Form 10-Q
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q

 
(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Quarter ended March 31, 2007

OR

o TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from

___________to___________

Commission File Number 0-23478
 
TurboChef Technologies, Inc.
(Exact name of Registrant as specified in its Charter)
 
DELAWARE
 
48-1100390
(State or other jurisdiction of incorporation or
organization)
 
(IRS employer identification number)
 
 
 
Six Concourse Parkway, Suite 1900
Atlanta, Georgia
 
30328
(Address of principal executive offices)
 
(Zip Code)
 
 
 
Registrant’s telephone number, including area code:
(678) 987-1700
 
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  o
 
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
 
Large Accelerated Filer   o   Accelerated Filer   x   Non-Accelerated Filer   o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   YES o NO x
 
Indicate the number of shares outstanding of each of the Registrant’s classes of common stock, as of the latest practicable date.
 
Title of Each Class
  
Number of Shares Outstanding
at September 1, 2007
Common Stock, $0.01 Par Value
  
29,240,175
 
TURBOCHEF TECHNOLOGIES, INC.
TABLE OF CONTENTS
 
Form 10-Q Item
  
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2
 
 PART 1.   FINANCIAL INFORMATION
     ITEM 1. FINANCIAL STATEMENTS

TURBOCHEF TECHNOLOGIES, INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
 
 
  
March 31,
2007
  
December 31,
2006
  
Assets:
  
 
  
 
  
 
  
 
  
 
  
Current assets:
  
 
  
 
  
Cash and cash equivalents
  
$
16,412
  
$
19,675
  
Accounts receivable, net of allowance of $252 and $162
    
10,929
    
11,001
  
Other receivables
    
3,168
    
2,771
  
Inventory, net
    
11,247
    
11,311
  
Prepaid expenses
    
2,061
    
2,128
  
Total current assets
    
43,817
    
46,886
  
 
          
Property and equipment, net
    
7,630
    
7,944
  
Developed technology, net of accumulated amortization of $2,309 and $2,107
    
5,761
    
5,963
  
Goodwill
    
5,934
    
5,934
  
Covenant not-to-compete, net of accumulated amortization of $866 and $726
    
4,734
    
4,874
  
Other assets
    
191
    
174
  
 
            
Total assets
  
$
68,067
  
$
71,775
  
 
          
Liabilities and Stockholders' Equity:
          
 
          
Current liabilities:
          
Accounts payable
  
$
8,574
  
$
9,200
  
Accrued expenses
    
3,651
    
3,103
  
Future installments due on covenants not-to-compete and additional consideration
for assets acquired
    
3,879
    
3,793
  
Deferred revenue
    
3,445
    
2,977
  
Accrued warranty
    
2,223
    
1,889
  
Deferred rent
    
247
    
247
  
Total current liabilities
    
22,019
    
21,209
  
 
          
Future installments due on covenants not-to-compete and additional consideration
for assets acquired, non-current
    
3,599
    
3,550
  
Deferred rent, non-current
    
1,157
    
1,218
  
Other liabilities
    
94
    
93
  
 
            
Total liabilities
    
26,869
    
26,070
  
 
          
Commitments and contingencies
          
 
          
Stockholders' equity:
          
Preferred stock, $1 par value, authorized 5,000,000 shares, 0 shares issued
    
--
    
--
  
Preferred membership units exchangeable for shares of TurboChef common stock
    
384
    
384
  
Common stock, $.01 par value, authorized 100,000,000 shares, issued 29,238,484 and 29,197,145 shares at March 31, 2007 and December 31, 2006, respectively
    
292
    
292
  
Additional paid-in capital
    
170,231
    
169,821
  
Accumulated deficit
    
(129,709
)
  
(124,792
)
Total stockholders' equity
    
41,198
    
45,705
  
 
          
Total liabilities and stockholders' equity
  
$
68,067
  
$
71,775
  

The accompanying notes are an integral part of these financial statements.
 
3
 
TURBOCHEF TECHNOLOGIES, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
 
 
  
Three Months Ended
March 31,
  
 
  
2007
  
2006
  
 
  
 
  
 
  
Revenues:
  
 
  
 
  
Product sales
  
$
17,939
  
$
9,107
  
Royalties and services
    
392
    
429
  
Total revenues
    
18,331
    
9,536
  
 
            
Costs and expenses:
            
Cost of product sales
    
11,533
    
6,637
  
Research and development expenses
    
1,487
    
1,159
  
Selling, general and administrative expenses
    
10,293
    
6,971
  
Restructuring costs
    
--
    
(41
)
Total costs and expenses
    
23,313
    
14,726
  
 
          
Operating loss
    
(4,982
)
  
(5,190
)
 
          
Other income (expense):
          
Interest income
    
221
    
369
  
Interest expense and other
    
(156
)
  
(111
)
 
    
65
    
258
  
Net loss
  
$
(4,917
)
$
(4,932
)
 
          
Per share data:
          
Net loss per share - basic and diluted
  
$
(0.17
)
$
(0.17
)
               
Weighted average number of common shares outstanding - basic and diluted
    
29,223,104
    
28,665,275
  
 
The accompanying notes are an integral part of these financial statements.
 
4
 
TURBOCHEF TECHNOLOGIES, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

 
  
Three Months Ended
March 31,
  
 
  
2007
  
2006
  
Cash flows from operating activities:
  
 
  
 
  
Net loss
  
$
(4,917
)
$
(4,932
)
Adjustments to reconcile net loss to net cash used in operating activities:
            
Depreciation and amortization
    
952
    
892
  
Amortization of deferred rent
    
(60
)
  
(61
)
Amortization of deferred loan costs and non-cash interest
    
145
    
87
  
Non-cash compensation expense
    
144
    
--
  
Provision for doubtful accounts
    
90
    
45
  
Other
    
--
    
8
  
Changes in operating assets and liabilities:
            
Accounts receivable
    
(18
)
  
1,083
  
Inventories
    
(52
)
  
418
  
Prepaid expenses and other assets
    
(345
)
  
(63
)
Accounts payable and other payables
    
(626
)
  
(1,753
)
Accrued expenses and warranty
    
882
    
(1,599
)
Deferred revenue
    
468
    
(444
)
Net cash used in operating activities
(3,337
)
(6,319
)
 
