The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes that appear elsewhere in this Annual Report on Form 10-K/A. In addition to historical consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements as a result of various factors, including those set forth in Part I, Item 1A, "Risk Factors" and under the heading "Cautionary Note Regarding Forward-Looking Statements" elsewhere in this Annual Report on Form 10-K/A. Management's Discussion and Analysis has been revised for the effects of the restatement as discussed in Note 1 to the consolidated financial statements that appear elsewhere in this Annual Report on Form 10-K/A.
Prior to
The Business Combination was accounted for as a reverse merger in accordance with GAAP. Under this method of accounting, Forum was treated as the "acquired" company for financial reporting purposes. Accordingly, for accounting purposes, the financial statements of the combined entity, including those included in this Annual Report, represent a continuation of the financial statements of Ittella Parent with the acquisition being treated as the equivalent ofIttella Parent issuing stock for the net assets of Forum, accompanied by a recapitalization. The net assets of Forum are stated at historical cost, with no goodwill or other intangible assets recorded.
Restatement of Previously Issued Consolidated Financial Statements
This Management's Discussion and Analysis of Financial Condition and Results of Operations has been amended and restated to give effect to the restatement of our consolidated financial statements as more fully described in the Explanatory Note and in Note 1, Restatement of Previously Issued Consolidated Financial Statements, in Part II, Item 8 Financial Statements and Supplementary Data. For further detail regarding the restatement adjustments, see the Explanatory Note and Note 1, Restatement of Previously Issued Consolidated Financial Statements, in Part II, Item 8 Financial Statements and Supplementary Data contained in this Form 10-K/A. Overview (As Restated) We are a rapidly growing plant-based food company with operations inthe United States andItaly , offering a broad portfolio of frozen, plant-based food products in private label and under the "Tattooed Chef" brand. We provide plant-based meals and snacks including, but not limited to, acai and smoothie bowls, zucchini spirals, riced cauliflower, burritos, vegetable bowls and cauliflower crust pizza, to leading club store and food retailers inthe United States . Our revenue in Fiscal 2021 was$208.0 million , which represents a 40.1% increase from Fiscal 2020 revenue of$148.5 million . As ofDecember 31, 2021 , our products were sold in approximately 14,000 retail outlets inthe United States . Our innovative plant-based products offer consumers a diverse portfolio of wholesome, clean label items that are convenient, without sacrificing on quality, nutritional value or freshness and that are great tasting. During Fiscal 2021, we sold a substantial portion of our products to three customers, which accounted for approximately 72% of Fiscal 2021 revenue. These three customers individually accounted for approximately 35%, 26%, and 11% of our Fiscal 2021 total revenue, respectively. Management believes our relationships with these customers are strong, and none have indicated any intent to cease or reduce the volume of business they do with us. As we grow "Tattooed Chef ," we continue to expand our sales and marketing team by adding more dedicated personnel to service additional retail customers and adding outside sales representatives and/or brokers to extend our sales efforts. These efforts to add retail customers could partially mitigate customer concentration risk. Segment Information We have one operating segment and one reportable segment, as our chief decision maker, our Chief Executive Officer, reviews financial information on an aggregate basis for purposes of allocating resources and evaluating financial performance. 35 --------------------------------------------------------------------------------
Trends and Other Factors Affecting Our Operating Performance (As Restated)
Our management team monitors the following trends and factors that could impact our operating performance.
•Revenue Strategy - Up until the end of 2019, our revenue growth strategy was private label products, but starting at the beginning of 2020, our strategy is to grow sales of "Tattooed Chef" branded products, which have increased from approximately 57% of revenue in Fiscal 2020 to approximately 61% of revenue in Fiscal 2021. We expect growth of "Tattooed Chef" sales to continue to outpace that of private label, which will require us to execute our detailed marketing strategy. •Long-Term Consumer Trends, and Demand - We participate in the$55 billion North American frozen food category. We believe our innovative food offerings converge with consumer trends and demands for great-tasting, wholesome, plant-based foods made from sustainably sourced ingredients, including preferences for flexitarian, vegetarian, vegan, organic, and gluten-free lifestyles. We expect consumer trends towards these healthier lifestyles to continue. •Competition - We compete with companies that operate in the highly competitive plant-based and frozen food segments, many of which have substantially greater financial resources, more comprehensive product lines, broader market presence, longer-standing relationships with distributors, retailers, and suppliers, longer operating histories, greater production and distribution capabilities, stronger brand recognition and greater marketing resources than us. We believe that principal competitive factors in this category include, among others, taste, nutritional profile, ingredients, cost and convenience. •Operating Costs - Our operating costs include raw materials, direct labor and other wages and related benefits, manufacturing overhead, selling, distribution, and other general and administrative expenses. We manage the impact of these operating costs on our business through select raw material contracts with growers and cooperatives inItaly that allow us to better control ingredient costs. •Sales and Marketing Costs - As we continue to grow our "Tattooed Chef" product portfolio, we expect to further expand our sales and marketing team by adding more