TATTOOED CHEF, INC. 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. 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", "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 theSecurities and Exchange Commission ("SEC") 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 continue as a going concern;
•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 inUkraine ), 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
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--------------------------------------------------------------------------------•the impact of future regulatory, judicial, and legislative changes on our industry.
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, entities acquired in the second and fourth quarters of 2021 (Refer to Note 8 Business Combinations and Asset Acquisitions for additional information), primarily manufacture private label products. The Karsten facility, which was acquired in the second quarter of 2021, is not currently in operations and is expected to become active during the fourth quarter of 2022. In the third quarter of 2022, we also entered into an asset purchase agreement, which included certain manufacturing and production assets and assumed an 80,000 square foot manufacturing facility inAlbuquerque, New Mexico . TheNew Mexico manufacturing facilities are expected to manufactureTattooed Chef branded salty snacks, Mexican entrees, traditional entree bowls and private label products. BCI has begun manufacturingTattooed Chef branded products during the third quarter of 2022 in addition to their legacy private label products. We anticipate continued growth inTattooed Chef branded products primarily due to new product introductions and further stock keeping units ("SKUs") and store count expansion with current customers. While we are primarily focused on growing our branded business, we will continue to support our private label channel and evaluate new private label opportunities as they arise.
Results of Operations
The following table sets forth key statistics for the three and nine months
ended
Three Months Ended Nine Months Ended
September 30, September 30,
(in thousands) 2022 % of revenue 2021 % of revenue 2022 % of revenue 2021 % of revenue
Net revenue $ 54,115 100.0 % $ 57,976 100.0 % $ 179,536 100.0 % $ 155,651 100.0 %
Cost of goods sold 58,010 107.2 % 53,018 91.4 % 180,212 100.4 % 139,557 89.7 %
Gross (loss) profit (3,895) (7.2) % 4,958 8.6 % (676) (0.4) % 16,094 10.3 %
Operating expenses 31,572 58.3 % 12,793 22.1 % 79,313 44.2 % 40,810 26.2 %
Loss from operations (35,467) (65.5) % (7,835) (13.5) % (79,989) (44.6) % (24,716) (15.9) %
Interest expense (230) (0.4) % (45) (0.1) % (313) (0.2) % (159) (0.1) %
Other expense (2,810) (5.2) % (588) (1.0) % (5,755) (3.2) % (2,536) (1.6) %
Loss before income tax
benefit (expense) (38,507) (71.2) % (8,468) (14.6) % (86,057) (47.9) % (27,411) (17.6) %
Income tax benefit
(expense) 11 - % 255 0.4 % (700) (0.4) % (47,794) (30.7) %
Net loss (38,496) (71.1) % (8,213) (14.2) % (86,757) (48.3) % (75,205) (48.3) %
Results of Operations for the Three Months Ended
Net revenue
Net revenue decreased by$3.9 million , or 6.7%, to$54.1 million for the three months endedSeptember 30, 2022 as compared to$58.0 million for the comparable period in 2021. The decrease was driven by a$10.3 million decline in branded revenue, partially offset by growth in private label and other revenues of$6.4 million . Branded revenue was impacted by a$6.2 million trade spend increase, which consisted of a$1.2 million increase in slotting fees as we focused on brand expansion ofTattooed Chef branded products into additional retail stores across the country. In addition, branded revenue was impacted by lower revenue in a tier-1 club and retail account, which has declined$15.0 million as compared to the prior year period. Private label and other revenues revenue growth is primarily driven by full quarter contribution from BCI, which was not part of the Company in the year ago period. 33 --------------------------------------------------------------------------------
Cost of goods sold
Cost of goods sold increased$5.0 million , or 9.4%, to$58.0 million for the three months endedSeptember 30, 2022 as compared to$53.0 million for the comparable period in 2021. Cost of goods sold, as a percentage of revenue, increased to 107.2% for the three months endedSeptember 30, 2022 from 91.4% for the three months endedSeptember 30, 2021 . The increase in cost of goods sold is primarily due to continued inflationary pressures pushing labor and freight to 34.1% of net revenue from 24.9% of net revenue as compared to the prior year three month period. We have seen increases as a percentage of revenue spanning freight, packaging, raw materials, and labor. This was compounded during the three months endedSeptember 30, 2022 by the acquisition of the new manufacturing facility, which is expected to be accretive in the fourth quarter of 2022, but increased our fixed costs including rent and depreciation expenses in the third quarter. As these new facilities are not yet operating at full capacity, our fixed cost as a percentage of net revenue is higher than the comparable period in 2021.
