ITEM 1. BUSINESS.
General
We manufacture, market, and sell handmade, fully-baked “high quality” pies. We have three sales channels: retail, corporate and wholesale that require “value added” marketing strategies to address each customer base. Our retail and corporate market covers all fifty states in the United States. Our wholesale market covers thirteen states in the south central, central and southeastern portions of the United States.
Our retail market consists primarily of individuals who purchase our products for gifts, special occasions or for their personal consumption. We sell to the retail market through our website, internet marketing from our websites, phone orders and walk-in customers at our storefront in Boerne, Texas, as well as our five Tootie Pie Gourmet Cafés in Texas, which are located in San Antonio, Austin, Fredericksburg and Frisco.
We currently own and operate seven Tootie Pie Gourmet Cafés. Our Cafés are a dessert destination where customers can enjoy a quality dine-in experience or pick up a pie to take home. In addition to featuring our Tootie Pies, the Cafés offer a light menu including pastries, bagels, soups, sandwiches, paninis, salads, drinks and a full coffee menu. We seek to create an inviting atmosphere which will enable us to attract a diverse guest base. We currently operate company-owned Cafés at the following locations:
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16615 Huebner Road at Bitters, San Antonio, TX
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5130 Broadway, San Antonio, TX
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10515 N. Mopac Expressway Ste. A-120, Austin, TX
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701 Capitol of Texas Highway, Austin, TX
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339 E. Main St, Fredericksburg, TX
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6959 Lebanon Road, Ste 100, Frisco, TX
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190 Stacy Road, Ste. 1408, Allen, TX
Our corporate market is comprised of businesses that purchase our pies for customer and employee appreciation gifts, marketing/promotional events and/or personal use. Our corporate sales program provides a convenient and cost effective way for our corporate clients to promote their company through customer and employee appreciation programs. Our corporate customers range in size from small businesses to large corporations. We believe this market will continue to play a key role in our future growth because our current corporate customers send our pies to their contacts and employees. We believe that once those end-recipients sample the quality of our pies, they may become our future customers. We sell to the corporate market through our website, internet marketing, phone orders and direct sales calls.
Our wholesale market is comprised of regional and national broad-line foodservice distributors who purchase our products and then resell them to their customers. All of our pies produced for wholesale distribution are shipped frozen to our distributors, who then deliver them to their respective end-users. We focus on the quality, handcrafted nature of our pies and the value that such a dessert can bring to the overall dining experience of an end-user. Because of the inherent cost of the high quality ingredients that we use and the value-added marketing approach we employ, we must price our pies at the higher end of the wholesale dessert industry category.
We sell to our wholesale market via our in-house sales force. Our in-house sales force works directly with foodservice distributors and foodservice brokers to sell our products to the distributors’ customers. These customers include restaurants, hotels, hospitals, convention centers, sports facilities, caterers and retail grocery store outlets.
History
On September 9, 2005, we purchased certain assets from Ms. Ruby Lorraine “Tootie” Feagan, including all of her pie recipes, customer lists, the right to the “Tootie Pie” name, the related baking equipment, and a building located in Medina, Texas in exchange for $50,000 in cash and the issuance of 600,000 shares of common stock valued at $150,000, with the goal of maximizing the market and profitability of her pie recipes. We lease a 5,000 square foot building in Boerne, Texas where we manufacture our pies for broad-based distribution. This facility also serves as our corporate headquarters. We closed the original Medina location in 2006 which allowed us to focus all production and sales efforts out of our facility in Boerne.
On October 8, 2009, we launched the initial phase of our Tootie Pie Gourmet Café concept with the purchase of certain business assets held by two Benny’s Bagels sandwich shops located in San Antonio, Texas. By March 2010, we completed the rebranding of these two stores as our first Tootie Pie Gourmet Cafés.
On March 14, 2011, we entered into an agreement to purchase certain of the assets of the business formerly known as the Silver Spoon Bakery. This location became our first Café in Austin. In February 2012, we opened our second Café in Austin.
On March 20, 2012 we entered into a lease agreement that included all of the assets of a former coffee business, at The Village at Allen Shopping Center, located in Allen (Dallas), TX. This location opened on June 7, 2012 and became our second location in the Dallas area.
As of June 30, 2012, we own and operate seven Cafés in Texas, which are located in San Antonio, Austin, Fredericksburg, Frisco (Dallas) and Allen (Dallas).
Our fiscal year end is March 31.
Market Overview
We manufacture, market and sell “high quality” pies. We have three sales channels: retail, corporate and wholesale. Each sales channel requires different “value added” marketing strategies to address the corresponding customer base.
Although 2012 is not being labeled “The Year of the Pie” as was 2011, pies continue to play an important role for in-store bakery dessert sales. Pie sales in supermarkets increased during the 52 weeks ending April 28, 2012. Nationally, the category averaged weekly per-store sales of $657, a gain of 2.1 percent.
Pies accounted for 6.2 percent of in-store bakery sales, a 0.1 percent decrease from the previous year. The pie category includes specialty/gourmet, fruit, open faced, mini/sliced/half, cream/custard, tarts, meringue, lattice and other pies.
Pies posted their highest dollar sales during holiday weeks. The week ending Nov. 26, 2011, posted the highest sales for the category, $3,714 per store per week, driven by the Thanksgiving holiday. This was a 5.2 percent increase compared to Thanksgiving week of 2010. The Christmas and New Year’s holidays also drove sales for pies, posting $1,564 and $1,085 per store per week, respectively. The week ending Feb. 25, 2011, was the lowest selling week, with average per-store sales of $448.
Pie sales varied regionally. The East and Central regions outperformed the national average, selling $922 and $774 per store per week, respectively. Both regions’ average weekly sales increased compared to the previous year, with weekly dollar sales per store rising 2.5 percent in the East region and almost 1 percent in the Central region. The West was the only region to experience a decline in average weekly sales, decreasing 1.4 percent. This was driven by a 9.5 percent decrease in specialty/gourmet pies’ average weekly sales. The South region’s sales of $537 per store per week was the result of a 4.4 percent increase due to a 6.5 percent gain in specialty/gourmet pies. Within the pies category, specialty/gourmet, fruit and open-faced pies made up 67.4 percent of dollar sales. Compared to the prior year, specialty/gourmet pies’ average weekly dollar sales decreased 0.5 percent and fruit pies maintained average weekly dollar sales. Conversely, open-faced pies experienced a strong sales increase of 4.3 percent. Mini/sliced/half pies, which make up 9.5 percent of the pie category, grew average weekly dollar sales 12 percent, giving support to the ongoing small portion trend.
Cream/custard, tarts, meringue and lattice pies made up 22.5 percent of category share, and all except meringue pies increased average weekly dollar sales.
As the summer dwindles down and fall approaches, pies will again be a major focus in the bakery department. Seven of the 10 highest-generating sales weeks occurred between Halloween and New Year’s last year, making the execution of holiday promotional strategies crucial to pies’ performance.
This sales review is provided by Nielsen Perishables Group. Based in Chicago, the Nielsen Perishables Group specializes in research, analytics, marketing communications, category development, promotional best practices and shopper insights. Reported results are for April 30, 2011, through April 28, 2012, representing more than 62 percent of national supermarket ACV share.
We believe that recent industry data indicates that more consumers are choosing to eat at home, and while they still desire desserts that have homemade quality, they are also looking for conveniences such as home delivery and nearby availability. This information focuses on the frozen pie industry as a whole and provides statistics on the top ten suppliers of frozen pies.
Top 10 Suppliers of Frozen Pie - Total Sales Frozen Pie Category - $ 341,685,400
Source: Bakery Redbook, July 2010, p. 12
Data obtained from InfoScan Reviews, Information Resources Inc.,
for Supermarkets, Drug Stores and Mass Merchandisers
Top 10 Brands (dollar sales)
52 weeks ending January 24, 2010
Source: Baking Management, March 2010, p.10
Data obtained from InfoScan Reviews, Information Resources Inc.,
for Supermarkets, Drug Stores and Mass Merchandisers
In today’s environment, we believe that several factors merit consideration in determining market preferences including quality, convenience and portion control. When it comes to desserts, research suggests that consumers insist upon quality and are willing to pay the price to indulge in value-added products. This trend has forced frozen pie manufacturers to continue to improve and differentiate their products in order to create the highest quality while meeting the convenience factor requirement. Packaging is a key component in communicating ease of preparation to the consumer on-the-go. Based on available industry information, and our analysis, we believe that consumers will pay a premium for high-quality products; especially if these products respond to certain trends that have developed in the frozen pie industry. These trends include health and wellness, convenience, as well as personal preference and indulgence factors. We believe our products address these trends and meet these demands.
Products
Our products are high quality, eleven-inch handmade pies. We sell several varieties of pies including: apple, peach, cherry, blackberry, blueberry, pecan, buttermilk, chocolate pecan, lemon velvet, coconut supreme, heavenly chocolate and key lime margarita. In May 2010, we added “Pie on a Stick” to our variety of pie offerings and expect to add, alter or delete pie offerings and varieties from time to time. Our Tootie Pie Gourmet Cafés offer a light menu that includes pastries, bagels, soup, sandwiches, salads, coffees, teas and other drinks, as well as whole pies and pie by the slice. We also offer seasonal pies in anticipation of customer demand and in response to holiday seasons, such as pumpkin pie in November for Thanksgiving. We individually package our pies to our retail and corporate customers. Our wholesale customers purchase our products by the case, which includes two pies per case.
Sales and Marketing
In September 2005, we secured the Tootie Pie brand which was already established in parts of Texas. Since the acquisition, we have expanded our brand identity. Our brand promotion includes website and internet marketing, point-of-sale materials at restaurants, seven of our own Cafés, as well as other marketing materials that focus on our retail and corporate customers. As our marketing efforts and brand reputation continue to expand, we believe the quality and unique nature of our high-end desserts will generate repeat sales in the Southwestern United States and beyond, and will allow us to open new wholesale markets.
As of March 31, 2012, we have a sales and marketing team of two full-time employees. The team’s primary responsibility is to establish sales strategies, product marketing events, and provide outside sales support.
Our primary sales channels include: retail, corporate and wholesale.
Retail: We market our products directly to consumers through various means:
● Website: www.tootiepieco.com. The website is a sales and marketing tool that allows our customers to make online purchases. We also have a website for our Tootie Pie Gourmet Cafes: www.tootiepiegourmetcafe.com that supplies information on each of our Cafes.
● Tootie Pie Gourmet Cafés: We own and operate seven small Cafés in San Antonio, Austin, Fredericksburg, Frisco and Allen, Texas. Our Cafés offer a light menu including pastries, bagels, soups, sandwiches, salads, coffee, tea and other drinks, as well as whole pies and pies by the slice.
● Phone orders: Customers can call us to place orders for pickup or delivery. Our phone number is 210-737-6600.
● In-store sales: Customers can visit our Boerne location for their purchases. Our Boerne facility is a 5,000 square foot building located at 129 Industrial Drive and includes our corporate offices and baking facility.
● Festivals/Events: Includes local and regional events where the pies are promoted and/or sold to the respective attendees.
Corporate: Our corporate marketing and sales efforts to date have been targeted towards local and regional companies, while customers on the national level have been primarily acquired through the corporate sales page on our website. Our customers range from small businesses to large corporations that place orders during the holiday season, or throughout the year, for pies to be shipped to their respective customers and/or employees. Some of these companies also order pies to be shipped to their place of business for employee events and/or special occasions.