            
Cash flows from investing activities:
            
Purchases of property and equipment, net
    
(167
)
  
(923
)
Net cash used in investing activities
    
(167
)
  
(923
)
 
            
Cash flows from financing activities:
            
Proceeds from the exercise of stock options and warrants
    
266
    
396
  
Payment of deferred loan costs
    
(25
)
  
(25
)
Net cash provided by financing activities
    
241
    
371
  
 
            
Net decrease in cash and cash equivalents
    
(3,263
)
  
(6,871
)
Cash and cash equivalents at beginning of period
    
19,675
    
40,098
  
Cash and cash equivalents at end of period
  
$
16,412
  
$
33,227
  
 
            
NON CASH INVESTING AND FINANCING ACTIVITIES:
            
 
            
Issuance of common stock in exchange for Enersyst preferred membership units
  
$
--
  
$
457
  
               
               
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
            
Cash paid for interest
  
$
12
  
$
15
  
Cash paid for income taxes
    
--
    
--
  
 
The accompanying notes are an integral part of these financial statements.
 
5
 
TURBOCHEF TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
NOTE 1.  NATURE OF OPERATIONS AND BASIS OF PRESENTATION

TurboChef Technologies, Inc. (the “Company”) was incorporated in 1991 and became a Delaware corporation in 1993. The Company is a leading provider of equipment, technology and services focused on the high speed preparation of food products. The Company's customizable speed cook ovens, the C3, the Tornado and the High h Batch, cook food products at high speeds with food quality comparable, and in many cases superior, to conventional heating methods. Through 2005, the Company's primary markets were with commercial food service operators throughout North America, Europe and Australia and management believes that, for 2005 and prior, the Company operated in one primary business segment. However, during 2005, the Company took several steps designed to take its technologies to residential consumers, including market research, related industrial design research and product development and exploration of distribution channels for a proposed residential oven product line. The launch of the residential product line created an additional business segment in 2005 for the Company.

The condensed consolidated financial statements of the Company as of March 31, 2007 and 2006 included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and have not been audited by independent registered public accountants. In the opinion of management, all adjustments of a normal and recurring nature necessary to present fairly the financial position and results of operations and cash flows for all periods presented have been made. Pursuant to SEC rules and regulations, certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted from these statements unless significant changes have taken place since the end of the Company's most recent fiscal year. The Company's December 31, 2006 consolidated balance sheet was derived from audited financial statements and notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2006, but does not include all disclosures required by GAAP. It is suggested that these financial statements be read in conjunction with the financial statements and notes included in the aforementioned Form 10-K. The results of operations for the three months ended March 31, 2007 are not necessarily indicative of the results to be expected for the full year.

The unaudited condensed consolidated financial statements include the accounts of TurboChef Technologies, Inc. and its majority-owned and controlled company. Significant inter-company accounts and transactions have been eliminated in consolidation.

NOTE 2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

For information regarding significant accounting policies, see Note 2 to the Consolidated Financial Statements of the Company for the year ended December 31, 2006, set forth in the Form 10-K.
 
REVENUE RECOGNITION

Revenue from product sales are recognized when no significant vendor obligation remains, title to the product passes (depending on terms, either upon shipment or delivery), and the customer has the intent and ability to pay in accordance with contract payment terms that are fixed and determinable. Royalty revenues are recognized based on the sales dates of licensees' products and service revenues are recorded based on attainment of scheduled performance milestones. Certain customers may purchase extended warranty coverage for a one-year period. Revenue from these extended warranties is deferred and recognized in product sales on a straight-line basis over the extended warranty term.

The Company provides for returns on product sales based on historical experience and adjusts such reserves as considered necessary. To date, there have been no significant sales returns.

Deferred revenue includes amounts billed to customers for which revenue has not been recognized. Deferred revenue primarily consists of sales deposits, unearned revenue from extended warranty contracts and other amounts billed to customers where the sale transaction is not yet complete and, accordingly, revenue cannot be recognized.

COST OF PRODUCT SALES

Cost of product sales is calculated based upon the cost of the oven, the cost of any accessories supplied with the oven, an allocation of cost for applicable delivery, duties and taxes and a reserve for warranty. Cost of product sales also includes cost of replacement parts and accessories and cost of labor, parts and payments to third party service agents in connection with fulfilling extended warranty contracts. The Company compares expected expenditures on extended warranty contracts to the deferred revenue over the remaining life of the contracts, and if the expenditures are anticipated to be greater than the remaining deferred revenue the Company records a charge to cost of product sales for the difference. Cost of product sales does not include any cost allocation for administrative and technical support services required to deliver or install the oven or an allocation of costs associated with the quality control of the Company's contract manufacturers. These costs are recorded within selling, general and administrative expenses. Cost of product sales also does not attribute any allocation of compensation or general and administrative expenses to royalty and services revenues.

6

GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill represents the excess purchase price of net tangible and intangible assets acquired in business combinations over their estimated fair values. Statement of Financial Accounting Standards (“SFAS”) No. 142, Goodwill and Other Intangible Assets, requires goodwill and other acquired intangible assets that have an indefinite useful life to no longer be amortized; however, these assets must undergo an impairment test at least annually.  The annual goodwill impairment test, completed in October 2006, determined that the carrying amount of goodwill was not impaired. 
 
SFAS No. 142 also requires that intangible assets with definite lives be amortized over their estimated useful life and reviewed for impairment in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. Currently, acquired developed technology and covenants not-to-compete are both amortized using the straight-line method over estimated useful lives of 10 years, and the Company recorded $342,000, in the aggregate, of amortization expense for the three months ended March 31, 2007 and 2006 for these long-lived intangible assets. Annual amortization for each of the next five years will approximate $1.4 million.

EARNINGS PER COMMON SHARE
 
Basic earnings per share is calculated by dividing net income (loss) by the weighted-average number of common shares outstanding during each period.   Diluted earnings per common share is calculated by dividing net income, adjusted on an “as if converted” basis, by the weighted-average number of actual shares outstanding and, when dilutive, the share equivalents that would arise from the assumed conversion of convertible instruments.
 
