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 ," "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" 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, 2020 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 shares on the Nasdaq;
? our ability to raise funding in the future;
? our ability to acquire and successfully integrate new operations;
? market conditions and global and economic factors beyond our control, including
the potential adverse effects of the current global coronavirus (COVID-19)
pandemic in financial markets, climate change, general economic conditions,
unemployment and our cash flow, operations and staff;
? our ability to obtain raw materials on time or in quantity
sufficient to meet the demand for our products;
? our ability to develop our customer base;
? our ability to forecast and maintain an adequate rate of revenue growth and
plan our expenses appropriately;
? our expectations for future spending;
? our ability to attract and retain qualified employees and key personnel;
? our ability to maintain relationships with third party vendors;
? 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 future regulatory, judicial and legislative changes on our
industry;
? our ability to effectively manage freight and container costs; and
? the effects of inflation.
37 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, and cauliflower crust pizza. Our products are available both in private label and our "Tattooed Chef™" brand in the frozen food section of retail food stores. Results of Operations Three months Ended September 30, (in thousands) 2021 % of revenue 2020 % of revenue Revenue$ 58,780 100.00 %$ 40,964 100.00 % Cost of goods sold (52,836 ) -89.89 % (36,733 ) -89.67 % Gross profit 5,944 10.11 % 4,231 10.33 % Net (loss) income (8,174 ) -13.91 % (3,245 ) -7.92 % Freight and container costs (included in cost of goods sold) 8,859 15.07 % 5,319 12.98 % Major operating expenses: Marketing expenses 3,410 5.80 % 55 0.13 % Sales commission expense 1,166 1.98 % 789 1.93 % Professional services 1,177 2.00 % 4,724 11.53 % Stock compensation expenses 842 1.43 % - 0.00 % Nine months Ended September 30, (in thousands) 2021 % of revenue 2020 % of revenue Revenue$ 161,972 100.00 %$ 108,903 100.00 % Cost of goods sold (140,304 ) -86.62 % (91,619 ) -84.13 % Gross profit 21,668 13.38 % 17,284 15.87 % Net (loss) income (70,095 ) -43.28 % 3,462 3.18 % Freight and container costs (included in cost of goods sold) 23,400 14.45 % 12,713 11.67 % Major operating expenses: Promotional expenses 5,434 3.35 % 1,835 1.68 % Marketing expenses 8,942 5.52 % 90 0.08 % Sales commission expense 3,841 2.37 % 2,311 2.12 % Professional services 6,005 3.71 % 4,914 4.51 % Stock compensation expenses 4,345 2.68 %
- 0.00 % 38 For the three months and nine months endedSeptember 30, 2021 , we had net losses of$8.17 million and$70.10 million , respectively. By comparison for the three and nine months endedSeptember 30, 2020 , we had a net loss of$3.25 million and net income of$3.46 million , respectively. Compared with prior-year periods, the increase of net losses during 2021 is due to a number of factors, including significant increases in (i) income tax expense for the period, primarily attributable to the$47.22 million valuation allowance for the Company's deferred tax assets, (ii) operating expenses resulting from being a public reporting company during the 2021 periods, (iii) freight and container costs, (iv) promotional, sales commission and marketing expenses to help build brand awareness and increase market share for the "Tattooed Chef" brand. The inflationary increases in freight and container costs from 2020 to 2021 show an increase of 2.09% when freight is taken as a percentage of revenue for the three months periods endedSeptember 30 and an increase of 2.78% when freight is taken as a percentage of revenue for the nine month periods endedSeptember 30 . We at times must contend with inflationary measures throughout our supply chain, which can lead to downward pressure on our gross margin due to price sensitivity on the part of our customers, which prevents us from recouping cost increases through price increases in certain cases. We negotiate different prices at our different club and retail customers based on product quantity and packaging configuration. We consistently evaluate pricing to ensure that the brand is competitive in pricing based on our competitors. With the current economic conditions and inflation, we will continue to monitor raw materials, packaging, and freight costs to determine if increases in pricing are necessary or possible. Revenue increased by$17.82 million , or 43.49%, to$58.78 million for the three months endedSeptember 30, 2021 and by$53.07 million , or 48.73%, to$161.97 million for the nine months endedSeptember 30, 2021 , from$40.96 million for the three months endedSeptember 30, 2020 and$108.90 million for the nine months