TATTOOED CHEF, INC. MANAGEMENT REPORT AND ANALYSIS OF FINANCIAL POSITION AND RESULTS OF OPERATIONS (Form 10-Q/A)
The following discussion and analysis should be read in conjunction with our condensed consolidated financial statements and related notes (the "Financial Statements") included elsewhere in this Quarterly Report on Form 10-Q/A (the "Quarterly Report") and the section entitled "Risk Factors." Unless otherwise indicated, the terms "
Tattooed Chef," "the Company," "we," "us," or "our" refer to Tattooed Chef, Inc., a Delawarecorporation, together with its consolidated subsidiaries. Management's Discussion and Analysis has been revised for the effects of the restatement as discussed in Note 2 Basis of Presentation and Significant Accounting Policies to the Financial Statements.
Special note regarding forward-looking statements
This Quarterly Report includes "forward-looking statements" within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act that are not historical facts and involve risks and uncertainties that could cause actual results to differ materially from those expected and projected. All statements, other than statements of historical fact included in this Quarterly Report including, without limitation, statements in this "Management's Discussion and Analysis of Financial Condition and Results of Operations" regarding the Company's financial position, business strategy and the plans and objectives of management for future operations, are forward-looking statements. Words such as "expect," "believe," "anticipate," "intend," "estimate," "seek" and variations and similar words and expressions are intended to identify such forward-looking statements. Such forward-looking statements relate to future events or future performance, but reflect management's current beliefs, based on information currently available. A number of factors could cause actual events, performance or results to differ materially from the events, performance and results discussed in the forward-looking statements. For information identifying important factors that could cause actual results to differ materially from those anticipated in the forward-looking statements, please refer to the Risk Factors section of the Company's Annual Report on Form 10-K/A for the period ending
December 31, 2021filed with the SECand Part II, Item 1A. Risk Factors herein. The Company's securities filings can be accessed on the EDGAR section of the SEC'swebsite at www.sec.gov. Except as expressly required by applicable securities law, the Company disclaims any intention or obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise. Factors that could cause actual results to differ materially from those in the forward-looking statements include, but are not limited to, the following:
• our ability to maintain the listing of our common stock on the Nasdaq;
•our ability to raise capital in the future;
•our ability to successfully acquire and integrate new operations;
•market conditions and global and economic factors beyond our control, including the potential adverse effects of the ongoing global coronavirus (COVID-19) pandemic on capital markets, war (including the ongoing conflict in
Ukraine), climate change, general economic conditions, unemployment and our liquidity, operations and personnel;
•our ability to obtain raw materials in a timely manner or in sufficient quantities to meet demand for our products;
•our ability to develop our customer base;
• our ability to forecast and maintain an adequate rate of revenue growth and plan expenses appropriately;
•our expectations regarding future expenditure;
• our ability to attract and retain qualified employees and key personnel;
• our ability to maintain relationships with third-party suppliers;
• our ability to compete effectively in the competitive packaged food industry;
• our ability to protect and enhance our company’s reputation and brand;
•the impact of inflation; and
•the impact of future regulatory, legal and legislative changes on our industry.
We are a rapidly growing plant-based food company offering a broad portfolio of innovative frozen foods. We supply plant-based products to leading retailers in
the United States, with signature products such as ready-to-cook bowls, zucchini spirals, riced cauliflower, acai and smoothie bowls, cauliflower crust pizza, handheld burritos, and quesadillas. Our products are available both in private label and our "Tattooed Chef™" brand in the frozen food section of retail food stores. Both NMFD and BCI, our new entities that were acquired in the second and fourth quarters of 2021 (see Note 9 Business Combinations), currently primarily manufacture private label products. NMFD is expected to manufacture both private label and Tattooed Chefbranded products during 2022. Our Mexican-style plant-based Tattooed Chefbranded products, including burritos, enchiladas, and quesadillas, total 18 new SKUs, were introduced to the market during the six months ended June 30, 2022. The Karsten facility is not currently in operation and is expected to become active during the third quarter of 2022. The Karsten facility is expected to manufacture Tattooed Chefbranded salty snacks and other alternative Tattooed Chefbranded and private label products. BCI is also expected to start manufacturing Tattooed Chefbranded products during the third quarter of 2022. We anticipate continued growth in Tattooed Chefbranded products primarily due to new product introductions, further expansion with current customers, and increased sales to new retail customers. While we are primarily focused on growing our branded business, we will continue to support our current private label business and will evaluate new opportunities with private label customers as they arise.