The effect of potentially dilutive stock options and warrants is calculated using the treasury stock method. For the three months ended March 31, 2007 the potentially dilutive securities include options, warrants and restricted stock units, convertible into 3.8 million shares of common stock; Enersyst Development Center, LLC (“Enersyst”) preferred membership units exchangeable for 37,000 shares of common stock and an indeterminate number of shares issuable in the future to settle the equity portion of the Company’s liability for additional consideration due under an asset acquisition agreement, all of which were excluded from the calculation of shares applicable to loss per share, because their inclusion would have been anti-dilutive. For the three months ended March 31, 2006 the potentially dilutive securities included options and warrants, which were convertible into 3.6 million shares of common stock and Enersyst preferred membership units exchangeable for 49,000 shares of common stock, all of which were excluded from the calculation of shares applicable to loss per share because their inclusion would have been anti-dilutive.
 
STOCK BASED EMPLOYEE COMPENSATION

Effective January 1, 2006, the Company adopted SFAS No. 123 (revised 2004), Share-Based Payment, a revision of SFAS No. 123 (SFAS No. 123R), using the modified prospective method. SFAS No. 123R requires measurement of compensation cost for all stock-based awards at fair value on the grant date and recognition of compensation expense over the requisite service period for awards expected to vest. The fair value of stock option grants is determined using the Black-Scholes valuation model, which is consistent with the valuation techniques previously utilized for options in footnote disclosures required under SFAS No. 123, Accounting for Stock Based Compensation, (“SFAS No. 123”) as amended by SFAS No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure (“SFAS No. 148”). The fair value of restricted stock awards is determined based on the number of shares granted and the quoted price of our common stock on the grant date. Such fair values will be recognized as compensation expense over the requisite service period, net of estimated forfeitures, using the straight-line method under SFAS No. 123R.

During the three months ended March 31, 2007, the Company issued 545,000 restricted stock units to certain employees. These restricted stock units had a weighted average fair value of $15.20 per unit and the aggregate fair value was $8.3 million. The fair value of these awards was based upon the market price of the underlying common stock as of the date of grant. All of these awards vest over a five-year period from the date of grant, provided the individual remains in the employment or service of the Company as of the vesting date. Additionally, these shares could vest earlier in the event of a change in control, merger or other acquisition, or upon termination for disability or death. The shares of common stock will be issued at vesting. As of March 31, 2007, 628,000 restricted stock units have been issued by the Company. Selling, general and administrative expenses for the three months ended March 31, 2007, include $144,000 recognized as stock-based compensation expense for these awards. At March 31, 2007, the unrecognized compensation expense related to these restricted stock awards is $8.9 million with a remaining weighted average life of 2.7 years.

NEW ACCOUNTING PRONOUNCEMENTS

In July 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation 48 (“FIN 48”), Accounting for Uncertainty in Income Taxes, an interpretation of SFAS No. 109, Accounting for Income Taxes.  FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements in accordance with SFAS No. 109.  This interpretation clarifies the application of SFAS No. 109 by defining a criterion that an individual tax position must meet for any part of the benefit of that position to be recognized in an enterprise's financial statements.  The interpretation would require the Company to review all tax positions accounted for in accordance with SFAS No. 109 and apply a more-likely-than-not recognition threshold.  A tax position that meets the more-likely-than-not recognition threshold is initially and subsequently measured as the largest amount of tax benefit that is greater than 50 percent likely of being realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information.  Subsequent recognition, de-recognition, and measurement is based on management's best judgment given the facts, circumstances and information available at the reporting date.  FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company adopted the requirements of this statement as of January 1, 2007. The adoption of FIN 48 did not have a material effect on the Company’s financial position or results of operations.

7

NOTE 3. OTHER ASSETS

The Company entered into a favorable final settlement in the second quarter of 2005 with a contract assembler related to consigned inventory lost in a fire suffered at one of the assembler's plants. The amount due under the settlement is included in other receivables in the accompanying consolidated balance sheets. The Company received payment on the settlement amount in April 2007.

NOTE 4.  INVENTORY

Inventory consists of the following (in thousands):
 
 
  
March 31,
2007
  
December 31,
2006
  
           
Parts inventory, net
  
$
6,439
  
$
6,933
  
Finished goods - ovens
    
4,578
    
4,154
  
Demonstration inventory, net
    
230
    
224
  
 
  
$
11,247
  
$
11,311
  
 
NOTE 5.  PROPERTY AND EQUIPMENT

Property and equipment consists of the following (in thousands):

 
  
Estimated
Useful Lives
(Years)
  
 
March 31,
2007
  
 
December 31,
2006
  
Tooling and equipment
    
3-7
  
$
6,608
  
$
6,471
  
Furniture and fixtures
    
5
    
1,369
    
1,369
  
Leasehold improvements
    
5-7.5
    
3,075
    
3,044
  
 
        
11,052
    
10,884
  
Less accumulated depreciation and amortization
        
(3,422
)
  
(2,940
)
 
      
$
7,630
  
$
7,944
  

NOTE 6.  ACCRUED WARRANTY

The Company generally provides a one-year parts and labor warranty on its ovens. Provisions for warranty claims are recorded at the time products are sold and are reviewed and adjusted periodically by management to reflect actual and anticipated experience. Because warranty estimates are forecasts that are based on the best available information, claims costs may differ from amounts provided, and these differences may be material.

An analysis of changes in the liability for product warranty claims is as follows (in thousands):
 
  
Three Months Ended
March 31,
  
 
  
2007
  
2006
  
Balance at beginning of period
  
$
1,889
  
$
2,482
  
Provision for warranties
    
1,002
    
946
  
Warranty expenditures
    
(668
)
  
(1,613
)
 
              
Balance at end of period
  
$
2,223
  
$
1,815
  
               
 
NOTE 7. INCOME TAXES

In preparing its financial statements, the Company estimates income taxes in each of the jurisdictions in which it operates. This process involves estimating actual current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and financial reporting purposes. These differences result in deferred income tax assets and liabilities. In addition, as of March 31, 2007, the Company had net operating losses (“NOLs”) of approximately $96.1 million, of which $25.0 million are subject to annual limitations resulting from the change in control provisions in Section 382 of the Internal Revenue Code. These NOLs begin to expire in 2011. A valuation allowance is recorded to reduce net deferred income tax assets to the amount that is more likely than not to be realized. Based on its history of losses, the Company recorded a valuation allowance as of March 31, 2007, equal to the full amount of net deferred income tax assets including those related to NOLs.

