Problems at Tattooed Chef (TTCF)
Problems at Tattooed Chef (TTCF)
Tattooed Chef (NASDAQ: TTCF — $1.13 billion), describes itself as a "plant-based food company" that sells healthy frozen items like cauliflower pizza, organic raspberry kombucha smoothie mixes, and Buddha bowls. The company is run by father-daughter duo Sam and Sarah Galletti and went public via SPAC in May 2020. Tattooed Chef is growing sales roughly 45% a year, but investors may be missing significant accounting issues, management red flags, and signs of rapidly decelerating growth.
Created in 2017, the Tattooed Chef brand produces ready-to-cook meals sold in over 4,000 retail outlets in the United States. The company earns about 60% of its revenue through branded products, primarily in Sam’s Clubs, and derives the rest from private label offerings. Tattooed Chef is currently unprofitable, but trades around six times sales because investors believe in the brand and its potential for growth. That faith may be misplaced. In the last three quarters, the company’s year-over-year revenue growth has gone from 59% to 46% to 44%, and on its most recent earnings call management lowered guidance despite announcing an acquisition.
Moreover, the market for healthy ready-to-cook meals is competitive with low barriers to entry, and brands like Tattooed Chef could easily fall out of favor. One indicator of consumer preferences is social media, which Tattooed Chef says “we have primarily used … to introduce Tattooed Chef to consumers.” A review of Tattooed Chef’s social media shows a sharp deceleration as well, mostly in Q4 2021.
Below is a monthly plot of followers for Tattooed Chef’s Instagram account, with the latter months of 2021 showing all-time low growth.
Likewise, Tattooed Chef’s Twitter account has slowed dramatically and actually lost 41 followers in December 2021 compared to gaining over 600 in December 2020.
Other issues abound.
For example, on April 15, 2021, Charles F. Cargile, Chief Financial Officer of Tattooed Chef., resigned “effective immediately.” He forfeited 290,000 shares worth over $5 million and in May 2021 launched his own advisory firm. Mr. Cargile also deleted his nine-month tenure at Tattooed Chef from his LinkedIn.
On the same day as Cargile’s resignation, CEO Salvatore Galletti filed a form 4 showing that he disposed of 1.3 million shares of stock (~$23 million). The footnotes are alarming. One 800,000 share disposition was a “transfer of shares by Mr. Galletti in satisfaction of personal indebtedness… in a privately negotiated transaction.” The second disposition of 500,000 shares was “a bona fide gift.”
A supplemental prospectus filed one week later by the company may give some clues as to the recipients of these “bona fide gifts” and transfers. Footnotes 22 and 23 reveal that two M&A advisors for the company, William Harrison and Grant Garbers, each received “150,000 shares transferred from Salvatore Galletti.”
Footnote 24 reveals that Daniel Williamson also received 250,000 shares “transferred from Salvatore Galletti.” Mr. Williamson is classified by the company as an independent director and chairs the corporate governance committee.
The very last recipient is Ellis Wasson, who received 500,00 shares “transferred from Salvatore Galletti.” Tattooed Chef discloses, in the filing’s very last sentence:
“On April 15, 2021, Salvatore Galletti, our Chief Executive Officer, transferred 500,000 shares of common stock to Ellis Wasson, who was a partner at Rutan & Tucker, LLP, counsel to the Company, at the time of the transfer. These shares represent approximately 0.6% of all outstanding shares of our common stock.”
Interestingly, the form 4s for the transactions on April 15 were not signed by Mr. Cargile, who resigned as CFO that day. Instead, they were signed by Stephanie Dieckmann on April 16, 2021. Ms. Dieckmann remains the company’s CFO today and earned her accounting degree in 2008 from the University of Phoenix.
Many of these issues were first highlighted by The Popular Investor on YouTube.
In May 2021, one month after the abrupt CFO transition and five days after announcing its Q1 earnings, Tattooed Chef disclosed a “reclassification of expenses” and that “the Company determined that it should reclassify fulfillment costs.” As a result of the reclassification, gross profit for the quarter was cut in half. That month the company also filed a “notification of inability to timely file Form 10-Q” and cited new SEC guidance concerning SPAC warrants.
The company filed a second “notification of inability to timely file Form 10-Q” in November 2021 after the company’s audit committee “recently identified immaterial errors in its previously issued financial statements related to the classification of certain accounts that primarily impact inventory, cost of goods sold, and operating expenses.”
