UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

[X]	Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended July 2, 2016
[  ]	Transition report pursuant to Section 13 or 15(d) of the Exchange Act for the transition period from [         ] to [         ]

 

Commission file number: 1-9009

 

Tofutti Brands Inc.

(Exact Name of Registrant as Specified in Its Charter)

 

Delaware		13-3094658
(State of Incorporation)		(I.R.S. Employer Identification No.)

 

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 [X] 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 [X] 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.

 

Large accelerated filer [  ]	Accelerated filer [  ]
Non-accelerated filer [  ] (Do not check if smaller reporting company)	Smaller reporting company[[X]

  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [  ] No [X]

 

As of August 12, 2016 the Registrant had 5,153,706 shares of Common Stock, par value $0.01, outstanding.

 

 

 

TOFUTTI BRANDS INC.

 

INDEX

 

		Page
Part I - Financial Information:
Item 1.	Financial Statements	3
	Condensed Balance Sheets – July 2, 2016 (Unaudited) and January 2, 2016	3
	Condensed Statements of Operations - (Unaudited) Thirteen and Twenty-Six Week Periods ended July 2, 2016 and June 27, 2015	4
	Condensed Statements of Cash Flows (Unaudited) - Twenty-Six Week Periods ended July 2, 2016 and June 27, 2015	5
	Notes to Condensed Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	11
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	16
Item 4.	Controls and Procedures	16
Part II - Other Information:
Item 1.	Legal Proceedings	17
Item 1A.	Risk Factors	17
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	17
Item 3.	Defaults Upon Senior Securities	17
Item 4.	Mine Safety Disclosures	17
Item 5.	Other Information	17
Item 6.	Exhibits	17
	Signatures	18

  

 

PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

TOFUTTI BRANDS INC.

Condensed Balance Sheets

(in thousands, except share and per share figures)

 

		July 2, 2016				January 2, 2016*
Assets
Current assets:
Cash and cash equivalents		$	185			$	55
Accounts receivable, net of allowance for doubtful accounts and sales promotions of $346 and $316 respectively			2,270				1,783
Inventories			1,853				1,473
Prepaid expenses			40				74
Deferred costs			96				101
Total current assets			4,444				3,486
Fixed assets (net of accumulated depreciation of $11 and $8, respectively)			18				21
Other assets			16				16
		$	4,478			$	3,523
Liabilities and Stockholders’ Equity
Current liabilities:
Note payable-current		$	5			$	5
Accounts payable			1,269				1,117
Accrued expenses			214				248
Deferred revenue			103				113
Total current liabilities			1,591				1,483
Note payable-related party			500				—
Note payable-long term			14				16
Total liabilities			2,105				1,499
Commitments and contingencies
Stockholders’ equity:
Preferred stock - par value $.01 per share; authorized 100,000 shares, none issued			—				—
Common stock - par value $.01 per share; authorized 15,000,000 shares, issued and outstanding 5,153,706 shares at July 2, 2016 and January 2, 2016			52				52
Additional paid-in capital			138				113
Retained earnings			2,183				1,859
Total stockholders’ equity			2,373				2,024
Total liabilities and stockholders’ equity		$	4,478			$	3,523

 

*Derived from audited financial information.

 

See accompanying notes to condensed financial statements.

 

 

TOFUTTI BRANDS, INC.

Condensed Statements of Operations

(Unaudited)

(in thousands, except per share figures)

 

		Thirteen weeks ended July 2, 2016				Thirteen weeks ended June 27, 2015				Twenty-six weeks ended July 2, 2016				Twenty-six weeks ended June 27, 2015
Net sales		$	3,554			$	3,624			$	7,296			$	6,767
Cost of sales			2,370				2,548				4,873				4,945
Gross profit			1,184				1,076				2,423				1,822
Operating expenses:
Selling and warehouse			349				350				733				750
Marketing			43				80				131				203
Research and development			116				143				249				283
General and administrative			474				524				967				979
			982				1,097				2,080				2,215
Income (loss) before interest expense			202				(21	)			343				(393	)
Interest expense			6				—				13				—
Income (loss) before income tax			196				(21	)			330				(393	)
Income tax expense			2				3				6				8
Net income (loss)		$	194			$	(24	)		$	324			$	(401	)
Weighted average common shares outstanding:
Basic			5,154				5,154				5,154				5,154
Diluted			5,154				5,154				5,154				5,154
Net income (loss) per common share:
Basic		$	0.04			$	(0.00	)		$	0.06			$	(0.08	)
Diluted		$	0.04			$	(0.00	)		$	0.06			$	(0.08	)

 

See accompanying notes to condensed financial statements.