Wholesale: Our wholesale efforts focus on food distributors that purchase our product for distribution to their respective customer base. Foodservice distributors carry extensive product lines in all categories of the food and beverage industry and represent a very large customer base both in number and geographically. Specialty distributors will carry focused product lines for specific markets and/or customers. During the fiscal year ended March 31, 2012, 24% of our wholesale business came from our efforts in the south Texas region where we are located and have had distribution channels in place for the longest period of time. These sales are driven through the efforts of our in-house sales personnel, working with our foodservice brokers and established food distributors.
We intend to expand our customer base by continuing to market directly to our website customers, corporate customers, and to work with food distributors who sell to commercial end-users such as restaurants, hotels, hospitals, convention centers, sports facilities, caterers, retail grocery store outlets, bakeries and coffee shops. We also intend to further expand our customer base through our five Tootie Pie Gourmet Cafés, which we expect to serve as models for our wholesale customers, in addition to exposing our brand and products directly to our retail customers.
Customers
For the fiscal years ended March 31, 2012 and March 31, 2011, our sales revenues were split between the following markets:
(1) This number includes pies sold in our Tootie Pie Gourmet Cafés.
For the fiscal years ended March 31, 2012 and March 31, 2011, our two primary wholesale customers, Ben E. Keith Food Services and Sysco Corporation, represented the following percentage of our overall product sales revenues:
The Baking Process
All pies are manufactured in our 5,000 square foot leased facility in Boerne, Texas for broad-based distribution. Products are prepared in batches based on customer demand as to specific flavor categories. Each pie is individually handmade and prepared for the baking process. After the baking process is complete, the pies are staged for cooling. Pies are then placed in our walk-in freezer unit to freeze. Once frozen, pies are individually shrink-wrapped and packaged in cases with 2 pies per case. Once packaged, the pies are stored in our freezer or transferred to a third party cold storage facility until removed for sale and distribution to customers.
Raw Materials
We purchase the majority of our baking ingredients from supplier and distributor, Ben E. Keith Foods San Antonio. We currently have a contract with Ben E. Keith Foods that offers cost incentives when 80% or more of our purchases are through Ben E. Keith Foods. Although this is beneficial for cost incentives, the contract is non-binding. If the contract with Ben E. Keith Foods were cancelled, we believe we could find another supplier or suppliers on the same or substantially similar terms.
As of March 31, 2012, we purchase our boxes for packing from Bates Container in San Antonio, Texas. There is no supplier risk for our packaging materials as there are many other vendors that can provide the same products at a similar price to meet our packaging needs.
Most of the materials we use to make and package our pies such as fruit, baking ingredients and cardboard for our packaging are commodity items, meaning they are available from many sources at approximately the same price. It is possible that certain commodity items may increase in price if, for example, weather negatively affects a particular crop. We have not experienced any substantial price increase, but if we do, our costs could increase which could affect our margins. If prices rise substantially for our raw materials, we may have to raise prices on our products which could hurt our competitive position and our revenues could decrease.
Delivery
All of our pies are fully-baked, frozen and packaged to prepare them for delivery. All retail and corporate pies are either picked up by the customer or shipped frozen via FedEx, UPS, or other similar carriers, utilizing either one or two-day delivery service, depending on the customer location. Ground delivery to home or business is available for Texas. All other states require standard overnight service in the summer or two day delivery in any other season in order to maintain product quality and freshness.
Wholesale pies are packaged and placed on standard food size shipping pallets for pickup by wholesale distributors. These pies are shipped by refrigerated trucks and stored frozen on the distributors’ premises before being delivered by refrigerated truck to the end-user.
Competition
The “high-end” dessert market is highly competitive. We compete against small to medium-size bakeries in our retail and corporate markets. These companies tend to focus on website sales, phone orders or walk-in retail outlets. In our wholesale market, we compete against larger, well-established companies, whose primary focus is on wholesale distribution to the food service industry. Our closest competitors in these markets and in our region include:
Retail and Corporate Competition:
Janie’s Pies - San Antonio, Texas
Collin Street Bakery - Corsicana, Texas
Goode Company - Houston, Texas
Royer’s Pies - Round Top, Texas
Wholesale Competition:
Sweet Street Desserts - Reading, Pennsylvania
Lawler’s Desserts - Humble, Texas
Chef Pierre, a division of Sara Lee Food Service - Cincinnati, Ohio
Our goal is to compete by differentiating ourselves in the marketplace and promoting a “value-added” approach. We accomplish this approach by promoting several key elements that we believe set us apart from our competition. One of the most important features of our products is quality. To date, we have competed in the retail markets primarily through word of mouth and by providing samples of our product at high profile shows/events where our target market is in attendance. We have also initiated internet-based marketing and sales efforts including a viral marketing campaign. When marketing our products to our customers, we stress the quality of our products, the fact that they are handmade, and our reputation for customer service. We have been able to communicate this message through the efforts of our sales personnel. We believe our approach to be well received in the marketplace.
In both our wholesale and retail categories, we believe that our price-points are consistent with what we see as our competition in this segment of the dessert market. Because of the relative expense of our products, especially in our wholesale business, we offer value-added services to our distributors’ end-users who may desire to utilize these services. These services include allowing the use of our “Tootie” brand, the education of wait staff by our sales personnel, as well as supplying end-users with point-of-sale materials. We believe the name “Tootie Pie” is catchy and we have found it to help generate interest among customers when mentioned by the end-users’ wait staff. We are currently a small competitor in terms of geographic coverage and volume compared to some of our competitors in the wholesale market, but based on the positive response and growth in orders we have received from our distributors and their respective customers, we believe we will continue to grow in geographic coverage and volume.
Distribution
We sell our pies through the following distributors:
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Ben E. Keith Food Services San Antonio
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Ben E. Keith Food Services Dallas/Fort Worth
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Ben E. Keith Food Services Oklahoma
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Ben E. Keith Food Services Amarillo
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Ben E. Keith Food Services Albuquerque
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Ben E. Keith Food Services Little Rock
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Sysco Food Services of San Antonio
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Sysco Food Services of Austin
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Sysco Food Services of Houston
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Sysco Food Services of Dallas
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Sysco Food Services of Atlanta
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Sysco Food Services of St. Louis
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Sysco Food Services of Jackson
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Sysco Food Services of East Texas
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U.S. Foodservice - Austin
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Performance Food Group - Temple
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Martin Preferred Foods - Houston
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Cheney Brothers - Florida
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Reinhart Food Service
Ben E. Keith Food Services of San Antonio, Dallas/Fort Worth, Oklahoma, Amarillo, Albuquerque and Little Rock are part of Ben E. Keith Food Services, a multi-state foodservice distributor. Each location covers the following territories:
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Ben E. Keith Food Services of San Antonio sells to customers located in the central and south Texas markets.
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Ben E. Keith Food Services of Dallas/Fort Worth sells to customers located in west Texas, north Texas, east Texas and parts of northern Louisiana.
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Ben E. Keith Food Services of San Antonio and Dallas/Fort Worth both service the Houston, Texas market.
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Ben E. Keith Food Services of Oklahoma sells to customers located in Oklahoma, eastern Kansas and western Missouri.
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Ben E. Keith Food Services of Amarillo sells to customers located in the Texas panhandle, eastern New Mexico, parts of western Oklahoma and western Kansas.
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Ben E. Keith Food Services of Albuquerque sells to customers located in New Mexico and southeastern Colorado.
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Ben E. Keith Food Services of Little Rock sells to customers located in Arkansas, southern Missouri, western Tennessee, northwest Mississippi and Louisiana.
Sysco Food Services of San Antonio, Austin, Houston, Dallas, East Texas, Atlanta, St. Louis and Jackson are part of Sysco Corporation, a national foodservice distributor. Each location covers the following territories:
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Sysco Food Services of San Antonio sells to customers located in the south Texas market.
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Sysco Food Services of Austin sells to customers located in the central Texas market.
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Sysco Food Services of Houston and East Texas sell to customers located in the east Texas market.
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Sysco Food Services of Dallas sells to customers located in the Dallas/Ft. Worth market.
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Sysco Food Services of Atlanta sells to customers in the greater Atlanta market.
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Sysco Food Services of St. Louis sells to customers in the greater St. Louis market.
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Sysco Food Services of Jackson sells to customers in Mississippi and surrounding markets.
U.S. Foodservice - Austin is part of U.S. Foodservice Corporation, a national foodservice distributor. U.S. Foodservice - Austin sells to customers in the central and south Texas.
Performance Food Group - Temple is part of Performance Food Group, a multi-state broad-line foodservice distributor as well as a national account foodservice distributor. Performance Food Group - Temple sells to customers in the central Texas market.
Martin Preferred Foods is a foodservice distributor based in Houston, Texas. It services the Texas market for our Company. Martin Preferred Foods is a member of Unipro. Unipro is the largest foodservice purchasing group that allows its independent distributors to compete with the major grocery distribution companies in the state of Texas.
Cheney Brothers Inc. is a food service distributor. It markets to customers in Florida from two locations in Riviera and Ocala.
Reinhart Food Service is a multi-state food service distributor that has locations primarily in the Eastern United States. Reinhart Food Service mostly serves the Oklahoma market for our Company.
The distributors purchase our products in volume and then sell and deliver our products to their customers. The distributors’ customers are referred to as “end-users,” and consist of restaurants, hotels, hospitals, schools, convention centers and caterers. The size of each distributor’s “end-user” varies and ranges from local to regional and national companies.
A key component of our wholesale business is actively marketing our products to our distributors’ sales forces and to their respective end-users. We accomplish this by hiring sales personnel, whose primary responsibility is to educate the distributors’ sales forces about our products and to assist them in selling our products, including going on sales calls with distributor sales personnel or making sales calls on their “end-users” directly..
We manage our production of finished inventory by maintaining an established minimum level of inventory by product type. We believe this strategy provides us the necessary lead time to produce inventory based on demand. To manage our inventory for the seasonality of our retail, corporate, and wholesale sales, we analyze our current production capacity and, based on this capacity and projected sales volumes, we build up our inventory of pies to meet the anticipated demand. In the event we over-produce inventory for the holiday season, we intend to reduce inventory production and sell the excess inventory to wholesale and retail customers after the holiday season.
Intellectual Property
We have filed and obtained a Federal Copyright to protect our Company logo and trade dress. We have also filed and obtained a State Trademark application with the State of Texas to protect the names “Tootie Pie Company” and “Tootie Pie Gourmet Café.” We have confidentiality agreements in place with all current employees protecting our trade secrets, including the recipes for our pies.
Government Regulation
Our food processing facilities and food products are subject to government regulation. We are periodically inspected by the Kendall County Health Department, as well as the Texas Department of Health; who advised us that they are also inspecting on behalf of the U.S. Food and Drug Agency. We have placed the required inspection certificates and reports in areas of plain view, as required. While these agencies do not issue opinions of a pass or fail nature, we were very pleased with the results of their inspections.
Seasonality
The high-end dessert business, and more specifically the pie business, experiences seasonal selling periods. We have completed seven such seasons since we started our business. We have experienced large fluctuations in the percentage breakdown between the categories of our business at the various reporting periods during the year. Although our retail and corporate customers purchase our pies throughout the year, the majority of these sales occur during November and December, or our fiscal third quarter. Sales to our wholesale customers also experience seasonal fluctuations with a large portion of our wholesale revenue also being recorded during our fiscal third quarter. Specifically, 47% of our retail revenue, 94% of our corporate revenue and 28% of our wholesale revenue for the fiscal year ended March 31, 2012 was recorded in our fiscal third quarter.
