The following discussion and analysis should be read in conjunction with our financial statements and related notes (the "Financial Statements") included elsewhere in this Quarterly Report on Form 10-Q (the "Quarterly Report") and the section entitled "Risk Factors." Unless otherwise indicated, the terms "Tattooed Chef ," "the Company," "we," "us," or "our" refer toTattooed Chef, Inc. , aDelaware corporation, together with its consolidated subsidiaries.
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", "expand" 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 for the period endingDecember 31, 2021 filed with theSEC and Part II, Item 1A. Risk Factors herein. The Company's securities filings can be accessed on the EDGAR section of theSEC's website 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 Nasdaq;
? our ability to raise capital in the future;
? our ability to acquire and integrate new operations successfully;
? 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
climate change, general economic conditions, unemployment and our liquidity,
operations and personnel;
? our ability to obtain raw materials on a timely basis or in quantities
sufficient to meet the demand for our products;
? our ability to grow our customer base;
? our ability to forecast and maintain an adequate rate of revenue growth and
appropriately plan its expenses;
? our expectations regarding future expenditures;
? our ability to attract and retain qualified employees and key personnel;
? our ability to retain relationship with third party suppliers;
? our ability to compete effectively in the competitive packaged food industry;
? our ability to protect and enhance our corporate reputation and brand;
? the impact of inflation; and
? the impact of future regulatory, judicial, and legislative changes on our industry. 28 Overview 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 inthe United States , with signature products such as ready-to-cook bowls, zucchini spirals, riced cauliflower, acai and smoothie bowls, cauliflower crust pizza, wood fire crusted pizza, handheld burritos, tortillas, chips, bars 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 8 Business Combinations), currently primarily manufacture private label products. NMFD is expected to manufacture both private label andTattooed Chef branded products during 2022. Our Mexican-style plant-basedTattooed Chef branded products, including burritos, enchiladas, and quesadillas, total 18 new SKUs, were introduced to the market during the six months endedJune 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 manufactureTattooed Chef branded salty snacks and other alternativeTattooed Chef branded and private label products. BCI is also expected to start manufacturingTattooed Chef branded products during the third quarter of 2022. 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. Results of Operations The following table sets forth key statistics for the three and six months endedJune 30, 2022 and 2021: Three months Ended Six months EndedJune 30 ,June 30 ,
(in thousands) 2022 % of revenue 2021 % of revenue 2022 % of revenue 2021 % of revenue
Net revenue
100.0 %$ 50,270 100.0 %$ 130,174 100.0 %$ 102,739 100.0 % Cost of goods sold 57,370 98.7 % 41,953 83.5 % 121,284 93.2 % 87,242 84.9 % Gross profit 740 1.3 % 8,317
16.5 % 8,890 6.8 % 15,497 15.1 % Operating expenses 24,346 41.9 % 16,419 32.7 % 49,139 37.7 % 30,615 29.8 % Loss from operations (23,606 ) -40.6 % (8,102 ) -16.1 % (40,249 ) -30.9 % (15,118 ) -14.7 %
Interest expense (42 ) -0.1 % (94 ) -0.2 % (83 ) -0.1 % (114 ) -0.1 % Other (expense) income (2,334 ) -4.0 % 733 1.5 % (2,945 ) -2.3 % (1,948 ) -1.9 % Loss before provision for income taxes (25,982 ) -44.7 % (7,463 ) -14.8 % (43,277 ) -33.2 % (17,180 ) -16.7 % Income tax expense (455 ) -0.8 % (50,009 ) -99.5 % (711 ) -0.5 % (48,534 ) -47.2 % Net loss (26,437 ) -45.5 % (57,472 ) -114.3 % (43,988 ) -33.8 % (65,714 ) -64.0 %
Results of Operations for the Three Months Ended
Net revenue Net revenue increased by$7.8 million , or 15.6%, to$58.1 million for the three months endedJune 30, 2022 as compared to$50.3 million for the comparable period in 2021. The increase was due to an increase of$3.8 million in private label products revenue primarily driven by the sales generated from NMFD and BCI, an increase of$2.9 million in other revenues, mainly driven by the sales of burritos, enchiladas, quesadillas and other products by NMFD to its restaurant customers, and an increase of$1.1 million inTattooed Chef branded products. Cost of goods sold