endedSeptember 30, 2020 . The increase in revenue is primarily due to growth in sales of our "Tattooed Chef" branded products. For the three months endedSeptember 30, 2021 , we had$35.29 million of sales of "Tattooed Chef" branded products and$23.12 million of sales of private label products, compared to$22.63 million and$18.11 million during the 2020 period. For the nine months endedSeptember 30, 2021 , we had$104.25 million in sales of "Tattooed Chef" branded products and$56.70 million of private label products, compared to$60.64 million and$47.50 million , respectively, for the 2020 period. Cost of goods sold increased by$16.10 million , or 43.84%, to$52.84 million for the three months endedSeptember 30, 2021 and by$48.69 million , or 53.14% to$140.30 million for the nine months endedSeptember 30, 2021 , from$36.73 million for the three months endedSeptember 30, 2020 and$91.62 million for the nine months endedSeptember 30, 2020 . The increase is primarily due to the increase in sales volume and the increases in freight and container expenses due to inflation. Freight and container expenses increased as a percentage of revenue by 2.09% and 2.78% for the three- and nine-month periods, respectively. Freight and container expenses were$8.86 million (15.07% of revenue) for the three months endedSeptember 30, 2021 compared with$5.32 million (12.98% of revenue) for the same period in 2020. Freight and container expenses were$23.40 million (14.45% of revenue) for the nine months endedSeptember 30, 2021 compared with$12.71 million (11.67% of revenue) for the same period in 2020. Gross profit increased by$1.71 million , or 40.49%, to$5.94 million for the three months endedSeptember 30, 2021 and by$4.38 million , or 25.36% to$21.67 million for the nine months endedSeptember 30, 2021 , from$4.23 million for the three months endedSeptember 30, 2020 and$17.28 million for the nine months endedSeptember 30, 2020 . The increase is primarily due to increasedTattooed Chef sales volume, improved production capacities, and our ability to take advantage of economies of scale, partially offset by an increase in cost of goods sold due largely to freight and container expense increases as described above. Gross margin for the three months endedSeptember 30, 2021 was 10.11% and for the nine months endedSeptember 30, 2021 was 13.38%, as compared to 10.33% for the three months endedSeptember 30, 2020 and 15.87% for the nine months endedSeptember 30, 2020 . Compared to both of the nine months endedSeptember 30, 2021 and 2020, we had lower margin during both of the three months endedSeptember 30, 2021 and 2020. The lower margin was primarily driven by the holiday month in August inItaly and the continual increase of freight and container expenses month by month. Due to the lower production volume in August, the fixed production costs resulted in higher unit cost and lower margin. We also acquired two facilities (NMFD and Karsten) inNew Mexico inMay 2021 , NMFD is a private label food manufacturer that from which we will begin sellingTattooed Chef branded items in 2022. The facility today is not running at full capacity, and as we begin to sell more items from this facility it should help to offset fixed overhead costs and improve gross margin. The slight decrease in margin for the three months endedSeptember 30, 2021 is primarily due to the increases in raw materials, packaging, and freight and container costs due to inflation, as well as the two facilities inNew Mexico that were newly acquired inMay 2021 , partially offset by the achievement of economies scale from the increase ofTattooed Chef sales volume and improved production capacity. The decrease in margin during the nine months endedSeptember 30, 2021 is attributable to the building out of our infrastructure to support the current and expected growth in operations, increases in raw materials, packaging, and freight and container costs due to inflation, as well as the two facilities inNew Mexico that were newly acquired inMay 2021 . NMFD currently only manufactures private label products, which have a lower margin when compared to ourTattooed Chef branded products. The facility 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 first quarter of 2022. 39