dedicated personnel to service additional retail customers. We continue to add outside sales representatives and/or brokers to extend our sales efforts. Marketing expenditures are expected to be primarily on product demonstration allowances, slotting fees (as we expand to additional retail grocery stores) and other similar in-store marketing costs. Some of these expenses will be categorized as net deductions to revenue under GAAP as opposed to marketing expense. We have also hired a national marketing firm to implement campaigns for digital video and display, connected television, social media and search engine marketing. As we expand and grow revenue, we started and continue to build out a brand management team (to supportMs. Galletti ,who currently oversees all "Tattooed Chef" marketing efforts) to focus on digital marketing, social media and other marketing functions. •Commodity Trends - Our profitability depends, among other things, on our ability to anticipate and react to raw material and food costs. We source our vegetables from a number of growing regions withinItaly , andNorth and South America . The prices of vegetables are subject to many factors beyond our control, such as the number and size of growers that produce crops, the vagaries of these farming businesses (including poor harvests due to adverse weather conditions, natural disasters and pestilence), changes in national or world economic conditions, political events, tariffs, trade wars or other conditions inItaly ,North America , orSouth America . •Debt Obligations - We regularly evaluate our debt obligations, which primarily consist of a revolving line of credit facility inUnited States used to finance working capital requirements. The line of credit outstanding balance was$0 million as of bothDecember 31, 2021 and 2020. The borrowing base is$25.0 million . Ittella Italy entered into several line of credits and notes used for working capital requirements. Additionally,Ittella Properties, LLC and Karsten have notes with financial institution through financing arrangements. (See Note 17 to the consolidated financial statements that appear elsewhere in this Annual Report on Form 10-K/A). •Currency Hedging - We currently incur some costs and expenses in Euros and expect in the future to incur additional costs and expenses in that currency. As a result, revenues and results of operations are subject to foreign exchange fluctuations. We utilize currency hedging (or purchase forward currency contracts) to mitigate currency exchange rate fluctuations. 36 -------------------------------------------------------------------------------- •Acquisitions - Although our growth to date has been achieved primarily from our organic business rather than growth through acquisitions, we made two strategic business acquisitions in 2021 and are considering additional acquisition opportunities that are strategically aligned with our mission and needs. •COVID-19 - TheWorld Health Organization declared COVID-19 to constitute a "Public Health Emergency of International Concern" onJanuary 30, 2020 and finally characterized it as a "pandemic" onMarch 11, 2020 . This corresponds closely with the beginning of COVID-19's impact on the consumption, distribution and production of our products. We have taken and are continuing to take necessary preventive actions and implementing additional measures to protect our employeeswho are working on and off site, including implementing a series of physical distancing and hygienic practices to further support the health and safety of our employees in compliance with suggested Personal Protective Equipment perUnited States Centers for Disease Control andWorld Health Organization guidelines, including mandatory face coverings, increased hand washing and significantly increased sanitation of hard surfaces. Generally, producers of food products have been deemed "essential industries" by federal, state, and local governments and are exempt from certain COVID-19-related restrictions on business operations. Our management team continues to meet regularly and monitor customer and consumer demands, in addition to guidance from local, national, and international health agencies, and will adapt our plans as needed to continue to meet these demands. While the ultimate health and economic impact of the COVID-19 pandemic are highly uncertain, we believe that our business operations and results of operations, including revenue, earnings and cash flows, will not be adversely impacted, in a material way, during 2022. To help mitigate any potential impact of COVID-19 on our business operations and results thereof, we have diversified our suppliers of raw materials and keep close contact with them to anticipate any problems with keeping up with the demand for our products. We have expanded our supplier base so that we no longer rely on a sole source supplier for any of our raw materials. In this way, we are able to ensure we are getting competitive prices and reduce the risk of supply interruptions. To date, there has been no impact on our liquidity, and we have not needed to raise capital, reduce our capital expenditures, or modify any terms or contractual arrangements in response to COVID-19. Except for the preventative and protective measures described above, any changes in our operations have been due to the growth of our business, which was planned prior to the pandemic. Use of Adjusted EBITDA We seek to achieve profitable, long term growth by monitoring and analyzing key operating metrics, including Adjusted EBITDA, as defined below in "Non-GAAP Financial Measures". Our management uses this non-GAAP financial metric and related computations to evaluate and manage our business and to plan and make near and long-term operating and strategic decisions. Our management team believes this non-GAAP financial metric is useful to investors to provide supplemental information in addition to the GAAP financial results. Management reviews the use of our primary key operating metrics from time-to-time. Adjusted EBITDA is not intended to be a substitute for any GAAP financial measure and, as calculated, may not be comparable to similarly titled measures of performance of other companies in other industries or within the same industry. Our management team believes it is useful to provide investors with the same financial information that it uses internally to make comparisons of historical operating results, identify trends in underlying operating results, and evaluate our business. Reconciliations between GAAP and non-GAAP financial measures are provided in "Non-GAAP Financial Measures," which appears later in this section. 37 --------------------------------------------------------------------------------