 

 

TOFUTTI BRANDS INC.

Condensed Statements of Cash Flows

(Unaudited)

(in thousands)

 

		Twenty-six weeks ended July 2, 2016				Twenty-six weeks ended June 27, 2015
Cash used in operating activities, net		$	(368	)		$	(153	)
Cash provided by (used in) financing activities, net			498				(3	)
Net increase (decrease) in cash and cash equivalents			130				(156	)
Cash and cash equivalents at beginning of period			55				341
Cash and cash equivalents at end of period		$	185			$	185
Supplemental cash flow information:
Income taxes paid		$	6			$	8
Interest paid		$	6			$	—

 

See accompanying notes to condensed financial statements.

 

 

TOFUTTI BRANDS INC.

Notes to Condensed Financial Statements

(In thousands, except for share and per share data)

 

Note 1: Liquidity and Capital Resources

 

At July 2, 2016, Tofutti Brands, Inc. (“Tofutti” or the “Company”) had approximately $185 in cash compared to $55 at January 2, 2016. Net cash used in operating activities for the twenty-six weeks ended July 2, 2016 was $368 compared to $153 used in operating activities for the twenty-six weeks ended June 27, 2015. Net cash provided by financing activities for the thirteen weeks ended July 2, 2016 was $498 compared to $3 used in financing activities for the twenty-six weeks ended June 27, 2015. Net cash provided by financing activities for the twenty-six weeks ended July 2, 2016 was primarily a result of the loan provided by the Company’s Chairman and Chief Executive Officer.

 

The Company has historically financed operations and met capital requirements primarily through positive cash flow from operations. However, due to the net loss and cash used in operations for the year ended January 2, 2016 and in order to provide the Company with additional working capital, David Mintz, the Company’s Chairman and Chief Executive Officer, provided it with a loan on January 6, 2016 of $500 which is due on December 31, 2017. Commencing March 31, 2016, interest of 5% is payable on a quarterly basis without compounding. The loan may be prepaid in whole or in part at any time without premium or penalty. The loan is convertible into the Company’s common stock at a conversion price of $4.01 per share, the closing price of the Company’s common stock on the date the promissory note was entered into.

 

The Company’s ability to introduce and support successful new products may be adversely affected by a number of factors, such as unforeseen cost and expenses, economic environment, increased competition, and other factors beyond the Company’s control. Management cannot provide assurance that the Company will operate profitably in the future, or that it will not require significant additional financing in order to accomplish or exceed the objectives of its business plan. Consequently, the Company’s historical operating results cannot be relied on to be an indicator of future performance, and management cannot predict whether the Company will obtain or sustain positive operating cash flow or generate net income in the future.

 

Note 2: Description of Business

 

Tofutti is engaged in one business segment, the development, production and marketing of non-dairy frozen desserts and other food products.

 

The Company reports on operating segments in accordance with standards for public companies to report information about operating segments and geographic distribution of sales in financial statements. While the Company has multiple products and or product groups, its goal is to focus on non-dairy foods. The Company’s chief operating decision maker tracks revenue by product groups, but does not track more granular operating results by product group as many of the ingredients are similar amongst these groups. As a result, the Company has determined that it has only one operating segment, which is the development, production and marketing of soy-based, non-dairy frozen desserts, frozen food products and soy-based cheese products.

 

 

TOFUTTI BRANDS INC.