Tattooed Chef’s audit committee is chaired by Edward Gelfand, 73, who is qualified because of his experience “as corporate securities counsel for several SEC-reporting public companies.” The companies mentioned in his biography are QS Energy (OTC: QSEP), which has fallen 99% since its 1998 IPO and currently trades for three cents, RightsCorp Inc (OTC: RIHT), which has fallen 94% since its 2013 IPO and also currently trades for three cents, Greenwave Technology Solutions (OTC: MSRT), which has fallen 96% since its 2015 IPO and currently trades for four cents, and PPOL Inc, a Japanese telegraph company that had its securitization revoked by the SEC in 2012.
In its most recent annual report, Tattooed Chef discloses that it “identified five material weaknesses in our internal control over financial reporting:”
“The first material weakness is related to the lack of design or maintenance of an effective control environment commensurate with financial reporting requirements and lack of a sufficient number of accounting professionals with the appropriate level of experience and training.
The second material weakness is related to a lack of design and maintenance of formal accounting policies, procedures and controls to achieve complete, accurate and timely financial accounting, reporting and disclosures, and monitoring controls maintained at the corporate level which are at a sufficient level of precision to provide for the appropriate level of oversight of activities related to our internal control over financial reporting.
The third material weakness is related to lack of implementation and maintenance of appropriate information technology general controls, including controls over data center and network operations, system software acquisition, change and maintenance, program changes, access security and application system acquisition, development, and maintenance.
The fourth material weakness is related to a lack of design and maintenance of effective controls over segregation of duties with respect to the preparation and review of account reconciliations as well as the creation and posting of manual journal entries.
The fifth material weakness relates to the lack of design and maintenance of formal accounting policies, processes and controls to analyze, account for and disclose complex transactions.”
Tattooed Chef is audited by BDO LLP.
Tattooed Chef went public through a SPAC merger with Forum Merger Corporation II, which was underwritten by EarlyBirdCapital. In the last two years, EarlyBirdCapital has underwritten 17 other SPAC deals. Of those 17, 16 are now trading lower and one is higher. The outlier is Betterware de Mexico (NASDAQ: BWMX), a Mexican MLM that has had three different CFOs since November 2019 and was previously criticized by The Bear Cave.
The Forum Merger Corporation II SPAC was led by David Boris, a seasoned SPAC executive who continues to serve on the board of Tattooed Chef. Mr. Boris served as the head of investment banking at Pali Capital from 2007 until its demise in 2010. Mr. Boris also serves on the board of Electric Last Mile Solutions (NASDAQ: ELMS), an electric delivery vehicle company that has fallen ~40% since its July 2021 SPAC merger.
Mr. Boris was previously a director of Pacific Special Acquisition Corp, a SPAC that merged with Borqs Technologies (NASDAQ: BRQS), which has fallen ~96% since its July 2017 merger.
Before that, Mr. Boris also served on the board of Trio Merger Corp. That SPAC merged with SAExploration in 2013. SAExploration declared bankruptcy in August 2020.
Caveat emptor.
This article is not investment advice and represents the opinions of its author, Edwin Dorsey. You can reach the author by email at edwin@585research.com or on Twitter @StockJabber. This article is for paid subscribers of The Bear Cave newsletter. If this article was forwarded to you please consider becoming a paid subscriber to receive articles like this twice every month. Learn more here.
Hi Edwin,
Unfortunately, I cannot comment on the Roblox article so i will do my comment here.
I think i am not the only one asking you to give more time for paid suscribers before tweeting the name of the exposed company.
We loose all the interest of being a suscriber if the market already moved down when/if we want to short the stock.
Since you have more and more followers on twitter (and so being more and more influent), you need to protect your paid suscribers.
Do you want your community to respond to reports? If so, how do you want us to do it? I realise that this may be a huge time sink for you, especially as your subscriber base grows.
How about communicating within the community (i.e. make it a community - not just a database of subscribers who have a 1:N relationship with you). For example, I've done some analysis prompted by your MarketSentiment tweet looking at how stock prices and prices of puts on those stocks have done after your reports. I'm too short on time to finish it, but I suspect there are others who would work with me on it - especially if they saw what the results show so far. It might also change the opinion of people like Jogojo below (they might feel less urgency to act, especially if they're happy to buy long term PUTS).
Justin