Results of Operations (As Restated)
The following table sets forth selected items in our consolidated financial data in dollar amounts and as a percentage of revenue for the period represented:
Fiscal Year Ended
Fiscal Year Ended December 31, 2021 2020 2019 2021 2020 2019 ($ in thousands) (As Restated) (As Restated) Revenues$ 207,994 $ 148,498 $ 84,918 100 % 100 % 100 % Cost of goods sold 190,857 126,140 71,178 91.8 % 84.9 % 83.8 % Gross profit 17,137 22,358 13,740 8.2 % 15.1 % 16.2 % Operating expenses 54,173 31,133 7,127 26.0 % 21.0 % 8.4 % Income (loss) from operations (37,036) (8,775) 6,613 (17.8 %) (5.9) % 7.8 % Other income, interest (expense), net (2,483) 38,699 (494) (1.2 %) 26.1 % (0.6 %) Income before provision for income taxes (39,519) 29,924 6,119 (19.0 %) 20.2 % 7.2 % Income tax benefit (expense) (47,439) 39,793 (154) (22.8 %) 26.8 % (0.2 %) Net (loss) income (86,958) 69,717 5,965 (41.8 %) 46.9 % 7.0 % Other comprehensive income (loss), net (954) 777 (174) (0.5 %) 0.5 % (0.2 %) Adjusted EBITDA$ (26,134) $ 9,661 $ 7,271 (12.6 %) 6.5 % 8.6 %
Results of Operations for the Year Ended
Revenue
Revenue increased by$59.5 million , or 40.1%, to$208.0 million for Fiscal 2021 as compared to$148.5 million for Fiscal 2020. The revenue increase was due to an increase of$42.5 million in volume forTattooed Chef branded products, primarily driven by expansion in the number ofUnited States distribution points, increased revenue at existing club channel customers and new product introductions. Private label products revenue increased by$12.7 million . Other revenue increased by$4.3 million , mainly driven by the food production service provided by NMFD, which we acquired inMay 2021 . We anticipate continued growth inTattooed Chef 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$64.7 million , or 51.3%, to$190.9 million for Fiscal 2021 as compared to$126.1 million for Fiscal 2020. Cost of goods sold as a percentage of revenue, increased to 91.8% for Fiscal 2021 from 84.9% for Fiscal 2020. The increase of cost of goods sold in dollar amount is primarily due to the increase in sales volume and the increase as a percentage of revenue is primarily due to the acquisition of two new facilities acquired inMay 2021 and increases in freight and container expenses. Freight and container expenses increased as a percentage of revenue by 2.7% compared to Fiscal 2020. Freight and container expenses were$31.3 million (15.1% of revenue) for Fiscal 2021 compared with$18.4 million (12.4% of revenue) for Fiscal 2020.
Gross Profit and Gross Margin
Gross profit decreased$5.2 million , or 23.4%, to$17.1 million for Fiscal 2021 as compared to$22.4 million for Fiscal 2020. Gross margin for Fiscal 2021 was 8.2% as compared to 15.1% for Fiscal 2020. The decrease in gross profit is primarily due to the promotional discount to the multi mailer vendor program. The decrease in gross margin in Fiscal 2021 38 -------------------------------------------------------------------------------- is attributable to the building out of our infrastructure to support the current and expected growth in operations, increases in raw materials, packaging, and particularly the freight and container costs due to inflation, the acquisition (NMFD and Karsten) inNew Mexico that was completed inMay 2021 and the acquisition (Belmont ) inOhio that was completed inDecember 2021 . Both NMFD andBelmont currently only manufacture private label products, which have a lower margin when compared to ourTattooed Chef branded products. NMFD is expected to be fully operational and manufacturing both private label andTattooed Chef branded products during 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 manufactureTattooed Chef branded salty snacks and other alternativeTattooed Chef branded and private label products.Belmont is expected to start manufacturingTattooed Chef branded products during the second quarter of 2022. Operating Expenses Operating expenses increased$23.0 million , or 74.0%, to$54.2 million for Fiscal 2021 as compared to$31.1 million for Fiscal 2020. As a percentage of revenue, total operating expenses increased to 26.0% for Fiscal 2021 from 21.0% for Fiscal 2020. Compared to Fiscal 2020, the increase for Fiscal 2021 is primarily due to a$13.0 million increase in marketing expenses, a$1.2 million increase in sales commission expenses, a$1.6 million increase in post-manufacture cold storage expenses, a$7.3 million increase in professional expenses, a$1.8 million increase in stock compensation expense, a$4.2 million increase in employee payroll benefits and recruiting expense, a$2.0 million increase in general liability insurance, a$0.5 million increase in enterprise resource planning ("ERP") software expenses, a$0.5 million increase in resolution of a dispute and related fees, and a$3.6 million increase in operating expenses for entities that were newly acquired in Fiscal 2021, offset by a$13.6 million one-time, merger-related compensation expense recognized in Fiscal 2020. The significant increase in advertising, marketing, sales commission, 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 being a public company sinceOctober 15, 2020 and the acquisitions (see Note 11 to the consolidated financial statements that appear elsewhere in this Annual Report on Form 10-K/A) we completed in 2021. The increase in stock compensation expense, payroll benefits and recruiting expense, and liability insurance expense are primarily due to our efforts to grow our business and expand the Tattooed Chef brand, as well as increased payroll and other administration expenses of recruiting and retaining key employees needed to meet the additional compliance requirements of being a public company. In Fiscal 2021, we spent approximately$0.5 million to start the implementation of an ERP software system to improve our financial reporting control environment.
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.