Employees
As of March 31, 2012, we had 34 full-time and 22 part-time employees. We are not a party to any collective bargaining agreements. We believe that our relations with our employees are good.
ITEM 1A.
ITEM 1A. RISK FACTORS.
Risks Related to Our Business
There are many factors that affect our business and the results of its operations, some of which are beyond our control. The following is a description of some of the important factors that may cause the actual results of our operations in future periods to differ materially from those currently expected or desired.
Economic conditions could materially adversely affect our business.
Our operations and performance depend to some degree on economic conditions and their impact on levels of consumer spending, which have recently deteriorated significantly in many countries and regions, including the regions in which we operate, and may remain depressed for the foreseeable future. For example, some of the factors that could influence the levels of consumer spending include increases in fuel and other energy costs, conditions in the residential real estate and mortgage markets, labor and healthcare costs, access to credit, consumer confidence and other macroeconomic factors affecting consumer spending behavior. These and other economic factors could have a material adverse effect on demand for our products and on our financial condition and operating results.
We need additional working capital and without adequate capital, we may not be able to fulfill our business plan.
Although we believe that we have adequate capital to fund our operations through our next fiscal year, we believe we will need additional working capital to fund our growth plans. However, we may not be able to access the capital we need on terms acceptable to us. If we can access financing, it may involve issuing debt or equity securities that are senior to our outstanding shares. Any issuance of convertible debt or equity securities may dilute the value of our current shares outstanding. If we issue debt securities or take loans from private investors, we may have to agree to certain covenants as a condition of those loans that restrict the manner in which we run our Company. In addition, if we cannot raise additional capital, it is likely that our potential growth will be restricted and we will be forced to scale back or curtail the implementation of our business plan. If we do not raise additional capital, the value of your investment may decrease or become worthless.
We initially began as a start up business with a small customer base and if we do not expand our customer base, we will not generate sufficient revenues to make our business successful.
We initially began as a start-up business with a small customer base. While we continue to experience a growth in revenues, we have not yet developed a viable customer base to become profitable. We will have to develop a substantial customer base and generate sufficient revenues to cover our expenses and eventually become profitable. We may not be successful at attracting customers. If we are unsuccessful at generating revenues from customers, our business will likely fail and you may lose some or all of your investment.
We are new to the restaurant/café industry. If we are not able to operate our Tootie Pie Gourmet Cafés effectively or to effectively manage the growth of additional cafés, it could adversely affect our ability to grow and could significantly harm our profitability.
Our growth in the restaurant/café industry will largely depend on our ability to operate our Cafés successfully in Texas as well as open additional Cafés. We opened 3 Cafés in fiscal 2011 and 2 Cafés in fiscal 2010. Our ability to identify and open new Cafés in future years in desirable locations and operate such new Cafés profitably is a key factor in our ability to grow successfully. We cannot assure you as to when or whether desirable locations will become available, the number of Tootie Pie Gourmet Cafés that we can or will ultimately open, or whether any such new Cafés can be profitably operated.
Our ability to open new Cafés and to manage our growth also depends on our ability to:
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negotiate acceptable lease terms, including desired tenant improvement allowances;
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finance the preopening costs, capital expenditures and working capital requirements of the Cafés;
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manage inventory to meet the needs of new and existing cafés on a timely basis;
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hire, train and retain qualified Café personnel;
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develop cooperative relationships with our landlords; and
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successfully integrate new Cafés into our existing operations.
Increased demands on our operational, managerial and administrative resources as a result of our growth strategy could cause us to operate our business less effectively, which in turn could cause deterioration in our profitability.
We use commodities such as fruit, flour and other raw materials to make our products that may be subject to certain price pressures and if our raw material prices increase significantly, it may reduce our margins.
We have numerous sources for fruit, flour and raw materials to make our products. However, we are exposed to the same economic risks associated with the factors that can affect commodities such as weather, market conditions, or transportation-related economic risks. If the price of our raw materials increases significantly, it may reduce our margins and negatively affect our profits, if any.
We use third party carriers to ship pies to our retail and corporate customers which may pass on increases in transportation related fuel cost to our customers which could discourage them from purchasing our products.
We have numerous sources for third party carriers, such as FedEx and UPS, to ship our products to our retail and corporate customers. The shipping cost is paid by the customer. If the price of fuel increases and the carrier chooses to pass these increases to our customers, it may reduce the number of customers willing to pay the higher shipping cost and negatively impact our results of operations.
Competition in the restaurant industry is intense.
The restaurant industry is highly competitive and we have many well-established competitors. While we operate our Cafés in the casual segment of the restaurant industry, one or more new major competitors with substantially greater financial, marketing and operating resources could enter the market at any time and compete directly against us.
Numerous factors including changes in consumer tastes and preferences often affect cafés and restaurants. Shifts in consumer preferences away from our type of cuisine and/or the fast-casual style could have a material effect on our results of operations. Dietary trends may negatively impact our sales. Changes in our guests’ spending habits and preferences could have a material adverse effect on our sales. Our results will depend on our ability to respond to changing consumer preferences and tastes.
Changes in consumer eating habits as a result of new information regarding diet, nutrition and health could impact demand for our product offerings.
Our success in creating demand for our product offerings is dependent on our ability to continue to accurately predict consumer taste preferences, and adapt our product offerings to trends in food consumption. If consumer eating habits change significantly, and we are unable to respond with appropriate product offerings, it could materially affect demand for our product offerings resulting in a decrease in our customer base and an adverse impact on our results of operations.
Inflation and other market conditions may increase our operating expenses.
Our profitability depends on, among other things, on our ability to anticipate and react to changes in the costs of key operating resources, including food and other raw materials, labor, energy, insurance (including liability and workers compensation) and other supplies and services. To the extent that price increases cannot be passed along to our customers, those increases could impact our financial results.
Future supplies and costs for the commodities that we purchase may fluctuate due to weather and other market conditions outside of our control. In addition, our suppliers may be affected by higher costs to produce and transport commodities used in our manufacturing facilities, higher minimum wage and benefit standards and other expenses that they pass through to their customers, which could result in higher costs for goods and services supplied to us.
We rely on two customers for the majority of our wholesale business, Ben E. Keith Food Services and Sysco Corporation, and if we lose these customers, our revenues will likely decline.
As of March 31, 2012, our two largest wholesale customers are Ben E. Keith Food Services and Sysco Corporation. Ben E. Keith Food Services is a customer through its Ben E. Keith Food Services San Antonio, Dallas/Fort Worth, Oklahoma City, and Albuquerque locations. Sysco Corporation is a customer through its Sysco Food Services of San Antonio, Houston, Dallas and Jackson locations. For the twelve month period ended March 31, 2012, Ben E. Keith Food Services accounted for 22% of our pie sales and Sysco Corporation accounted for 6% of our pie sales, or a combined 28% of our overall pie sales. These food distributors buy our products for resale to their customers. The loss of business from either of these food distributors could have a negative impact on our ability to grow our wholesale business, which we expect to be a significant part of our sales growth.
We depend on the experience of our Chief Executive Officer and the loss of our Chief Executive Officer would affect our ability to implement our business plan.
Our performance is substantially dependent on the performance of Don Merrill, Jr. our Chief Executive Officer and Interim Chief Financial Officer. Mr. Merrill is knowledgeable about our Company and our business plan. The loss of his services would require us to expend time and resources to seek a replacement. We would also have to invest in training and educating such replacement about our business. We have limited resources and it may be difficult for us to offer compensation that would allow us to attract well-qualified executive officers. If the replacement has less experience than Mr. Merrill or does not understand our business as well, we may not implement our business plan successfully. Without the expertise of Mr. Merrill, or an immediate and qualified successor, we may be forced to curtail operations or, ultimately, to close the business entirely.
If we do not manage our growth, we may not be successful.
In order to become profitable, we will need to continue to grow our business. One area we have targeted for growth is increasing our number of Cafés, which we have already grown from two locations to seven. Our growth is expected to place a significant strain on our managerial, operational and financial resources. Further, as our revenues increase, in addition to managing five Café locations, we will be required to manage multiple relationships with various customers and other third parties. These requirements will be exacerbated in the event of our further growth or an increase in the number of our orders. Our systems, procedures and controls may not be adequate to support our operations and we may not be able to achieve the rapid execution necessary to successfully offer our products and implement our business plan. Our future operating results will also depend on our ability to add additional personnel commensurate with the growth of our business. If we are unable to manage growth effectively, our business, results of operations and financial condition may deteriorate and our business may fail.
If we do not protect our trademarks and other intellectual property, we may find it harder to compete in the marketplace.
We rely on trademarks, copyrights, domain names, trade dress and trade secrets to market our products and develop our business. We have filed and obtained a Federal Copyright to protect our Company logo and trade dress. We have also filed and obtained a State Trademark application with the State of Texas to protect the name “Tootie Pie Company.” When we purchased some of the assets associated with Tootie Pie Company, Inc., including the name and recipes, we believed the Tootie Pie brand image would allow us to more effectively market our products. We cannot be sure that our interests in these intellectual property rights will be completely protected. It is possible that our rights in this intellectual property will be invalidated, circumvented or challenged in the future. If our rights are challenged, we will likely have to expend significant resources to protect them and we may not have sufficient resources to adequately defend our rights. If we do not protect our intellectual property, we will have to develop new branding for our products which could substantially increase our costs and such branding may not be accepted by consumers. Our failure to successfully assert our intellectual property rights could make us less competitive and could have an adverse effect on our business, operating results and financial condition. We have confidentiality agreements in place with all current employees protecting our trade secrets, including the recipes for our pies.
We face intense competition, and if we are not successful in marketing our products, our business could fail.
The “high end” dessert market is highly competitive. We currently use two forms of distribution to our customers. The retail and corporate market of our business is served via third party shipper delivery, while foodservice distributors serve our wholesale market. We compete on a national level with our mail order retail business, shipping pies throughout the United States utilizing third party shipping carriers such as FedEx and UPS.
Our primary challenge in our retail market is the size and scope of servicing customers on a national level. There are many companies marketing and shipping “high end” dessert offerings throughout the United States. We believe to complete effectively, we will have to expend significant funds to build our brand and market our products. Our foodservice distribution for our wholesale market is provided by local, regional and national distributors that carry many different products and brands. We currently cover the greater Texas region, Oklahoma, Kansas, Missouri, Louisiana, New Mexico, Colorado, Tennessee, Mississippi, Georgia and Arkansas with these distributors. While we feel there is a market for the “high end, handmade” pies that we provide, we are competing against numerous well-established companies with significant resources that market quality dessert products. Our challenge will be our ability to compete successfully against the competitive pressures the large competitors present, including possible downward pressure on the prices we charge for our products that could reduce our revenues or increase our costs, or both. Working through our foodservice distributors will also require significant investment and marketing support in order to further expand our wholesale distribution. If we are unable to compete in the market for “high end” dessert products, we may not have sufficient revenues to become, or remain, profitable.
The food production industry is subject to government regulation which may increase our costs and reduce our margins.
Our food processing facilities and food products are subject to regulation and random inspection by the U.S. Food and Drug Agency, the State of Texas Department of Health, and the Kendall County Health Inspector. We must structure our operations to comply with such government regulation and pay the expense necessary to comply. It is possible the government could increase its regulation of our industry. More stringent requirements could result in changes in industry practices, increased inspections or increased compliance requirements that could increase our costs and reduce margins.
Risks Related to Our Common Stock
”Penny stock” rules may make buying or selling our securities difficult, which may make our stock less liquid and make it harder for investors to buy and sell our shares.