Cost of goods sold increased$15.4 million , or 36.7%, to$57.4 million for the three months endedJune 30, 2022 as compared to$42.0 million for the comparable period in 2021. Cost of goods sold, as a percentage of revenue, increased to 98.7% for the three months endedJune 30, 2022 from 83.5% for the three months endedJune 30, 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 revenue is primarily due to the increases in cost of freight, packaging, raw materials, and labor due to inflation and the increase in fixed costs including rent and depreciation expenses resulting from new leases assumed and fixed assets acquired though the acquisitions completed during the second and fourth quarters of 2021, as well as our newly leased facility inVernon, California that started onApril 1, 2022 . As these new facilities are not yet operating at full capacity, the fixed cost as a percentage of revenue is higher than the comparable period in 2021. Gross Profit Gross profit decreased$7.6 million , or 91.1%, to$0.7 million for the three months endedJune 30, 2022 as compared to$8.3 million for the comparable period in 2021. Gross margin for the three months endedJune 30, 2022 was 1.3%, as compared to 16.5% for the three months endedJune 30, 2021 . We are in the process of ramping production on newTattooed Chef branded products utilizing the facilities and equipment acquired through the NMFD transaction and the BCI acquisitions. Moving forward, we expectTattooed Chef branded products to be manufactured by both plants. Therefore, we expect our fixed cost as a percentage of revenue to decrease and our gross margin to increase once the facilities operate at full capacity and achieve economies of scale. In addition, beginning in the fourth quarter of 2022, we plan to implement the first ever price increases forTattooed Chef branded products. 29 Operating expenses Operating expenses increased$7.9 million , or 48.3%, to$24.3 million for the three months endedJune 30, 2022 as compared to$16.4 million for the comparable period in 2021. The increase is primarily due to a$2.5 million increase in marketing and promotional expenses, a$1.0 million increase in post-manufacture cold storage expenses, a$1.1 million increase in stock compensation expense, a$1.5 million increase in payroll related expenses, a$0.2 million increase in ERP software implementation and a$2.2 million increase related to entities that were acquired during the second and fourth quarter of 2021, partially offset by a$1.8 million decrease in professional expenses. The significant increase in marketing, promotional and post-manufacture cold storage expenses is 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 payroll related expenses is primarily due to our efforts to recruit and retain key employees who will grow our business, expand the Tattooed Chef brand and meet the additional compliance requirements of being a public company. The increase in stock compensation expense is primarily due to the vesting of one restricted stock grant to a marketing consultant onJanuary 1, 2022 (this grant vests over two years), plus the effect of a forfeiture of restricted stock upon a former employee's termination during the three months endedJune 30, 2021 . The decrease in professional expenses is primarily related to acquisitions that occurred during the three months endedJune 30, 2021 . Income tax expense Income tax expense decreased$49.6 million , or 99.1%, to$0.5 million for the three months endedJune 30, 2022 as compared to$50.0 million for the comparable period in 2021. The decrease was mainly driven by$50.0 million income tax expense recognized during the comparable period of 2021 that resulted from a whole valuation allowance recognition with respect to a deferred tax asset. We continue to use a full valuation allowance established against our net deferred tax assets in theU.S. Net Loss For the three months endedJune 30, 2022 , we had a net loss of$26.4 million , compared to a net loss of$57.5 million for the three months endedJune 30, 2021 . The decrease in net loss was mainly driven by the$50.0 million income tax expense in 2021 as discussed above, which was not present in 2022.