Results of operations The following table (restated for the effects of the corrections of errors identified in note 2 of the summary financial statements) presents the key statistics for the three months ended
Three months Completed
% of % of (in thousands) 2022 net revenue 2021 net revenue Net revenue
$ 67,688100.0 % $ 50,415100.0 % Cost of goods sold 63,621 94.0 % 45,408 90.1 % Gross profit $ 4,0676.0 % $ 5,0079.9 % Net loss $ (20,173)(29.8) % $ (7,629)(15.1) % Major operating expenses: Marketing expenses $ 7,96011.8 % $ 1,6953.4 % Post-manufacture cold storage costs $ 1,8012.7 % $ 7111.4 % Professional services $ 2,7264.0 % $ 9191.8 % Stock compensation expenses $ 1,2871.9 % $ 3,1856.3 % Payroll, benefits and recruiting expenses $ 2,6283.9 % $ 1,1622.3 % Operating expenses of newly acquired entities NMFD and BCI $ 2,3653.5 % - - % Net revenue Net revenue increased by $17.3 million, or 34.3%, to $67.7 millionfor the three months ended March 31, 2022as compared to $50.4 millionfor the comparable period in 2021. The revenue increase was due in part to an increase of $5.3 millionfor Tattooed Chefbranded products. In addition, private label products revenue increased by $8.8 million, primarily driven by the sales generated from NMFD and BCI (see Note 9 Business Combinations). Other revenue increased by $3.2 million, mainly driven by the sales of salsa, tamales, meats and other products by NMFD to its restaurant customers. Both NMFD and BCI currently primarily manufacture private label products. In the aggregate, NMFD and BCI contributed approximately $16.6 millionto our net revenue during the three months ended March 31, 2022. NMFD is expected to be fully operational and manufacturing both private label and Tattooed Chefbranded products during 2022. Our Mexican-style plant-based Tattooed Chefbranded products, burritos and quesadillas, were introduced to the market during the three months ended March 31, 2022. The Karsten facility is not currently in operation and is expected to become active during the second quarter of 2022. The Karsten facility is expected to manufacture Tattooed Chefbranded salty snacks and other alternative Tattooed Chefbranded and private label products. Belmont is expected to start manufacturing Tattooed Chefbranded products during the second quarter of 2022. We anticipate continued growth in Tattooed Chef30 -------------------------------------------------------------------------------- branded products primarily due to new product introductions, further expansion with current customers and increased sales to new retail customers. While we are primarily focused on growing our branded business, we will continue to support our current private label business and will evaluate new opportunities with private label customers as they arise.
Cost of Goods Sold
Cost of goods sold increased
$18.2 million, or 40.1%, to $63.6 millionfor the three months ended March 31, 2022as compared to $45.4 millionfor the comparable period in 2021. Cost of goods sold as a percentage of net revenue, increased to 94.0% for the three months ended March 31, 2022from 90.1% for the three months ended March 31, 2021. The increase of cost of goods sold in dollar amount is primarily due to the increase in sales volume. The increase as a percentage of net revenue is primarily due to the increases in cost of freight, packaging, and labor due to inflation and the increase in fixed costs including rent and depreciation expenses resulted from new leases assumed and fixed assets acquired though the acquisitions completed during the second and fourth quarters of 2021. As these new subsidiaries haven't operated at full capacity, our fixed costs as a percentage of net revenue are higher than the comparable period in 2021. Gross profit Gross profit decreased $0.9 million, or 18.8%, to $4.1 millionfor the three months ended March 31, 2022as compared to $5.0 millionfor the comparable period in 2021. Gross margin for the three months ended March 31, 2022was 6.0% as compared to 9.9% for the three months ended March 31, 2021. The decrease in gross margin in 2022 is due to the increase of cost of sales and the increase in the expense related to the multi-vendor mailer program previously in Note 2 Basis of Presentation and Significant Accounting Policies to the Financial Statements. The acquisition (NMFD and Karsten) in New Mexicothat was completed in May 2021and the acquisition (BCI) in Ohiothat was completed in December 2021. Neither NMFD nor BCI are currently operating at full capacity, because we are in the process to integrate both facilities into our strategic business plans. We expect more new Tattooed Chefbranded products to be manufactured by both plants. Therefore, we believe our fixed costs as a percentage of new revenue will decrease once the facilities operate at full capacity and achieve economies scale. We are negotiating different prices