Pink Sheets

Tootie Pie (TOOT)
They sell pies, mostly wholesale to Ben E. Keith Food Services and Sysco in San Antonio. The corporate customers buy pies for gifts, events, customer gifts, and personal use. They do have a store where they sell retail, but its not much. They also sell to area schools for fundraisers. Pies on the website run at about $32. Shipping costs seem about $20 to $40 for long distance.

I ordered one of their classic apple pies with 2-day shipping. It arrived just fine, packing was good, nothing fancy. The pie itself was very good, enormously big, and (importantly) it was normal: what you'd expect of an apple pie. It would make a very good gift.

TOOT is a recent startup and ramping up. They started the quarter (ending June 30) with:

• Ben E. Keith Food Services San Antonio
• Ben E. Keith Food Services Fort Worth
• Ben E. Keith Food Services Oklahoma
• Sysco Food Services of San Antonio
• Sysco Food Services of Austin
• Sysco Food Services of Houston

And during the quarter added

• U.S. Foodservice – Austin
• Ben E. Keith Food Services Amarillo
• Ben E. Keith Food Services Albuquerque

Ben E. Keith was 41% of revenue.
Sysco was 20% of revenue.

Quarter ended Sept 30, 2007 (this is an update: I had looked at the prior quarter first, see below):
8.4 million shares on Nov 9, 2007

BALANCE SHEET
Cash is up $309K qoq.
Low AR (12 days)
Inventory is way up, but this is as expected just before the big season, now I'm thinking some of that cash is from financing.
No increase in gross PP&E
$37K of construction in progress (up from $22K prior quarter)
Net cash is $647K or about 5 cents per fully diluted share.
Additional paid-in capital is up by $600K (there's the financing).

INCOME STATEMENT
Revenues doubled year over year, but are down quite a bit from prior quarter.
Gross margins are down to 35% from 43% in prior quarter but up from 20% in prior year.
SG&A is way up, but they're scaling the business up. Their explanation:

...principally due to managing growth in unit sales, market territories, foodshow fees and related marketing expenses, increases in customer support capabilities, hiring additional personnel in both the sales and administrative departments, and expenses incurred in the quarter ended September 30, 2007 related to being a public company.

Net loss of $154K. Assuming 40% gross margins, revenues would need to more than double to reach breakeven. Same for the 6 month results.

CASH FLOW
Operations burned $397K (with a $350K net loss) no-thanks to inventory and other current assets increasing. Very low capex, but $37K went into construction. $1 million was raised via stock.

So what's the dilution amount now? (unchanged, see below)

The stock option expense was only $3K for the quarter.
$300K NOLs.

Ben E. Keith was 31% of revenue
Sysco was 24% of revenue

As a percentage of total sales: retail increased slightly to 23%, wholesale decreased slightly to 70%, corporate was only 7%. If I understand this correctly, it means that the next quarter will be largely corporate and retail and that these parts of the business are extremely seasonal. The two big customers above are apparently not seasonal or perhaps even drop during the next quarter.

Apparently, they raised the $1 million by calling the Class A warrants. Subsequent to the quarter, they sold another $166K worth from the same call. 544K warrants total remain.


Prior quarter:
Period ending June 30, 2007. This is Q1.
Balance sheet has $444K of cash plus an assortment of equipment, inventory, and almost no AR. Also some intangibles (probably the Tootie name, recipes, etc). Fairly strong balance sheet.

Revenues were $204K in Q1 (vs $78K yoy), $105K in Q4, $340K in Q3 (their strongest seasonal quarter which includes Nov and Dec).
Only 43% gross margin, but "We expect the gross margin percentage to continue to fluctuate as we refine our manufacturing process."
SG&A killed them, being larger than revenue.

The increase from the prior year quarter was principally due to managing growth in unit sales, market territories, foodshow fees and related marketing expenses, increases in customer support capabilities, hiring additional personnel in both the sales and administrative departments, and expenses incurred in the quarter ended June 30, 2007 related to being a public company.

They sold stock to raise essentially all the cash sitting on the balance sheet. As you'd expect, they have lots of warrants outstanding.

The CEO had an interview with StockGuru.com: They're building a sales network. Trying to minimize the seasonal effects of the business (why? [update: obviously to fully utilize the PP&E etc. during the full year]) via wholesale. He said revenues were about 100% higher than last year (I didn't see Q2 2006 results broken down anywhere, but Q1+Q2 revenue was only$167K). They're in 10 states now. For the upcoming season, they're seeing interest from small chains of restaurants. They have some venture with Fox Home Entertainment about the movie The Waitress where Fox sent pies to retailers. In Nov the DVD rolls out, Fox will be part of it, distibuting pies to some other media outlets (CEO says not sure what that means) and some sort of press release. Basically, the CEO said that every time they've sent out a corporate pie, it's resulted in multiple additional pie sales. Tootie Pie paid $23K to get the interview done. Nobody ever compensates me for this blog. Where's my $23K? [note: I actually don't ask for or accept any compensation whatsoever]

7.6 million shares on July 31, 2007. Looks like 12 million shares fully diluted. Shares are trading around 94 cents, which I think is a reasonable value.

Let's look at the 10-K:
period ending Mar 31, 2007.
6.6 million shares on June 1, 2007. 13 million fully diluted.