8
 
The Company adopted the provisions of FIN 48 effective January 1, 2007. No cumulative adjustment was required or recorded as a result of the implementation of FIN 48. As of January 1, 2007, the Company had no unrecognized tax benefits. The Company will recognize accrued interest and penalties related to unrecognized tax benefits in income tax expense when and if incurred. The Company had no interest or penalties related to unrecognized tax benefits accrued as of January 1, 2007. The Company does not anticipate that the amount of the unrecognized benefit will significantly increase or decrease within the next 12 months.

NOTE 8. STOCKHOLDER'S EQUITY

The Company issued an aggregate of 545,000 restricted stock units to certain employees in the three months ended March 31, 2007.

A summary of restricted stock unit (RSU) activity follows:
 
  
 
Number of
RSUs
  
Weighted
Average
Grant-Date
Fair Value
  
 
  
 
  
 
  
Balance at January 1, 2007
    
77,826
  
$
12.82
  
RSUs granted
    
545,000
    
15.20
  
RSUs vested
    
(2,286
)
  
13.08
  
RSUs forfeited
    
--
    
--
  
Balance at March 31, 2007
    
620,540
  
$
14.92
  
               

NOTE 9. CREDIT FACILITY

On February 28, 2005, the Company entered into a Credit Agreement with Bank of America, N.A. (the Credit Agreement). The Credit Agreement, as amended (most recently to extend the expiration period to February 28, 2008), allows the Company to borrow up to $10.0 million at any time under the revolving credit facility, based upon a portion of the Company's eligible accounts receivable and inventory. The Credit Agreement contains an accordion feature allowing the Company to borrow up to an additional $10.0 million subject to certain conditions. The Credit Agreement also provides for a letter of credit facility within the credit limit of up to $5.0 million. Revolving credit loans under the Credit Agreement bear interest at a rate of the British Bankers Association LIBOR Rate plus 2.5% unless for certain reasons Eurodollar Rate Loans are unavailable, then at a rate of 2.5% over the higher of the Federal Funds Rate plus 0.5% and Bank of America's prime rate. The Company's obligations under the Credit Agreement are secured by substantially all of the assets of TurboChef and its subsidiaries. The Credit Agreement contains customary affirmative and negative covenants and acceleration provisions. The credit commitment expires on February 28, 2008, and any outstanding indebtedness under the Credit Agreement is due on that date. To date, the Company has not borrowed under the Credit Agreement.

NOTE 10. COMMITMENTS AND CONTINGENCIES

LEGAL PROCEEDINGS

The Company is party to legal proceedings from time to time that arise in the ordinary course of our business. The Company believes an unfavorable outcome of any such existing proceedings would not have a material adverse affect on our operating results or future operations.
 
NOTE 11.  SEGMENT INFORMATION AND CUSTOMER CONCENTRATIONS
 
SFAS No. 131, Disclosure about Segments of an Enterprise and Related Information, establishes standards for the way in which public companies are to disclose certain information about operating segments in their financial reports.  It also establishes standards for related disclosures about products and services, geographic areas, and major customers.
 
The results from operations are reported using two reportable operating segments:   Commercial and Residential. The Commercial segment includes operations from our commercial product line excluding corporate expenses, defined below, other income (expense) and income taxes. The Residential segment includes costs related to the development and launch of the residential product line.
 
The accounting policies of the operating segments are the same as those described in Summary of Significant Accounting Policies. The Chief Operating Decision Maker evaluates performance of the segments based on operating income. Costs excluded from this profit measure primarily consist of corporate expenses, other income (expense) and income taxes. Corporate expenses are primarily comprised of corporate overhead expenses. Thus, operating income includes only the costs that are directly attributable to the operations of the individual segment. The Company does not currently account for or report to the Chief Operating Decision Maker its assets or capital expenditures by segments.
 
9
 
Information about the Company's operations by operating segment follows (in thousands):
 
 
  
Three Months Ended
March 31,
  
 
  
2007
  
2006
  
Commercial:
  
 
  
 
  
Revenues
  
$
18,331
  
$
9,536
  
Net income (loss)
    
1,400
    
(1,124
)
Residential:
            
Revenues
  
$
--
  
$
--
  
Net loss
    
(3,038
)
  
(1,815
)
Corporate:
            
Revenues
  
$
--
  
$
--
  
Net loss
    
(3,279
)
  
(1,993
)
Totals:
            
Revenues
  
$
18,331
  
$
9,536
  
Net loss
    
(4,917
)
  
(4,932
)
 
Through March 31, 2007, the Company derived all of its revenues from the sale of ovens in the Commercial segment. The Company does not have significant assets outside of the United States. Commercial segment revenues by geographic region for the three months ended March 31 is as follows (in thousands):
 
 
REGION
  
Three Months Ended
March 31,
  
 
  
2007
  
2006
  
North America
  
$
15,316
  
$
7,119
  
Europe and Asia
    
3,015
    
2,417
  
Totals
  
$
18,331
  
$
9,536
  
 
The Company is generally subject to the financial condition of commercial food service operators and related equipment providers; however, management does not believe that there is significant credit risk with respect to trade receivables. For the three months ended March 31, 2007 and 2006, 60% and 44% of the Company's sales were made to three and one customers, respectively. As of March 31, 2007, 32% of the outstanding accounts receivable were related to two customers.
 
10

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

TurboChef Technologies, Inc. is a leading provider of equipment, technology and services focused on the high-speed preparation of food products for the speed cook sector of the commercial cooking equipment market. Our user-friendly speed cook ovens employ proprietary combinations of heating technologies such as convection, air impingement, microwave energy and other advanced methods to cook food products at high speeds with food quality that we believe to be comparable or superior to that of conventional heating methods. We currently offer three commercial ovens: the C3 oven, the Tornado oven and, the High h Batch oven and one residential oven: the TurboChef Double Wall Oven. We are working to develop new ovens for the commercial cooking equipment market and the residential marketplace.