Trading in our securities is subject to the SEC’s “penny stock” rules and it is anticipated that trading in our securities will continue to be subject to the penny stock rules for the foreseeable future. The SEC has adopted regulations that generally define a penny stock to be any equity security that has a market price of less than $5.00 per share, subject to certain exceptions. These rules require that any broker-dealer who recommends our securities to persons other than prior customers and accredited investors must, prior to the sale, make a special written suitability determination for the purchaser and receive the purchaser’s written agreement to execute the transaction. Unless an exception is available, the regulations require the delivery, prior to any transaction involving a penny stock, of a disclosure schedule explaining the penny stock market and the risks associated with trading in the penny stock market. In addition, broker-dealers must disclose commissions payable to both the broker-dealer and the registered representative and current quotations for the securities they offer. The additional burdens imposed upon broker-dealers by these requirements may discourage broker-dealers from recommending transactions in our securities, which could severely limit the liquidity of our securities and consequently adversely affect the market price for our securities.
The price of our common stock may continue to be volatile and our trading volume may continue to be relatively low.
The market price of our common stock has fluctuated significantly to date. In the future, the market price of the common stock could be subject to significant fluctuations due to general market conditions and in response to quarter-to-quarter variations in:
·
our anticipated or actual operating results;
·
announcements or introductions of new products and/or Cafés;
·
setbacks by us or our competitors;
·
conditions in the food distribution markets;
·
the commencement of litigation; and
·
general economic and market conditions.
ITEM 2.
ITEM 2. PROPERTIES.
As of March 31, 2012, our headquarters and operations were housed in approximately 5,000 square feet of leased office/warehouse space in Boerne, Texas. The lease requires payments of $3,000 per month. In addition, we pay the real estate taxes and insurance on the building which totaled approximately $9,200 for the twelve month period ended March 31, 2012. While we believe our existing facilities will be adequate to meet our anticipated needs for the next year, we are currently evaluating our facility requirements to meet our future needs.
We also have leases on our seven Gourmet Cafés; requiring payments ranging from $2,300 to $3,600 per month per store, and lease terms ranging from November 2011 to August 2015.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
We may be involved from time to time in ordinary litigation, negotiation and settlement matters that will not have a material effect on our operations or finances. We are not aware of any pending or threatened litigation against us or our officers and directors in their capacity as such that could have a material impact on our operations or finances.
ITEM 4.
ITEM 4. REMOVED AND RESERVED.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
Market Information
Acting trading of our common stock commenced on April 9, 2007 on the Over the Counter Bulletin Board (OTCBB). On February 16, 2011 the active trading of our stock commenced on the OTCQB Marketplace, which is operated by OTC Markets, Inc. under the symbol “TOOT.”
The following table sets forth, for the quarterly periods indicated, the range of high and low bid prices of our common stock as reported for the past two fiscal years. These quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.
Holders
As of June 27, 2012, there were 14,738,100 shares of our common stock issued and outstanding. As of June 27, 2012, there were approximately 135 stockholders of record of our common stock.
Dividends
We have never declared or paid cash or stock dividends and have no plans to pay any such dividends in the foreseeable future. Instead, we intend to reinvest our earnings, if any, into our Company.
Recent Sales of Unregistered Securities
On March 21, 2012, we issued 600,000 shares to Cliff Rogers for $150,000 in proceeds. This transaction was outlined in Form 8K, filed with the Commission on March 26, 2012.
On March 21, 2012, we issued 100,000 shares of our common stock to David Strolle and such shares were valued at $25,000. This transaction was outlined in Form 8K, filed with the Commission on March 26, 2012.
On March 21, 2012, we issued 100,000 shares of our common stock to Dan Gostlyo for $25,000 in proceeds. This transaction was outlined in Form 8K, filed with the Commission on March 26, 2012.
On March 21, 2012, we issued 60,000 shares of our common stock to Leslie Doss for $15,000 in proceeds. This transaction was outlined in Form 8K, filed with the Commission on March 26, 2012.
On March 21, 2012, we issued 100,000 shares of our common stock to Don Merrill, Jr. for $25,000 in proceeds. This transaction was outlined in Form 8K, filed with the Commission on March 26, 2012.
On March 21, 2012, we issued 287,750 shares of our common stock to a private investor for $57,550 in proceeds.
On March 21, 2012, we issued 200,000 shares of our common stock to a private investor for $50,000 in proceeds.
On March 21, 2012, we issued 40,000 shares of our common stock to a private investor for $10,000 in proceeds.
On April 6, 2012, we issued 162,162 shares of our common stock to TCA Global Credit Master Fund, LP, in conjunction with them extending the Company a $1,000,000 working capital line of credit. Such shares were valued at $60,000. This transaction was outlined in Form 8K, filed with the Commission on April 12, 2012.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA.
As a Smaller Reporting Company, as defined by Rule 12b-2 of the Exchange Act and in Item 10(f)(1) of Regulation S-K, we are electing scaled disclosure reporting obligations and therefore are not required to provide the information requested by this Item.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements that involve risks and uncertainties. You should not place undue reliance on these forward-looking statements. Our actual results could differ materially from those anticipated in the forward-looking statements for many reasons, including the risks described in this report and other reports we file with the Securities and Exchange Commission. Although we believe the expectations reflected in the forward-looking statements are reasonable, they relate only to events as of the date on which the statements are made. We do not intend to update any of the forward-looking statements after the date of this report to conform these statements to actual results or to changes in our expectations, except as required by law.
The following Management’s Discussion and Analysis should be read in conjunction with the Financial Statements and Notes thereto, and other financial information included elsewhere in this Annual Report on Form 10-K.
Overview
We manufacture, market and sell “high quality” pies. We have three sales channels: retail, corporate and wholesale that require different “value added” marketing strategies to address each customer base.
We currently own and operate seven Tootie Pie Gourmet Cafés. Our Cafés offer a light menu including pastries, bagels, soups, sandwiches, salads, coffee, tea and other drinks, as well as whole pies and pies by the slice.
Our corporate market is comprised of businesses that purchase our pies for gifts, events and/or personal use. Our corporate sales program provides a convenient and cost effective way for our corporate clients to promote their company through customer and employee appreciation programs. Our corporate customers range in size from small businesses to large corporations. We believe this market will continue to play a key role in our future growth because our current corporate customers send our pies to their contacts and employees. We believe that once those end-recipients sample the quality of our pies, they may become our future customers. Our wholesale market is comprised of regional and national broad-line foodservice distributors who purchase our products and then resell them to their customers.
Critical Accounting Policies and Estimates
General: This Management's Discussion and Analysis of Financial Condition and Results of Operations is based upon our financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of our financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to the reported amounts of revenues and expenses, bad debt, investments, intangible assets, income taxes, and contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from these estimates under different assumptions or conditions. We consider the following accounting policies to be critical because the nature of the estimates or assumptions is material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change or because the impact of the estimates and assumptions on financial condition or operating performance is material.
Valuation of Intangible Assets: We periodically review, on at least an annual basis, the carrying value of intangible assets and other long-lived assets, or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. To the extent the fair value of intangible assets and long-lived assets, determined based upon the estimated future cash flows attributable to the assets, less estimated future cash outflows, are less than the carrying amount, an impairment loss is recognized.
Federal Income Taxes: Deferred tax assets and liabilities are recorded based on the difference between the tax bases of assets and liabilities and their carrying amount for financial reporting purposes, as measured by the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Deferred tax assets are computed with the presumption that they will be realizable in future periods when taxable income is generated. Predicting the ability to realize these assets in future periods requires a great deal of judgment by management. It is our judgment we cannot predict with reasonable certainty that the deferred tax assets as of March 31, 2012 will be realized in future periods. Accordingly, a valuation allowance has been provided to reduce the net deferred tax assets to $0. We recognize income tax benefits only when it meets the “more likely than not” recognition threshold. We have not recorded any unrecognized income tax benefits at March 31, 2012.
Revenue Recognition: Revenue is recognized when the following four criteria have been met: (1) the product has been shipped and we have no significant remaining obligations; (2) persuasive evidence of an arrangement exists; (3) the price to the buyer is fixed or determinable; and (4) collection is probable. Our products may be shipped from either production or third party storage facilities to customers. Deductions from sales for discounts are recorded as reductions of revenues and are provided for at the time of initial sale of product.
Share-Based Compensation: We recognize compensation cost relating to share-based payments, including grants of common stock and employee stock options based on the estimated fair value of the equity or liability instruments issued using the Black-Scholes option pricing model. We measure the cost of services received in exchange for stock options based on the grant-date fair value of the award and recognize the cost over the requisite service period.
New Accounting Standard
We are not aware of any new accounting pronouncements that have been released, and are not yet effective, that will have a significant impact on our financial position or results of operations in future periods.
Results of Operations
Comparison of the Year Ended March 31, 2012 to the Year Ended March 31, 2011
Revenues:
Our revenues are principally derived from selling our pies to retail, corporate and wholesale markets. Revenues for the twelve months ended March 31, 2012 increased 35% from the prior year; increasing to $2,732,858 from $2,027,547 for the twelve months ended March 31, 2011. Revenues from corporate and retail sales were up from the prior year periods, while wholesale foodservice sales were down from the prior year periods. The increase in corporate sales was due primarily to our increased efforts to market to more corporate customers, as well as an increase in overall economic activity. The increase in retail sales was due primarily to the opening of additional Café locations, going from five to seven locations; as well as increased sales per location.
Revenues for the years ended March 31, 2012 and 2011 are detailed in the following table.
(1) This figure includes pies sold in our Tootie Pie Gourmet Cafés.
Our customers were in the following categories:
(1) This figure includes pies sold in our Tootie Pie Gourmet Cafés.
Due to the seasonal nature of our business, we expect there will be large fluctuations in the percentage breakdown between the categories of our business reported at the various reporting periods. Although our retail and corporate customers purchase our pies throughout the year, the majority of such sales are during November and December, our third fiscal quarter. Sales to our wholesale customers also experience seasonal fluctuations with a large portion of our wholesale revenue recorded during our third fiscal quarter. Specifically, 47% of our retail revenue, 94% of our corporate revenue and 28% of our wholesale revenue for the fiscal year ended March 31, 2012 was recorded in our fiscal third quarter.
As of March 31, 2012, our two largest wholesale customers were Ben E. Keith Food Services and Sysco Corporation, accounting for 28% of our overall product sales, 22% and 6% respectively.
Costs of Goods Sold:
Cost of goods sold includes raw materials, direct labor, cooking and cleaning supplies, and factory overhead. Cost of goods sold was $1,035,476 for the twelve months ended March 31, 2012 compared to $775,749 for the twelve months ended March 31, 2011. The increase in cost of sales from the prior year was due directly to the increase in sales for the year.
Cost of goods sold, as a percentage of net sales, was 37.9% for the twelve month period ended March 31, 2012 compared to 38.3% for the twelve month period ended March 31, 2011. We do not consider the 0.4% change to be a particularly meaningful change and attribute it to our fixed cost of manufacturing being spread over the number of units sold resulting in no meaningful changes in manufacturing efficiencies. The result is a fairly constant cost of sales and overall cost per unit produced and sold from one twelve month period to the next.
Gross Margin:
Gross margin was 62.1% for the year ended March 31, 2012 compared to 61.7% for the year ended March 31, 2011. Consequently, we had a similar gross profit for each unit sold from the prior year period. We expect our gross margin percentage to continue to fluctuate as we refine our manufacturing process.