Results of Operations for the Six Months Ended
Net revenue
Net revenue increased by$27.4 million , or 26.7%, to$130.2 million for the six months endedJune 30, 2022 as compared to$102.7 million for the comparable period in 2021. The increase was due to an increase of$12.6 million in private label products revenue, primarily driven by the sales generated from NMFD and BCI, an increase of$8.7 million inTattooed Chef branded products, and an increase of$6.1 million in other revenues, mainly driven by the sales of burritos, enchiladas, quesadillas and other products by NMFD to its restaurant customers. Cost of goods sold
Cost of goods sold increased$34.0 million , or 39.0%, to$121.3 million for the six months endedJune 30, 2022 as compared to$87.2 million for the comparable period in 2021. Cost of goods sold, as a percentage of revenue, increased to 93.2% for the six months endedJune 30, 2022 from 84.9% for the six months endedJune 30, 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 revenue is primarily due to the increases in cost of freight, packaging, raw materials, and labor due to inflation and the increase in fixed costs including rent and depreciation expenses resulting from new leases assumed and fixed assets acquired though the acquisitions completed during the second and fourth quarters of 2021, as well as our newly leased facility inVernon that started onApril 1, 2022 . As these new facilities are not yet operating at full capacity, the fixed cost as a percentage of revenue is higher than the comparable period in 2021. 30 Gross Profit
Gross profit decreased$6.6 million , or 42.6%, to$8.9 million for the six months endedJune 30, 2022 as compared to$15.5 million for the comparable period in 2021. Gross margin for the six months endedJune 30, 2022 was 6.8%, as compared to 15.1% for the six months endedJune 30, 2021 . We are in the process of ramping production on newTattooed Chef branded products by utilizing the facilities and equipment acquired through the NMFD transaction and the BCI acquisition. Moving forward, we expectTattooed Chef branded products to be manufactured by both plants. Therefore, we expect our fixed cost as a percentage of revenue to decrease and our gross margin to increase once the facilities operate at full capacity and achieve economies of scale. In addition, beginning in the fourth quarter of 2022, we plan to implement the first ever price increases forTattooed Chef branded products. Operating expenses
Operating expenses increased$18.5 million , or 60.5%, to$49.1 million for the six months endedJune 30, 2022 as compared to$30.6 million for the comparable period in 2021. The increase is primarily due to a$6.9 million increase in marketing and promotional expenses, a$2.1 million increase in post-manufacture cold storage expenses, a$3.5 million increase in payroll related expenses, a$0.3 million increase in ERP software implementation and a$4.6 million increase related to entities that were acquired during the second and fourth quarters of 2021, partially offset by a$0.8 million decrease in stock compensation expense and a$0.3 million decrease in professional expenses. The significant increase in marketing, promotional and post-manufacture cold storage expenses is 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 payroll related expenses is primarily due to our efforts to recruit and retain key employees who will grow our business, expand the Tattooed Chef brand and meet the additional compliance requirements of being a public company. The decrease in stock compensation expense is mainly driven by one restricted stock grant to a marketing consultant during the first quarter of 2021, which was vested immediately. The decrease in professional expenses is primarily related to acquisitions that occurred during the six months endedJune 30, 2021 . Income tax expense Income tax expense decreased$47.8 million , or 98.5%, to$0.7 million for the six months endedJune 30, 2022 as compared to$48.5 million for the comparable period in 2021. The decrease was mainly driven by$50.0 million income tax expense recognized during the comparable period of 2021 resulted from a whole valuation allowance recognition with respect to a deferred tax asset. We continue to use a full valuation allowance established against our net deferred tax assets in theU.S. Net Loss
For the six months endedJune 30, 2022 , we had a net loss of$44.0 million , compared to a net loss of$65.7 million for the six months endedJune 30, 2021 . The decrease in net loss was mainly driven by$50.0 million income tax expense in 2021 as discussed above, which was not present in 2022. 31 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, 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 adjusts 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 in the evaluation of our operating performance.
The following table provides a reconciliation from net income to Adjusted EBITDA
for the three and six months ended
Three Months Ended Six Months Ended June 30, June 30, (in thousands) 2022 2021 2022 2021 Net loss$ (26,437 ) $ (57,472 ) $ (43,988 ) $ (65,714 ) Interest expense 42 94 83 114 Income tax expense 455 50,009 711 48,534 Depreciation and amortization 1,536 896 3,043 1,448 EBITDA (24,404 ) (6,473 ) (40,151 ) (15,618 ) Adjustments Stock compensation expense 1,415 318 2,702 3,502
Loss (gain) on foreign currency forward contracts 2,049 (1,023 ) 3,072 1,978 (Gain) loss on warrant remeasurement (461 ) 371 (668 ) 51 Unrealized foreign currency losses 626 -
626 - Acquisition expenses 119 726 224 726 UMB ATM transaction - 22 - 22 ERP related expenses 179 - 338 - Total Adjustments 3,927 414 6,294 6,279 Adjusted EBITDA$ (20,477 ) $ (6,059 ) $ (33,857 ) $ (9,339 ) Adjusted EBITDA was negative$20.5 million and negative$33.9 million for the three and six months endedJune 30, 2022 , respectively, compared to adjusted EBITDA of negative$6.1 million and negative$9.3 million for the three and six months endedJune 30, 2021 , respectively. The decline in Adjusted EBITDA was primarily due to a lower gross margin resulting primarily from inflation related increases in costs that have not yet been recouped through product price increases as well as the fixed cost of our new facilities that are currently operating at low capacity, and a significant increase in spending on sales and marketing expenses to support the growth in revenue and brand recognition forTattooed Chef .