Operating expenses for the three months endedSeptember 30, 2021 increased by$5.98 million , or 78.51%, to$13.60 million and for the nine months endedSeptember 30, 2021 increased by$32.26 million , or 256.26%, to$44.85 million , compared to$7.62 million for the three months endedSeptember 30, 2020 and$12.59 million for the nine months endedSeptember 30, 2020 . Compared to the three months endedSeptember 30, 2020 , the increase for the three months endedSeptember 30, 2021 is primarily due to$3.36 million increase in marketing expenses,$0.38 million increase in sales commission expense,$0.47 million in resolution of a dispute and related fees,$0.84 million increase in stock compensation expense,$1.47 million operating expenses in NMFD which was newly acquired inMay 2021 and offset by$3.55 million decrease in professional expenses. Compared to the nine months endedSeptember 30, 2020 , the increase for the nine months endedSeptember 30, 2021 is primarily due to$3.60 million increase in promotional expenses,$8.85 million increase in marketing expenses,$1.53 million increase in sales commission expense,$1.09 million increase in professional expenses,$4.35 million increase in stock compensation expense,$2.03 million operating expenses in NMFD which was newly acquired inMay 2021 . However, 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. We are heavily investing 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. Adjusted EBITDA was negative$4.97 million for the three months endedSeptember 30, 2021 and negative$14.72 million for the nine months endedSeptember 30, 2021 , compared to positive$1.60 million for the three months endedSeptember 30, 2020 and positive$10.16 million for the nine months endedSeptember 30, 2020 . The decline in Adjusted EBITDA was primarily due to public company accounting costs that were not present during the 2020 periods, as well as significant increases in promotional expenses, marketing expenses, and freight and container expenses discussed above. Non-GAAP Financial Measures
We use non-GAAP financial information and believe it is useful to investors as it provides additional information to facilitate comparisons of historical operating results, identify trends in operating results, and provide additional insight on how the management team evaluates the business. Our management team uses Adjusted EBITDA to make operating and strategic decisions, evaluate performance and comply with indebtedness related reporting requirements. Below are details on this non-GAAP measure and the non-GAAP adjustments that the management team makes in the definition of Adjusted EBITDA. The adjustments generally fall within the categories of non-cash items, acquisition and integration costs, business transformation initiatives, 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 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, and 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 months endedSeptember 30, 2021 and the three months endedSeptember 30, 2020 : Three Months Ended September 30, (in thousands) 2021 2020 Net (loss) income$ (8,174 ) $ (3,245 ) Interest 45 188 Income tax (benefit) expense (255 ) 492 Depreciation and amortization 1,066 222 EBITDA (7,318 ) (2,343 ) Adjustments Stock compensation expense 842 -
Loss (gain) on forward currency contracts 853 (825) Loss (gain) on revaluation of warrants
(218 ) - Acquisition expenses 281 - UMB ATM transaction 126 - Nonrecurring transaction expenses - 4,770 Dispute resolution and related fees 465 - Total Adjustments 2,349 3,945 Adjusted EBITDA$ (4,969 ) $ 1,602 40 The following table provides a reconciliation from net income to Adjusted EBITDA for the nine months endedSeptember 30, 2021 and the nine months endedSeptember 30, 2020 : Nine Months Ended September 30, (in thousands) 2021 2020 Net (loss) income$ (70,095 ) $ 3,462 Interest 159 569 Income tax expense 44,255 1,776 Depreciation and amortization 2,514 693 EBITDA (23,167 ) 6,500 Adjustments - Stock compensation expense 4,344 -
Loss (gain) on forward exchange contracts 2,654 (1,113) Loss (gain) on revaluation of warrants
(167 ) - Acquisition expenses 1,007 - UMB ATM transaction 148 - Nonrecurring transaction expenses - 4,770 Dispute resolution and related fees 465 -
Total Adjustments 8,451 3,657 Adjusted EBITDA$ (14,716 ) $ 10,157
Liquidity and capital resources in
As ofSeptember 30, 2021 , we had$129.48 million in cash and cash equivalents. We believe our cash on hand is sufficient to meet our current working capital and capital expenditure requirements for a period of at least twelve months
from the date of this filing. Indebtedness
We have a line of credit that provides for borrowings up to (a) 90% of the net amount of eligible accounts receivables; plus, (b) the least of (i) the sum of: (A) 50% of the net amount of eligible inventory; plus (B) 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. This line of credit is secured by substantially all of our assets. Outstanding borrowings under this line of credit bear interest at the sum of (i) the higher of the prime rate or LIBOR rate plus 2.0% and (ii) 1%. The Credit Facility provides the Company with up to$25.00 million in revolving credit. The balance on the credit facility was$2.62 million and$0.02 million as ofSeptember 30, 2021 andDecember 31, 2020 , respectively. The credit facility has been extended toJanuary 25, 2022 . The Company is working with the lender to reach a new loan agreement. 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 main components of net cash provided by (used in) operating, investing and financing activities for the nine months ended.