Gross (Loss) Profit
Gross (loss) profit decreased$8.9 million , or 178.6%, to$(3.9) million for the three months endedSeptember 30, 2022 as compared to$5.0 million for the comparable period in 2021. Gross margin for the three months endedSeptember 30, 2022 was (7.2)%, as compared to 8.6% for the three months endedSeptember 30, 2021 . Operating expenses Operating expenses increased$18.8 million , or 146.8%, to$31.6 million for the three months endedSeptember 30, 2022 as compared to$12.8 million for the comparable period in 2021. The increase is primarily due to a$7.0 million increase in stock based compensation, a$4.6 million increase in marketing and advertising expenses, a$2.5 million increase in outside services expense, a$2.0 million increase in payroll related expenses and a$0.7 million increase in facility expenses. The increase in stock based compensation is driven by shares issued under our employee equity incentive plan. Investments in marketing and advertising expenses continue to grow brand awareness and accelerate Tattooed Chef brand growth. Increases in outside services and payroll related expenses is primarily driven by the Sarbanes-Oxley Act of 2002 ("SOX") and public company reporting requirements. Income tax benefit
Income tax benefit decreased
Net Loss
For the three months ended
Results of Operations for the Nine Months Ended
Net revenue
Net revenue increased by$23.9 million , or 15.3%, to$179.5 million for the nine months endedSeptember 30, 2022 as compared to$155.7 million for the comparable period in 2021. The increase was driven by$16.7 million increase in private label product revenue, and a$8.4 million increase in other revenues, both primarily driven by the sales generated from NMFD and BCI, partially offset by a$1.1 million decline inTattooed Chef branded product revenue. The decline in branded product net revenue was driven by a$8.2 million increase in trade spend related to those same products partially offset by a$7.1 million increase in branded product sales. Trade is elevated in the nine months endedSeptember 30, 2022 as compared to the prior year results due to higher slotting fees as our revenue mix has shifted towards retail and the reclassification of the multi-vender mailer program from operating expenses into trade spend.
Cost of goods sold
Cost of goods sold increased$40.7 million , or 29.1%, to$180.2 million for the nine months endedSeptember 30, 2022 as compared to$139.6 million for the comparable period in 2021. Cost of goods sold, as a percentage of revenue, increased to 100.4% for the nine months endedSeptember 30, 2022 from 89.7% for the nine months endedSeptember 30, 2021 . The 34 -------------------------------------------------------------------------------- increase in cost of goods sold is primarily driven by continued inflationary pressures on freight and labor costs as well as increases in fixed costs including facility and depreciation expenses resulting from new manufacturing and storage facilities and fixed assets acquired in 2021 and 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$16.8 million , or 104.2%, to$(0.7) million for the nine months endedSeptember 30, 2022 as compared to$16.1 million for the comparable period in 2021. Gross margin for the nine months endedSeptember 30, 2022 was (0.4)%, as compared to 10.3% for the nine months endedSeptember 30, 2021 .
Operating expenses
Operating expenses increased$38.5 million , or 94.3%, to$79.3 million for the nine months endedSeptember 30, 2022 as compared to$40.8 million for the comparable period in 2021. The increase is primarily driven by a$12.7 million increase in marketing and advertising expense, a$7.2 million increase in outside service expenses, a$6.2 million increase in stock based compensation, a$4.5 million increase in payroll related expenses, a$2.5 million increase in outside cold storage expenses, a$1.6 million increase in equipment and supplies and a$1.0 million increase in facility related expenses. The increase in marketing and advertising expenses are driven by continued focus on building brand awareness and accelerating Tattooed Chef brand growth. Higher outside service and payroll related expenses are primarily driven by public company cost, specifically costs associated with the filing of restated financials and preparations for SOX compliance. The increase in stock based compensation is driven by shares issued under our employee equity incentive plan. Increases in post-manufacture cold storage expenses is due to elevated levels of finished good inventory as compared to the prior year period. The increase in facility related expenses is driven by new facilities consummated in 2022 as compared to 2021. Income tax expense Income tax expense decreased$47.1 million , or 98.5%, to$0.7 million for the nine months endedSeptember 30, 2022 as compared to$47.8 million for the comparable period in 2021. The decrease was mainly driven by$47.8 million income tax expense recognized during the comparable period of 2021, which resulted from a full valuation allowance recognition with respect to our deferred tax assets. We continue to use a full valuation allowance established against our net deferred tax assets in theU.S.
Net Loss
For the nine months ended
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 and amortization. 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
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--------------------------------------------------------------------------------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 nine months ended
Three Months Ended Nine Months Ended
September 30, September 30,
(in thousands) 2022 2021 2022 2021
Net loss $ (38,496) $ (8,213) $ (86,757) $ (75,205)
Interest expense 230 45 313 159
Income tax expense (11) (255) 700 47,794
Depreciation and amortization 1,729 1,066 4,772 2,553
EBITDA (36,548) (7,357) (80,972) (24,699)
Adjustments
Stock compensation expense 7,821 842 10,523 4,344
Loss on foreign currency forward contracts 1,939 717 5,011 2,694
Gain on warrant remeasurement (13) (218) (681) (167)
Unrealized foreign currency losses 900 - 1,526 -
Acquisition expenses 113 281 337 1,007
UMB ATM transaction - 126 - 148
Enterprise resource planning ("ERP") related
expenses 137 - 475 -
Dispute resolution and related fees 147 465 147 465
Total adjustments 11,044 2,213 17,338 8,491
Adjusted EBITDA $ (25,504) $ (5,144) $ (63,634) $ (16,208)
Our Adjusted EBITDA loss was $25.5 million and $63.6 million for the three and
nine months ended September 30, 2022 , respectively, compared to Adjusted EBITDA
loss of $5.1 million and $16.2 million for the three and nine months ended
September 30, 2021 , respectively. The increase in Adjusted EBITDA loss was
primarily driven by higher operating expenses, inflationary impacts on cost of
sales leading to lower profitability and higher fixed operating costs as
compared to the prior year periods.