Notes to Condensed Financial Statements

(In thousands, except for share and per share data)

 

Note 3: 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, 2016 are derived from our audited financial statements for the year ended January 2, 2016. The financial information should be read in conjunction with the audited financial statements and notes thereto for the year ended January 2, 2016 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 and twenty-six week periods ended July 2, 2016 are not necessarily indicative of the results to be expected for the full year or any other period.

 

The Company operates on a fiscal year which ends on the Saturday closest to December 31st.

 

Note 4: Recent Accounting Pronouncements

 

In March 2016, the FASB issued ASU 2016-09, Stock Compensation, which simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The guidance is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The Company is currently evaluating the impact of adopting this guidance on its financial statements.

 

Note 5: Inventories

 

The composition of inventories is as follows:

 

		July 2, 2016				January 2, 2016
Finished products		$	1,236			$	1,007
Raw materials and packaging			617				466
		$	1,853			$	1,473

 

Note 6: 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. Deferred tax assets are reduced by a valuation allowance to the extent management concludes it is more likely than not that the assets will not be realized. As of the periods ended July 2, 2016 and January 2, 2016, the Company recorded a full valuation allowance on its deferred tax asset balances.

 

 

TOFUTTI BRANDS INC.

Notes to Condensed Financial Statements

(In thousands, except for share and per share data)

 

Note 7: Earnings Per Share

 

Basic earnings per common share has been computed by dividing net income (loss) by the weighted average number of common shares outstanding. Diluted earnings per common share for the periods ended July 2, 2016 and June 27, 2015 have been computed by dividing net income (loss) 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 for July 2, 2016 were 80,000 non-qualified options granted to directors that were antidilutive because the market price of the common stock as of July 2, 2016 was less than the exercise prices of any of these options.

 

The following table sets forth the computation of basic and diluted earnings per share:

 

		Thirteen Weeks Ended July 2, 2016				Thirteen Weeks Ended June 27, 2015				Twenty-six Weeks Ended July 2, 2016				Twenty-six Weeks Ended June 27, 2015
Numerator
Net income (loss)-basic		$	194			$	(24	)		$	324			$	(401	)
Net income (loss)-diluted		$	194			$	(24	)		$	324			$	(401	)
Denominator
Basic earnings per share weighted average shares			5,153,706				5,153,706				5,153,706				5,153,706
Diluted earnings per share weighted average shares			5,153,706				5,153,706				5,153,706				5,153,706
Income (loss) per common share
Basic		$	0.04			$	(0.00	)		$	0.06			$	(0.08	)
Diluted		$	0.04			$	(0.00	)		$	0.06			$	(0.08	)

 

Note 8: Fixed Assets

 

Fixed assets consist of the following:

 

		July 2, 2016				January 2, 2016
Automobile		$	29			$	29
Less: accumulated depreciation			(11	)			(8	)
Fixed assets, net		$	18			$	21

 

Depreciation expense for the thirteen and twenty-six weeks ended July 2, 2016 was $1 and $3, respectively. Depreciation expense for the thirteen and twenty-six weeks ended June 27, 2015 was $1 and $3, respectively.

 

 

TOFUTTI BRANDS INC.

Notes to Condensed Financial Statements

(In thousands, except for share and per share data)

 

Note 9: Stock Based Compensation

 

On June 10, 2014, the shareholders of the Company approved the 2014 Equity Incentive Plan (the “2014 Plan”). The 2014 Plan provides for grants of various types of awards that are designed to attract and retain highly qualified personnel who will contribute to the success of the Company and to provide incentives to participants in the 2014 Plan that are linked directly to increases in shareholder value which will therefore inure to the benefit of all shareholders of the Company. The Company intends to rely on a combination of multi-year performance awards, options and other stock-based awards for these purposes.

 

The 2014 Plan made 250,000 shares of common stock available for awards. The 2014 Plan also permits performance-based 2014 awards paid under it to be tax deductible under Section 162(m) of the Internal Revenue Code of 1986, as amended, as “performance-based compensation.” As of July 2, 2016, the Company issued 80,000 non-qualified stock option awards under the 2014 Plan.