Selling, General and Administrative Expenses:
Selling, general and administrative expenses increased $449,022, or 20%, to $2,729,769 for the twelve month period ended March 31, 2012, from $2,280,747 for the twelve month period ended March 31, 2011. The increase in selling, general and administrative expenses from the prior year was principally due to additional expenses incurred to open, staff and operate two additional Café locations, taking our number of locations from five to seven.
Net Loss:
Net loss decreased 21.3% to $861,262 for the twelve months ended March 31, 2012 from $1,094,001 for the twelve months ended March 31, 2011. The net loss decrease for the twelve months ended March 31, 2012 was principally due to a reduction in non-recurring start up related and operating expenses incurred to open, staff and operate additional Cafés, as well as an 87.8% increase in higher margin retail sales, coming primarily through our Cafes. .
Liquidity and Capital Resources
At March 31, 2012, we had $27,569 of cash and cash equivalents, compared to $402,362 of cash and cash equivalents at March 31, 2011. Our current assets at March 31, 2012 were $335,462, compared to $714,589 at March 31, 2011. Our current liabilities at March 31, 2012 were $439,271, compared to $434,280at March 31, 2011.
On April 6, 2012, we obtained a $1,000,000 working capital line of credit from TCA Global Credit Master Fund, LP. We believe our current working capital is sufficient to fund our current operations; however, we are seeking additional capital to fund our growth plans through our fiscal year ending March 31, 2013. Potential sources of such working capital could include senior debt facilities, new lines of credit or additional sales of our securities. There is a risk that such additional financing may not be available, or may not be available on acceptable terms, and the inability to obtain additional financing or generate sufficient cash from operations could require we not grow and continue to maintain operations at our historic levels.
Net cash used in operating activities was $363,116 for the twelve months ended March 31, 2012 and $539,752 of cash used for the twelve months ended March 31, 2011. Net cash used in operating activities decreased primarily due to an increase of 87.8% in higher margin retail sales, coming primarily through our Cafes.
Net cash used in investing activities was $412,868 for the twelve months ended March 31, 2012 and $227,158 for the twelve months ended March 31, 2011. Net cash used in investing activities increased primarily due to expenditures related to opening additional Café locations, increasing our number of locations from five to seven.
Net cash provided by financing activities of $401,191 and $1,122,216 for the twelve months ended March 31, 2012 and 2011, respectively, represented proceeds from the issuance of common stock as well as borrowings in notes payable, net of repayments.
Off-Balance Sheet Arrangements
We currently have no off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
As a Smaller Reporting Company, as defined by Rule 12b-2 of the Exchange Act and in Item 10(f)(1) of Regulation S-K, we are electing scaled disclosure reporting obligations and therefore are not required to provide the information requested by this Item.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Letter from Management
Balance Sheets as of March 31, 2012 and 2011
Statements of Operations for the years ended March 31, 2012 and 2011
Statements of Changes in Stockholders’ Equity for the years ended March 31, 2012 and 2011
Statements of Cash Flows for the years ended March 31, 2012 and 2011
Notes to Financial Statements
REPORT OF MANAGEMENT ON COMPANY FINANCIAL STATEMENTS
In a Form 8K filing with the SEC, dated May 24, 2012, our Board of Directors notified investors of our decision to change accounting firms. We have used the accounting firm of Akin, Daugherty, Klein & Feuge for over six years.
Since that date, our new accounting firm, M&K CPA’S, began the audit for our fiscal year ending March 31, 2012. This process has labored on for over four months and, regrettably, is still not concluded.
As of this date, our former and current auditors continue to debate accounting adjustments regarding non-cash journal entries amounting to $173,809. Unfortunately, as the debate continues, our current auditor will not issue an audit opinion unless our prior auditor signs off on these adjustments.
We concluded this impasse between accountants left us with only two options: allow our current auditor to go back and audit two years, those years being our fiscal years ending 2011 and 2012; or file our 10K with unaudited financials. We could not allow the current process to continue indefinitely and waiting for the current auditor to go back and audit two years was not a viable option; particularly considering that our lender, TCA Global, informed us that further delays would endanger loan covenants on our existing credit facility. Furthermore, we are not required to file audited financials in order for our common stock to continue trading in the same manner and venue it has traded for the last sixty days. Given these options, we decided to file our 10K with unaudited financials. We may still elect, as some point in the future, to have fiscal years 2012 and 2013 audited.
We have prepared the accompanying balance sheets of Tootie Pie Company, Inc. as of March 31, 2012 and 2011, and the related statements of operations, changes in stockholders' equity, and cash flows for the two years in the period ended March 31, 2012.
We have done our best to prepare these financial statements in accordance with U.S. generally accepted accounting principles, with reasonable assurance that the financial statements are free of material misstatement. The Company is not required to have, nor were auditors engaged to perform, an audit of our internal control over financial reporting. Our auditor input included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purposes of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, no such opinion has been given. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.
In our opinion, the financial statements referred to above presents fairly, in all material respects, the financial position of Tootie Pie Company, Inc., as of March 31, 2012 and 2011, and the results of its operations and its cash flows for each of the two years in the period ended March 31, 2012, in conformity with U. S. generally accepted accounting principles, to the best of our knowledge and ability.
The Management and Board of Directors
The Tootie Pie Company, Inc.
See notes to financial statements.
TOOTIE PIE COMPANY, INC.
BALANCE SHEETS
See notes to financial statements.
TOOTIE PIE COMPANY, INC.
STATEMENTS OF OPERATIONS
See notes to financial statements.
TOOTIE PIE COMPANY, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
See notes to financial statements.
TOOTIE PIE COMPANY, INC.
STATEMENTS OF CASH FLOWS
See notes to financial statements.
TOOTIE PIE COMPANY, INC.
Notes to Financial Statements
NOTE 1 - DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Nature of Business: Tootie Pie Company, Inc. (the “Company”) was organized under the laws of the State of Nevada on June 16, 2005 and commenced its formal operations on September 9, 2005. The Company is engaged in the development, production and marketing of “high end” desserts through retail, corporate and wholesale channels from its manufacturing and corporate office facilities in Boerne, Texas. In addition, the Company operates cafés under the name Tootie Pie Gourmet Café that serve a light menu including pastries, bagels, soups, sandwiches, salads, coffee, teas and other drinks, as well as whole pies and pie by the slice .
Reporting Period: These financial statements are as of and for the years ended March 31, 2012 and 2011. The Company operates on a March 31 fiscal year end.
Cash: Cash consists of demand deposits held at financial institutions and cash on hand.
Accounts Receivable: Accounts receivable is reported at outstanding principal, net of an allowance for doubtful accounts of $4,389 at March 31, 2012 and $4,871 at March 31, 2011. The allowance is determined based on historical trends and an account-by-account review. Accounts are charged off when collection efforts have failed and the account is deemed uncollectible. The Company normally does not charge interest on accounts receivable.
Inventories: Inventories are stated at the lower of cost (which is determined on a first-in, first-out method) or market and consists of raw materials, packaging materials and finished goods. Reserves for slow moving and obsolete inventories are provided based on historical experience and product demand. A reserve for obsolete inventories was not required at March 31, 2012and 2011.
Fixed Assets: Fixed assets are stated at cost. Depreciation is computed on the straight-line method over the estimated useful lives of the related assets, ranging from three to twenty years. Leasehold improvements are amortized straight-line over the lesser of the estimated useful life of the asset or over the remaining lease period. Expenditures for maintenance and repairs are charged to expense as incurred.
Intangible Assets: Intangible assets consist primarily of recipes (see Note 2), and are being amortized straight-line over 7 years. Accumulated amortization totaled $179,631 at March 31, 2012 and $152,346 at March 31, 2011. The Company periodically reviews, on at least an annual basis, the carrying value of its intangible and long-lived assets, or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. To the extent the fair value of intangible and long-lived assets, determined based upon the estimated future cash inflows attributable to the assets, less estimated future cash outflows, are less than the carrying amount, an impairment loss is recognized.
Income Taxes: The Company is taxed as a regular C Corporation. Deferred tax assets and liabilities are recorded based on differences between financial reporting and tax bases of assets and liabilities, and are measured using the enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse. The Company is subject to the Texas margin tax.
The Company follows Accounting Standard Codification (“ASC”) Topic 740. The Standard defines the confidence level that a tax position must meet in order to be recognized in the financial statements. ASC 740 requires a two-step approach under which the tax effect of a position is recognized only if it is “more-likely-than not” to be sustained and the amount of tax benefit recognized is equal to the largest tax benefit that is greater than 50% likely of being realized upon ultimate settlement of the tax position. This approach requires the Company to exercise considerable judgment and estimates are inherent. ASC 740 also requires that the amount of interest expense to be recognized related to uncertain tax positions be computed by applying the applicable statutory rate of interest to the difference between the tax position recognized in accordance with ASC 740 and the amount previously taken or expected to be taken in a tax return.
TOOTIE PIE COMPANY, INC.
Notes to Financial Statements
NOTE 1 - DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES - continued
Revenue Recognition: Revenue is recognized when goods are shipped from production or third party storage facilities to customers. Revenue is recognized when the following four criteria have been met: the product has been shipped and the Company has no significant remaining obligations; persuasive evidence of an arrangement exists; the price to the buyer is fixed or determinable; and collection is probable. Deductions from sales for discounts are recorded as reductions of revenues and are provided for at the time of initial sale of product. Sales taxes when billed are reported directly as a liability to the taxing authority, and not included in revenues.
Advertising Costs: Advertising is expensed as incurred. The Company incurred advertising expense of approximately $258,000 for the year ended March 31, 2012 and $18,000 for the year ended March 31, 2011.
Product Development Costs: Cost of new product development and product redesign are charged to expense as incurred.
Shipping and Handling Costs: Revenue received from shipping and handling fees of $198,142 for the year ended March 31, 2012 and $175,806 for the year ended March 31, 2011 is reflected in sales. Costs associated with shipping product to customers is included in selling expenses and totaled $210,967 for the year ended March 31, 2012 and $232,475 for the year ended March 31, 2011.
Loss Per Common Stock: Basic and diluted loss per common share is calculated by dividing net loss by the weighted average number of common shares outstanding during the period. Common stock and equivalents, which consist of unvested common stock, stock options and warrants, were excluded from the computation of the weighted average number of common shares outstanding for purposes of calculating diluted loss per common share because their effect was anti-dilutive.
Share-Based Compensation: The Company recognizes as compensation expense all share based payment awards made to employees and directors, including grants of stock options and warrants, based on estimated fair values. Fair value is generally determined based on the closing price of the Company’s common stock on the date of grant. Compensation expense related to share based payments totaled $169,123 for the year ended March 31, 2012 and $190,130 for the year ended March 31, 2011.
Concentration of Credit Risk: Financial instruments that potentially expose the Company to credit risk consist of cash and accounts receivable. The Company is exposed to credit risk on its cash in the event of default by the financial institutions to the extent of balances in excess of amounts insured by the FDIC. Accounts receivables potentially subject the Company to concentrations of credit risk. The Company’s customer base consists of retail, corporate and wholesale buyers which are geographically dispersed. For the year ended March 31, 2012, the Company’s two primary wholesale customers represented 21% and 6% of pie sales revenue.
Fair Value of Financial Instruments: Cash, accounts receivable, accounts payable, and accrued expenses are reflected in the accompanying audited financial statements at cost, which approximates fair value because of the short-term maturity of these instruments.