We currently derive revenue primarily from the sale of our ovens to commercial foodservice operators throughout North America, Europe and Australia. In North America we sell our equipment through our internal sales force as well as through manufacturer's representatives. In Europe and Australia we utilize a network of equipment distributors. We are working to expand the market for our commercial ovens in Latin America and Asia. We also derive revenues from licensing our technologies to food service equipment manufacturers. Through 2005, our primary markets were with commercial food service operators throughout North America, Europe and Australia and management believes that, for 2005 and prior, the Company operated in one primary business segment. However, during 2005, we took several steps designed to take our technologies to residential consumers, including market research, related industrial design research and product development and exploration of distribution channels for a proposed residential oven product line. The launch of the residential product line created an additional business segment for the Company.

We believe it is important to our success that we continue to sell to our existing base of commercial customers to meet their expansion or replacement needs, while at the same time extending that customer base by concentrating our internal sales efforts on major foodservice operators and by supporting our networks of manufacturer's representatives and equipment distributors. We must strive to do that while maintaining a cost structure for our products and controlling our operating expenses to provide a satisfactory return on sales. We must compete effectively in the marketplace on the basis of price, quality and product performance, and we must meet market demand through development and improvement of our speed cook ovens and introduction of new oven products. These same marketplace and product development factors will apply to our achieving success with the launch of our residential speed cook oven products; however, the residential market is new to us and there may be factors important to our success that are unknown to us at present.

Our financial results in 2007 as compared to 2006 reflect our efforts to expand our non-Subway customer base, continue to perform under our supply agreement with the Subway system, continue to reduce our cost of product sales as a percentage of revenues, and develop and launch our residential oven and market strategy. The Subway relationship has been and should continue to be a meaningful contributor to future revenues. Demand for equipment will continue from this major customer as new Subway restaurants are opened and existing restaurants seek additional ovens. In 2006 we continued our sales efforts on expanding our customer base beyond the Subway system and successfully reduced the percentage of Subway sales to total revenues from 58% in 2005 to 35% in 2006. In the quarter ended March 31, 2007, these efforts resulted in significant sales to two additional major customers other than Subway. In 2007, we will also continue to focus on increasing the profitability of commercial products, introducing our residential oven products and developing enabling strategies.

The following sets forth, as a percentage of revenue, consolidated statements of operations data for the three months ended March 31:
 
 
  
Three Months Ended
March 31,
  
 
  
2007
  
2006
  
Revenues
    
100
%
  
100
%
Cost of product sales
    
63
    
70
  
Research and development expenses
    
8
    
12
  
Selling, general and administrative expenses
    
56
    
73
  
Total costs and expenses
    
127
    
155
  
 
            
Operating loss
    
(27
)
  
(55
)
Interest income
    
1
    
4
  
Interest expense and other
    
(1
)
  
(1
)
Total other income, net
    
--
    
3
  
Net loss
    
(27
)%
  
(52
)%
 
11
 
We have observed the following trends and events that are likely to have an impact on our financial condition and results of operations in the future:
 
 
· 
During the three months ended March 31, 2007, our non-Subway product sales increased $9.3 million, or 189%, from $5.0 million to $14.3 million, over the comparable period in 2006. We expect our non-Subway revenue to continue to increase in 2007. Two customers other than Subway accounted for 41% of our total revenues during the three months ended March 31, 2007.
 
 
 
· 
Subway sales accounted for 20% and 44% of our total revenues during the three months ended March 31, 2007 and 2006, respectively. We expect Subway to be a meaningful contributor to future revenues, however, we expect Subway sales as a percentage of our total revenues to continue to decline as our customer base continues to expand.
 
 
 
 
· 
In the first quarter of 2007 compared to the fourth quarter of 2006, our gross margin percentages remained stable. We expect gross profit percentages to remain at these levels through the remainder of 2007.
 
 
 
· 
During the first quarter of 2007, we continued to invest in the development of our residential oven and commercial ovens and expect this trend to continue through the first half of 2007.
 
 
 
· 
During the three months ended March 31, 2007, we increased our selling, general and administrative expenses, excluding depreciation and amortization, by $3.3 million from the comparable period in 2006. These increases are the result of increased legal and professional costs related to the Company’s review of its stock option grants and practices and increased selling, marketing and related expenses. We continue to expect increases in 2007 as compared to 2006, primarily due to increased marketing costs related to the residential product launch.
 
 

Based on our analysis of the aforementioned trends and events, we expect to generate a net loss for 2007. Our future results will be affected by many factors, some of which are identified below and in Item 1A of our Annual Report on Form 10-K, including our ability to:

 
· 
increase our commercial revenue across our customer base;
 
 
 
· 
manage costs related to commercial business segment;
     
 
·
successfully launch our residential product line;
 
 
 
· 
manage costs related to the residential product launch.

As a result, there is no assurance that we will achieve our expected financial objectives.

Application of Critical Accounting Policies

Below is a discussion of our critical accounting policies. For a complete discussion of our significant accounting policies, see the footnotes to the financial statements included in our 2006 Annual Report on Form 10-K. These policies are critical to the portrayal of our financial condition and/or are dependent on subjective or complex judgments, assumptions and estimates. If actual results differ significantly from management's estimates and projections, then there could be a significant impact on the financial statements. The impact of changes in key assumptions may not be linear. Our management has reviewed the application of these policies with the audit committee of our board of directors.

Revenue Recognition

Revenue from product sales are recognized when no significant vendor obligation remains, title to the product passes (depending on terms, either upon shipment or delivery), and the customer has the intent and ability to pay in accordance with contract payment terms that are fixed and determinable. Royalty revenues are recognized based on the sales dates of licensees' products, and services revenues are recorded based on attainment of scheduled performance milestones. Certain customers may purchase extended warranty coverage for a one-year period. Revenue from sales of extended warranties is deferred and recognized in product sales on a straight-line basis over the term of the extended warranty contract.
 
12
 
We provide for returns on product sales based on historical experience and adjust such reserves as considered necessary. To date, there have been no significant sales returns.

Deferred revenue includes amounts billed to customers for which revenue has not been recognized. Deferred revenue primarily consists of sales deposits, unearned revenue from extended warranty contracts and other amounts billed to customers where the sale transaction is not yet complete and, accordingly, revenue cannot be recognized.