 

The following is a summary of stock option activity from January 2, 2016 to July 2, 2016:

 

		Non-Qualified Options
		Shares				Weighted Average Exercise Price ($)
Outstanding at January 2, 2016			80,000				4.42
Exercised as of July 2, 2016			—				—
Outstanding at July 2, 2016			80,000				4.42
Exercisable at July 2, 2016			53,336				4.42

 

The following table summarizes information about stock options outstanding at July 2, 2016:

 

Range of Exercise Prices ($)				Number Outstanding				Weighted Average Remaining Life (in years)				Weighted Average Exercise Price($)				Number Exercisable
	4.39 – 4.46				80,000				3.72				4.42				53,336

 

The fair value of each option award is estimated on the date of grant using the Black-Scholes option-pricing formula. Expected volatilities and risk-free interest rates are based upon the expected life of the grant. The interest rates used are the U.S. Treasury yield curve in effect at the time of the grant.

 

There were no options granted during the thirteen and twenty-six weeks ended July 2, 2016.

 

As of July 2, 2016, the intrinsic value of the options outstanding and exercisable was immaterial. As of July 2, 2016, there was approximately $68 of total unrecognized compensation cost that will be recognized through January 2, 2017 related to non-vested share-based compensation arrangements granted under the Plan. For the thirteen and twenty-six weeks ended July 2, 2016, stock compensation expense was $0 and $25, respectively.

 

 

TOFUTTI BRANDS INC.

Notes to Condensed Financial Statements

(In thousands, except for share and per share data)

 

Note 10: Notes Payable

 

In September 2014, the Company obtained an auto loan of approximately $29 from a bank. The loan requires 60 monthly payments of $0.535 through August 2019. Interest is charged at a fixed nominal rate of 4.64%. The loan is collateralized by the underlying automobile.

 

		July 2, 2016				January 2, 2016
Note payable		$	19			$	21
Less current maturity			5				5
Note payable, net of current maturity		$	14			$	16

 

On January 6, 2016, David Mintz, the Company’s Chairman and Chief Executive, provided it with a loan of $500 which is due on December 31, 2017. Commencing March 31, 2016, interest of 5% is payable on a quarterly basis without compounding. The loan may be prepaid in whole or in part at any time without premium or penalty. The loan is convertible into the Company’s common stock at a conversion price of $4.01 per share, the closing price of the Company’s common stock on the date the promissory note was entered into. In any event of default, as defined in the promissory note, without any action on the part of Mr. Mintz, the interest rate will increase to 12% per annum and the entire principal and interest balance under the loan, and all of the Company’s other obligations under the loan, will be immediately due and payable, and Mr. Mintz will be entitled to seek and institute any and all remedies available to him.

 

		July 2, 2016				January 2, 2016
Note payable-related party		$	500				—
Less current maturity			—				—
Note payable related party, net of current maturity		$	500				—

 

Note 11: Sales by Geographic Region and Product Category

 

Revenues by geographical region are as follows (in thousands):

 

		Thirteen Weeks ended July 2, 2016				Thirteen Weeks ended June 27, 2015				Twenty-Six Weeks ended July 2, 2016				Twenty-Six Weeks ended June 27, 2015
Revenues by geography:
Americas		$	3,227			$	3,121			$	6,558			$	6,030
Europe			195				257				312				347
Asia Pacific and Africa			47				141				202				188
Middle East			85				105				224				202
		$	3,554			$	3,624			$	7,296			$	6,767

 

Approximately 93% of the Americas revenue in 2016 and 92% of the Americas revenue in 2015 is attributable to sales in the United States in both the thirteen and twenty-six week periods. All of the Company’s assets are located in the United States.

 

Net sales by major product category (in thousands):

 

		Thirteen Weeks ended July 2, 2016				Thirteen Weeks ended June 27, 2015				Twenty-Six Weeks ended July 2, 2016				Twenty-Six Weeks ended June 27, 2015
Frozen Desserts		$	1,097			$	1,005			$	2,069			$	1,843
Cheeses			2,417				2,378				5,140				4,594
Frozen Foods			40				241				87				330
		$	3,554			$	3,624			$	7,296			$	6,767

 

 

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 customers’ 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.

