $18,000, which was partially offset by increases in public relations expense of $23,000, artwork and plate expense of $5,000 and point of sale material expense of $5,000. We anticipate that the current period’s marketing expenses will continue on the same level for the balance of 2012.

Research and development costs, which consist principally of salary expenses and laboratory costs, increased by $18,000 to $168,000 for the thirteen weeks ended March 31, 2012 from $150,000 for the comparable period in 2011, due to an increase in lab costs and supplies of $4,000, payroll expenses of $7,000, equipment repairs of $4,000 and auto expense of $3,000. The increase in payroll expense was due to the addition of another person in research and development.

General and administrative expenses decreased by $65,000 to $468,000 for the thirteen weeks ended March 31, 2012 compared with $533,000 for the comparable period in 2011 due to a decrease in payroll costs of $117,000, which was offset by increases in office supply expense of $5,000, IT expense of $28,000, outside public relations expense of $5,000 and auto expense of $14,000. We anticipate that the current period’s general and administrative expenses will continue on the same level, or increase slightly, for the balance of 2012.

There was no provision for bonuses in the first quarter of 2012 as compared to a provision of $125,000 in the first quarter of 2011, resulting in the significant decrease in overall payroll expense during the first quarter of 2012.

In the thirteen weeks ended March 31, 2012, we recorded an income tax benefit of $130,000 compared to an income tax benefit of $45,000 in the thirteen weeks ended April 2, 2011. The income tax benefit in both periods reflect our net losses in such periods.

Liquidity and Capital Resources

As of March 31, 2012, we had approximately $1.0 million in cash and cash equivalents and our working capital was approximately $4.2 million, compared with approximately $1.6 million in cash and cash equivalents and working capital of $4.4 million at December 31, 2011.

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

		Thirteen Weeks ended March 31, 2012			Thirteen Weeks ended April 2, 2011
Net cash used in operating activities		$	(605,000	)	$	(876,000	)
Net cash used in financing activities			(17,000	)		—
Net change in cash and cash equivalents		$	(622,000	)	$	(876,000	)

The decrease in our cash and cash equivalents for the thirteen weeks ended March 31, 2012 is primarily attributable to the $605,000 used in operating activities. The net cash used in operating activities was the

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result of the $210,000 net loss in the period, a $495,000 increase in inventory and refundable and deferred taxes of $136,000, offset in part by an increase in accounts payable and accrued expenses of $234,000. Net cash used in financing activities was used in connection with the repurchase of shares of our common stock under our share repurchase program. 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. While we may purchase an additional 360,000 shares of common stock based on such authorization, we did not purchase any shares of our common stock from the first quarter of fiscal 2009 until December 2011. During December 2011, we repurchased 14,492 shares at a cost of $24,115. We repurchased an additional 8,480 shares in January and February 2012 at a cost of $14,000. Cumulatively, from the beginning of our share repurchase program, we have purchased 1,829,000 shares at a cost of $5,318,000.

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 March 31, 2012, 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 March 31, 2012, 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

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financial officer concluded that our disclosure controls and procedures were not effective as March 31, 2012.

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.

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 March 31, 2012 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 twelve employees at March 31, 2012, that will not require us to hire additional personnel.

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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 December 31, 2011.
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds
	None.
Item 3.	Default Upon Senior Securities
	None.
Item 4.	Mine Safety Disclosures
	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.
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*

*	Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for the purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

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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 15, 2012

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