Other Income and Interest Expense, Net
Other income and interest expense, net, reflected a loss of$2.5 million for Fiscal 2021 versus income of$38.7 million for Fiscal 2020. Interest expense decreased by$0.5 million for Fiscal 2021 to$0.3 million versus$0.7 million for Fiscal 2020 due to lower average debt balances outstanding during Fiscal 2021. In Fiscal 2021, we recorded$2.8 million in realized and unrealized net loss on forward foreign currency contracts compared to$1.0 million in realized and unrealized gain in Fiscal 2020. Starting in Fiscal 2020, we have purchased forward foreign currency contracts for the Euro to mitigate potential impact on our manufacturing costs inItaly . In Fiscal 2021, we recognized a$0.6 million gain from warrant liabilities settlements and remeasurements compared to a$1.2 million gain recognized in Fiscal 2020. In Fiscal 2020, we recognized a nonrecurring gain of$37.2 million on settlement of a contingent consideration derivative liability related to the Holdback Shares which was remeasured with changes in fair value recognized in earnings of$37.2 million upon release of the Holdback Shares to certain stockholders inNovember 2020 .
Income Tax Benefit (Expense)
InOctober 2020 , in anticipation of the Business Combination,UMB's andIttella International's prior ownership were exchanged for interests in Myjojo (Delaware ) shares. This taxable pre-merger exchange resulted in a step-up in the tax bases of intangible assets of approximately$140.0 million . As a result of this transaction, in 2020 Myjojo (Delaware ) recorded a one-time tax benefit of$39.1 million resulting from Myjojo (Delaware )'s change in tax status from an S-corporation to a C-corporation. 39 -------------------------------------------------------------------------------- In Fiscal 2021, management assessed the available positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit use of the existing deferred tax assets. A significant piece of objective negative evidence evaluated was the cumulative loss incurred over the past three-year periods. Such objective evidence limits the ability to consider other subjective evidence, such as our projections for future growth. Primarily based on the objective evidence as described above, a full valuation allowance was recorded on the net deferred tax asset. During Fiscal 2020, we recognized a$47.1 million in deferred tax asset and a$39.8 million tax benefit. During Fiscal 2021, we recorded a full valuation allowance against the deferred tax asset resulting in a corresponding tax expense of$47.4 million . See Note 16 to the consolidated financial statements that appear elsewhere in this Annual Report on Form 10-K/A.
Net (Loss) Income
Net operating results decreased by$156.7 million , to a loss of$87.0 million for Fiscal 2021 as compared to net income of$69.7 million for Fiscal 2020, due primarily to derivative gain discussed in the section "-Other Income and Interest Expense, Net" and the income tax expense and benefit discussed in the section "-Income Tax Benefit (Expense)". Excluding the non-recurring gain on derivative related to the settlement of contingently redeemable equity, the one-time tax benefit resulting from the change in tax status, and the one-time compensation expense described in "-Operating Expenses", the increase of net loss in Fiscal 2021 was mainly driven by the increase in operating expenses and the realized and unrealized loss from forward foreign currency contracts, as discussed above.
Other Comprehensive Income (Loss), Net
Other comprehensive income (loss), net, represents the effect of the Euro currency translation resulting from income statement accounts that are translated toUnited States dollars based on an average monthly exchange rate. Balance sheet accounts are translated toUnited States dollars at the balance sheet date. For Fiscal 2021, we recorded loss of$1.0 million on translation versus a$0.8 million gain in Fiscal 2020.
Adjusted EBITDA
Adjusted EBITDA decreased by$35.8 million to a loss of$26.1 million for Fiscal 2021 as compared to positive$9.7 million for Fiscal 2020. The decline in Adjusted EBITDA was primarily due to a significant increase in spending on sales and marketing expenses to support the growth in revenue and brand recognition forTattooed Chef , the increase of professional expense related to being a public company, accounting costs and acquisition transaction costs that were not fully present during Fiscal 2020, and the increased payroll and other administration expenses to recruit and retain key employees as discussed above.
Year Ended
Revenue
Revenue increased by$63.6 million , or 74.9%, to$148.5 million for Fiscal 2020 as compared to$84.9 million for Fiscal 2019. The revenue increase was due to an increase of$66.3 million in volume forTattooed Chef branded products, primarily driven by expansion in the number ofUnited States distribution points, increased revenue at existing club channel customers and new product introductions. The increase in branded product sales was partially offset by a$0.9 million decline in private label products and a$1.8 million decline in legacy products that are expected to be phased out in future periods.
Cost of Goods Sold
Cost of goods sold increased$54.9 million , or 77.2%, to$126.1 million for Fiscal 2020 as compared to$71.2 million for Fiscal 2019, primarily due to the increase in volume of products manufactured, stored and shipped, resulting in increased costs of raw materials (in absolute dollars), direct labor and additional freight and storage costs. Cost of goods sold was relatively flat as a percentage of revenue, constituting 84.9% of revenue for Fiscal 2020 compared to 83.8% of revenue for Fiscal 2019.
Gross Profit and Gross Margin
Gross profit increased$8.7 million , or 62.7%, to$22.4 million for Fiscal 2020 as compared to$13.7 million for Fiscal 2019. Gross margin for Fiscal 2020 was 15.1% as compared to 16.2% for Fiscal 2019. The decrease in gross margin was 40 -------------------------------------------------------------------------------- due to increased cost of raw materials and other manufacturing expenses offset by production efficiencies associated with larger sales volume in Fiscal 2020 compared to Fiscal 2019. Operating Expenses Operating expenses increased$24.0 million , or 336.8%, to$31.1 million for Fiscal 2020 as compared to$7.1 million for Fiscal 2019, primarily due to first time grants of stock based compensation; a one-time, merger-related bonus (stock plus cash) to our Chief Operating Officer of approximately$13.0 million ; increases in sales and marketing expenses resulting from a shift in focus to building the Tattooed Chef brand; increases in general and administrative expenses resulting from higher wages and related expenses; headcount additions required to manage the increase in revenue, and increased rent due to facility expansion.