 

 

Deferred Revenue and Costs. Deferred revenue represents amounts from sales of our products that have been billed and shipped, but for which the transactions have not met our revenue recognition criteria. The cost of the related products have been recorded as deferred costs on our balance sheet.

 

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.

 

Fixed Assets. Fixed assets consist of a company automobile used for advertising and trade show purposes. Amortization is provided by charges to income using the straight-line method over the useful life of five years.

 

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 2013 through 2015.

 

Stock Based Compensation. The Company follows the provisions of ASC 718 Share-Based Payment. The Company uses the Black-Scholes option pricing model to measure the estimated fair value of the options under ASC 718. Stock-based compensation expense is recognized over the requisite service period.

 

Results of Operations

 

Thirteen Weeks Ended July 2, 2016 Compared with Thirteen Weeks Ended June 27, 2015

 

Net sales for the thirteen weeks ended July 2, 2016 were $3,554,000, a decrease of $70,000, or 2%, from net sales of $3,624,000 for the thirteen weeks ended June 27, 2015. Sales of our frozen dessert product line increased to $1,097,000 in the thirteen weeks ended July 2, 2016 from $1,005,000 for the thirteen weeks ended June 27, 2015 as a result of improved frozen dessert novelty sales. Sales of soy-cheese products increased to $2,417,000 in the 2016 period from $2,378,000 in the 2015 period, primarily as a result of improved domestic sales. Sales of frozen food entrée products decreased to $40,000 in the 2016 thirteen week period from $241,000 in the 2015 thirteen week period. Sales of our frozen dessert and soy cheese products were positively impacted by the elimination of various sales promotions, which increased the net selling prices of our products in the 2016 period. Sales allowance expense decreased to $391,000 for the thirteen weeks ended July 2, 2016 compared to $517,000 for the thirteen weeks ended June 27, 2016. Sales of frozen food entrée products were negatively impacted primarily as a result of consumer resistance to purchasing the nine-slice pizza package that we introduced in 2015 as compared to the three-slice package it replaced.

 

 

Our gross profit increased to $1,184,000 in the thirteen weeks ended July 2, 2016 from $1,076,000 in the thirteen weeks ended June 27, 2015. Our gross profit percentage was 33% for the thirteen weeks ending July 2, 2016 compared to 30% for the thirteen weeks ending June 27, 2015 as a result of the reduction in sales allowance expense. Freight out expense, a significant part of our cost of sales, increased by $83,000, or 65%, to $211,000 for the thirteen weeks ended July 2, 2016 from $128,000 for the thirteen weeks ended June 27, 2015, due to increased freight costs associated with customer orders, while in the 2015 period such expenses benefited from a greater number of customers picking up their orders. As a percentage of sales, freight out expense increased to 6% in the 2016 thirteen week period compared to 4% for the 2015 thirteen week period.

 

Selling expenses marginally decreased to $349,000 for the thirteen weeks ended July 2, 2016 from $350,000 for the thirteen weeks ended June 27, 2015. This decrease was principally due to decreases in meetings and conventions expense of $40,000 and messenger costs of $5,000, which were partially offset by an increase in outside warehouse rental expense of $43,000. Outside warehouse rental expense increased due to the significant increase in our inventory. We anticipate that our selling expenses will decline for the balance of 2016 because of the cost cutting measures that we instituted in our sales operations, such as lowering the commission rate paid to outside food brokers, reducing the number of brokers, and reducing the number of trade shows we participate in.

 

Marketing expenses decreased by $37,000, or 46%, to $43,000 for the thirteen weeks ended July 2, 2016 from $80,000 for the thirteen weeks ended June 27, 2015, due principally to decreases in advertising expense of $30,000, promotions expense of $3,000, and public relations expense of $2,000. We anticipate that marketing expenses will remain at the same level for the remainder of fiscal 2016.