Nine Months Ended September 30, (in thousands) 2021 2020
Cash flow (used) provided by operating activities
Cash flows used in investing activities
(46,966 ) (5,921 ) Cash flows provided by financing activities 78,116 3,303 Operating Activities
For the nine months ended
41 For the nine months endedSeptember 30, 2021 , cash used in operations was driven primarily by the net loss of$70.10 million for the period, which is largely due to the income tax valuation allowance recorded as ofJune 30, 2021 . During the nine-month period, non-cash items included depreciation expense of$2.51 million , stock compensation expense of$4.34 million , bad debt expense of$0.54 million and unrealized forward contract loss of$2.34 million . Expenses increased for the same period 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$3.45 million increase in accounts receivable resulting from increased revenue, a$4.10 million increase in inventory, a$3.09 million increase in prepaid expenses mainly due to the increase in prepaid advertising expenses, a$1.08 million decrease in deferred revenue and a$4.42 million decrease in accounts payable, accrued expenses and other current liabilities. For the nine months endedSeptember 30, 2020 , we realized net income of$3.46 million . Net cash was reduced by a$7.70 million increase in accounts receivable due to increased sales volume and a$9.50 million increase in inventory to meet anticipated growth in sales, offset by a$15.79 million increase in accounts payable, accrued expenses and other current liabilities. All other changes in operating assets and liabilities and non-cash adjustments netted to zero, causing net cash provided in operating activities to be$1.82 million . 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, 2021 , net cash used in investing activities was$46.97 million as compared to$5.92 million for the nine months endedSeptember 30, 2020 . Cash used in both periods consisted primarily of capital expenditures to improve efficiency and output from our current facilities and the expansion of existing production capacity through the acquisition of NMFD and Karsten and assets from Esogel and Ferdifin (see Note 10). Financing Activities For the nine months endedSeptember 30, 2021 , net cash provided by financing activities was$78.12 million , primarily from$74.32 million due to warrant exercises and additional borrowings under the credit facility of$3.30 million to support working capital requirements to fund continued growth. For the nine months endedSeptember 30, 2020 , net cash provided by financing activities was approximately$3.30 million primarily attributable to a$9.66 million increase in our borrowings under our credit facility to support working capital requirements to fund growth, partially offset by$5.61 million in tax distributions to stockholders.
Off-balance sheet financing arrangements
We have no obligations, assets or liabilities that would be considered off-balance sheet arrangements as ofSeptember 30, 2021 . We do not participate in transactions that create relationships with unconsolidated entities or financial partnerships, often referred to as variable interest entities, which would 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. Contractual Obligations
Other than lease obligations, purchase obligations or other liabilities reflected in the Company’s balance sheet, we have no other material contractual obligations.
Critical Accounting Policies The preparation of the condensed consolidated financial statements and related disclosures in conformity with accounting principles generally accepted inthe United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and income and expenses during the periods reported. Actual results could materially differ from those estimates. We have identified the following critical accounting policies:
Valuation of retained shares and sponsor’s compensation shares
We recognized and measured the contingent amounts associated with the Holdback Shares and Sponsor Earnout Shares at fair value as of the Closing Date of$120.35 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 12 to our consolidated financial statements for discussion related to the measurement and recognition. 42 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. andItaly . 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. Most contracts also include some form of variable consideration. The most common forms of variable consideration include discounts 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. Accounts Receivable Accounts receivable are recorded at invoiced amounts. We extend credit to our customers based on an evaluation of a customer's financial condition and collateral is generally not required. We maintain an allowance for doubtful accounts for estimated uncollectible accounts receivable. The allowance is based on our assessment of known delinquent accounts, historical experience, and other currently available evidence of the collectability and the aging of accounts receivable. Although management believes the current allowance is sufficient to cover existing exposures, there can be no assurance against the deterioration of a major customer's creditworthiness, or against defaults that are higher than what has been experienced historically. Income Taxes Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
Provisions for valuation of 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 it does 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.
© Edgar online, source