Use of Estimates: The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure on contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Recent Accounting Pronouncements: Management is not aware of any new accounting pronouncements that have been released, and are not yet effective, which will have a significant impact to its financial position or results of activities in future periods.
TOOTIE PIE COMPANY, INC.
Notes to Financial Statements
NOTE 2 - PURCHASE OF CERTAIN ASSETS WITH COMMENCEMENT OF OPERATIONS
On September 9, 2005, the Company purchased the rights, recipes, customer lists, and certain equipment of a sole proprietor located in Medina, Texas in exchange for $50,000 in cash and the issuance of 600,000 shares of common stock valued at $150,000. The $200,000 purchase price was allocated as $9,000 to equipment and $191,000 to intangible assets. The intangible assets are being amortized $27,286 per year through fiscal year ended March 31, 2012, and will be amortized as $11,418 in fiscal year ended March 31, 2013.
NOTE 3 - INVENTORIES
Inventories consist of the following at March 31:
NOTE 4 - LONG-TERM DEBT
Maturities of long-term debt will result in the following principal requirements:
NOTE 5 - NOTE PAYABLE, RELATED PARTY
During the year ended March 31, 2012, the Company borrowed $25,000 from Don Merrill Sr., the father of the Chief Executive Officer of the Company, with interest paid bi-annually at 15%. The note matures in November 2012. As further consideration, the Company issued 100,000 shares of common stock and warrants to purchase an additional 100,000 shares of common stock with an exercise price of $0.50 per share. The warrants expire December 31, 2013.
TOOTIE PIE COMPANY, INC.
Notes to Financial Statements
NOTE 6 - STOCKHOLDERS’ EQUITY
Preferred Stock: The Company has authorized 100,000 shares of $0.001 par value preferred stock, none of which is issued or outstanding at March 31, 2012. Voting powers, designations, preferences, and qualifications have not been set by the Board of Directors.
Stock Warrants: The Company has warrants outstanding to purchase an aggregate of 2,525,000 shares of common stock:
·
On August 26, 2010, the Company also sold Class B Warrants to purchase 2,100,000 shares of its common stock at $0.50 per share, subject to adjustment. The Class B Warrants expire December 31, 2012, subject to extension under certain circumstances.
·
The Company has warrants outstanding that expire on December 31, 2013 to purchase 125,000 shares of its Common Stock at $0.40 per share, subject to adjustment.
·
The Company has warrants outstanding that expire on December 31, 2013 to purchase 100,000 shares of its Common Stock at $0.50 per share, subject to adjustment.
·
The Company has warrants outstanding that expire on March 21, 2021 to purchase 200,000 shares of its Common Stock at $0.43 per share, subject to adjustment.
Stock Based Employee Compensation Plan: On March 2, 2011, the Board of Directors adopted the Tootie Pie Company 2011 Stock Option and Incentive Plan, reserving 2,000,000 shares of common stock for issuance upon exercise of any awards granted under the Plan.
Stock Awards: During 2011, the Company granted common stock as compensation to the Chief Executive Officer of the Company with an aggregate fair value of $200,550 with a vesting period of five years, and granted common stock as compensation to non-employee directors of the Company with an aggregate fair value of $86,000 with a vesting period of two years. Key employees were also granted common stock as compensation with aggregate fair value of $75,250 with a vesting period of two years. Compensation expense of $109,621 was recognized in 2011 and the remaining $252,179 will be recognized over the remainder of the vesting period.
Stock Options: The Company periodically grants non-qualified stock options and uses the Black-Scholes option pricing model in valuing theses grants. The fair value for these options was estimated at the date of grant with the following weighted-average assumptions for the year ended March 31:
The Black-Scholes option pricing model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company’s employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing model does not necessarily provide a reliable single measure of the fair value of its employee stock options.
TOOTIE PIE COMPANY, INC.
Notes to Financial Statements
A summary of the status of the Company’s non-plan and plan options is as follows:
The Company recognized $80,509 in compensation expense related to stock options for the year ended March 31, 2011 and the remaining $185,223 will be recognized over a weighted average period of 3.75 years.
TOOTIE PIE COMPANY, INC. Notes to Financial Statements
NOTE 7 - EARNINGS (LOSS) PER SHARE
The following reconciles the components of the earnings (loss) per share (“EPS”) computation.
TOOTIE PIE COMPANY, INC. Notes to Financial Statements
NOTE 8 - INCOME TAXES
The reconciliation of income tax computed at the U.S. federal statutory tax rates to total income tax is as follows for the fiscal years ended March 31:
Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and used for income tax purposes. Significant components of the Company’s deferred tax assets and liabilities are as follows at March 31:
In assessing the reliability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred income tax assets will not be realized. The ultimate realization of deferred income tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred income tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based on consideration of these items, management has determined that enough uncertainty exists relative to the realization of the deferred income tax asset balances to warrant the application of a full valuation allowance as of March 31, 2012 and 2011.
If applicable, the Company would recognize interest and penalties related to uncertain tax positions in interest expense. As of March 31, 2012, the Company had no accrued interest or penalties.
As of March 31, 2012, the tax years ended March 31, 2006 through March 31, 2012 remain subject to examination by tax authorities.
The Company’s tax net operating loss carry forward of approximately $3,260,000 (net benefit at 34% of $1,108,000) expires from 2026 to 2031.
TOOTIE PIE COMPANY, INC. Notes to Financial Statements
NOTE 9 - COMMITMENTS AND CONTINGENCIES
Operating Leases: The Company’s corporate office and bakery building is leased on a month to month basis. The Company also has leases on its seven Gourmet Cafés that range in expiration from November 2012 to August 2018. Rental expense for all facilities was approximately $308,523 for the fiscal year ended March 31, 2012 and $145,000 for the fiscal year ended March 31, 2011. Future minimum annual lease payments are as follow:
Purchase Commitment: The Company signed a purchase commitment with Smeltzer Orchard Company, LLC on February 7, 2012 to purchase 160,000 pounds of apples for a total cost of approximately $94,000. All apples must be delivered by September 2012.
Contingency: The Company may be involved in various claims and legal actions arising in the ordinary course of business. The Company believes it is unlikely that the final outcome of any of the claims or proceedings to which the Company is a party would have a material adverse effect on the Company’s financial position or result of operations.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
Our management evaluated, with the participation of our Chief Executive Officer / Interim Chief Financial Officer, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this Annual Report on Form 10-K. Based on that evaluation, our Chief Executive Officer / Interim Chief Financial Officer concluded that our disclosure controls and procedures as of March 31, 2012 are effective to ensure that information we are required to disclose in reports that we file or submit under the Exchange Act (i) are recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and (ii) are accumulated and communicated to our management, including our Chief Executive Officer / Interim Chief Financial Officer, as appropriate, to allow timely decisions regarding required reasonable assurance that such information is accumulated and communicated to our management. Our disclosure controls and procedures are designed to provide reasonable assurance that such information is accumulated and communicated to our management. Our disclosure controls and procedures include components of our internal control over financial reporting. Management's assessment of the effectiveness of our internal control over financial reporting is expressed at the level of reasonable assurance that the control system, no matter how well designed and operated, can provide only reasonable, but not absolute, assurance that the control system's objectives will be met.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that:
1.
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect our transactions and dispositions of our assets;
2.
provide reasonable assurance that our transactions are recorded as necessary to permit preparation of our financial statements in accordance with generally accepted accounting principles, and that the receipts and expenditures of our Company are being made only in accordance with authorizations of our management and our directors; and
3.
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on our financial statements.
Internal control over financial reporting includes the controls themselves, monitoring and internal auditing practices and actions taken to correct deficiencies identified.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with policies or procedures may deteriorate.
Under the supervision and with the participation of our management, including our Chief Executive Officer / Interim Chief Financial Officer, we conducted an assessment of the effectiveness of our internal control over financial reporting as of March 31, 2012. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Based on this evaluation, our management concluded that our internal control over financial reporting was effective as of March 31, 2012.
This Annual Report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit us to provide only management’s report in this Annual Report.
Changes In Internal Control Over Financial Reporting
There was no change in our internal controls over financial reporting that occurred during the quarter ended March 31, 2012, that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.
ITEM 9B.
ITEM 9B. OTHER INFORMATION.
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE.
The following table sets forth the name, age, positions, offices and biographies for the past five years as of March 31, 2012, of our executive officers and directors. Members of the board are elected and serve for three year terms or until their successors are elected and qualify. All of the officers serve at the pleasure of the Board of Directors.
BIOGRAPHIES OF EXECUTIVE OFFICERS AND DIRECTORS
Don L. Merrill, Jr. has been our Chief Executive Officer and a director since our inception in June 2005. Effective May 21, 2009, Mr. Merrill was appointed to serve as our Interim Chief Financial Officer. Mr. Merrill has over twenty years experience in capital markets, where he began his career with Merrill Lynch in 1983. In May 1989, Mr. Merrill left Merrill Lynch and began consulting directly with primarily early stage companies until September 2005 when he joined our Company. Mr. Merrill has provided his expertise on a consulting basis to companies in many business sectors, including specialty retail, telecommunications, financial services, and high tech communications, for close to twenty years. Mr. Merrill has evaluated many young companies and provided his expertise in raising both public and private equity. Mr. Merrill holds a Bachelor Degree in Advertising from the University of Texas at Austin, Texas.
Dan Gostylo has served as a director on our Board since June 16, 2009 and serves as Chairman of our Compensation Committee. Mr. Gostylo is a co-founder, principal and broker with Providence Commercial Real Estate Services in San Antonio, Texas. Prior to co-founding Providence Commercial in 1991, Mr. Gostylo was a commercial real estate investment broker with Coldwell Banker Commercial's office in San Antonio for seven years. As a licensed commercial real estate broker in the State of Texas, Mr. Gostylo has over 25 years experience in handling commercial real estate transactions, primarily office and industrial, by representing tenants, landlords, buyers and sellers in numerous complex negotiations. He is a past-president (2004) of CORFAC International, an affiliation of commercial brokerage firms from all across North and South America, and he continues to serve CORFAC as chairman of the Affiliation Development Committee. Mr. Gostylo is a graduate of Princeton University where he earned a bachelor's degree in chemical engineering in 1976.
David P. Strolle, Jr. has served as a director on our Board since October 23, 2008 and currently serves as our general corporate counsel and Corporate Secretary. Mr. Strolle is a licensed attorney who has been engaged in the private practice of civil law with various firms for over twenty-four years with an emphasis on business litigation. Mr. Strolle currently represents several small to medium-sized Texas companies in an ex-officio general counsel role handling all legal issues for those companies. Mr. Strolle is a member in good standing of both the Texas and San Antonio Bar Associations and is licensed to practice in all state courts, the Federal Court of Claims and the federal courts in the Western and Southern Districts of Texas. Mr. Strolle has previously represented clients in complex business transactions including the purchase and sale of companies and the formation and dissolution of business entities. From February 2003 to June 2005, Mr. Strolle was a partner practicing law with Martin & Strolle, P.C. Since July 2005, Mr. Strolle has been practicing law with the Law Offices of David P. Strolle, Jr., a sole proprietorship, with offices in San Antonio, Texas. Mr. Strolle holds a Bachelor of Business Administration from the University of Texas at Austin, Texas and a Doctor of Jurisprudence from the University of Houston Law Center.