Other Income and Interest Expense, Net
Other income and interest expense, net, reflected income of$38.7 million for Fiscal 2020 versus an expense of$0.5 million for Fiscal 2019. The increase is primarily driven by a nonrecurring gain of$37.2 million on settlement of a contingent consideration derivative liability. Interest expense increased by$0.2 million for Fiscal 2020 to$0.7 million versus$0.5 million for Fiscal 2019 due to slightly higher average debt balances outstanding during Fiscal 2020. In Fiscal 2020, we recognized$1.2 million gain from the settlement and remeasurement of warrant liabilities. In Fiscal 2020, we recorded an unrealized gain of$1.0 million on foreign currency contracts that had not been settled as ofDecember 31, 2020 , whereby we purchased forward contracts for the Euro to mitigate potential impact on our manufacturing costs inItaly . There was no comparable other income from warrant liabilities and foreign currency contract in Fiscal 2019 because we did not engage in such transactions for Fiscal 2019.
Income Tax Benefit (Expense)
InOctober 2020 , in anticipation of the Business Combination,UMB's andIttella International's prior ownership were exchanged for interests in Myjojo (Delaware ) shares. This taxable pre-merger exchange resulted in a step-up in the tax bases of intangible assets of approximately$140.0 million . As a result of this transaction, Myjojo (Delaware ) recorded a one-time tax benefit of$39.1 million resulting from Myjojo (Delaware )'s change in tax status from an S-corporation to a C-corporation. For the fourth quarter endingDecember 31, 2020 , we recorded a$47.1 million deferred tax asset and a$39.8 million tax benefit. For the year endingDecember 31, 2019 , we had an income tax expense of$0.2 million . Prior to the completion of the Business Combination, we elected to be taxed as an S-corporation for federal and state income tax purposes. Accordingly, our taxable income for federal and certain state purposes was attributed to, and reported by, our stockholders. We were subject to state franchise taxes and limited (reduced rate) state income taxes inCalifornia . Our Italian operations are subject to foreign taxes applicable to its income derived inItaly . These taxes include income tax. Prior to the pre-merger exchange, we had a 70% interest in our Italian subsidiary, which was taxed as a partnership forU.S. income tax purposes. Following the pre-merger exchange, our Italian subsidiary is classified as a wholly owned disregarded entity forU.S. income tax purposes. As such, its operations are also subject toU.S. income taxes, with respect to which the associated Italian taxes may be claimed as a foreign tax deduction or credit.
Net income
Net income increased by$63.7 million , to$69.7 million for Fiscal 2020 as compared to net income of$6.0 million for Fiscal 2019, due primarily to the derivative gain discussed in the section "-Other Income and Interest expense, Net" and the income tax benefit discussed in the section "-Income Tax Benefit (Expense), Net". Excluding the non-recurring gain on derivative related to the settlement of contingently redeemable equity, the one-time tax benefit resulting from the change in tax status, and the one-time compensation expense described in "-Operating Expenses", net income for Fiscal 2020 would have been slightly less than Fiscal 2019, as increases in gross profit were offset by increased investment in the Tattooed Chef brand and costs incurred to transition to a public company, including stock-based compensation expense.
Other Comprehensive Income (Loss), Net
Other comprehensive income (loss), net, represents the effect of the Euro
currency translation resulting from income statement accounts that are
translated to
41 -------------------------------------------------------------------------------- accounts are translated toUnited States dollars at the balance sheet date. For Fiscal 2020, we recorded income of$0.8 million on translation versus a$0.2 million loss in Fiscal 2019. Adjusted EBITDA (As Restated) Adjusted EBITDA increased by$2.4 million to$9.7 million for Fiscal 2020 as compared to$7.3 million for Fiscal 2019. The improvement in Adjusted EBITDA was primarily the result of the increase in revenue and gross profit, partially offset by increased operating expenses to support the growth in revenue, brand recognition forTattooed Chef , and, beginning in the fourth quarter of Fiscal 2020, increased general and administrative costs resulting from being a public company as compared to the prior-year period.
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 our management team evaluates our 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, financing related costs and operating costs of 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 are presented throughout this Management's Discussion and Analysis of Financial Condition and Results of Operations. Adjusted EBITDA Definition
We define EBITDA as net income before interest, taxes, depreciation and amortization. Adjusted EBITDA further adjusts EBITDA by adding back non-recurring expenses and other non-operational charges. 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.
42 --------------------------------------------------------------------------------
Adjusted EBITDA Reconciliation
The following table provides a reconciliation from net income to Adjusted EBITDA for Fiscal 2021, 2020 and 2019:
Fiscal Year Ended December 31, ($ in thousands) 2021 2020 2019 (As Restated) Net (loss) income (86,958) 69,717 5,965 Interest 261 735 494 Income tax expense (benefit) 47,439 (39,793) 154 Depreciation 3,603 1,427 658 EBITDA (35,655) 32,086 7,271 Adjustments Stock compensation expense 5,192 3,399 - Loss (gain) on foreign currency forward contracts 2,847 (1,042) - Transaction related bonuses - 13,610 - Gain on settlement of contingent consideration derivative - (37,200) - Gain on warrant remeasurement (589) (1,192) - Acquisition expenses 1,043 - - UMB ATM transaction 148 - - Dispute resolution and related fees 465 - - ERP related expenses 415 - - Total Adjustments 9,521 (22,425) - Adjusted EBITDA (26,134) 9,661 7,271 Pricing Policies We negotiate different prices at our different club and retail customers based on product quantity and packaging configuration. Price increases from suppliers require that we carefully observe and evaluate costs in making decisions on price increases, while also remaining competitive in the market. We have increased marketing and advertising expenditures and will continue to evaluate the use of discounting or promotional campaigns in an effort to build the Tattooed Chef brand in the future.
