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TOFUTTI BRANDS INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

August 12, 2014

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.

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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.

Income Taxes. Our company has a history of losses and has a full valuation allowance on the deferred tax assets. 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 2011 through 2013.

Results of Operations

Thirteen Weeks Ended June 28, 2014 Compared with Thirteen Weeks Ended June 29, 2013

Net sales for the thirteen weeks ended June 28, 2014 were $3,498,000, a decrease of $764,000, or 18%, from net sales of $4,262,000 for the thirteen weeks ended June 29, 2013. The decrease was mainly the result of a decrease in frozen food product sales, primarily frozen desserts, with a smaller decrease in our nondairy cheese product line. In addition, in the 2014 period we increased promotional and allowance activity by over $100,000, which negatively affected reported sales.

Our gross profit decreased to $961,000 in the period ended June 28, 2014 from $1,489,000 in the period ended June 29, 2013 due to the decrease in sales. Our gross profit percentage was 27% for the period ending June 28, 2014 compared to 35% for the period ending June 29, 2013. The decrease in our gross profit percentage was due primarily to the decrease in sales and a substantial increase in our promotional allowance programs of $100,000. Freight out expense, a significant part of our cost of sales, increased by $14,000, or 6%, to $231,000 for the thirteen weeks ended June 28, 2014 compared with $217,000 for the thirteen weeks ended June 29, 2013. As a percentage of sales, freight out expense increased to 7% in the 2014 thirteen week period compared to 5% for the 2013 thirteen week period. Our freight out expense during the second quarter was negatively impacted by a substantial increase in the cost of shipping our products to the west coast. As a result of the drought situation there, the amount of cargo available to truckers to pick up for their return trips east has decreased, causing rates to the west coast to increase. Additionally, the cost of oil increased in the thirteen weeks ended June 28, 2014 as compared to the thirteen weeks ended June 29, 2013. Subject to our freight expenses for our west coast shipments returning to their usual levels and the price of oil stabilizing, we expect that our freight out expense to stabilize as a result of our pick-up allowance program. The pick-up allowance we offer saves us a significant expense, because we no longer have to pay for shipping to the customers who utilize it, and it costs significantly less to offer it than for us to pay to ship the products.

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Selling expenses decreased by $39,000, or 8%, to $425,000 for the thirteen weeks ended June 28, 2014 compared to $464,000 for the thirteen weeks ended June 29, 2013. This decrease was due principally to decreases in payroll expense of $45,000, commission expense of $13,000, and travel, entertainment and auto expense of $6,000, which decreases were partially offset by an increase in outside warehouse rental expense of $28,000. Outside warehouse rental expense increased due to the increase in our inventory and the addition of two more warehouses used to support new customers. We anticipate that the current period's selling expenses will continue on the same level for the balance of 2014 due to lower payroll costs resulting from fewer sales personnel.

Marketing expenses decreased by $33,000, or 18%, to $147,000 for the thirteen weeks ended June 28, 2014 compared to $180,000 for the thirteen weeks ended June 29, 2013, due principally to decreases in newspaper and magazine advertising expense of $30,000, public relations expense of $9,000 and promotions expense of $4,000, which decreases were partially offset by an increase in artwork and plate expense of $15,000. We anticipate that the current period's marketing expenses will continue on the same level for the balance of 2014, due to ongoing reductions in public relations and promotions expense.

Research and development costs, which consist principally of salary expenses and laboratory costs, decreased by $13,000, or 8%, to $147,000 for the thirteen weeks ended June 28, 2014 from $160,000 for the thirteen weeks ended June 29, 2013, primarily due to a decrease in group insurance expense of $21,000. We anticipate that the current period's research and development costs will continue on the same level for the balance of 2014.

General and administrative expenses decreased by $73,000, or 14%, to $432,000 for the thirteen weeks ended June 28, 2014 compared with $505,000 for the thirteen weeks ended June 29, 2013, due to decreases in professional fees and outside services expense of $30,000, public relations expense of $9,000, travel, entertainment and auto expense of $5,000 and contribution expense of $9,000, which decreases were partially offset by increases in IT expense of $4,000 and general insurance expense of $5,000. We anticipate that our general and administrative expenses will continue on the same level for the balance of 2014.

We did not recognize any income tax expense for the thirteen weeks ended June 28, 2014 or the thirteen weeks ended June 29, 2013. The lack of income tax expense for the thirteen weeks ended June 28, 2014 is due to our anticipated net loss position for fiscal year 2014.

Twenty-Six Weeks Ended June 28, 2014 Compared with Twenty-Six Weeks Ended June 29, 2013

Net sales for the twenty-six weeks ended June 28, 2014 were $7,355,000, a decrease of $346,000, or 4%, from net sales of $7,701,000 for the twenty-six weeks ended June 29, 2013. The decrease in sales was primarily from the decrease in sales in the second quarter, which offset the increase in sales in the first quarter.