Liquidity, Capital Resources and Going Concern
As ofSeptember 30, 2022 , we had$14.2 million in cash and cash equivalents. The cash outflow during the nine months endedSeptember 30, 2022 is primarily attributable to$20.0 million in marketing and promotional spend to raise our brand awareness,$26.9 million capital expenditures and continued losses from operating activities. The capital expenditures are for automation and robotic machinery that is intended to improve our production efficiency and reduce labor cost. Indebtedness
See Note 14 Indebtedness to the Financial Statements for details regarding our indebtedness.
Liquidity and going concern
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.
See Note 2 Basis of Presentation and Significant Accounting Policies under
"--Going Concern Consideration" to the Financial Statements for details
regarding our going concern consideration. We have historically incurred losses
and expect to continue to generate operating losses and consume cash resources
in the near term. These conditions raise substantial doubt about our ability to
continue as a going concern for a period of twelve months from the date the
Financial Statements are issued and may cause us continue to be unable to
maintain compliance with our financial covenants giving the lender
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the right to accelerate repayment of the debt. We have implemented and continue
to implement plans to achieve operating profitability and positive cash flow,
including various margin improvement initiatives, the optimization of our
pricing strategy, and new product innovation.
We will seek outside capital for the foreseeable future until such time that we
can begin generating positive cash flow. However, there can be no assurances
that we will be able to obtain additional capital on terms acceptable to us or
at all. Our ability to raise additional capital may be adversely impacted by the
potential worsening of global economic conditions, including inflationary
pressures, and the recent disruptions to, and volatility in, the credit and
financial markets in the United States .
Cash Flows
The following section presents the major components of net cash flows from and used in operating, investing and financing activities for the nine months endedSeptember 30, 2022 and 2021: Nine Months Ended September 30, Change (in thousands) 2022 2021 Amount % Cash (used in) provided by: Operating activities$ (67,286) (33,125)$ (34,161) 103 % Investing activities (30,083) (46,966) 16,883 (36) % Financing activities 19,629 78,116 (58,487) (75) % Net decrease in cash$ (77,740) $ (1,975) $ (75,765) 3836 %
Operating Activities
For the nine months endedSeptember 30, 2022 , net cash used in operating activities was$67.3 million , primarily driven by the net loss of$86.8 million , partially offset by non-cash items, which included stock compensation expense of$10.5 million , depreciation and amortization expense of$4.8 million , unrealized forward contract loss of$2.8 million and unrealized foreign currency losses of$1.5 million . Working capital consumed cash of$0.5 million driven by a$21.8 million increase in inventory, partially offset by a$21.1 million increase in accounts payable, accrued expenses and other current liabilities. For the nine months endedSeptember 30, 2021 , net cash used in operating activities was$33.1 million , primarily driven by the net loss of$75.2 million , partially offset by non-cash items which include a net change in deferred taxes of$47.1 million , stock compensation expense of$4.3 million , depreciation expense of$2.6 million , and unrealized forward contract loss of$2.3 million . Working capital consumed cash of$14.1 million driven by an$3.6 million increase in inventory, a$3.3 million increase in accounts receivable due to increased revenue, a$2.1 million increase in prepaid expenses and other current assets, and a$5.1 million decrease in accounts payable, accrued expenses and other current 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 the nine months endedSeptember 30, 2022 , net cash used in investing activities was$30.1 million as compared to$47.0 million for the nine months endedSeptember 30, 2021 . Cash used in both periods consisted primarily of capital expenditures to improve efficiency and output from our current facilities and, included the expansion of existing production capacity through the acquisition of NMFD and Karsten and assets acquisitions in both of the 2021 period and 2022 period. Financing Activities For the nine months endedSeptember 30, 2022 , net cash provided by financing activities was$19.6 million , primarily from$18.9 million of net borrowings under our line of credit. For the nine months endedSeptember 30, 2021 , net cash provided by financing activities was$78.1 million , primarily from$74.3 million due to warrant exercises and net borrowings under the line of credit of$3.3 million to support working capital requirements to fund continued growth. 37 --------------------------------------------------------------------------------
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/A for the fiscal year endedDecember 31, 2021 ("Form 10-K/A").
Recent Accounting Pronouncements
The information required by this Item is incorporated herein by reference to Note 3 Recently Issued Accounting Pronouncements in Part I, Item 1 of this Quarterly Report on Form 10-Q.
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