at our different club and retail customers based on product quantity and packaging configuration. We regularly evaluate pricing to ensure that the brand is competitive in pricing based on our competitors. With the current economic conditions and inflation, we are continuing to monitor raw materials, packaging, and freight costs to determine our pricing strategy. Operating expenses Operating expenses increased $12.2 million, or 108.9%, to $23.3 millionfor the three months ended March 31, 2022as compared to $11.2 millionfor the comparable period in 2021. As a percentage of net revenue, total operating expenses increased to 34.5% for three months ended March 31, 2022from 22.2% for the same period in 2021. Compared to the three months ended March 31, 2021, the increase in 2022 is primarily due to a $6.3 millionincrease in marketing expenses, a $1.1 millionincrease in post-manufacture cold storage expenses, a $1.8 millionincrease in professional expenses, a $1.5 millionincrease in payroll and recruiting expenses, and $2.4 millionoperating expenses for entities that were newly acquired during the second and fourth quarter of 2021, offset by a $2.0 milliondecrease in stock compensation expense. The significant increase in advertising, marketing, promotional and post-manufacture cold storage expenses are due to our heavy investment in the Tattooed Chef brand, in order to increase distribution, raise brand awareness, and drive sales in the new stores that are launching our products. The increase in professional expenses is mainly due to the legal, accounting and auditing fees attributable to services performed during the three months ended March 31, 2022in relation to 2021 year-end audit and reviews (including the filing of amendments to our Form of 10-Qs for the quarterly periods ended March 31, 2021, June 30, 2021and September 30, 2021), as well as proxy statements to comply as a public reporting company. The increase in payroll and recruiting expense is primarily due to temporary employee cost for marketing activities and our efforts to recruit and retain key employees needed to meet the additional compliance requirements of being a public company. The decrease of stock compensation expense was mainly driven by one restricted stock grant to a marketing consultant during the three months ended March 31, 2021, which grant vested immediately. We expect operating expenses to decrease over time as a percentage of revenue as certain relatively fixed operating expenses will be spread over increasing revenue. 31 --------------------------------------------------------------------------------
For the three months ended
March 31, 2022, we had net losses of $20.2 million, compared to a net loss of $7.6 millionfor the three months ended March 31, 2021. The increase of net loss was mainly driven by the decrease in gross margin and the increase in operating expenses, as discussed above.
Non-GAAP Financial Measures
We use non-GAAP financial information and believe it is useful to investors as it provides additional information to facilitate comparisons of historical operating results, identify trends in operating results, and provide additional insight on how the management team evaluates the business. Our management team uses Adjusted EBITDA to make operating and strategic decisions, evaluate performance and comply with indebtedness related reporting requirements. Below are details on this non-GAAP measure and the non-GAAP adjustments that the management team makes in the definition of Adjusted EBITDA. The adjustments generally fall within the categories of non-cash items, acquisition and integration costs, business transformation initiatives, including ERP related expenses for initial ERP implementation, and infrequent or unusual losses and gains in a non-recurring nature. We believe this non-GAAP measure should be considered along with net income, the most closely related GAAP financial measure. Reconciliations between Adjusted EBITDA and net income are below, and discussion regarding underlying GAAP results throughout this Management's Discussion and Analysis of Financial Condition and Results of Operations. As new events or circumstances arise, the definition of Adjusted EBITDA could change. When the definitions change, we will provide the updated definition and present the related non-GAAP historical results on a comparable basis. We define EBITDA as net income before interest, taxes, depreciation. Adjusted EBITDA further adjust EBITDA by adding back non-cash compensation expenses, non-recurring expenses, and other non-operational charges. Adjusted EBITDA is one of the key performance indicators we use in evaluating our operating performance and in making financial, operating, and planning decisions. We believe Adjusted EBITDA is useful to the readers of this quarterly report on Form 10-Q/A in the evaluation of our operating performance.