Our gross profit decreased to $2,251,000 in the period ended June 28, 2014 from $2,493,000 in the period ended June 29, 2013, due to the decrease in sales. Our gross profit percentage was 31% for the period ending June 28, 2014 compared to 32% for the period ending June 29, 2013. Freight out expense, a significant part of our cost of sales, decreased by $69,000, or 14%, to $438,000 for the twenty-six weeks ended June 28, 2014 compared to $507,000 for the twenty-six weeks ended June 29, 2013. As a percentage of sales, freight out expense decreased to 6% in the 2014 twenty-six week period compared to 7% for the 2013 twenty-six week period. Freight out expense in the twenty-six week period ended June 28, 2014 was a smaller part of our cost of sales than in the thirteen week period ended June 28, 2014, because our freight out expense in the first thirteen weeks of 2014 was not affected by the west coast drought or the increase in the price of oil, thus offsetting the increases in the second half of the 2014 twenty-six week period. The pick-up allowance we offer saves us a significant expense, because we no longer have to pay for shipping to the customers who utilize it, and it costs significantly less to offer it than for us to pay to ship the products.

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Selling expenses decreased by $135,000, or 14%, to $811,000 for the twenty-six weeks June 28, 2014 compared to $946,000 for the twenty-six weeks ended June 29, 2013. This decrease was due principally to decreases in payroll expense of $117,000, due to the elimination of three salespersons during the thirteen weeks ended June 28, 2014, commissions expense of $26,000, meetings and convention expense of $22,000, and travel, entertainment and auto expense of $7,000, which decreases were partially offset by an increase in outside warehouse rental expense of $39,000. Outside warehouse rental expense increased due to the increase in inventory on hand in the current period compared to inventory as of December 28, 2013 and the addition of two more warehouses being used to support new customers.

Marketing expenses decreased by $50,000, or 15%, to $273,000 for the twenty-six weeks ended June 28, 2014 compared to $323,000 for the twenty-six weeks ended June 29, 2013, due principally to decreases in newspaper and magazine advertising expense of $63,000 and promotion expense of $16,000, which decreases were offset by increases in artwork and plate expense of $21,000 and public relations expense of $6,000.

Research and development costs, which consist principally of salary expenses and laboratory costs, increased by $16,000, or 5%, to $337,000 for the twenty-six weeks ended June 28, 2014 from $321,000 for the twenty-six weeks ended June 29, 2013, due primarily to an increase in professional fees and outside services expense of $30,000, which increase was partially offset by a reduction in group insurance expense of $11,000.

General and administrative expenses decreased by $76,000, or 8%, to $908,000 for the twenty-six weeks ended June 28, 2014 compared with $984,000 for the twenty-six weeks ended June 29, 2013, due to decreases in group insurance expense of $23,000, professional fees and outside services expense of $45,000, charitable contribution expense of $14,000, and public relations expense of $9,000. These decreases were partially offset by an increase in general insurance expense of $8,000.

For the twenty-six weeks ended June 28, 2014, we recognized an income tax expense of $6,000 compared to an income tax expense of $6,000 for the twenty-six weeks ended June 29, 2013. The income tax expense for both periods represented various state statutory filings of franchise taxes. We did not record an income tax expense related to the current year or the prior year due to our net operating losses for the six month periods ended June 28, 2014 and June 29, 2013.

Liquidity and Capital Resources

As of June 28, 2014, we had approximately $171,000 in cash and cash equivalents and our working capital was approximately $2.6 million, compared with approximately $214,000 in cash and cash equivalents and working capital of $2.7 million at December 28, 2013.

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

Twenty-Six Twenty-Six Weeks Weeks ended June 28, ended June 29, 2014 2013 Net cash (used in) operating activities $ (43,000 )$ (120,000 ) Net cash (used in) financing activities -- -- Net (decrease) in cash and cash equivalents $ (43,000 )$ (120,000 ) 12



The decrease in our cash and cash equivalents for the twenty-six weeks ended June 28, 2014 is attributable to the $43,000 used in operating activities. The net cash used in operating activities was the result of the $84,000 net loss in the period and a $103,000 increase in current assets, offset in part by an increase in current liabilities of $188,000. Inventory increased by $171,000 as a result of purchases by us of finished goods in preparation for the historically stronger selling periods of the second and third quarters and the addition of two warehouses, while accounts receivables decreased by $67,000 due to the lower level of sales in the second quarter. Accounts payable and accrued expenses increased primarily as a result of the inventory purchases made during the twenty-six weeks ended June 28, 2014. 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.

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 June 28, 2014, 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.


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Source: Edgar Glimpses


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