Cost of Product Sales

Cost of product sales is calculated based upon the cost of the oven, the cost of any accessories supplied with the oven, an allocation of cost for applicable delivery, duties and taxes and a reserve for warranty. Cost of product sales also includes cost of replacement parts and accessories and cost of labor, parts and payments to third party service agents in connection with fulfilling extended warranty contracts. We compare the expected warranty expenditures on extended warranty contracts to the deferred revenue over the remaining life of the contracts, and if the expenditures are anticipated to be greater than the remaining deferred revenue we record a charge to cost of product sales for the difference. Cost of product sales does not include any cost allocation for administrative and technical support services required to deliver or install the oven or an allocation of costs associated with the quality control of the Company's contract manufacturers. These costs are recorded within selling, general and administrative expenses. Cost of product sales also does not attribute any allocation of compensation or general and administrative expenses to royalty and services revenues.
 
Product Warranty

We warrant our ovens against defects in material and workmanship for a period of one year from the date of installation. Anticipated future warranty costs are estimated based upon historical experience and are recorded in the periods ovens are sold. Periodically, our warranty reserve is reviewed to determine if the reserve is sufficient to cover the estimated repair costs associated with the remaining ovens under warranty. Because warranty estimates are forecasts that are based on the best available information, claims cost may differ from amounts provided, and these differences may be material.

At this time, we believe that, based upon historical data, the current warranty reserve is sufficient to cover the estimate of associated costs. If warranty costs trend higher, we would need to record a higher initial reserve as well as reserve the estimated amounts necessary to cover all ovens remaining under warranty. Any such additional reserves would be charged to cost of goods sold and could have a material effect on our financial statements.

Stock-Based Compensation and Other Equity Instruments

Effective January 1, 2006, we adopted SFAS 123R using the modified prospective method. SFAS 123R requires measurement of compensation cost for all stock-based awards at fair value on the grant date and recognition of compensation expense over the requisite service period for awards expected to vest. The fair value of stock option grants is determined using the Black-Scholes valuation model, which is consistent with our valuation techniques previously utilized for options in footnote disclosures required under SFAS No. 123, Accounting for Stock Based Compensation , (“SFAS No. 123”) as amended by SFAS No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure (“SFAS No. 148”). The fair value of restricted stock awards is determined based on the number of shares granted and the quoted price of our common stock on the grant date. Such fair values will be recognized as compensation expense over the requisite service period, net of estimated forfeitures, using the straight-line method under SFAS 123R.
 
During the three months ended March 31, 2007, we issued 545,000 restricted stock units to certain employees. These restricted stock units had a weighted average fair value of $15.20 per unit and the aggregate fair value was $8.3 million. The fair value of these awards was based upon the market price of the underlying common stock as of the date of grant. All of these awards vest over a five-year period from the date of grant, provided the individual remains in our employ or service as of the vesting date. Additionally, these shares could vest earlier in the event of a change in control, merger or other acquisition, or upon termination for disability or death. The shares of common stock will be issued at vesting. As of March 31, 2007, we have issued 628,000 restricted stock units. Selling, general and administrative expenses for the three months ended March 31, 2007, include $144,000 recognized as stock-based compensation expense for these awards. At March 31, 2007, the unrecognized compensation expense related to these restricted stock awards is $8.9 million with a remaining weighted average life of 2.7 years.

Deferred Income Taxes

In preparing our financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves estimating actual current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and financial reporting purposes. These differences result in deferred income tax assets and liabilities. In addition, as of March 31, 2007, we have net operating losses (“NOLs”) of approximately $96.1 million, of which $25.0 million are subject to annual limitations resulting from the change in control provisions in Section 382 of the Internal Revenue Code. These NOLs begin to expire in 2011.

13
 
We currently have significant deferred tax assets, including those resulting from NOLs, tax credit carryforwards and deductible temporary differences. We provide a full valuation allowance against our net deferred tax assets. Management weighs the positive and negative evidence to determine if it is more likely than not that some or all of the deferred tax assets will be realized. Forming a conclusion that a valuation allowance is not needed is difficult when there is negative evidence such as cumulative losses in past years. Despite our profitability in 2004 and our future plans and prospects, we have continued to maintain a full valuation allowance on our net tax benefits until profitability has been sustained over a time period and in amounts that are sufficient to support a conclusion that it is more likely than not that a portion or all of the deferred tax assets will be realized. A decrease in our valuation allowance would result in an immediate material income tax benefit, an increase in total assets and stockholder's equity, and could have a significant impact on earnings in future periods.

Commitments and Contingencies

We evaluate contingent liabilities including threatened or pending litigation in accordance with SFAS No. 5, Accounting for Contingencies. We define a loss contingency as a condition involving uncertainty as to a possible loss related to a previous event that will not be resolved until one or more future events occur or fail to occur. Our primary loss contingencies relate to pending or threatened litigation. We record a liability for a loss contingency when we believe that it is probable that a loss has been incurred and the amount of the loss can be reasonably estimated. When we believe the likelihood of a loss is less than probable and more than remote, we do not record a liability but we disclose material loss contingencies in the notes to the consolidated financial statements. We make these assessments based on facts and circumstances and in some instances based in part on the advice of outside legal counsel.

Segment Information
 
SFAS No. 131, Disclosure about Segments of an Enterprise and Related Information, establishes standards for the way in which public companies are to disclose certain information about operating segments in their financial reports.  It also establishes standards for related disclosures about products and services, geographic areas, and major customers.
 
The results from operations are now reported using two reportable operating segments:   Commercial and Residential. The Commercial segment includes operations of the commercial product line excluding corporate expenses, defined below, other income (expense) and income taxes. The Residential segment includes costs related to the development and the anticipated launch of the consumer product line.
 
The accounting policies of the operating segments are the same as those described in Summary of Significant Accounting Policies. The Chief Operating Decision Maker evaluates performance of the segments based on operating income. Costs excluded from this profit measure primarily consist of corporate expenses, other income (expense) and income taxes. Corporate expenses are primarily comprised of corporate overhead expenses. Thus, operating income includes only the costs that are directly attributable to the operations of the individual segment. The Company does not currently account for or report to the Chief Operating Decision Maker its assets or capital expenditures by segments.
 