 

Research and development costs, which consist principally of salary expenses and laboratory costs, decreased by $27,000 or 19%, to $116,000 for the thirteen weeks ended July 2, 2016 from $143,000 for the thirteen weeks ended June 27, 2015, primarily due to a decrease in payroll expense of $14,000 and lab costs and supplies of $17,000. We anticipate that research and development expenses will remain at the same level for the remainder of fiscal 2016.

 

General and administrative expenses decreased by $50,000, or 10%, to $474,000 for the thirteen weeks ended July 2, 2016 from $524,000 for the thirteen weeks ended June 27, 2015 due to a decrease in stock option expense of $113,000, which was partially offset by increases in public relations expense of $51,000 and general insurance expense of $9,000. We anticipate that general and administrative expenses will remain at the same level for the remainder of fiscal 2016.

 

We recognized income tax expense of $2,000 for the thirteen weeks ended July 2, 2016 compared to $3,000 income tax expense for the thirteen weeks ended June 27, 2015. We have a history of losses and have a valuation allowance on our deferred assets. We did not record tax expense other than state taxes for the thirteen weeks ended July 2, 2016 and the thirteen weeks ended June 27, 2015.

 

Twenty-Six Weeks Ended July 2, 2016 Compared with Twenty-Six Weeks Ended June 27, 2015

 

Net sales for the twenty-six weeks ended July 2, 2016 were $7,296,000, an increase of $529,000, or 8%, from net sales of $6,767,000 for the twenty-six weeks ended June 27, 2015. Sales of our frozen dessert product line increased to $2,069,000 in the twenty-six weeks ended July 2, 2016 from $1,843,000 for the twenty-six weeks ended June 27, 2015. Sales of soy-cheese products increased to $5,140,000 in the 2016 period from $4,594,000 in the 2015 period. Sales of frozen food entrée products decreased to $87,000 in the 2016 twenty-six week period from $330,000 in the 2015 twenty-six week period. Sales of our frozen dessert and soy cheese products were positively impacted by the elimination of various sales promotions, which increased the net selling prices of our products in the 2016 period. Sales allowance expense decreased to $812,000 for the twenty-six weeks ended July 2, 2016 compared to $937,000 for the twenty-six weeks ended June 27, 2016. Sales of frozen food entrée products were negatively impacted primarily as a result of consumer resistance to purchasing the nine-slice pizza package that we introduced in 2015 as compared to the three-slice package it replaced.

 

 

Our gross profit increased to $2,423,000 in the twenty-six week period ended July 2, 2016 from $1,822,000 in the twenty-six week period ended June 27, 2015, due to the increase in sales. Our gross profit percentage was 33% for the period ending July 2, 2016 compared to 27% for the period ending June 27, 2015, due to the implementation of price increases in 2016 and the elimination of various sales promotion programs in 2016. Freight out expense, a significant part of our cost of sales, increased by $141,000, or 40%, to $493,000 for the twenty-six weeks ended July 2, 2016 compared to $352,000 for the twenty-six weeks ended June 27, 2015 due to the increase in sales and increased freight costs associated with customer orders, while in the 2015 period such expenses benefited from a greater number of customers picking up their orders. As a percentage of sales, freight out expense increased to 7% in the 2016 twenty-six week period compared to 5% for the 2015 twenty-six week period.

 

Selling expenses decreased by $17,000, or 2%, to $733,000 for the twenty-six weeks July 2, 2016 from $750,000 for the twenty-six weeks ended June 27, 2015. This decrease was due to decreases in commissions expense of $16,000, meetings and conventions expense of $39,000 and messenger expense of $10,000, which were partially offset by an increase in outside warehouse rental expense of $41,000. Outside warehouse rental expense increased due to the significant increase in our inventory. Meetings and convention expense decreased in the 2016 period as a result of less participation in trade shows in 2016.

 

Marketing expenses decreased by $72,000, or 35%, to $131,000 for the twenty-six weeks ended July 2, 2016 from $203,000 for the twenty-six weeks ended June 27, 2015, due principally to decreases in advertising expense of $54,000 and public relations expense of $17,000.