Sept 2005, they purchased key assets from Ruby Lorraine "Tootie" Feagan: pie recipes, customer list, the rights to the "Tootie Pie" name, some equipment, and a building in Medina, TX. Tootie pies were already well established in parts of Texas. Tootie and some others were hired for training. At this time they also leased a 5K sq ft building.

TOOT focuses on the high end market. The pies are hand made (in my view, that's a negative; I'd rather have repeatable machines with good human QA).

Targeting three markets: retail, corporate, wholesale. Not currently in the grocery market.

The whole frozen pie market overall is $338 million. Mrs Smith's has $87 million. Edwards has $71 million. Marie Calendar's has $50 million. Sara Lee has $40 million. But these aren't the real high end sellers. TOOT currently has less than $1 million.

Arugably, there's an overall trend in deserts (and in all sorts of food markets) towards higher quality, especially for something that's typically a gift item. This is where moats are made and kept.

TOOT plans to expand. Their recent expansion has been:
Aug 2006: Ben E. Keith, Forth Worth
Sept 2006: Sysco, Austin
Feb 2007: Ben E. Keith, Oklahoma
Mar 2007: Sysco, Houston

On Mar 31, 2007, they had two full-time and two part-time sales and marketing people. Hank's Brokerage Company represents TOOT in wholesale markets.

Most of wholesale came locally from South Texas. The intent is to expand wholesale through restaurants, bakeries, etc.

Corporate has been local, regional, and even national (through the website).

Year ending Mar 31, 2006:
Retail: 65%
Corporate: 15%
Wholesale: 20%

Year ending Mar 31, 2007:
Retail: 31%
Corporate: 24%
Wholesale: 45%

So wholesale is the big grower. Corporate is also doing well.

Most of the ingredients come from Ben E. Keith in San Antonio. They have a non-binding contract with Ben E. Keith that has cost incentives when 80% of purchases are from Ben E. Keith.

Closest competitors:
Retail:
Janie's Pies in San Antonio
Collin Street Bakery in Corsicana, TX
Royer's Pies in Round Top, TX
Wholesale:
Sweet Street Desserts in Reading, PA
Lawler's Deserts in Humble, TX
Chef Pierre (Sara Lee) in Cincinnati, OH

Only 6 full-time and 18 part-time employees.

47% gross margin.

Class A warrants: strike price 50 cents. About 3 million.
Class B warrants: strike price 1 dollar. About 3 million.

Notable risk factors:

• reliance on commodity prices for raw ingredients
• potential dilution from raising cash for future expansion
• two customers are 15% and 13% of overall sales
  

Auditors: Akin Doherty, Klein & Feuge, San Antonio. They're not on the largest auditors list.
Non-qualified opinion, except that the company changed how it accounts for stock-based compensation on April 1, 2006. Audit fees were $28K plus another $25K in fees to the same company.

I've looked at a more recent balance sheet above. Fairly strong. Not much depreciation of PP&E. Assets are roughly 1/3 cash, 1/3 PP&E, 1/3 intangibles. Significant net cash.

Income statement:
47% gross margins
At the same gross margins and SG&A, they need to triple their revenes to reach breakeven.

Equity statement going back more than one year:
Started off 2005 with 2 million shares.
Issued 600K shares to acquire recipes.
Private placement of 2 million more shares to raise $492K (about 25 cents per share).
Issued 271K shares for consulting/services
Another private placement of 915K shares to raise $296K (about 32 cents per share).
Issued 52K shares for services.
Currently have 5.96 shares outstanding.

Cash flow statement:
Operating cash flow was better than earnings (but still negative) thanks to stock based compensation, depreciation, amortization.
The story is this: operations burned up about $300K, there was $45K in capex, and they raised about $300K via stock. The result was a slight decrease in cash.

NOTES:

No allowance for doubtful accounts.
No obsolete inventories.
Recipe intangibles are being amortized over 7 years, straight line.
$29K advertising costs.
Shipping and handling charges of $80K are included in sales figures. Shipping costs of $69Kare in selling expenses.
The stock compensation expense was $35K.
About 500K stock options outstanding (29 cents strike)
About 6 million warrants outstanding (75 cents strike), callable if stock trades at 75+ cents.

CEO is from Merrill Lynch and then some sort of venture firm. 20 years experience consulting with companies in many fields. Degree in advertising.

CFO has 20+ years in public accounting. Was an auditor with Touche Ross (merged with Deloitte Haskins etc. in 1990). Founding partner and CFO of Guardian Food Service Systems (practially nothing googles, seems like a local San Antonio/Austin business). Was Sarbox team lead on a project for Baker Hughes (NYSE, sec) oil and gas company (would show up in the 2004 10-K).

CEO's father-in-law (Raymond G. Armstrong, M.D.) is on the board. He only owns 25K shares.

CEO owns about 14% (10% direct and outright). Directors and executives own about 30% including options.

Total compensation amounts are quite low. CEO's total compensation was only $87K.



The stock is selling for around 90 cents and it's been steady for a while. With 12 million diluted shares, the question to ask is whether this company will generate significantly more free cash than $720K per year. Right now, I don't think anyone serious is looking at this stock, so I worry about posting it and losing a future opportunity. But I don't feel like sitting on this for a long time.

I think the stock is probably reasonably priced right now. They might do very well, but there are always big risks. They need an enormous amount of growth just to break even. My gut sense is that all of that is priced in at 90 cents.