James E. Dawson served as Director from August 26, 2010 until his resignation on February 6, 2012. Since 2007, James E. Dawson has served as Senior Vice President and Chief Financial Officer of Blackfish, Ltd., where he is responsible for all accounting and administrative duties. Also since 2007, he has served as a Partner of Dawson Holdings, L.P., seeking and analyzing partnership investments. Prior to these positions, he served as Senior Vice President and Chief Financial Officer of BudCo, Ltd. He also serves on the board of directors of Programming Concepts, Ltd., a privately held educational publishing company, and serves as an officer of GPCI, Inc., a related company to Programming Concepts, Ltd. Mr. Dawson received a Bachelor of Business Administration in Accounting from Texas Tech University, and is a Certified Public Accountant.
Vincent M. Dawson served as Director from August 26, 2010 until his resignation on February 6, 2012. Since 2007, Vincent M. Dawson has served as Executive Vice President of Blackfish, Ltd., and also as a Partner of Dawson Holdings, L.P. In both positions, he is involved in the company’s day to day operations. Mr. Dawson has a Bachelor of Arts in Philosophy and Economics.
Leslie E. Doss has served as Director since March 5, 2012. Since 2007, Leslie E. Doss has served as President of DML Enterprises, a company he started that provides billing services to over 43 physician practices across Texas. He is also working on his Ph.D. in economics, while serving as a full time professor of economics at the University of Texas at San Antonio. He has a Bachelors of Science in electrical engineering from the University of Texas at Arlington and an MBA from the University of Texas at San Antonio.
Clifford L. Rogers has served as Director since March 5, 2012. Since 2007, Clifford L. Rogers has served as President & CEO and board member of Unified Power Holdings, LLC. While in the United States Army, Mr. Rogers attended Central Texas College, where he studied electrical engineering and the University of Maryland, where he studied business.
Compliance with Section 16(a) of the Exchange Act
We do not have any securities registered under Section 12 of the Exchange Act, as amended. Accordingly, our directors, executive officers, and stockholders beneficially owning more than 10% of our common stock are not required to comply with the reporting requirements of Section 16(a) of the Exchange Act.
Code of Ethics
We have not adopted a written code of ethics. Our Company is a small start-up company and we have not had the resources to document in writing all of our policies. Our Board of Directors currently is in the process of reviewing a code of ethics policy that will apply to our Principal Executive Officer, Principal Financial and Accounting Officer, Board of Directors and to all of our staff. While we do not have a formal code of ethics in place, we believe that our Company follows an ethical code in practice.
Procedure for Nominating Directors
There have been no material changes to the procedures by which security holders may recommend nominees to our Board of Directors.
The Board of Directors will consider candidates for director positions that are recommended by any of our stockholders. Any such recommendation for the 2012 Annual Meeting of Stockholders should be provided to our Chief Executive Officer. The recommended candidate should be submitted to us in writing addressed to 129 Industrial Drive, Boerne, Texas 78006. The recommendation should include the following information: name of candidate; address, phone and fax number of candidate; a statement signed by the candidate certifying that the candidate wishes to be considered for nomination to our Board of Directors and stating why the candidate believes that he or she would be a valuable addition to our Board of Directors; a summary of the candidate's work experience for the prior five years and the number of shares of our stock beneficially owned by the candidate.
The Board will evaluate the recommended candidate and shall determine whether or not to proceed with the candidate in accordance with our procedures. We reserve the right to change our procedures at any time to comply with the requirements of applicable laws.
Committees of the Board of Directors
The Board of Directors has the responsibility for establishing broad corporate policies and reviewing our overall performance rather than day-to-day operations. The Board's primary responsibility is to oversee management of our Company and, in so doing, serve the best interests of our Company and our stockholders. Our full Board of Directors performs all of the functions normally designated to an audit committee, compensation committee and nominating committee.
Audit Committee and Audit Committee Financial Expert
The Board of Directors has not designated a separate audit committee and the functions of such committee are conducted by the entire Board, whose members are named above. We do not have an “audit committee financial expert,” as defined in Item 407(d)(5)(ii) of Regulation S-K. At the present time, we do not believe the services of a financial expert are warranted. We believe that each member of our Board is financially literate and possesses sufficient experience, both professionally and by virtue of his service on our Board, to be fully capable of discharging his duties as a member of our Board performing audit committee functions. However, none of the members of our Board has a professional background in accounting or “preparing, auditing, analyzing or evaluating financial statements.” If our Board determines that it requires additional financial expertise, it will either engage professional advisers or seek to recruit a member who would qualify as an audit committee financial expert.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION.
The following table presents the compensation information during the fiscal years ended March 31, 2012 and March 31, 2011 for our Principal Executive Officer/ Principal Financial Officer. We refer to this executive officer as our “named executive officer” elsewhere in this Annual Report.
Summary Compensation Table for Fiscal Years Ended March 31, 2012 and 2011
(1)
The amounts disclosed in columns (e) and (f) represent the aggregate grant date fair value for awards of stock and options granted in the respective fiscal year as computed in accordance with FASB ASC Topic 718. For a discussion of the assumptions made in the valuation of the amounts in these columns, see Note 6 of the Notes to our audited financial statements contained elsewhere in this Annual Report on Form 10-K.
(2)
Mr. Merrill’s base salary at March 31, 2011 was $105,000. The $6,729 additional paid for FY 2011 was due to a salary difference for the majority of the year.
(3)
On January 5, 2011, pursuant to our employment agreement with Mr. Merrill, we issued 286,500 shares of our common stock to Mr. Merrill. Such shares were valued at $200,550. Subsequently, under Mr. Merrill’s instruction, we re-issued the 286,500 shares to Cathryn Merrill.
(4)
On January 5th, 2011, we issued Mr. Merrill options to purchase 286,500 shares of common stock, at $.70 per share, no later than January 5, 2021. The options have a five-year vesting schedule such that Mr. Merrill can sell no more than one fifth of the restricted shares nor exercise more than one fifth of the options per year, assuming compliance with all State and Federal laws regarding sales of restricted securities.
NARRATIVE TO SUMMARY COMPENSATION TABLE
EMPLOYMENT AGREEMENTS OF EACH NAMED EXECUTIVE OFFICER
On December 1, 2010, our Board of Directors approved a new five year employment agreement with Don Merrill, our Chief Executive Officer and Interim Chief Financial Officer. Pursuant to the agreement, we will pay Mr. Merrill base salary of $105,000 per year over the five year term of the agreement, subject to annual increases based on performance standards set by our Board. Mr. Merrill will also be eligible for additional yearly bonuses over the term of the agreement as determined by our Board.
Mr. Merrill also receives such medical and other personal benefits as paid to other employees. Additionally, Mr. Merrill will receive an automobile allowance of up to $550 per month.
We have issued compensation in the form of stock options to our named executive officer as disclosed in the above Summary Compensation Table, however we have not committed to issue any additional equity securities to our named executive officers other than the common stock underlying these options.
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
The following table shows grants of options outstanding on March 31, 2012, the last day of our fiscal year, to the named executive officer as depicted in the Summary Compensation Table.
Outstanding Equity Awards at Fiscal Year-End Table: March 31, 2012
NARRATIVE TO OUTSTANDING EQUITY AWARDS TABLE
Retirement Benefits
We do not have any qualified or non-qualified defined benefit plans that will be paid primarily following retirement.
Nonqualified Deferred Compensation
We do not have any non-qualified defined contribution plans or other deferred compensation plans.
Potential Payments Upon Resignation, Retirement, Termination or Change of Control of the Company
We have entered into an employment agreement with our Chief Executive Officer, Don Merrill, Jr.
In the event that Mr. Merrill’s employment is terminated by reason of death or disability, we shall pay the following amounts to Mr. Merrill (or his spouse or estate, as applicable):
·
Any accrued but unpaid base salary for services rendered to the date of termination.
·
In the event of disability, an additional six months of base salary. Additionally, in the event of disability, Mr. Merrill will remain covered on our health and dental insurance for up to eighteen months insurance on the same terms as when Mr. Merrill was employed by us.
·
Any accrued but unpaid expenses.
·
A pro rata share, based on the portion of the fiscal year in which Mr. Merrill was employed at the time of his death or disability, of the annual bonus to which Mr. Merrill would have been entitled had Mr. Merrill remained employed by us through the end of the then current fiscal year. Such amount shall be paid as soon as reasonably practicable following the calculation thereof at the end of such fiscal year.
In the event Mr. Merrill’s employment is terminated by us without cause, we shall pay the following amounts to Mr. Merrill:
·
Any accrued but unpaid base salary for services rendered to the date of termination.
·
Any accrued but unpaid expenses.
·
Base salary for a period of six months from the date of termination payable in a lump sum at the time of termination.
·
Access to benefits and insurance for a period of twelve months from the date of termination on the same terms as when Mr. Merrill was employed including Company contributions.
·
Within ten business days following termination, Mr. Merrill will provide a statement to us indicating how many shares of common stock he holds. Within two weeks following the receipt of such statement, we may repurchase any shares of our common stock held by Mr. Merrill at purchase price equal to 125% of the closing price on the date of termination. However, we shall not repurchase any common stock such that, along with any benefits listed, will require us to exceed the limit in IRS Tax Sections 280G and 4999.
In the event Mr. Merrill's employment is terminated by us with cause, or in the event Mr. Merrill terminates his employment, we shall pay the following amounts to Mr. Merrill:
·
Any accrued but unpaid base salary for services rendered to the date of termination.
·
Any accrued but unpaid expenses.
DIRECTOR COMPENSATION
The following table sets forth a summary of the compensation earned by our directors and/or paid to certain of our directors pursuant to certain agreements we have with them during the fiscal year ended March 31, 2012.
March 31, 2012 Director Compensation Table(1)
(1)
Directors who are also included in the Summary Compensation Table as named executive officers are not included in this table.
(2)
The amounts disclosed in these columns represent the aggregate grant date fair value for awards of stock and options granted in the respective fiscal year as computed in accordance with FASB ASC Topic 718. For a discussion of the assumptions made in the valuation of the amounts in these columns, see Note 6 of the Notes to our audited financial statements contained elsewhere in this Annual Report on Form 10-K
(3)
On March 21, 2011, we granted Mr. Strolle 100,000 shares of our common stock, and warrants to purchase up to 100,000 shares of our common stock at an exercise price of $0.43 and expiration date of March 21, 2021.
(4)
On March 21, 2011, we granted Mr. Gostylo 100,000 shares of our common stock, and warrants to purchase up to 100,000 shares of our common stock at an exercise price of $0.43 and expiration date of March 21, 2021.
NARRATIVE TO DIRECTOR COMPENSATION TABLE
During the fiscal year ended March 31, 2011, no cash compensation was paid to our non-employee and employee directors for their services on our Board of Directors in connection with attendance at Board meetings.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
The following table sets forth certain information concerning the beneficial ownership of our common stock as of June 27, 2012, by each person known by us to (i) beneficially own more than 5% of our common stock, and by each of our (ii) directors, (iii) our named executive officer at the end of our most recently completed fiscal year, and (iv) all directors and officers as a group.
(1)
Unless indicated otherwise, the address of all beneficial owners is c/o Tootie Pie Company, Inc., 129 Industrial Dr., Boerne, TX 78006.
(2)
For purposes of this table “beneficial ownership” is determined in accordance with Rule 13d-3 under the Securities Exchange Act of 1934, pursuant to which a person or group of persons is deemed to have “beneficial ownership” of any common shares that such person or group has the right to acquire within 60 days after June 20, 2012. For purposes of computing the percentage of outstanding common shares held by each person or group of persons named above, any shares that such person or group has the right to acquire within 60 days after June 20, 2012 are deemed outstanding but are not deemed to be outstanding for purposes of computing the percentage ownership of any other person or group. Percentage calculations are based on 14,738,100 shares issued and outstanding on June 27, 2012.