Seasonality
Historically, we experienced greater demand for certain products of ours during the third and fourth quarters, primarily due to increased demand in the summer season and increased holiday orders from retailers and club stores. We expect that seasonality in revenue will decrease as our business grows and additional products are introduced.
Liquidity and Capital Resources
As ofDecember 31, 2021 , we had$92.4 million of cash. We believe that our cash will be sufficient to support our planned operations for at least the next 12 months. We have historically financed our operations and capital expenditures through a combination of internally generated cash from operations, available cash on hand and the ability to draw on our line of credit. In connection with the reverse recapitalization onOctober 15, 2020 (see Note 3 to the consolidated financial statements that appear elsewhere in this Annual Report on Form 10-K/A), we received proceeds of$187.2 million from reverse recapitalization transaction, net of a$75.0 million distribution to Myjojo stockholders and$7.2 million in transaction costs. We received$74.5 million and$53.0 million of proceeds from the exercises of warrants (including both public and private warrants) during Fiscal 2021 and Fiscal 2020, respectively. 43 -------------------------------------------------------------------------------- Our current working capital needs are to support accounts receivable growth, manage inventory to meet demand forecasts and support operational growth. Our long-term financial needs primarily include working capital requirements, capital expenditures and payments on notes payable. We may also pursue strategic acquisition opportunities that may impact our future cash requirements. There are a number of factors that may negatively impact our available sources of funds in the future including the ability to generate cash from operations and borrow on our debt facilities. The amount of cash generated from operations is dependent upon factors such as the successful execution of our business strategy and general economic conditions. We may opportunistically raise debt capital, subject to market and other conditions. Additionally, as part of our growth strategies, we may also raise debt capital for strategic alternatives and general corporate purposes. If additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us or at all. If we are unable to raise additional capital when desired, our business, operating results, and financial condition may be adversely affected. During Fiscal 2021, we spent approximately$46.9 million cash to complete two strategic business acquisitions. In addition, approximately$4.0 million of the purchase price was paid by issuing 241,546 shares ofTattooed Chef's common stock to the prior owner. See Note 11 to the consolidated financial statements that appear elsewhere in this Annual Report on Form 10-K/A.
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 untilMarch 31, 2022 (the "Credit Facility"). The Credit Facility provides us with up to$25.0 million in 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 ofDecember 31, 2021 , we were not in compliance with the fixed charge coverage ratio term of the credit facility. OnFebruary 21, 2022 , the lender issued a waiver of financial covenants letter to us waiving the requirement to comply with the debt covenant for the period endedDecember 31, 2021 . 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 million as of bothDecember 31, 2021 and 2020. We are currently negotiating a new Credit Facility with our current lender. No assurance can be given that these negotiations will be successful. InMay 2021 , we completed the NMFD acquisition (see Note 11 to the consolidated financial statements that appear elsewhere in this Annual Report on Form 10-K/A) and assumed a$2.9 million note payable which was associated with an IRB lease arrangement. The note bears interest at 3.8% and has a maturity date ofDecember 29, 2025 . The balance on the note payable was$2.8 million as ofDecember 31, 2021 and classified as a current liability.
In
InMay 2021 , Ittella Italy entered into a promissory note with a financial institution in the amount of1.00 million Euros . The note accrues interest at 1.014% and has a maturity date ofMay 28, 2025 , when the full principal and interest are due. The balance on the promissory note was0.9 million Euro ($1.0 million USD ) as ofDecember 31, 2021 . OnJanuary 6, 2020 ,Ittella Properties, LLC , a variable interest entity ("VIE") (see Note 22), refinanced all of its existing debt with a financial institution in the amount of$2.10 million . The debt accrues interest at 3.60% and has a maturity date ofJanuary 31, 2035 . Financial covenants of the debt include a minimum fixed charge coverage ratio of 1.20 to 1.00. The outstanding balance on the debt was$1.91 million and$2.02 million as ofDecember 31, 2021 and 2020, respectively. As ofDecember 31, 2021 , the VIE was not in compliance with the fixed charge coverage ratio and the entire balance of the debt was classified as a current liability. OnMarch 15, 2022 , the VIE executed an amendment to the Note that includes a waiver of the requirement to comply with the debt covenant throughJune 30, 2022 . Commencing with the fiscal quarter endingSeptember 30, 2022 , the VIE should meet a minimum fixed charge coverage ratio of 1.20 to 1.00. 44 --------------------------------------------------------------------------------
Liquidity
We generally fund our short- and long-term liquidity needs through a combination of cash on hand, cash flows generated from operations, and available borrowings under our line of credit (See "- Indebtedness" above). Our management regularly reviews certain liquidity measures to monitor performance.
