Tattooed Chef CEO Earns 5X the Prime Rate On Money He Loans the Company
Company made an “adjustment” that added $23.4 million to 2020 net income after disclosing control deficiencies.
May 19, 2021
Tattooed Chef (TTCF), a plant based frozen food company, leases processing facilities in Italy and California owned by the company’s CEO Salvatore “Sam” Galletti. In its 2020 10-K, Tattooed Chef revealed some additional detail:
“The Paramount facility also serves as our headquarters. Ittella Properties, LLC, a California limited liability company (“Ittella Properties”), a related entity controlled by Mr. Galletti, owns one of the buildings that comprise the Paramount facility and Deluna Investments, Inc., a California corporation (“Deluna”), a related party controlled by Mr. Galletti, owns the San Pedro building. We believe that the lease terms with Ittella Properties and Deluna are on an arms-length basis.”
Later, the annual report reveals Tattooed Chef has paid Galletti $60,000 in rent per year for the prior two years. In the footnotes, we learn more about the related party transaction, including that Galletti is the sole owner of a Paramount building which the company has agreed to lease for a decade:
“Ittella Properties LLC (“Properties”), the Company’s consolidated VIE, owns the Alondra Building, which is leased by Ittella International for 10 years from August 1, 2015 through August 1, 2025. Properties is wholly owned by Salvatore Galletti. The construction and acquisition of the Alondra building by Properties were funded by a loan agreement with unconditional guarantees by Ittella International and terms providing that 100% of the Alondra building must be leased to Ittella International throughout the term of the loan agreement.”
While Galletti pockets the rent, investors bear the burden the building’s expenses:
“For the twelve-month periods ended December 31, 2020 and 2019, 100% of the revenue of Properties is intercompany and thus was eliminated in consolidation. Properties contributed expenses of $0.26 million and $0.20 million for the years ended December 31, 2020 and 2019, respectively.”
It’s not the only instance in which Galletti is on both sides of a Tattooed Chef transaction.
For the past decade, Galletti has loaned money to Tattooed Chef at an interest rate far in excess of the prime rate. In the case of a revolving line of credit provided by Galletti, Tattooed was required to pay interest each month regardless of whether the company used the facility.
In January 2009, Galletti lent the company $50,000 at 4.75% over the prime rate. This promissory note comes two years after a much larger credit agreement Galletti made with the company:
“The Company entered into a credit agreement with Salvatore Galletti for a $1.20 million revolving line of credit in January 2007. Monthly interest payments are accrued at 4.75% above the Prime Rate on any outstanding balance. In addition, the Company agreed to pay Salvatore Galletti 0.67% per month of the full amount of the revolving credit line, regardless of whether the Company has borrowed against the line of credit.”
Galletti liked the agreement so much that after it expired in 2011, it was extended another 13 years to December 31, 2024. Even if Tattooed Chef never draws on the revolver, Galletti stands to earn a minimum of $1.64 million over the term of the loan, or the equivalent of 4.3 years of his base pay as CEO.
Despite the $1.2 million revolver in 2007 and the $50k promissory note in 2009, one year later Tattooed Chef felt the need to borrow yet again from Galletti:
“In June 2010, the Company entered into a promissory note with the Salvatore Galletti as the lender in the amount of $0.15 million, which bears interest at 8.00% per annum.”
The loans have undoubtedly been good for Galletti even if Tattooed Chef hasn’t been for shareholders. In October 2020, Tattooed Chef merged with a SPAC to become a publicly traded company. As of this writing, shares of Tattooed Chef were down approximately 20% since the SPAC merger closed.
Of particular interest to investors is an 8-K filed on the same day Tattooed Chef filed its annual report. The 8-K revealed that a news release issued nine days earlier announcing the company’s fourth quarter and full year 2020 results needed to be “adjusted.” The adjustments increased Tattooed Chef’s net income in the quarter and full year by $23.4 million, from $45.4 million to $68.7 million. The adjustment is 34% of revised net income. It’s not the first “correction” Tattooed Chef has filed since becoming a public company five months ago.
The adjustments and corrections might be difficult for some investors to comprehend, considering Tattooed Chef’s Co-CEO/ CFO David Boris, a 30-year Wall Street veteran, has advised on “approximately” twenty SPAC transactions. Galletti and a firm he controls owned 40.2% of Tattooed Chef’s outstanding shares as of March 17, 2021. The company burnt $13.3 million in cash from operations in 2020.
It’s not surprising net income needed adjustment when you consider Tattooed Chef has identified five material weaknesses in its internal controls over financial reporting:
1) The company lacks an effective control environment and a sufficient number of accounting professionals with the right training
2) The company lacks formal accounting policies necessary to generate accurate and timely financial disclosures
3) The company lacks appropriate information technology (IT) controls including those over data center and network operations and security
4) The company lacks controls that segregate duties in the preparation of account reconciliations and manual journal entry postings
5) The company lacks accounting policies to analyze and account for complex transactions
Tattooed Chef says it’s working to remediate the deficiencies and hiring qualified staff. Tattooed Chef does not advertise job openings on its website. We were unable to find accounting related job postings online. Since filing its 10-K, Tattooed Chef disclosed it would file its next 10-Q late due to accounting issues related to SPAC warrants. The company’s accounting is also likely to become more complex. In May 2021, Tattooed Chef acquired a tortilla factory in New Mexico and a manufacturing facility in Italy the month prior.
Related: BYND, CAG, K, SYY, KR, HRL, NSRGY, KHC
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