Results of Operations

Revenues

We currently derive all sales, cost of product sales and gross profit from our Commercial segment. For the three months ended March 31, 2007, total revenues increased 92%, or $8.8 million, to $18.3 million as compared to $9.5 million for the comparable period in 2006. This increase is attributable to increased volume and average selling prices. For the three months ended March 31, 2007, increased oven sales to non-Subway customers combined with increased sales of parts and consumables accounted for an increase of $9.3 million in product revenues. Subway sales accounted for 20% and 44% of our total revenues during the three months ended March 31, 2007 and 2006, respectively. Sales to two non-Subway customers accounted for 41% of our total revenues during the three months ended March 31, 2007. Subway will continue to be an important contributor to our revenues as we supply ovens for new stores and as existing stores evaluate their needs for additional ovens, however, we expect Subway sales as a percentage of our total revenues to continue to decline as our customer base continues to expand.

Royalty and services revenue, which consists principally of revenue from licensing our technology to third parties, was $392,000 for the three months ended March 31, 2007, as compared to $429,000 for the comparable period in 2006. We expect further diminution in services revenue as the resources which generate this revenue are repurposed to support our commercial oven business and to benefit our residential speed cook oven initiative.

Cost of Product Sales and Gross Profit

We currently derive all sales, cost of product sales and gross profit from our Commercial segment. For the three months ended March 31, 2007, cost of product sales was $11.5 million, an increase of $4.9 million, compared to $6.6 million for the comparable period in 2006. The variability in cost of product sales was due primarily to the number of ovens sold. As a percentage of product sales, cost of product sales for the three months ended March 31, 2007 was 64% versus 73% for the comparable period in 2006. The improvement from 2006 to 2007 is due to higher sales volumes, improved margins on service agreements and the positive benefits of the sales mix in the quarter.

14
 
For the three months ended March 31, 2007, gross profit on product sales was $6.4 million, an increase of $3.9 million, compared to gross profit on product sales of $2.5 million for the comparable period in 2006. The variability in the gross profit on product sales was due primarily to the increase in the number of ovens sold. Gross profit on product sales as a percentage of product sales revenue increased for the three months ended March 31, 2007 due to improved sales mix resulting in higher average selling prices.

Research and Development

We currently incur research and development expenditures in our Commercial and Residential segments. Research and development expenses consist primarily of payroll and benefits, consulting services paid to third parties, supplies, facilities and other administrative costs for support of the engineers, scientists and other research and development personnel who design, develop, test and enhance our ovens and oven-related services. Research and development costs are expensed as incurred.

For the three months ended March 31, 2007, research and development expenses increased 28%, or $328,000, to $1.5 million as compared to $1.2 million for the comparable period in 2006. The net increase was primarily attributable to an expanded scope of research activities in our Commercial segment related to the development of new oven lines and, to a lesser extent, an increase in the Residential segment related to the development and launch of our new residential speed cook ovens.

The following table quantifies the net increase in research and development expenses over periods presented (in thousands):
 
  
Increase in
Research and Development
Expenses for the Three
Months Ended
March 31, 2006 to 2007
  
General and administrative expenses
  
$
197
  
Payroll and related expenses
    
114
  
Design, prototype and other related expenses
    
17
  
Total increase
  
$
328
  
 
We believe that research and development expenses for 2007 will approximate 2006 levels, as we continue our development efforts for residential speed cook ovens and related products and for new commercial ovens planned for introduction in late 2007.

Selling, General and Administrative

Selling, general and administrative expenses, or SG&A, consist primarily of payroll and related costs; variable commissions and bonuses for personnel and third-party representatives engaged in sales functions; marketing, advertising and promotional expenses; legal and professional fees; travel; communications; facilities; insurance and other administrative expenses; depreciation of furniture, fixtures and equipment and amortization of intangible assets. These expenses are incurred to support our sales and marketing activities and our executive, finance, legal, business applications, human resources and other administrative functions.

SG&A expenses increased 49%, or $3.4 million, to $10.3 million for the three months ended March 31, 2007 as compared to $6.9 million for the comparable period in 2006. Selling, marketing and related expenses increased $1.7 million, primarily due to increased marketing and advertising expenses in the Residential segment related to the launch of our new residential oven, increased Commercial segment marketing and advertising and increased manufacturing representative commissions as a result of increased oven sales. Payroll and related expenses increased by $694,000 across all segments primarily due to increased headcount. Legal and professional fees increased $691,000 due to fees incurred in relation to the Company’s review of its stock option grants and practices.

The following table quantifies the net increase in general and administrative expenses for the periods presented (in thousands):
 
  
Increase (Decrease) in
General and Administrative
Expenses for the Three Months Ended March 31, 2006 to 2007
  
Selling, marketing and related expenses
  
$
1,712
  
Payroll and related expenses
    
694
  
Legal and professional fees
    
691
  
Rent and occupancy costs
    
174
  
Depreciation and amortization
    
59
  
Restructuring charges
    
41
  
Other
    
(8
)
Total increase
  
$
3,363
  
 
15

For the remainder of 2007, we expect to augment our SG&A infrastructure in our Residential segment in contemplation of the launch of our residential speed cook oven products as the marketing and promotion plans are finalized and the product launch is executed; however, the extent of the investment required to launch this new product in, what will be to us, a new market is difficult to quantify. We also expect increased sales and marketing expenses in 2007 in our Commercial segment as compared to 2006 due to an expected increase in commissions as a result of higher forecasted sales and an increase in the volume of sales generated by our networks of manufacturer's representatives and food equipment distributors.

Net Other Income 

Net other income for the three months ended March 31, 2007 was $65,000 as compared to $258,000 for the comparable period in 2006 primarily due to decreased interest income and increased interest expense as a result of the Global acquisition.

Liquidity and Capital Resources

Our capital requirements in connection with our product and technology development and marketing efforts have been significant. In light of the planned launch of our residential speed cook ovens, the capital requirements for these efforts likely will continue to be significant.

Our management anticipates that our existing cash, credit availability and anticipated future cash flows from operations provide sufficient liquidity for us to execute our business plan and expand our business as needed in the near term. Additionally, we renewed our credit facility with Bank of America through February 28, 2008. This facility provides stand-by credit availability to augment the cash flow anticipated from operations. However, should the launch of our residential speed cook oven products or a significant increase in demand for commercial products engender significant expansion of our operations, we may require additional capital in future periods.