Liquidity and Capital Resources
As ofJune 30, 2022 , we had$27.7 million in cash and cash equivalents. The cash outflow during the six months endedJune 30, 2022 is primarily attributable to$23.8 million in marketing and promotional spend to raise our brand awareness, and$15.6 million capital 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 believe our cash on hand plus availability under our credit facilities are 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. 32 Indebtedness We are party to a revolving line of credit agreement, which has been amended from time to time, pursuant to which a credit facility has been extended to us untilSeptember 30, 2023 (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. As ofJune 30, 2022 , up to the full$25.0 million was available for borrowing under the Credit Facility, of which$0.6 million has been utilized for the letter of credit issuance leaving$24.4 million of undrawn availability. Under the Credit Facility we must always maintain minimum liquidity of not less than$10.0 million . Not less often than monthly (or weekly during a Trigger Period), we must furnish to the lender a Borrowing Base Certificate as of the close of business on the last business day of each month (or week, as applicable). "Trigger Period" means the period of time between (a) the date on which (i) an event of default has occurred, or (ii) our liquidity is less than$20.0 million and (b) the date the event of default has been cured or liquidity exceeds the minimum requirement. See Note 14 to the condensed consolidated financial statements that appear elsewhere in this Quarterly Report on Form 10-Q, for additional details regarding our indebtedness. OnAugust 5, 2022 , we expanded the Credit Facility with the lender from$25.0 million to$40.0 million and extended the maturity date fromSeptember 2023 toSeptember 2025 . Liquidity
We generally fund our short-term and long-term liquidity needs through a combination of cash on hand, cash flows generated from operations, and available borrowings under our Credit Facility (See "- Indebtedness" above). Our management regularly reviews certain liquidity measures to monitor performance.
Cash Flows
The following section presents the major components of net cash flows from and used in operating, investing and financing activities for the six months endedJune 30, 2022 and 2021: (in thousands) 2022 2021 Cash (used in) provided by: Operating activities$ (50,064 ) $ (24,372 ) Investing activities (15,610 ) (44,058 ) Financing activities 1,261 76,728
Net (decrease) increase in cash
Operating Activities For six months endedJune 30, 2022 , net cash used in operating activities was$50.1 million , primarily driven by the net loss of$44.0 million , partially offset by non-cash items, which included depreciation expense of$3.0 million , stock compensation expense of$2.7 million , unrealized forward contract loss of$1.2 million , unrealized foreign currency losses of$0.6 million , and a gain on the revaluation of warrant liability of$0.6 million . Working capital consumed cash of$13.2 million driven by an$8.7 million increase in inventory, a$7.1 million increase in accounts receivable, a$3.5 million increase in prepaid expenses, partially offset by a$6.1 million increase in accounts payable, accrued expenses and other current liabilities. For the six months endedJune 30, 2021 , net cash used in operating activities was$24.4 million , primarily driven by the net loss of$65.7 million , partially offset by non-cash items which include net change in deferred taxes of$47.5 million , stock compensation expense of$3.5 million , depreciation expense of$1.5 million , and unrealized forward contract loss of$1.1 million . The net loss is largely due to the income tax valuation allowance recorded as of period end. Working capital consumed cash of$12.7 million driven by an$8.4 million increase in inventory, a$3.6 million increase in prepaid expenses and other current assets, a$2.3 million increase in accounts receivable due to increased revenue, partially offset a$1.7 million increase in accounts payable, accrued expenses and other current liabilities. 33 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 the six months endedJune 30, 2022 , net cash used in investing activities was$15.6 million as compared to$44.1 million for the six months endedJune 30, 2021 . Cash used in both periods consisted primarily of capital expenditures to improve efficiency and output from our current facilities and, in the 2021 period, included the expansion of existing production capacity through the acquisition of NMFD and Karsten and assets from Esogel and Ferdifin. Financing Activities
For the six months ended
For the six months ended
Critical Accounting Policies and Estimates
There have been no material changes to our critical accounting policies and estimates 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 for the fiscal year endedDecember 31, 2021 ("Form 10-K").
Recent Accounting Pronouncements
The information required by this Item is incorporated herein by reference to the Notes to Condensed Consolidated Financial Statements - Note 3. Recent Accounting Pronouncements, in Part I, Item 1, of this Quarterly Report on Form 10-Q.
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