Cash Flows
The following table presents the major components of net cash flows from and used in operating, investing and financing activities for Fiscal 2021, 2020 and 2019: ($ in thousands) 2021 2020 2019 Cash (used in) provided by: (As Restated) Operating activities (51,299) (13,367) (1,076) Investing activities (63,799) (7,016) (3,387) Financing activities 75,822 147,428 8,799
Operating Activities (As Restated)
For Fiscal 2021, cash used in operations was driven primarily by the net loss of$87.0 million for the year, adjusted for non-cash items which included the decrease in deferred taxes assets of$46.7 million , depreciation expense of$3.6 million , stock compensation expense of$5.2 million , warrant liability revaluation gain of$0.6 million , and unrealized forward contract loss of$1.8 million . Expenses increased for Fiscal 2021 primarily due to increased spending on sales, promotion and marketing programs to heavily invest in the Tattooed Chef brand and raise brand awareness, as well as the inflationary pricing on freight and container costs. Working capital usage has also increased largely due to a$3.8 million increase in accounts receivable resulting from increased revenue, a$10.2 million increase in inventory, a$2.6 million increase in prepaid expenses mainly due to the increase in prepaid advertising expenses, and a$4.6 million decrease in accounts payable, accrued expenses and other current liabilities. For Fiscal 2020, we realized net income of$69.7 million . Non-cash items included$37.2 million gain on derivatives, a non-cash tax benefit of$40.8 million , depreciation expenses of$1.4 million , stock compensation expenses of$15.4 million , warrant liability revaluation gain of$1.2 million and unrealized gains on forward contracts of$1.0 million . Net cash was reduced by$6.8 million ,$22.0 million and$0.4 million due to increases in accounts receivable, inventory, and prepaid expenses and other current assets, respectively, due to the significant increase in sales activity and backlog of products scheduled for delivery to fulfill customer demands. Offsetting those increases was a$9.4 million increase in accounts payable, accrued expenses, and other current liabilities (combined) due to the increased activity to meet higher sales volume. For Fiscal 2019, we realized net income of$6.0 million . In Fiscal 2019, non-cash items included depreciation expenses of$0.7 million . Net cash was reduced by a$7.1 million increase in inventory to meet growth in anticipated sales and a$2.6 million increase in accounts receivable resulting from that growth and increase in prepaid expenses of$1.4 million , partially offset by a$3.6 million increase in accounts payable and accrued liabilities.
Investing Activities
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 Fiscal 2021, net cash used in investing activities was
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Financing Activities
For Fiscal 2021, net cash provided by financing activities was$75.8 million , primarily due to$74.5 million proceeds from warrant exercises and$1.7 million of net borrowings under the credit facility and notes payable to support working capital requirements to fund continued growth. For Fiscal 2020, net cash provided by financing activities was$147.4 million . As a result of the Business Combination, we received$105.0 million in cash, net of issuance and other transaction costs. As a result of the cash received, we made a net reduction in our outstanding line of credit and notes payable (including to related parties) of$12.0 million . We received a capital contribution of$9.5 million in Fiscal 2020 and made a distribution payment of$8.1 million . Also, in Fiscal 2020, we received$53.0 million from the exercise of outstanding warrants. For Fiscal 2019, net cash provided by financing activities was$8.8 million consisting of$6.0 million in capital contributions resulting from the 12.5% minority investment by UMB, and$3.0 million of net borrowings under our credit facility and notes payable to support working capital requirements to fund growth, partially offset by$0.3 million in dividends and$0.2 million in repayment of debt to related parties. We have no obligations, assets or liabilities that would be considered off-balance sheet arrangements as ofDecember 31, 2021 . We do not participate in transactions that create relationships with unconsolidated entities or financial partnerships, often referred to as variable interest entities, that have been established for the purpose of facilitating off-balance sheet arrangements. We have not entered into any off-balance sheet financing arrangements, established any special purpose entities, guaranteed any debt or commitments of other entities, or purchased any non-financial assets.
Critical Accounting Policies and Estimates
Our management's discussion and analysis of financial condition and results of operations is based on our consolidated financial statements which have been prepared in accordance withU.S. GAAP. In preparing our financial statements, we make estimates, assumptions, and judgments that can have a significant impact on our reported revenue, results of operations, and comprehensive net income or loss, as well as on the value of certain assets and liabilities on our balance sheet during, and as of, the reporting periods. These estimates, assumptions, and judgments are necessary and are made based on our historical experience, market trends and on other assumptions and factors that we believe to be reasonable under the circumstances because future events and their effects on our results of operations and value of our assets cannot be determined with certainty. These estimates may change as new events occur or additional information is obtained. We may periodically be faced with uncertainties, the outcomes of which are not within our control and may not be known for a prolonged period of time. Because the use of estimates is inherent in the financial reporting process, actual results could differ from those estimates or assumptions. The critical accounting estimates, assumptions, and judgments that we believe have the most significant impact on our consolidated financial statements are described below.
Valuation of Holdback Shares and Sponsor Earnout Shares
We recognized and measured the contingent amounts associated with the Holdback Shares and Sponsor Earnout Shares at fair value as ofOctober 15, 2020 (the closing date of the Business Combination) of$120.4 million and$0 , respectively, using a probability-weighted discounted cash flow model. These measures are based upon significant inputs that are not observable by the market and are therefore considered to be Level 3 inputs. Refer to Note 13 to our consolidated financial statements that appear elsewhere in this Annual Report on Form 10-K/A for discussion related to the measurement and recognition.