(3)
Mr. Merrill is our Chief Executive Officer and our Interim Chief Financial Officer. Mr. Merrill beneficially owns 900,000 shares of common stock. Mr. Merrill also beneficially owns 225,000 shares of common stock issuable upon the exercise of options that are exercisable within 60 days of June 20, 2012.
An aggregate of 125,000 shares of common stock held by irrevocable trusts are additionally attributable to Mr. Merrill, and represented by: (i) 50,000 shares of common stock held by the Merrill Family Trust, (ii) 25,000 shares of common stock held in the Madeline Merrill Trust, (iii) 25,000 shares of common stock held in the Matthew Merrill Trust, and (iv) 25,000 shares of common stock held in the Emily Merrill Trust. Joan Bradshaw is the trustee of these trusts, and has sole voting and dispositive control over the shares.
(4)
Mr. Strolle is a member of our Board of Directors and serves as our general corporate counsel. Mr. Strolle beneficially owns 554,483 shares of common stock.
(5)
Mr. Gostylo is a member of our Board of Directors. Mr. Gostylo beneficially owns 491,000 shares of common stock.
(6)
Dawson Holdings, L.P. is a Texas limited partnership. Dawson Brothers, LLC is the General Partner of Dawson Holdings, and consequently has voting control and investment discretion over securities held by Dawson Holdings. By virtue of their direct and indirect control of Dawson Holdings and Dawson Brothers, James Dawson and Vincent Dawson as Partners of Dawson Holdings, are deemed to have voting power and investment power over these securities and may be deemed to beneficially own any securities owned by Dawson Holdings and Dawson Brothers. Mr. James Dawson and Mr. Vincent Dawson were members of our Board of Directors until their resignation on February 6, 2012.
(7)
Represents 3,239,130 shares owned by Dawson Holdings, L.P. Dawson Holdings holds common stock purchase warrants previously purchased and originally exercisable into 2,100,000 shares of common stock in the aggregate.
Securities Authorized for Issuance under Equity Compensation Plans
As of March 31, 2012, our equity securities authorized for issuance, aggregated, are as follows:
Equity Compensation Plan Information
(1)
The Tootie Pie Company, Inc. 2008 Stock Option and Incentive Plan allows for the issuance of up to 500,000 shares of common stock or shares underlying common stock options. This number includes 2,338 shares available for issuance under this Plan.
(2)
The Tootie Pie Company, Inc. 2011 Stock Option and Incentive Plan allows for the issuance of up to 2,000,000 shares of common stock or shares underlying common stock options. This number includes 1,800,000 shares available for issuance under this Plan.
Tootie Pie Company, Inc. 2011 Stock Option and Incentive Plan
On March 2, 2011, our Board of Directors approved the Tootie Pie Company, Inc. 2011 Stock Option and Incentive Plan, or the Plan. Prior to adoption of the Plan, our Board issued equity securities on January 5, 2011 as compensation to certain employees. Subsequent to the adoption of the Plan, equity securities issued as compensation as of March 21, 2012 have been issued pursuant to the Plan.
The purpose of the Plan is to encourage and enable our officers, directors, employees and other key persons to acquire a proprietary interest in our Company. We anticipate that by providing such persons with a direct stake in the welfare of our Company, we will assure a closer identification of their interests with those of our Company and our stockholders, thereby motivating their efforts on our behalf and strengthening their desire to remain with our Company.
We may issue up to 2,000,000 shares of common stock under the Plan. These shares may be issued in the form of unrestricted common stock awards, non-qualified stock options or stock options with restrictions or conditions as determined at the discretion of our Board of Directors. These conditions may be based on continuing employment, or other service relationship, and/or achievement of pre-established performance goals and objectives. No grants of stock options or other awards under the Plan may be made after March 2, 2021.
Individual Compensation Arrangements
On November 11, 2010, our Board of Directors approved bonuses to be paid effective January 5, 2011, in the form of partially vested stock options, to certain individuals. The following table summarizes the stock options granted to these individuals:
On November 11, 2010, our Board of Directors approved bonuses in the form of partially vested stock options, effective March 21, 2011, to certain individuals. The following table summarizes the stock options granted to these individuals:
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
Certain Relationships and Related Transactions
David P. Strolle, Jr., a member of our Board of Directors, also serves as our general corporate counsel and we compensate him for his services in that capacity. During the fiscal year ended March 31, 2011, we paid Mr. Strolle a total of $19,364 for these services.
Director Independence
As of March 31, 2012, Don L. Merrill, Jr., David P. Strolle, Jr., Dan Gostylo, Clifford Rogers and Leslie Doss served as our directors. Vincent Dawson, and Jim Dawson served as our directors until their resignation on February 6, 2012. David P. Strolle, Jr., Dan Gostylo, Clifford Rogers, Leslie Doss, Vincent Dawson, and Jim Dawson all qualify as “independent” in accordance with Rule 4200(a)(15) of the NASDAQ Marketplace Rules. W are currently traded on the OTCQB market. The OTCQB does not require that a majority of the Board be independent.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
Audit Fees
Akin, Doherty, Klein & Feuge, P.C. audited our financial statements for the fiscal years ended March 31, 2011..
M&K CPA’s provided accounting assistance and advice in our preparation of our unaudited financial statements for the fiscal year ended March 31, 2012.
Fees related to services performed by Akin in the years ended March 31, 2011and by M&K CPA’s for the year ended March 31, 2012 were as follows:
(1)
Accounting fees represent services provided in connection with the fiscal year of our financial statements, notwithstanding when the fees were billed or when the service was rendered.
(2)
Audit fees include an amount that is in dispute between the Company and its prior audit firm for the fiscal year ended March 2012.
(3)
Tax fees principally included tax advice, tax planning and tax return preparation for services billed from April through March of the fiscal year.
The Board of Directors has reviewed and discussed with our management our financial statements contained in this Annual Report on Form 10-K for our fiscal year ended March 31, 2012Based on the review and discussions referred to above, the Board approved the inclusion of the financial statements in our Annual Report on Form 10-K for the fiscal year ended March 31, 2012, for filing with the Securities and Exchange Commission.
Pre-Approval Policies
The Board’s policy is to pre-approve all audit services and all non-audit services before they commence, including the fees and terms thereof, to be provided by our independent auditor; provided, however, pre-approval requirements for non-audit services are not required if all such services (1) do not aggregate to more than five percent of total revenues paid by our Company to the accountant in the fiscal year when services are provided; (2) were not recognized as non-audit services at the time of the engagement; and (3) are promptly brought to the attention of the Board and approved prior to the completion of the audit.
The Board approved all fees described above.
ITEM 15.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
(a)(1) Financial Statements.
The following documents are filed in Part II, Item 8 of this Annual Report on Form 10-K:
Report of Management on Financial Statements
Balance Sheets as of March 31, 2012 and 2011
Statements of Operations for the years ended March 31, 2012 and 2011
Statements of Changes in Stockholders’ Equity for the years ended March 31, 2012 and 2011
Statements of Cash Flows for the years ended March 31, 2012 and 2011
Notes to Audited Financial Statements
(a)(2) Financial Statement Schedules.
All financial statement schedules have been omitted as they are not required, not applicable, or the required information is otherwise included.
(a)(3) Exhibits.
The exhibits listed below are filed as part of or incorporated by reference in this report.
Exhibit
Description
3.1
Articles of Incorporation (included as Exhibit 3.1 to the Form SB-2 filed July 11, 2006 and incorporated herein by reference).
3.2
Bylaws (included as Exhibit 3.2 to the Form SB-2 filed July 11, 2006 and incorporated herein by reference).
4.1
Corrected Form A Warrant (included as Exhibit 4.1 to the Form SB-2/A filed August 24, 2006 and incorporated herein by reference).
4.2
Corrected Form B Warrant (included as Exhibit 4.2 to the Form SB-2/A filed August 24, 2006 and incorporated herein by reference).
10.1
Hold Harmless Agreement and Guaranty/Warranty of Product between the Company and Sysco Corporation, dated August 9, 2006 (included as Exhibit 10.4 to the Form SB-2/A filed October 18, 2006 and incorporated herein by reference).
10.2
Non-Compete Agreement between the Company and Bobbie Keese, dated September 9, 2005 (included as Exhibit 10.5 to the Form SB-2/A filed October 18, 2006 and incorporated herein by reference).
10.3
Non-Compete Agreement between the Company and Ruby Lorraine “Tootie” Feagan, dated September 9, 2005 (included as Exhibit 10.6 to the Form SB-2/A filed October 18, 2006 and incorporated herein by reference).
10.4
Final Agreement between the Company and Ruby Lorraine “Tootie” Feagan dated November 6, 2006 (included as Exhibit 10.7 to the Form SB-2/A filed November 9, 2006 and incorporated herein by reference).
10.5
Full Service Broker Agreement between the Company and Hanks Brokerage Company dated November 7, 2006 (included as Exhibit 10.8 to the Form SB-2/A filed November 9, 2006 and incorporated herein by reference).
10.6
Stock Option Agreement between the Company and Don L. Merrill, Jr., dated March 22, 2007 (included as Exhibit 10.1 to the Form 8-K filed March 28, 2007 and incorporated herein by reference).
10.7
Tootie Pie Company, Inc. 2008 Stock Option and Incentive Plan, dated January 14, 2008 (included as Exhibit 10.1 to the Registration Statement on Form S-8 filed January 22, 2008 and incorporated herein by reference).
10.8
Asset Purchase and Sale Agreement between the Company and Amado Mesta and Adrianna Mesta doing business as Benny’s Bagels, dated August 11, 2009.
10.9
Securities Purchase Agreement by and between the Company and Dawson Holdings, L.P., dated August 26, 2010 (included as Exhibit 10.1 to the Form 8-K filed August 31, 2010).
10.10
Tootie Pie Company, Inc. 2011 Stock Option and Incentive Plan, dated January 14, 2008 (included as Exhibit 10.1 to the Registration Statement on Form S-8 filed March 2, 2011 and incorporated herein by reference).
10.11
Employment Agreement between the Company and Don L. Merrill, Jr., dated December 1, 2010 (included as Exhibit 10.1 to the Form 8-K/A filed March 24, 2011 and incorporated herein by reference).
10.12
Lease on Boerne, TX property
10.13
Securities Purchase Agreement, Senior Secured Redeemable Debenture, Subordination of Loans Agreement and Security Agreement by and between the Company and TCA Global Credit Master Fund, LP, executed April 6, 2012 (included as Exhibit 10.1, 10.2, 4.1 and 4.2 to the Form 8-K filed April 12, 2012)
21.1
Subsidiaries of the Registrant (included as Exhibit 21.1 to the Annual Report on Form 10-K filed June 30, 2008 and incorporated herein by reference).
31.1
Certification of the Chief Executive Officer/Interim Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
32.1
Certification of Chief Executive Officer/Interim Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been duly signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Date: October 5, 2012
By:
/s/ Don L. Merrill, Jr.
Don L. Merrill, Jr.
Principal Executive Officer, and Principal Financial and Accounting Officer
Date: October 5, 2012
By:
/s/ Dan Gostylo
Dan Gostylo
Director
Date: October 5, 2012
By:
/s/ David P. Strolle, Jr.
David P. Strolle, Jr.
Director
Date: October 5, 2012
By:
/s/ Clifford Rogers
Clifford Rogers
Director
Date: October 5, 2012
By:
/s/ Leslie Doss
Leslie Doss
Director