 

Research and development costs, which consist principally of salary expenses and laboratory costs, decreased by $34,000, or 12%, to $249,000 for the twenty-six weeks ended July 2, 2016 from $283,000 for the twenty-six weeks ended June 27, 2015, due primarily to decreases in lab costs and supplies of $36,000 and payroll expense of $44,000, which decreases were partially offset by an increase in professional fees and outside services expense of $40,000.

 

General and administrative expenses decreased by $12,000 to $967,000 for the twenty-six weeks ended July 2, 2016 from $979,000 for the twenty-six weeks ended June 27, 2015. Decreases in stock option expense of $88,000 and payroll expense of $17,000 were offset by increases in IT expense of $11,000 and professional fees and outside services expense of $45,000.

 

For the twenty-six weeks ended July 2, 2016, we recognized income tax expense of $6,000 compared to income tax expense of $8,000 for the twenty-six weeks ended June 27, 2015. We have a history of losses and have a full valuation allowance on our deferred tax assets. We did not record tax expense other than state taxes for the twenty-six weeks ending July 2, 2016 and June 27, 2015.

 

Liquidity and Capital Resources

 

As of July 2, 2016, we had approximately $185,000 in cash and cash equivalents and our working capital was approximately $2.9 million, compared with approximately $55,000 in cash and cash equivalents and working capital of $2.0 million at January 2, 2016. In order to provide our company with additional working capital, on January 6, 2016, David Mintz, our Chairman and Chief Executive, provided our company with a loan of $500,000 which is secured by substantially all of our assets and is due on December 31, 2017. Commencing March 31, 2016, interest of 5% is payable on a quarterly basis without compounding. The loan may be prepaid in whole or in part at any time without premium or penalty. The loan is convertible into our common stock at a conversion price of $4.01 per share, the closing price of our common stock on the date the promissory note was entered into. In any event of default, as defined in the promissory note, without any action on the part of Mr. Mintz, the interest rate will increase to 12% per annum and the entire principal and interest balance under the loan, and all of our other obligations under the loan, will be immediately due and payable, and Mr. Mintz will be entitled to seek and institute any and all remedies available to him.

 

 

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

 

		Twenty-Six Weeks ended July 2, 2016				Twenty-Six Weeks ended June 27, 2015
Net cash used in operating activities		$	(368,000	)		$	(153,000	)
Net cash provided by (used in) financing activities			498,000				(3,000	)
Net increase (decrease) in cash and cash equivalents		$	130,000			$	(156,000	)

 

Net cash used in operating activities for the twenty-six weeks ended July 2, 2016 was $368,000 compared to $153,000 used in operating activities for the twenty-six weeks ended June 27, 2015. Net cash used in operating activities for the twenty-six weeks ended July 2, 2016 was primarily a result of net income for the twenty-six weeks ended July 2, 2016, offset by larger increases in accounts receivable and inventory. Accounts receivable increased due to the sales increase in the current period. Inventory increased as a result of purchases by us of finished goods in preparation for the historically stronger second and third quarter selling periods. Net cash provided by financing activities for the twenty-six weeks ended July 2, 2016 was $498,000 compared to $3,000 used in financing activities for the twenty-six weeks ended June 27, 2015 primarily as a result of the loan from our Chairman and Chief Executive Officer.

 

We believe our existing cash and cash equivalents on hand at July 2, 2016, existing working capital and the cash flows expected from operations, will be sufficient to support our operating and capital requirements during the next twelve months. However, we may require additional financing in order to carry out our business plans for future periods.

 

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, 2016, we did not have any material contractual obligations or commercial commitments, including obligations relating to discontinued operations.

 

 

Recent Accounting Pronouncements

 

See Note 4 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, 2016, 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 July 2, 2016.

 

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 continued to be ineffective as of July 2, 2016 because of the following recurring 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 nine employees at July 2, 2016, 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.

 

 

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 2, 2016.

 

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

  

 

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 and Chief Executive Officer
	/s/ Steven Kass
	Steven Kass
	Chief Accounting and Financial Officer

 

Date: August 16, 2016