Revenue Recognition
We sell plant-based meals and snacks including, but not limited to, acai and smoothie bowls, zucchini spirals, riced cauliflower, vegetable bowls and cauliflower crust pizza primarily in theU.S. All of our revenue relates to contracts with customers. Our accounting contracts are from purchase orders or purchase orders combined with purchase contracts. Revenue recognition is completed on a point in time basis when product control is transferred to the customer. In general, control transfers to the customer when the product is shipped or delivered to the customer based upon applicable shipping terms. Customer contracts generally do include more than one performance obligation and the performance obligations in our contracts are satisfied within one year. No payment terms beyond one year are granted at contract inception. 46 -------------------------------------------------------------------------------- Some contracts also include some form of variable consideration. The most common forms of variable consideration include discounts, slotting fees, trade discounts, promotional programs, and demonstration costs. Variable consideration is treated as a reduction in revenue when product revenue is recognized. Depending on the specific type of variable consideration, we use either the expected value or most likely amount method to determine the variable consideration. We review and update our estimates and related accruals of variable consideration each period based on the terms of the agreements, historical experience, and any recent changes in the market.
Valuation Allowances for Deferred Tax Assets
We establish an income tax valuation allowance when available evidence indicates that it is more likely than not that all or a portion of a deferred tax asset will not be realized. In assessing the need for a valuation allowance, we consider the amounts and timing of expected future deductions or carryforwards and sources of taxable income that may enable utilization. We maintain an existing valuation allowance until enough positive evidence exists to support its reversal. Changes in the amount or timing of expected future deductions or taxable income may have a material impact on the level of income tax valuation allowances. Our assessment of the realizability of the deferred tax assets requires judgment about its future results. Inherent in this estimation is the requirement for us to estimate future book and taxable income and possible tax planning strategies. These estimates require us to exercise judgment about our future results, the prudence and feasibility of possible tax planning strategies, and the economic environment in which we do business. It is possible that the actual results will differ from the assumptions and require adjustments to the allowance. Adjustments to the allowance would affect future net income.
Warrant Liabilities
We account for the Private Placement Warrants issued in connection with our private placements in accordance with ASC 815, whereby the Private Placement Warrants are recorded as liabilities as they do not meet the criteria for an equity classification. As the Private Placement Warrants meet the definition of a derivative as contemplated in ASC 815, they are measured at fair value at inception and subsequently remeasured at each reporting date, with changes in fair value recognized in the consolidated statements of operations and other comprehensive income (loss) in the period of change.
Acquisitions and Purchase Price Allocation
We follow the guidance in ASC 805, Business Combinations, for determining whether an acquisition meets the definition of a business combination or asset acquisition. Based on the analysis and conclusion on an acquisition's classification of a business combination or asset acquisition, the accounting treatment is determined. Acquisition costs are expensed for an acquisition of a business and capitalized for an acquisition of assets. Business combinations are accounted for using the acquisition method of accounting, which requires an acquirer to recognize the assets acquired and the liabilities assumed at the acquisition date measured at their fair values as of that date. The value of goodwill reflects the excess of the fair value of the consideration conveyed to the seller over the fair value of the net assets received. Fair value determinations are based on discounted cash flow analyses or other valuation techniques. In determining the fair value of the assets acquired and liabilities assumed in a material acquisition, we may utilize appraisals from third party valuation firms to determine fair values of some or all of the assets acquired, and liabilities assumed, or may complete some or all of the valuations internally. Although we believe that the assumptions and estimates we have made in these fair value determinations have been reasonable and appropriate, they are based in part on historical experience and information obtained from management of the acquired company and are inherently uncertain.
Foreign Currency Translation and Transactions
Our functional currency isthe United States dollar forU.S. entities.Ittella Italy's functional currency is the Euro. Transactions in currency other than the functional currency are recognized at the rates of exchange prevailing at the dates of the transaction. Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency of each entity are included in the results of operations in income from operations as incurred. The consolidated financial statements that appear elsewhere in this Annual Report on Form 10-K/A are expressed inUnited States dollars. Assets and liabilities of foreign operations are translated at period-end rates of exchange. Revenues, costs and expenses are translated at average rates of exchange prevailing during the period. Equity 47 --------------------------------------------------------------------------------
adjustments resulting from translating foreign currency financial statements are accumulated as a separate component of stockholders' equity.
We conduct business globally and are therefore exposed to adverse movements in foreign currency exchange rates, specifically the Euro to US dollar. To limit the exposure related to foreign currency changes, we entered into foreign currency exchange forward contracts starting in 2020. We do not enter into contracts for speculative purposes. We have access to open foreign exchange forward contract instruments to purchase a specific amount of funds in Euros and to settle, on an agreed-upon future date, in a corresponding amount of funds inUnited States dollars. These derivatives are not designated as hedging instruments. Gains and losses on the contracts are included in other income net, and substantially offset foreign exchange gains and losses from the short-term effects of foreign currency fluctuations on assets and liabilities, such as purchases, receivables and payables, which are denominated in currencies other than the functional currency of the reporting entity. These derivative instruments generally have maturities of up to twelve months. The fair values of these derivative instruments classified as Level 2 input financial instruments. Refer to Note 12 to our consolidated financial statements that appear elsewhere in this Annual Report on Form 10-K/A for discussion related to the derivative instruments.
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