Cash used in operating activities was $3.3 million for the three months ended March 31, 2007 as compared to $6.3 million for the comparable period in 2006. Net cash used in operating activities for the three months ended March 31, 2007 resulted from our net loss of $(4.9) million less non-cash charges of $1.3 million (principally depreciation and amortization) and a decreased investment in working capital of $309,000. The change in working capital items included an increase in accrued expenses and warranty and cash used to reduce accounts payable. Net cash used in operating activities for the three months ended March 31, 2006 resulted from our net loss of $(4.9) million less non-cash charges of $1.0 million (principally depreciation and amortization) offset by an increased investment in working capital of $2.4 million.

Cash used in investing activities for the three months ended March 31, 2007 was $167,000 compared to $923,000 for the comparable period in 2006. Net cash used in investing activities resulted principally from capital expenditures in tooling and equipment for our Residential segment. We anticipate capital expenditures of approximately $1.5 million during 2007, including anticipated capital expenditures in connection with the introduction of our residential oven. We anticipate funding these expenditures from working capital.

Cash provided by financing activities for the three months ended March 31, 2007 was $241,000 compared to $371,000 for the comparable period in 2006 due to decreased proceeds from the exercise of stock options and warrants.

At March 31, 2007, we had cash and cash equivalents of $16.4 million and working capital of $21.8 million as compared to cash and cash equivalents of $19.7 million and working capital of $25.7 million at December 31, 2006.

Contractual Cash Obligations

As of March 31, 2007, our future contractual cash obligations are as follows (in thousands):

   
Payments Due By Period
 
 
Total
  
April - December
2007
  
2008
  
2009
  
2010
  
2011
  
Thereafter
Installment Payments for Covenants Not-to-Compete
 
$
2,665
 
$
1,335
 
$
1,330
 
$
--
 
$
--
 
$
--
 
$
--
Installment Payments for Contingent Consideration Due Under Asset Purchase Agreement
    
5,333
    
2,668
*
  
2,665
*
  
--
    
--
    
--
    
--
Operating Leases
 
 
4,813
 
 
888
 
 
1,130
 
 
956
 
 
613
 
 
613
 
 
613
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
12,811
 
$
4,891
 
$
5,125
 
$
956
 
$
613
 
$
613
 
$
613
* 62% of this obligation is to be settled by issuance of common stock 
 
16
 
We believe that existing working capital and cash flow from operations, together with availability under our credit facility with Bank of America, will provide sufficient cash flow to meet our contractual obligations. We intend to seek financing for any amounts that we are unable to pay from operating cash flows. Financing alternatives are routinely evaluated to determine their practicality and availability in order to provide us with additional funding at the least possible cost.

We believe that our existing cash, credit availability and anticipated future cash flows from operations will be sufficient to fund our working capital and capital investment requirements for the next twelve months and a reasonable period of time thereafter.

Authoritative Pronouncements

In July 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation 48 (“FIN 48”), Accounting for Uncertainty in Income Taxes, an interpretation of SFAS No. 109, Accounting for Income Taxes .  FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements in accordance with SFAS No. 109.  This interpretation clarifies the application of SFAS No. 109 by defining a criterion that an individual tax position must meet for any part of the benefit of that position to be recognized in an enterprise's financial statements.  The interpretation would require us to review all tax positions accounted for in accordance with SFAS No. 109 and apply a more-likely-than-not recognition threshold.  A tax position that meets the more-likely-than-not recognition threshold is initially and subsequently measured as the largest amount of tax benefit that is greater than 50 percent likely of being realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information.  Subsequent recognition, de-recognition, and measurement is based on management's best judgment given the facts, circumstances and information available at the reporting date.  FIN 48 is effective for fiscal years beginning after December 15, 2006. We adopted the requirements of this statement as of January 1, 2007. The adoption of FIN 48 did not have a material effect on our financial position or results of operations.

17
 
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

None.
 
ITEM 4. CONTROLS AND PROCEDURES

Evaluation of disclosure controls and procedure

Disclosure controls and procedures are our controls and other procedures that are designed to ensure that information required to be disclosed by us in our reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in our reports that we file or submit under the Securities Exchange Act of 1934 is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. Our management evaluated, with the participation of our principal executive officer and principal financial officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on this evaluation, our principal executive officer and our principal financial officer have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective.

Changes in internal control over financial reporting 
 
We believe the control deficiencies and related material weakness that existed in prior years and at December 31, 2006 related to our stock option granting practices have been resolved by the filing of our Form 10-K for the year ended December 31, 2006. In order to further enhance our internal controls, management recommended the following enhancements to our equity compensation granting policies and procedures to the Compensation Committee of the Board of Directors, all of which were approved and implemented by us in the first quarter of 2007:
 
 
•
 
The adoption of a policy requiring that all equity awards to executive officers and other employees be granted and priced according to a pre-determined, fixed schedule each year;
 
 
•
 
Revisions and clarifications of the parameters of the Compensation Committee’s delegation of authority to our Chairman and Chief Executive Officer to make equity awards;
 
 
•
 
Establishment of improved processes and procedures for the documentation of corporate actions approving the grant of stock options, including the use of unanimous written consents; and
 
 
•
 
Improvements to our processes and procedures with respect to the timing of recording and processing equity awards.

Except for the corrective actions noted above, there were no other changes that have materially affected, or are reasonably likely to materially affect our internal control over financial reporting.
 
18
 
PART II. OTHER INFORMATION
 
ITEM 1. LEGAL PROCEEDINGS

See Item 3 of the Company's Annual Report on Form 10-K for the year ended December 31, 2006.

ITEM 1A. RISK FACTORS

For a discussion of our risk factors, see Item 1A of the Company's Annual Report on Form 10-K for the year ended December 31, 2006.
 
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None. 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.
 
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.
 
ITEM 5. OTHER INFORMATION

None.
 
ITEM 6. EXHIBITS

EXHIBITS
 
10.1*
2007 Incentive-Based Compensation Plan
   
31.1
Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
   
31.2
Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
   
32
Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
* Portions of this document have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment of the omitted portions under Rule 24b-2 of the Securities and Exchange Act of 1934, as amended.
 
19
 
SIGNATURES

Pursuant to the requirements 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.
 
     
 
TURBOCHEF TECHNOLOGIES, INC.
 
 		  
 		  
 
  By:   /s/ James A. Cochran
 
James A. Cochran
Chief Financial Officer
(Duly Authorized Officer and
Principal Financial Officer)
 
Dated: September 21 , 2007
 
20