The following table provides a reconciliation between net earnings and adjusted EBITDA for the three months ended
Three Months Ended March 31, March 31, (in thousands) 2022 2021 Net loss
$ (20,173) $ (7,629)Interest 41 20 Income tax expense (benefit) 256 (1,236) Depreciation 1,507 552 EBITDA (18,369) (8,293) Adjustments Stock compensation expense 1,287 3,185 Loss on foreign currency forward contracts 1,023 3,001 Gain on warrant remeasurement (207) (320) Acquisition expenses 105 - ERP related expenses 159 - Total Adjustments 2,367 5,866 Adjusted EBITDA $ (16,002) $ (2,427)
Cash and capital resources
March 31, 2022, we had $57.4 millionin cash and cash equivalents. The cash outflow during the three months ended March 31, 2022is primarily attributable to a $20.8 millionincrease in accounts receivable mainly reflecting a higher volume of sales, $4.2 millionpromotional and marketing spending to continually raise our brand awareness, and $8.8 millioncapital expenditures. The capital expenditures are for automation and robotic machinery to improve our production efficiency and reduce labor cost. By evaluating our business projections and expenditure budgets for 2022 and 2023, we 32 -------------------------------------------------------------------------------- believe our cash on hand is sufficient to meet our current working capital and capital expenditure requirements for a period of at least twelve months from the date of this filing. Indebtedness We have a revolving line of credit agreement, which has been amended from time to time, pursuant to which a credit facility has been extended to the Company until May 31, 2022(the "Credit Facility"). The Credit Facility provides us with up to $25.0 millionin revolving credit. Under the Credit Facility, we may borrow up to (a) 90% of the net amount of eligible accounts receivable; plus, (b) the lower of: (i) sum of: (1) 50% of the net amount of eligible inventory; plus (2) 45% of the net amount of eligible in-transit inventory; (ii) $10.0 million; or (iii) 50% of the aggregate amount of revolving loans outstanding, minus (c) the sum of all reserves. Under the Credit Facility, our fixed charge coverage ratio may not be less than 1.10:1.00. As of March 31, 2022, we were not in compliance with the fixed charge coverage ratio term of the Credit Facility. Currently, this noncompliance does not impact our borrowing capacity or accelerate any repayment terms. The revolving line of credit bears interest at the sum of (i) the greater of (a) the daily Prime Rate, or (b) LIBOR plus 2%; and (ii) 1%. The balance on the Credit Facility was $0 millionas of March 31, 2022. We are currently working with the financial institution for a new facility but have no assurance that our negotiations in this regard will be successful (See Part II, Item 1A, Risk Factors). See Note 14 Indebtedness to the Financial Statements, for details of our debt disclosure.
We generally fund our short-term and long-term liquidity needs through a combination of cash on hand, cash flow generated from operations and borrowings available under our credit facility (see “- Indebtedness” below). above). Our management regularly reviews certain liquidity measures to monitor performance.
The following section presents the major components of net cash flows from and used in operating, investing and financing activities for the three months ended
March 31, 2022and the three months ended March 31, 2021: Three months ended March 31, (in thousands) 2022 2021 Cash (used in) provided by: Operating activities $ (26,393) $ (17,574)Investing activities (8,807) (2,852) Financing activities 300 73,502 Net (decrease) increase in cash $ (34,900) $ 53,076Operating Activities For three months ended March 31, 2022, net cash used in operations was $26.4 million, driven primarily by the net loss of $20.2 million, a $20.8 millionincrease in accounts receivable and a $3.5 millionincrease in inventory, partially offset by non-cash items, which included depreciation and amortization expense of $1.5 million, stock compensation expense of $1.3 million, unrealized forward contract loss of $0.2 million, bad debt expense of $0.2 million, offset by a $4.2 milliondecrease in prepaid expenses and a $11.1 millionincrease in accounts payable, accrued expenses and other current liabilities. The increase in accounts receivable is primarily resulting from the increased revenue and some invoice transmission interruption during system conversion. We are actively working with customers to solve the system transmission issues and expect the issue to be resolved during May 2022. For three months ended March 31, 2021, net cash used in operations was $17.6 million, driven in part by the net loss of $7.6 million, adjusted for non-cash items which included stock compensation expense of $3.2 million, unrealized forward contract loss of $2.2 million, net change in deferred taxes of $1.5 million, depreciation and amortization expense of $0.6 million, warrant liability revaluation gain of $0.3 million. Working capital usage has also increased largely due to a $12.9 millionincrease in accounts receivable resulting from increased revenue, a $9.3 millionincrease in prepaid expenses mainly due to the increase in prepaid advertising expenses, a $0.2 millionincrease in inventory, and offset by a $8.0 millionincrease in accounts payable, accrued expenses and other current liabilities. 33 --------------------------------------------------------------------------------
Net cash used in investing activities relates to capital expenditures to support growth and investment in property, plant and equipment to expand production capacity, tenant improvements, and to a lesser extent, replacement of existing equipment. For the three months ended
March 31, 2022, net cash used in investing activities was $8.8 millionas compared to $2.9 millionfor the three months ended March 31, 2021. Cash used in both periods consisted primarily of capital expenditures to improve efficiency and output from our current facilities.
For the three months ended
For the three months ended
Critical accounting policies
There have been no material changes to our critical accounting policies from the information provided in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations", included in our Annual Report on Form 10-K/A for the fiscal year ended
December 31, 2021("Form 10-K/A").
Recent accounting pronouncements
The disclosures required by this section are incorporated herein by reference in Note 3. Recent Accounting Pronouncements to the Financial Statements.
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